diversification and heterogeneity of investor beliefs abstract in the paper we find that diversification reduces the heterogeneity of investor beliefs on firm value we obtain this finding by comparing not only between diversified and focused firms but also between diversifying and non diversifying mergers we also find that the reduced heterogeneity of investor beliefs on a diversified firm relative to its focused peers is negatively associated with its contemporaneous excess value and positively associated with its future excess value overall our results contribute to the understanding about how corporate organization structure affects the heterogeneity of investor beliefs and further firm value

contagion as a wealth effect financial contagion is described as a wealth effect in a continuous time model with two risky assets and three types of traders noise traders trade randomly in one market long term investors provide liquidity using a linear rule based on fundamentals convergence traders with logarithmic utility trade optimally in both markets asset price dynamics are endogenously determined numerically as functions of endogenous wealth and exogenous noise when convergence traders lose money they liquidate positions in both markets this creates contagion in that returns become more volatile and more correlated contagion reduces benefits from portfolio diversification and raises issues for risk management during the f inancial panic associated with the default of the russian government in august 1998 and the subsequent collapse of the hedge fund long term capital management numerous hedge funds banks and securities firms tried simultaneously to reduce exposures to a variety of financial instruments such as russian bonds brazilian stocks u s mortgages spreads between on therun and off the run government securities and spreads between swaps and u s treasuries although the fundamental values of these positions would appear to have little correlation during this financial crisis the asset prices in these markets exhibited the following common empirical pattern 1 financial intermediaries suffered losses as prices moved against their positions 2 market depth and liquidity decreased simultaneously in several markets 3 the volatility of prices increased simultaneously in several markets and

network models and financial stability abstract systemic risk is a key concern for central banks charged with safeguarding overall financial stability in this paper we investigate how systemic risk is affected by the structure of the financial system we construct banking systems that are composed of a number of banks that are connected by interbank linkages we then vary the key parameters that define the structure of the financial system including its level of capitalisation the degree to which banks are connected the size of interbank exposures and the degree of concentration of the system and analyse the influence of these parameters on the likelihood of knock on defaults first we find that the better capitalised banks are the more resilient is the banking system against contagious defaults and this effect is non linear second the effect of the degree of connectivity is non monotonic i e initially a small increase in connectivity increases the contagion effect but after a certain threshold value connectivity improves the ability of a banking system to absorb shocks third the size of interbank liabilities tends to increase the risk of knock on default even if banks hold capital against such exposures fourth more concentrated banking systems are shown to be prone to larger systemic risk all else equal in an extension to the main analysis we study how liquidity effects interact with banking structure to produce a greater chance of systemic breakdown we finally consider how the risk of contagion might depend on the degree of asymmetry tiering inherent in the structure of the banking system a number of our results have important implications for public policy which this paper also draws out

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

credit market constraints consumption smoothing and the accumulation of durable production assets in low income countries investments in bullocks in india in this paper we formulate and estimate a finite horizon structural dynamic model of agricultural investment behavior that incorporates the major features of low income agricultural environments income uncertainty constraints on borrowing and rental markets and the use of investment assets to generate income and smooth consumption the model is fit to longitudinal indian household data on farm profits bullock stocks and pump sets the estimated structural parameters are used to assess the effects on the life cycle accumulation of bullocks agricultural profits and welfare associated with complete markets and bullock liquidity and with second best policies that provide assured sources of income to farmers and weather insurance

do bond credit ratings lead to excess comovement abstract we investigate whether non fundamental comovement results from investors using credit ratings to group assets into different styles we find that bonds that join a new rating class start comoving more with the bonds in this class even when fundamental factors suggest otherwise we show that this comovement effect varies according to the nature of the bond considered and the modalities of the rating action downgrades have a larger impact than upgrades and rating reviews matter as much as actual movements finally rating changes between grades bbb and bb which lead bonds to be reclassified as either high yield or investment grade assets seem to be of particular importance

consumption vulnerability to risk in rural pakistan abstract as one of the dimensions of vulnerability this paper empirically investigates the inability of rural dwellers to cope with negative income shocks a variable coefficient regression model is applied to a two period household panel dataset collected in the north west frontier province pakistan an area with high incidence of income poverty and low human development the empirical model allows for a different ability to smooth consumption approximated by a linear function of households attributes and controls for the endogeneity of observed changes in income using qualitative information on subjective risk assessment estimation results show that the ability to cope with negative income shocks is lower for households that are aged landless and do not receive remittances regularly

