a theoretical analysis connecting conservative accounting to the cost of capital abstract we connect conservative accounting to the cost of capital by developing an accounting model within an asset pricing framework the model has three distinctive features 1 transaction cycle conformity where the book value equals the value of cash at the beginning and the end of a cash to cash transaction cycle 2 a revenue recognition principle where uncertainty affects the amount of revenues recognized 3 a matching principle where expenses are matched with revenue with a conservative bias due to uncertainty we demonstrate how the growth rate of expected earnings the accruals to cash ratio and the expected earnings yield relate to the expected stock return

economics health and health economics hyes healthy years equivalent versus qalys quality adjusted live year this paper responds to culyer and wagstaff s cw and buckingham s b arguments we refute their claim about the equivalence of hyes and qalys they fail to distinguish between choice under uncertainty and under certainty cw assume that all individuals have a specific form of utility function which yields their conclusion of equivalence b s arguments confuse the measurement technique and the utility theory from which it stems his argument about the normative superiority of the qaly construct is inconsistent with economic thinking the hye by being compatible with the principles of economics is superior to the qaly for economic evaluations of health care interventions

or forum perspectives on utility theory utility theory is a branch of decision analysis that is concerned with building models to explain and guide choice behavior under uncertainty in situations in which long run expected values are too simplistic beginning with bernoulli in the 18th century researchers have tried to analyze how people do and how people should make decisions when risk aversion is a factor in this paper we review some recent developments in the area

risk premiums for decision regret some people find decision making under uncertainty difficult because they fear making the wrong decision wrong in the sense that the outcome of their chosen alternative proves to be worse than could have been achieved with another alternative these people may be willing to pay a premium to avoid consequences that produce this decision regret this paper continues an earlier investigation into the normative implications of decision regret and looks at situations where the joint probability distribution of consequences between alternatives is not specified at the time of the decision it includes a discussion of cases where the outcomes produced by alternatives not chosen are never resolved a consequence of this model of preferences for risky situations is that two components of risk aversion may be identified decreasing marginal value and regret aversion

disappointment in decision making under uncertainty decision analysis requires that two equally desirable consequences should have the same utility and vice versa most analyses of financial decision making presume that two consequences with the same dollar outcome will be equally preferred however winning the top prize of 10 000 in a lottery may leave one much happier than receiving 10 000 as the lowest prize in a lottery this paper explores the implications of disappointment a psychological reaction caused by comparing the actual outcome of a lottery to one s prior expectations for decision making under uncertainty explicit recognition that decision makers may be paying a premium to avoid potential disappointment provides an interpretation for some known behavioral paradoxes and suggests that decision makers may be sensitive to the manner in which a lottery is resolved the concept of disappointment is integrated into utility theory in a prescriptive model

the relative efficiency of slave agriculture a reply professors hofler and folland have written a very interesting paper which brings out several interesting ideas and is a contribution to the literature they argue that their results contradict those of our original paper concerning the relative efficiency of small versus large slave farms specifically they find that large slave farms are relatively more efficient however they have missed that main point of the original paper which was to compare the relative efficiency of slave and non slave farms on this issue the holfer and folland comment provides no additional insight thus their paper while interesting is not a comment on our original work

historical perspetives on the american economy explaining the relative efficiency of slave agriculture in the antebellum south the comments by paul david and others in the march 1979 issue of this review dealt mainly with technical issues related to the measurement of the relative efficiency of slave agriculture and so does this reply 1 the debate over these technical issues should not however obscure the marked shift in thought about the nature of the slave economy that has occurred during the past two decades until the mid 1950 s it was widely believed that the slave plantations were unprofitable and inefficient enterprises that were kept in operation by a class prepared to sacrifice its private economic interest enduring economic stagnation for the south in order to maintain its political and cultural hegemony the first critical blow to this thesis was delivered by the now famous 1958 essay of alfred conrad and john meyer marshalling the limited evidence available at that time and using a standard capital model to estimate the internal rate of return on an investment in slaves they concluded that rates of return on this form of capital compared favorably with rates on alternative investments this finding set off an extended debate that took more than a decade to resolve eventually refinements in the original capital model and a considerable expansion of the data base including the parker gallman sample of over 5 000 southern farms and large samples of slave prices and hire rates from probate and other records placed the rate of return in the 610 percent range thus demonstrating the allocative efficiency of the slave economy the second blow to the traditional thesis was delivered by richard easterlin s development of regional income estimates extending back to 1840 both these initial estimates and the subsequent refinements in them see our 1971a paper showed that the south experienced a high rate of growth in per capita income between 1840 and 1860 thus contradicting the view that the antebellum south was economically stagnant these twin blows to the traditional interpretation shifted cliometric attention to the question of the relative technical efficiency of slave and free agriculture in input utilization while it is obviously premature to declare this question settled a consensus has emerged on one critical point it is now clear that the previous view that slave agriculture was less efficient than free agriculture is incorrect what remains to be resolved is the exact margin of the advantage enjoyed by slave plantations and the explanation for this margin