environment technology and the social articulation of risk in west african agriculture two preoccupations are not mutually exclusive superficially they share the common concern that liberalization is insufficient to resolve the subsaharan food crisis at a deeper level the two preoccupations are more intimately interrelated via the correspondence that links initial wealth to risk exposure and to behavior in both production and asset accumulation a number of recent empirical studies of risk in low income countries find that households are able to employ their accumulated assets to smooth consumption in the face of adverse agricultural production shocks 3 missing from these studies is explicit attention to the fact that the effective risk from which households insulate consumption is not that of production shocks directly but of those shocks as socially articulated by institutions and property rights this article explores the creation and distribution of effective risk estimating how environment technology and social factors interact to construct it endogenously 4 put differently this article develops the notion that the risk from which households ex post try to insulate consumption is not an immutable natural or technical feature of the landscape as michael watt s contrast between precolonial and colonial nigeria forcefully demonstrates the effective risk presented by an unchanged set of environmental and technical circumstances can

estimating households vulnerability to idiosyncratic and covariate shocks a novel method applied in madagascar households in developing countries are frequently hit by severe idiosyncratic and covariate shocks leading to high consumption volatility a household s currently observed poverty status might therefore not be a good indicator of the household s general vulnerability to poverty in the recent years there has been an emerging literature on the concept and empirical analysis of vulnerability but because of strong data requirements for vulnerability analysis and limited availability of panel and shock data for developing countries static poverty analysis still dominates empirical vulnerability studies in this paper we propose a simple method to empirically assess the impact of idiosyncratic and covariate shocks on households vulnerability which can be applied in a wide context as it relies on more commonly available cross sectional or short panel data we empirically illustrate our approach for madagascar we show that covariate shocks have a relatively higher impact on rural households whereas idiosyncratic shocks have a relatively higher impact on urban households vulnerability

ethics in finance and accounting editorial introduction in light of the recent crisis and its aftershocks it becomes crucial to reflect on the relationship between finance and accounting and on how to integrate ethics and efficiency as well as on how to motivate and empower practitioners in the world of finance to commit to justice fairness and enhanced understanding and to improving their personal integrity this article written as an editorial introduction to a special issue includes works related to control measurement and ethical behavior misbehaviors in finances and accounting professionalism in accounting ethical investing and corporate reporting we conclude by suggesting further research for a better integration of technical aspects of accounting and finances into business activity human activity actually and an for understanding of ethics not limited to rules but as a mutual and interdependent system of values human goods virtues and principles

nonfarm income diversification and household livelihood strategies in rural africa concepts dynamics and policy implications abstract asset activity and income diversification lie at the heart of livelihood strategies in rural africa this paper introduces a special issue on the topic income diversification and livelihoods in rural africa cause and consequence of change we concentrate on core conceptual issues that bedevil the literature on rural income diversification and the policy implications of the empirical evidence presented in this special issue

executive incentives and the horizon problem an empirical investigation abstract this paper investigates the hypothesis that ceos in their final years of office manage discretionary investment expenditures to improve short term earnings performance we examine the behavior of r d expenditures for a sample of firms in industries that have significant ongoing r d activities the results suggest that ceos spend less on r d during their final years in office however we find the reductions in r d expenditures are mitigated through ceo stock ownership there is no evidence that the reduced r d expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes

contagion of self fulfilling financial crises due to diversification of investment portfolios abstract we look at two countries that have independent fundamentals but share the same group of investors each country might face a self fulfilling crisis agents withdrawing their investments fearing that others will a crisis in one country reduces agents wealth this makes them more averse to the strategic risk associated with the unknown behavior of other agents in the second country increasing their incentive to withdraw their investments consequently the probability of a crisis there increases this generates a positive correlation between the returns in the two countries since diversification affects returns in our model its welfare implications are non trivial

the economics of poverty traps and persistent poverty an asset based approach abstract longitudinal data on household living standards open the way to a deeper analysis of the nature and extent of poverty while a number of studies have exploited this type of data to distinguish transitory from more chronic forms of income or expenditure poverty this paper develops an asset based approach to poverty analysis that makes it possible to distinguish deep rooted persistent structural poverty from poverty that passes naturally with time due to systemic growth processes drawing on the economic theory of poverty traps and bifurcated accumulation strategies this paper briefly discusses some feasible estimation strategies for empirically identifying poverty traps and long term persistent structural poverty as well as relevant extensions of the popular foster greer thorbecke class of poverty measures the paper closes with reflections on how asset based poverty can be used to underwrite the design of persistent poverty reduction strategies

testing theories of consumption behavior using information on aggregate shocks income seasonality and rainfall in rural india we develop an integrated framework for testing theories of consumption behavior by examining how agricultural households in rural india respond to anticipated and unanticipated seasonal income fluctuations using information on village level rainfall surprises we estimate idiosyncratic unanticipated income shocks by allowing weather risk to impact households differently depending on observable characteristics in applying our methodology to unique panel data on consumption debt and intrahousehold gift exchanges we address a number of shortcomings in previous tests of theories of consumption behavior yet we find no evidence against the hypothesis that households smooth idiosyncratic fluctuations in their income our approach also uncovers several interesting features of rural credit and insurance markets

disproportional control rights and the governance role of debt we examine the governance role of debt in the context of u s based dual class ownership structures we hypothesize that the use of debt alleviates the conflict between shareholder classes by balancing the power of controlling insiders we document that dual class firms have higher leverage and a greater propensity to issue private debt they also more frequently use cash sweeps and performance based covenants dual class firms with greater agency conflicts and a greater need to access the capital market appear to rely more extensively on debt these findings are consistent with controlling insiders bonding against the agency costs associated with dual class ownership the governance role of debt is further corroborated by the valuation effect of debt for dual class companies private debt issuances trigger greater positive market reactions to the inferior dual class stock in relation to both the superior dual class stock and a matched sample of single class firms further leverage attenuates the previou

consumption and vulnerability among foragers and horticulturalists in the rainforest of honduras abstract it is often said that poor rural households in developing countries remain inadequately insured against shocks using panel data from tawahka amerindians in the honduran rainforest a horticultural foraging society we estimate the consumption smoothing ability and vulnerability to risks of 32 households in two villages with varying degrees of market openness the information was collected using cultural anthropology methods and key variables were estimated through direct observations and physical measures to reduce measurement errors results suggest that household consumption is directly affected by income shocks despite the practice of partial insurance and risk sharing within communities in a comparison between the villages we find evidence that households practice distinctly different consumption smoothing behaviors partly driven by their gap in economic development

financial fragility with rational and irrational exuberance this article formalizes investor rationality and irrationality exuberance and apprehension to consider the implications of belief formation for the fragility of an economy s financial structure the model presented generates a financial structure with portfolio linkages that make it susceptible to contagious financial crises despite the absence of coordination failures investors forecast the likelihood of loss from contagion and may shift preemptively to safer portfolios breaking portfolio linkages in the process the entire financial structure collapses when the last group of investors reallocates their portfolios if some investors are irrationally exuberant the financial structure remains intact longer in fact financial collapse occurs sooner when almost all investors are rationally exuberant than when they are irrationally exuberant additionally a financial crisis initiated by real shocks is indistinguishable from one caused solely by the presence of rationally apprehensive investors in a fundamentally sound economy policies that make portfolio linkages more resilient can improve welfare

chief executive officer equity incentives and accounting irregularities this study examines whether chief executive officer ceo equity based holdings and compensation provide incentives to manipulate accounting reports while several prior studies have examined this important question the empirical evidence is mixed and the existence of a link between ceo equity incentives and accounting irregularities remains an open question because inferences from prior studies may be confounded by assumptions inherent in research design choices we use propensity score matching and assess hidden omitted variable bias within a broader sample in contrast to most prior research we do not find evidence of a positive association between ceo equity incentives and accounting irregularities after matching ceos on the observable characteristics of their contracting environments instead we find some evidence that accounting irregularities occur less frequently at firms where ceos have relatively higher levels of equity incentives

consumption inequality and family labor supply we examine the link between wage and consumption inequality using a life cycle model incorporating consumption and family labor supply decisions we derive analytical expressions for the dynamics of consumption hours and earnings of two earners in the presence of correlated wage shocks nonseparability progressive taxation and asset accumulation the model is estimated using panel data for hours earnings assets and consumption we focus on family labor supply as an insurance mechanism and find strong evidence of smoothing of permanent wage shocks once family labor supply assets and taxes are properly accounted for there is little evidence of additional insurance jel d12 d14 d91 j22 j31

how much income mobility is there in britain using the first four waves of the british household panel survey 1991 4 and a variety of methods we show that there is much mobility in household net income from one year to the next in britain however most income changes from one year to the next are not very large and when incomes are longitudinally averaged so that transitory variations are smoothed out substantial permanent income differences are revealed there is some evidence of greater mobility for those in the tails of the income distribution relative to the middle and for elderly persons compared to non elderly persons

consumption versus asset smoothing testing the implications of poverty trap theory in burkina faso abstract despite solid theoretical foundations for the notion that poor borrowing constrained households will intertemporally manage assets to smooth consumption the consumption smoothing hypothesis has not always withstood empirical scrutiny this paper reassesses the intertemporal asset management problem with a poverty trap model and shows that we would expect to see asset smoothing not consumption smoothing in the neighborhood of critical asset levels at which optimal accumulation behavior bifurcates we then employ threshold estimation techniques to empirically confirm the co existence of consumption and asset smoothing regimes using a household panel data set from west africa households above the estimated threshold almost completely insulate their consumption from weather shocks whereas those below the threshold do not these results not only indirectly provide evidence of the existence of poverty traps but also speak to the level and incidence of the costs of uninsured risk