the size of the state economic growth and the efficient utilization of national resources the motives of the state in projecting a more than minimal presence in the economy may be conceived of as benevolent or malevolent whatever the characterization of the motivation increases in the size of the government share of the economy adversely affect economic growth and the allocation of resources nations with relatively large government shares in 1960 on the whole grew more slowly than nations with relatively small state sectors interperiod increases in the size of government were associated with lower growth rates over the period the size of the government share coefficients in the regressions were of sufficiently large magnitude to conclude that the rise in the size of the government has had a substantial depressing effect on economic growth these results are consistent with those reported by landau 1983 and marlow 1986 landau did not adjust economic growth for the growth in factor endowment consequently his results overstate the adverse effect of government size

a note on the measurement of equity duration and convexity the appropriate measure of equity duration and by extension convexity is a controversial matter in 1986 leibowitz presented empirical duration measures that are considerably shorter than those derived from a traditional dividend discount model a class of dividend discount models developed by hurley and johnson is used to try to reconcile the difference the values derived for equity duration are intermediate between the leibowitz and traditional measures these models overcome the standard criticism of dividend discount models by allowing for realistic patterns of future dividend growth corresponding models of equity convexity developed by johnson are used to derive equity convexity

application of a stochastic production frontier to slave agriculture an extension free small slave and large slave farms in the antebellum american south are compared using a stochastic production frontier approach which allows a distinction to be drawn between technological superiority and technical efficiency previous studies using this approach had only considered slave farms in addition cotton share is included as an independent variable in the production function in order to control for variations in crop mix across farm types that might make slave farms look more efficient i find that the gang system did make large slave farms technologically superior but that without the gang system slave agriculture was not superior in contrast to previous findings large slave farms were not less technically efficient than small slave farms overall slave farms were more efficient than free farms

stock interest rate risk and inflation shocks abstract in this paper we proceed to estimate a measure of the flow through capability of the firms listed on the spanish stock exchange the flow through capability is defined as the ability of firms to transmit inflation shocks to the prices of the products and services sold by the company according to a strand of the literature this flow through capability can to some extent explain the so called stock duration paradox which is the difference between the theoretical stock duration derived from the ddm model and its empirical estimates the line of reasoning suggests that if a company can pass on inflation shocks to the prices of its own outputs and then to profits and dividends nominal interest rate changes due to variations in the expected inflation will have a limited impact on stock prices so in this paper we first estimate the flow through capability for different industries and find great differences among them then we analyse the link between flow through capability and stock duration and find a significant negative relationship between them as claimed by part of the literature

rights equity and economic efficiency the adelman morris premise that economic development and equity are incompatible is not supported by the evidence of a strong relationship between equality of rights and the income distribution the premise that equity requires the denial of individual rights and the affirmation of state control is an oxymoron what has been overlooked in the literature on growth and equity is the effect of the rights structure on both economic efficiency and on the income distribution the evidence is that free societies have much larger shares of income going to the middle 60 percent of the distribution than is observed in societies where men are not free to choose in politically open societies compared to politically closed regimes the share of income to the middle three quintiles is q2 10 7 vs 8 0 q3 16 0 vs 11 5 and q4 22 9 vs 17 9 in the aggregate the shares to the middle quintiles are 49 6 vs 37 4 in nations that obey the rule of law compared to regimes in which the rights of the state relative to the individual are paramount the comparisons are q2 11 2 vs 7 4 q3 16 3 vs 10 6 q4 23 0 vs 17 3 summing the three quintiles yields a comparison of 50 5 vs 35 3 in countries that have private property market allocation of resources and minimum intervention by the state compared to command economies the shares of income to the middle quintiles are q2 10 8 vs 8 0 q3 16 0 vs 11 1 and q4 22 8 vs 17 7 aggregated the shares of the middle class in regimes with high levels of economic liberty are 49 6 vs 36 8 for regimes with restricted private economic rights