gone with the storm rainfall shocks and household well being in guatemala this paper investigates the causal consequences of tropical storm agatha 2010 the strongest tropical storm ever to strike guatemala since rainfall records have been kept on household welfare the analysis reveals substantial negative effects particularly among urban households per capita consumption fell by 12 6 percent raising poverty by 5 5 percentage points an increase of 18 percent the negative effects of the shock span other areas of human welfare households cut back on food consumption 10 percent or 43 to 108 fewer calories per person per day and reduced expenditures on basic durables these effects are related to a drop in income per capita 10 percent mostly among salaried workers adults coped with the shock by increasing their labor supply on the intensive margin and simultaneously relying on the labor supply of their children and withdrawing them from school impact heterogeneity is associated with the intensity of the shock food price inflation and the timing of agatha with respect to the harvest cycle of the main crops the results are robust to placebo treatments household migration issues of measurement error and different samples the negative effects of the storm partly explain the increase in poverty seen in urban guatemala between 2006 and 2011 which national authorities and analysts previously attributed solely to the collateral effects of the global financial crisis

asset smoothing consumption smoothing and the reproduction of inequality under risk and subsistence constraints abstract a growing literature asks whether low wealth agents can accumulate assets over time or whether they are trapped in poverty this paper develops a stochastic dynamic programming model with endogenous asset price risk to explore savings and portfolio decisions in a resource poor environment characterized by risk and subsistence constraints optimal portfolio strategies are found to bifurcate despite divisible assets and fully rational agents wealthier agents acquire a higher yielding portfolio and pursue conventional consumption smoothing poorer agents acquire a less remunerative portfolio and pursue asset smoothing rather than consumption smoothing asset based risk coping thus results in positive correlation between initial wealth and portfolio rate of return

moral judgment and causal attributions consequences of engaging in earnings management recent well publicized accounting scandals have shown that the penalties outsiders impose on those found culpable of earnings management can be severe however less is known about how colleagues within internal labor markets respond when they believe fellow managers have managed earnings designers of responsibility accounting systems need to understand the reputational costs managers impose on one another within internal labor markets in an experimental study 159 evening mba students were asked to assume the role of a manager in a company and respond to a scenario in which another manager the target manager has the opportunity to engage in earnings management participants provided causal attributions assessed the morality of the target manager and indicated whether they would change their judgments about the target manager s reputation the study manipulated three between subjects factors 1 whether the target manager chose to engage in earnings management 2 whether the company s budgetary control system was rigid or flexible and 3 whether the target manager s work history was average or above average we found that causal attributions are affected more by the budgetary systems when the target did not manage earnings than when the manager did we also found that morality judgments were significantly associated with the target manager s behavior but not with the budgetary system in addition participants judgments about the target manager s reputation were more strongly associated with morality judgments than with causal attributions we discuss implications of the role of reputation in management control systems design

discussion of the impact of the options backdating scandal on shareholders and taxes and the backdating of stock option exercise dates abstract bernile and jarrell provide extensive analysis regarding the impact of backdating the stock option exercise price on stock returns for a sample of firms identified by the wall street journal dhaliwal erickson and heitzman investigate whether executives backdate the exercise date to obtain favorable tax consequences this discussion comment focuses on several fundamental issues that confront researchers examining the backdating scandal and other related decisions specifically we discuss the decision models for executives engaged in backdating and the potential role of social networks among directors selection considerations institutional voting behavior and how backdated options can be replicated with existing equity instruments

heterogeneity and tests of risk sharing how well do people share risk standard risk sharing regressions assume that any variation in households risk preferences is uncorrelated with variation in the cyclicality of income i combine administrative and survey data to show that this assumption is questionable risk tolerant workers hold jobs in which earnings carry more aggregate risk the correlation makes risk sharing regressions in the previous literature too pessimistic i derive techniques that eliminate the bias apply them to u s data and find that the effect of idiosyncratic income shocks on consumption is practically small and statistically difficult to distinguish from zero

theory research design assumptions and causal inferences abstract ferri zheng and zou test fischer and verrecchia s 2000 prediction that a reduction in investors uncertainty about managers financial reporting objectives leads to an increase in the valuation relevance of earnings reports they use mandatory cd a disclosures as an arguably exogenous shock that provided investors with more precise information about managers contractual incentives and find that these enhanced disclosures increased the relation between firms unexpected earnings and stock returns using ferri et al as a backdrop we discuss the implicit assumptions invoked in natural experimental research designs and the fundamental role of theory in drawing causal inferences from empirical evidence

the relation between equity incentives and misreporting the role of risk taking incentives abstract prior research argues that a manager whose wealth is more sensitive to changes in the firm s stock price has a greater incentive to misreport however if the manager is risk averse and misreporting increases both equity values and equity risk the sensitivity of the manager s wealth to changes in stock price portfolio delta will have two countervailing incentive effects a positive reward effect and a negative risk effect in contrast the sensitivity of the manager s wealth to changes in risk portfolio vega will have an unambiguously positive incentive effect we show that jointly considering the incentive effects of both portfolio delta and portfolio vega substantially alters inferences reported in prior literature using both regression and matching designs and measuring misreporting using discretionary accruals restatements and enforcement actions we find strong evidence of a positive relation between vega and misreporting and that the incentives provided by vega subsume those of delta collectively our results suggest that equity portfolios provide managers with incentives to misreport when they make managers less averse to equity risk

selection on observed and unobserved variables assessing the effectiveness of catholic schools in this paper we measure the effect of catholic high school attendance on educational attainment and test scores because we do not have a good instrumental variable for catholic school attendance we develop new estimation methods based on the idea that the amount of selection on the observed explanatory variables in a model provides a guide to the amount of selection on the unobservables we also propose an informal way to assess selectivity bias based on measuring the ratio of selection on unobservables to selection on observables that would be required if one is to attribute the entire effect of catholic school attendance to selection bias we use our methods to estimate the effect of attending a catholic high school on a variety of outcomes our main conclusion is that catholic high schools substantially increase the probability of graduating from high school and more tentatively attending college we find little evidence of an effect on test scores

moral reasoning and ethical climate not for profit vs for profit boards of directors utilizing rest s moral development and victor and cullen s ethical climate surveys we examine differences in moral reasoning and ethical climate between board members in the for profit and not for profit sectors six for profit corporations and seven not for profit corporations all with base operations in a major midwestern state participated in the study we find that profit and not for profit boards may not differ in moral reasoning but do exhibit different types of ethical climates we also find that for profit board members may utilize higher stages of reasoning a greater percentage of the time than not for profit directors in contrast the ethical climates of the two types of organizations are significantly different for profit companies had climates higher in egoism than did not for profit companies in addition not for profit firms reflected higher benevolence factors than for profit firms not forprofit organizations also had somewhat higher but not significantly different mean scores on the principle factor compared to the for profit organizations

the anatomy of corporate fraud a comparative analysis of high profile american and european corporate scandals this paper presents a comparative analysis of three american enron worldcom and healthsouth and three european parmalat royal ahold and vivendi universal corporate failures the first part of the analysis is based on a theoretical framework including six areas of ethical climate tone at the top bubble economy and market pressure fraudulent financial reporting accountability control auditing and governance and management compensation the second and third parts consider the analysis of these cases from fraud perspective and in terms of firm specific characteristics ownership structure and environmental context coverage in media and academic literature regulatory and corporate governance frameworks the research analyses shed light on the fact that despite major differences between europe and u s in terms of political institutions laws and regulations as well as managerial practices there are significant similarities between six groups the analysis also demonstrates that the ethical dilemma has been coupled with ineffective boards inefficient corporate governance and control mechanisms distorted incentive schemes accounting irregularities failure of auditors dominant ceos dysfunctional management behavior and the lack of a sound ethical tone at the top significant similarities were also observed in the analysis from the fraud triangle perspective however there are several major differences between the six corporate failure cases particularly with regard to ownership structure coverage in media and legal regulatory and governance frameworks this research study may have several academic and practical contributions particularly because of multidisciplinary international features and comparative analyses used in the paper

why is consumption so smooth for thirty years it has been accepted that consumption is smooth because permanent income is smoother than measured income this paper considers the evidence for the contrary position that permanent income is in fact less smooth than measured income so that the smoothness of consumption cannot be straightforwardly explained by permanent income theory the paper argues that in postwar u s quarterly data consumption is smooth because it responds with a lag to changes in income

the ability of global stock exchange mechanisms to mitigate home bias evidence from euronext this paper examines the effects on equity home bias of two mechanisms adopted by euronext when it was formed by the merger of four european countries stock exchanges in 2002 the two structural mechanisms are the integration of trading platforms across the four predecessor exchanges and the creation of named segments of the integrated exchange on which firms could voluntarily list by precommitting to enhanced disclosure and transparency employing a difference in differences research design using other european union companies as a control group we document that the integration of the euronext market was associated with a reduction in home bias for firms listed on the named segments of the euronext exchange but not for the nonsegment euronext firms our results suggest that the reduction in transaction costs from the integration of the trading platforms did not make the nonsegment euronext firms more attractive to the specific investors for whom the transaction costs were reduced on the other hand the decrease in information costs due to the precommitments to enhanced transparency made the segment firms more attractive to all categories of foreign investors consistent with the information costs hypothesis this paper was accepted by mary barth accounting

a theory of corporate scandals why the usa and europe differ a wave of financial irregularity in the usa in 2001 2 culminated in the sarbanes oxley act a worldwide stockmarket bubble burst over this same period with the actual market decline being proportionately more severe in europe yet no corresponding wave of financial scandals involving a similar level of companies occurred in europe given the higher level of public and private enforcement in the usa for securities fraud this contrast seems perplexing this paper submits that different kinds of scandals characterize different systems of corporate governance in particular dispersed ownership systems of governance are prone to the forms of earnings management that erupted in the usa but concentrated ownership systems are much less vulnerable instead the characteristic scandal in such systems is the appropriation of private benefits of control this paper suggests that this difference in the likely source of and motive for financial misconduct has implications both for the utility of gatekeepers as reputational intermediaries and for design of legal controls to protect public shareholders the difficulty in achieving auditor independence in a corporation with a controlling shareholder may also imply that minority shareholders in concentrated ownership economies should directly select their own gatekeepers copyright 2005 oxford university press