a total differential approach to equity duration most of the risk associated with fixed income price movements is accounted for by their duration that is their sensitivity to changes in the discount rate thus for bonds duration and interest rate sensitivity are virtually synonymous for equities however duration is only one of several factors describing risk a major source of confusion in evaluating equity duration is the definition of duration itself measured as a function of the sensitivity of stock price to the discount rate ignoring all links between the discount rate and the growth rate the traditional dividend discount model ddm duration is long 20 years or more but this measure of duration fails to take into account the offsetting effects of inflation induced rate increases on corporate profits a measure of the total sensitivity of stock prices to interest rate movements recognizes that the two components of nominal interest rates inflation and the real rate affect both the equity discount rate and the equity earnings growth rate but not necessarily in the same direction the stock market as a whole is less sensitive to changes in inflation expectations than to changes in real rates because most companies can raise prices hence nominal growth rates in times of inflation thus a measure of stock price total sensitivity to interest rates will generally be substantially shorter than the duration measure derived from the traditional ddm

the theory and measurement of the net benefits of multinationality the case of the international petroleum industry internalization is one of the most important factors for foreign direct investment and multinationality going multinational brings some gains the empirical evidence presented provides an objective quantitative measure of the gains of being a multinational firm in the petroleum refining industry it is estimated that multination ality increases scale efficiency by approximately 3 and reduces business risk by approximately 43 however the gains of multinationality cannot be attained without incurring some costs the cost of expanding the firs s operation beyond its national boundaries is estimated to be approximately a 10 reduction in the firm s overall economic efficiency

disappointment and dynamic consistency in choice under uncertainty the central proposition of disappointment theory is that an individual forms expectations about uncertain prospects and that if the actual consequence turns out to be worse than or better than that expectation the individual experiences a sensation of disappointment or elation generating a decrement or increment of utility which modifies the basic utility derived from the consequence by incorporating a simple disappointment elation function into a model of individual choice many observed violations of conventional expected utility axioms including violations of savage s sure thing principle and the isolation effect can be predicted and defended as rational and dynamically consistent behaviour

spread driven dividend discount models a key determinant of shareholder value is the franchise spread the company s incremental return on new investments over the cost of capital explicitly incorporating this spread into the valuation process paves the way for a more compact two parameter formulation of the standard three parameter dividend discount model this transformation leads to a number of interesting implications in particular the spread driven representation of the ddm 1 clarifies the role of growth driven roes versus the role of spread driven roes 2 facilitates the development of two phase models that reflect a typical company s earnings pattern 3 shows how earnings growth and franchise spreads can underpin a wide range of p e levels 4 addresses the problem of artificially high p es being forced by low estimates for the risk premium and or the inflation rate 5 provides a useful expression for the growth rate of shareholder value and 6 under certain stability conditions leads to a pro forma equity duration that i

the relative efficiency of slave agriculture a comment in their book time on the cross fogel and engerman fe present evidence that average factor productivity was greater for larger southern slave farms in 1860 than for both free farms and smaller slave farms in a recent article field 1988 lends support to the fe theory by finding that an upward shift in the production function occurs for slave farms at 15 slaves the size at which fe propose that gang labour became feasible in a more recent article grabowski and pasurka gp contradict both fe and field by finding that there was no relationship between the size of slave farms and their efficiency the present paper extends both gp s and field s work and refines a point made by fe we distinguish between a technological advantage due to the gang labour system and revenue inefficiency due both to the incentive structure of slavery and the repugnance of gang labour two factors which foster rational shirking and resistance by slaves that is we propose that relative to small slave farms large slave f