fraud in sustainability departments an exploratory study while sustainability is largely associated with do gooders this article discusses whether and how fraud might also be an issue in sustainability departments more specifically transferring the concept of the fraud triangle to sustainability departments i discuss possible pressures incentives opportunities and rationalizations attitudes for sustainability managers to commit fraud based on interviews with sustainability and forensic practitioners my findings suggest that sustainability managers face mounting pressure and have opportunities to manipulate due to an immature control environment whether a presumably morality driven attitude may prevent them from committing and easily rationalizing fraud remains controversial even though cases of fraud happening in sustainability departments are still widely unknown the interview analysis reveals that sustainability fraud is likely to occur at least to some extent and presumably remains undetected the study brings to light the importance of a clear commitment from executives to sustainability to prevent sustainability fraud and demonstrates adverse developments driven by external stakeholders specifically the bonus relevancy of sustainability index scores in particular the study shows a lack of awareness for potential fraud in sustainability departments

wealth risk and activity choice cattle in western tanzania abstract imperfect credit markets force households to use their savings for investment profitable activities often require lumpy investments limiting entry by poorer households resulting in increasing welfare differences in tanzania cattle are a profitable but lumpy investment and a liquid asset for consumption smoothing richer households own substantial cattle herds while poorer households specialize in low return low risk activities a dynamic programming model and simulations are presented to analyze entry into asset accumulation under income risk the evidence suggests that households with lower endowments are less likely to own cattle and returns to their endowments are lower

stability analysis of financial contagion due to overlapping portfolios abstract common asset holdings are widely believed to have been the primary vector of contagion in the recent financial crisis we develop a network approach to the amplification of financial contagion due to the combination of overlapping portfolios and leverage and we show how it can be understood in terms of a generalized branching process this can be used to compute the stability for any particular configuration of portfolios by studying a stylized model we estimate the circumstances under which systemic instabilities are likely to occur as a function of parameters such as leverage market crowding diversification and market impact although diversification may be good for individual institutions it can create dangerous systemic effects and as a result financial contagion gets worse with too much diversification there is a critical threshold for leverage below it financial networks are always stable and above it the unstable region grows as leverage increases note that our model assumes passive portfolio management during a crisis however we show that dynamic deleveraging during a crisis can amplify instabilities the financial system exhibits robust yet fragile behavior with regions of the parameter space where contagion is rare but catastrophic whenever it occurs our model and methods of analysis can be calibrated to real data and provide simple yet powerful tools for macroprudential stress testing

rational contagion and the globalization of securities markets this paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios in the presence of short selling constraints the gain of gathering information at a fixed cost may diminish as markets grow moreover if a portfolio manager s marginal cost for yielding below market returns exceeds the marginal gain for above market returns there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets

earnings quality evidence from the field abstract we provide insights into earnings quality from a survey of 169 cfos of public companies and in depth interviews of 12 cfos and two standard setters cfos believe that i above all high quality earnings are sustainable and repeatable specific characteristics include consistent reporting choices backing by actual cash flows and absence of one time items and long term estimates ii about 50 of earnings quality is driven by non discretionary factors such as industry and macro economic conditions iii in any given period about 20 of firms manage earnings to misrepresent economic performance and for such firms 10 of eps is typically managed iv earnings manipulation is hard to unravel from the outside but peer comparisons and lack of correspondence between earnings and cash flows provide helpful red flags in addition cfos disagree with current standard setting on a number of issues including the sheer number of promulgated rules the top down approach to rule making the neglect of the matching principle and the emphasis on fair value accounting they indicate that a rules based culture makes the audit function centralized and mechanical and hinders the development of audit professionals a summary impression from our work is that cfos view earnings quality as more of a single and unconditional characteristic in contrast to current research where measures of earnings quality are strongly conditional on the decision setting this cfo view is related to their idea of one number a single earnings metric that shapes both their interactions with external stakeholders and internal decision making

the effect of cash flow forecasts on accrual quality and benchmark beating when analysts provide forecasts of both earnings and operating cash flow they also implicitly provide a forecast of total operating accruals we posit that this increases the transparency and the expected costs of accrual manipulations used to manage earnings as a consequence we predict and find that accrual quality improves and firms propensity to meet or beat earnings benchmarks declines following the provision of cash flow forecasts we also predict and find that firms turn to other benchmark beating mechanisms such as real activities manipulation and earnings guidance in response to the provision of cash flow forecasts