total portfolio duration a new perspective on asset allocation the concept of duration has proved to be a valuable tool for gauging the sensitivity of a bond portfolio to movements in interest rates by balancing the duration of a fixed income portfolio against the duration of the stream of liabilities it is funding one creates a portfolio that is immunized against interest rate changes but what if the portfolio contains stocks as well as bonds the interest rate risk of an equity portfolio can be estimated from a measure of the correlation between stock and bonds by using variance parameters routinely used in conventional asset allocation procedures the correlation is used in conjunction with a measure of bond market duration to derive an estimate of the duration of the stock market these durations together with a portfolio s allocations to stocks and bonds and the beta of the stock component may be used to obtain a measure of total portfolio duration what the duration measure tells us in general is that a total portfolio s sensitivity to interest rate mo

reply putting a premium on regret anand anand p 1985 testing regret management sci 31 114 116 has suggested that measuring the sacrifice a person is prepared to make to avoid regret may be more difficult than i suggest in bell bell d e 1983 risk premiums for decision regret management sci 29 1156 1166 though he believes regret is probably widespread he is concerned that regret may be confounded with other of the psychological phenomena that i have discussed especially disappointment bell bell d e 1985 disappointment in decision making under uncertainty harvard business school working paper 83 18 1982 oper res january february i will use this opportunity for response to set my work in perspective

technological change in illinois agriculture 1982 1984 abstract this paper has two main purposes 1 to develop a method for measuring the extent and bias of technical change which involves the use of non parametric production frontiers and does not require information on prices or factor shares 2 to apply this method to individual farm data drawn from a sample of illinois grain farms for the years 1982 and 1984 the results indicate that technical innovation is land using in nature and that the rate of technical change is related to the size of farm

a theory of anticipated utility abstract a new theory of cardinal utility with an associated set of axioms is presented it is a generalization of the von neumann morgenstern expected utility theory which permits the analysis of phenomena associated with the distortion of subjective probability

efficiency differences between private and state owned enterprises in the international petroleum industry technical managerial scale and allocative efficiency differences between private and state owned firms in the international petroleum industry are estimated the estimation of aigner chu deterministic frontiers maximum likelihood stochastic frontiers and maximum likelihood gamma frontiers make this analysis the most complete and sophisticated testing of property rights theory available the empirical findings suggestceteris paribus that state firms could satisfy the demand for their output with something less than half of their current resource inputs simply by being converted to private for profit enterprizes

p es and pension funding ratios some evidence supports the intriguing conjecture that p es in the u s market may decline in times of both significantly lower as well as significantly higher real interest rates the p e response pattern would then resemble a tent that angles downward at both ends for pension liabilities defined in real terms very low real rates would then lead to a clifflike falloff in the funding ratio from the decline in equity valuations combined with surging liability costs this article explores the risk implications of such a low rate scenario and the equity valuations that could give rise to such a tent pattern

equity considerations in public risks evaluation recent contributions by r k sarin and r l keeney and r l winkler approach the problem of public risks evaluation from a multiattribute perspective in which fatalities ex ante equity and ex post equity play leading roles the present paper considers the same problem from the perspective of holistic comparisons between potential fatality distributions we consider a number of axioms for such comparisons identify maximally compatible sets of axioms and relate our approach to the multiattribute approach we also identify a form of dispersive equity that is not discussed in recent work but deserves further consideration

strength of preference and risky choice this paper provides conditions under which a utility function under risk can be legitimately interpreted to measure strength of preference between consequences these conditions require that if a decision maker regards the preference difference between acts a and b to be the same as the preference difference between acts a and b for every state of the world then the preference difference between a and b should be regarded as equivalent to the preference difference between a and b a key assumption is that a decision maker s preference differences between acts given one state of the world should be independent of common consequences given other states of the world usefulness of this result is discussed

production frontiers and panel data an application to u s class 1 railroads in this article the appropriateness of inefficiency measures obtained directly from the production function as in schmidt and sickles 1984 is examined relative to those provided by a the cost function aproach b klein s approach and c the iterative sur technique efficiency rankings yielded by different methods are also compared and tested