the impact of performance based compensation on misreporting abstract this paper examines the effect of ceo compensation contracts on misreporting we find that the sensitivity of the ceo s option portfolio to stock price is significantly positively related to the propensity to misreport we do not find that the sensitivity of other components of ceo compensation i e equity restricted stock long term incentive payouts and salary plus bonus have any significant impact on the propensity to misreport relative to other components of compensation stock options are associated with stronger incentives to misreport because convexity in ceo wealth introduced by stock options limits the downside risk on detection of the misreporting

do baths muddy the waters or clear the air we examine the information environments of firms following large non recurring charges baths we test competing hypotheses about the consequences of a bath a bath either improves the information environment the transparency hypothesis or degrades it the opacity hypothesis difference in differences analysis suggests that after a bath 1 earnings become smoother 2 firm level information asymmetry decreases and 3 stock returns become more responsive to unexpected earnings we interpret these findings as supportive of the transparency hypothesis we also document that the relative improvement in the information environment is greater for baths that are not voluntary consistent with managerial obfuscation prior to the bath

using weather variability to estimate the response of savings to transitory income in thailand this paper measures the extent to which farmers are able to use savings and dissavings to smooth consumption in response to unexpected shocks to income time series information on regional rainfall is used to construct estimates of transitory income due to rainfall shocks the relationship between these measures of transitory income and savings indicates that farm households save a significantly higher fraction of transitory income than nontransitory income jel d91 016 the incomes of farm households in developing countries are notorious for being both low and uncertain policies that increase the incomes of farmers may well be different

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

what does ceos pay for performance reveal about shareholders attitude toward earnings overstatements if overstatements were a symptom of the agency conflict pay for performance sensitivities should have increased in response to the additional penalties for misreporting imposed by sox our finding of their decrease is inconsistent with the view that overstatements were an unintended consequence of incentive pay prior to 2002 to corroborate our interpretation we show that i ceo pay for performance sensitivities are higher among firms whose shareholders stand to benefit from overstatements ii this cross sectional relationship weakens significantly after sox and iii the within firm decrease in pay for performance sensitivity is most pronounced among firms with high pre sox shareholder benefits from overstatements

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

differential risk exposure and stochastic poverty traps among east african pastoralists in the pastoraland agropastoralsystems of east africa s arid and semi arid lands asal climatic shocks price volatility disease outbreaks and widespread violence beget frequent disruption of already fragile livelihoods last year s drought dramatically demonstrates that intense suffering recurs regularly in the asal in spite of significant humanitarian aid flows this article explores why that might be we draw on preliminary results of an ongoing quarterly survey in six sites in northern kenya seventeen years herd history data collected from boran pastoralists in southern ethiopia desta five years seasonaldata on land use and herd management decisions among gabra pastoralists in northern kenya mcpeak 2000a b and three years transactions level data on livestock markets in northern kenya barrett et al in the interest of brevity we present only a synthesis of findings from these and related studies that suggest how differences in pastoralists ubiquitous risk exposure create and sustain structuralpoverty traps from which many asal pastoralists are having a difficult time escaping

vulnerability seasonality and poverty in ethiopia most studies examining the dynamics of welfare have found large fluctuations in consumption over relatively short periods suggesting substantial short run movements in and out of poverty the consequence is that cross section poverty research may not be able to identify the poor in this study we explore this short run variability further we use a data set on a panel of 1450 households in different communities in rural ethiopia surveyed thrice over 18 months on average year to year poverty is very similar however we find high variability in consumption and poverty over the seasons and year by year econometric analysis suggests that consumption is affected by idiosyncratic and common shocks including rainfall and household specific crop failure while households respond to seasonal incentives related to changing labour demand and prices the results imply that a larger number of households are vulnerable to shocks than implied by the standard poverty statistics while some of the non poor in the

shocks and their consequences across and within households in rural zimbabwe abstract increasing attention is now being paid to poverty dynamics in developing countries this work links the extent to which households smooth consumption or smooth assets given income shocks the empirical evidence on the churning of households in and out of poverty and the possibility that temporary shocks can have permanent consequences using longitudinal data from rural zimbabwe this paper extends the discussion of these issues by disaggregating the impact of shocks by levels of asset holdings by disaggregating the impact of shocks on individual level welfare and by assessing the extent to which such shocks have permanent consequences by doing so it assesses the validity of distinguishing between asset and consumption smoothing and provides insights into whether poverty dynamics assessed at the household level provide an adequate picture of dynamics at the individual level

are the poor less well insured evidence on vulnerability to income risk in rural china the authors test how well consumption is insured against income risk in a panel of sampled households in rural china they estimate the risk insurance models by generalized method of moments treating income and household size as endogenous insurance exists for all wealth groups although the hypothesis of perfect insurance is universally rejected those in the poorest wealth decile are the least well insured with 40 percent of an income shock being passed on to current consumption by contrast consumption by the richest third of households is protected from almost 90 percent of an income shock the extent of insurance in a given wealth stratum varies little between poor and nonpoor areas

insuring consumption against illness one of the most sizable and least predictable shocks to economic opportunities in developing countries is major illness we investigate the extent to which families are able to insure consumption against major illness using a unique panel data set from indonesia that combines excellent measures of health status with consumption information we find that there are significant economic costs associated with major illness and that there is very imperfect insurance of consumption over illness episodes these estimates suggest that public disability insurance or subsidies for medical care may improve welfare by providing consumption insurance

consumption smoothing and vulnerability in russia applying bootstrapped quantile regression to the russian longitudinal monitoring survey rlms data we examine the channels through which individuals experience and seek to cope with changes in consumption we find that married individuals living in small households with educated heads in urban areas are better equipped to smooth consumption investigating the impact of idiosyncratic shocks we find that the labour market is an important transmission mechanism allowing households to smooth their consumption but also exposing them to risk mainly through job loss outside of pension payments the formal social safety net does not facilitate consumption smoothing thus heightening the importance of informal coping institutions it transpires that both support from relatives friends and home production act as important insurance mechanisms for the most vulnerable

when faced with income and asset shocks do poor rural households in vietnam smooth food consumption or assets abstractvietnamese rural households are exposed to severe covariate and idiosyncratic shocks however these households are remarkably resilient and have steadily increased real income and consumption over the survey period 2006 to 2012 to explain household strategies to cope with shocks we test three theoretical models the permanent income hypothesis pih complete market hypothesis cmh and asset smoothing theory ast there is support for ast as households smooth productive assets rather than consumption and for cmh as households smooth consumption against idiosyncratic but not covariate shocks there is no support for pih

is there a link between executive equity incentives and accounting fraud we compare executive equity incentives of firms accused of accounting fraud by the securities and exchange commission sec during the period 1996 2003 with two samples of firms not accused of fraud we measure equity incentives in a variety of ways and employ a battery of empirical tests we find no consistent evidence that executive equity incentives are associated with fraud these results stand in contrast to assertions by policy makers that incentives from stock based compensation and the resulting equity holdings increase the likelihood of accounting fraud

attracting attention in a limited attention world exploring the causes and consequences of extreme positive earnings surprises we investigate why extreme positive earnings surprises occur and the consequences of these events we posit that managers know before analysts when extremely good earnings news is developing but can have incentives to allow the earnings news to surprise the market at the earnings announcement in particular managers can use an extreme positive earnings surprise to attract investor attention when they believe their stock is neglected and future performance is expected to be strong analysts who must allocate scarce resources across many firms can also be inattentive and miss signals that suggest good performance is going to be announced using various proxies for extreme positive earnings surprises management expectations for future performance and desire for attention and analyst neglect we find evidence that an extreme positive earnings surprise is a predictable event these findings are incremental to controlling for a firm s information environment earnings volatility and operating leverage finally we show that extreme positive earnings surprises are a successful method for attracting attention with significant increases in the number of institutional owners the number of analysts and trading volume during the subsequent three years this paper was accepted by mary barth accounting

diversification and systemic risk abstract portfolio diversification makes investors individually safer but creates connections between them through common asset holdings such connections create endogenous covariances between assets and investors and enhance systemic risk by propagating shocks swiftly through the system we provide a theoretical model in which shocks spread through constrained selling from n diversified portfolio investors in a network of asset holdings with home bias and study the desirability of diversification by comparing the multivariate distribution of implied losses for every level of diversification there may be a region on the parameter set for which the propagation effect dominates the individually safer one we derive analytically the general element of the covariance between two assets i and j we find agents may minimize their exposure to endogenous risk by spreading their wealth across more and more distant assets the resulting network enhances systemic stability

are rainfed agricultural households insured evidence from five villages in vidarbha india there are several studies on risk and insurance in village economies in the developing world however there is a lack of evidence for recent decades in spite of profound changes including structural transformation and widespread market liberalization in most regions in this paper i use primary panel data from five rainfed villages in a high risk region of india and find evidence of considerable exposure as well as vulnerability to idiosyncratic and covariate risks further there is significant wealth differentiated heterogeneity in vulnerability the findings help identify the scope of public policy in improving risk management in rainfed agriculture

does managerial sentiment affect accrual estimates evidence from the banking industry abstract we examine whether managerial sentiment is associated with errors in accrual estimates using public banks we find 1 managerial sentiment is negatively associated with loan loss provision estimates 2 future charge offs per dollar of provision are positively associated with sentiment when the provision is estimated and 3 the effects of sentiment are greater for firms with more uncertain charge offs results are similar for private banks suggesting accrual manipulation related to capital market incentives is unlikely to explain the results although economic fundamentals explain most of the variation in the provision we find sentiment has an incremental and economically meaningful effect