technical efficiency of finnish brewing plants a production frontier approach in recent years there has been a substantial change in the common approach to estimating production functions this is primarily the result of the stochastic frontier production model developed by aigner et al 1977 and meeusen and van den broeck 1977 their approach accords with the textbook definition of the production function which is a locus of maximum output levels from given input sets thus a one sided error term is introduced into the frontier production model since all the firms in an industry are not able to produce the frontier output this one sided error is interpreted as technical inefficiency which represents the amount by which a firm s output falls short of the maximum possible output earlier studies that applied this new approach involved estimation of the mean level of efficiency for the industry the subsequent literature has developed techniques to estimate technical inefficiency for each firm in the industry for example jondrow et al 1982 developed techniques to estimate technical inefficiency for each production unit when technical inefficiency is distributed as either half normal or exponential and is independent of the inputs used this last assumption is relaxed in kumbhakar 1987a and the estimation technique is extended to cover panel data the primary motivation for applications of frontier estimation techniques is the measurement of inefficiency this exercise thus has some direct policy relevance see schmidt 1985 86 in this paper we estimate the technical efficiency of 17 finnish brewing plants using panel data 1955 84 the distinguishing features of this study are that the data is of high quality and the observation period is long

efficiency estimation in a profit maximising model using flexible production function abstract this paper uses a flexible translog production function to estimate efficiency of 227 farms from west bengal india we consider estimation of technical and allocative inefficiencies using a profit maximising framework which accommodates both endogenous and exogenous inputs the maximum likelihood method of estimation developed in this paper is based on the production function and the first order conditions of profit maximisation farm specific technical and allocative inefficiencies are also estimated empirical results show that the mean level of technical efficiency is 75 46 while the best farm is 85 87 efficient technically so far as allocative efficiency is concerned the majority of the farms are found to be under users of the endogenous inputs viz fertiliser manure human and bullock labour

testing for short termism in the uk stock market a comment in the november i 993 issue of thisjournal david miles estimates and tests for the presence of short termism in the united kingdom using data from i980 to i988 based on a sample of 477 non financial firms he modestly declines to claim that he has detected the presence of shorttermism but concludes that those who believe it does not exist do need to explain something about the operation of security markets which makes longerterm cash flow appear to be discounted at much higher rates than shorter term flows the purpose of this note is to provide a model which gives such an explanation we shall also show that such a model is consistent with the empirical realities of the early i980s j we believe that the miles paper has two serious defects the first is the assumption that the risk premia per unit time varies across firms but is constant through time over under discounting is then detected relative to this base to quote miles

the relative technical efficiency of northern and southern u s farms in 1860 prior to the 1960s it was widely accepted that the slave economy of the south was unprofitable and inefficient 14 however in the 1960s a number of scholars demonstrated using economic analysis and econometric techniques that slavery was indeed profitable 5 12 this evidence was further supported by findings that per capita income in the south was not only high by standards of the mid nineteenth century but was also growing rapidly during the two decades preceding the civil war 7 8 9 although these findings were important they did not address the issue of the technical efficiency of northern and southern farms however in the early 1970s fogel and engerman determined that southern agriculture was more technically efficient than northern agriculture 11 13 this paper will also compare the relative technical efficiency of northern and southern farms for a sample of farms for the year 1860 however the method we will use to measure technical efficiency is superior to that used by fogel and engerman a non parametric production frontier is constructed with inefficiency measured by the extent to which firms operate below the frontier using this approach it is possible to determine whether technical inefficiency is the result of operating off of the isoquant pure technical inefficiency or operating at an inappropriate scale i e not operating at constant returns to scale the next section of this paper reviews the literature concerning the relative technical efficiency of northern relative to southern agriculture section three discusses the methodology used in this paper to measure the technical efficiency of farms section four presents and analyzes the empirical results and section five summarizes the paper

the economic efficiency of backward vertical integration in the international petroleum refining industry a benefit of backward vertical integration in the petroleum refining industry is reduced uncertainly in the supply of crude oil for refining however there is no a priori reason to believe that refiners are more skilful in managing combined refining and crude oil production operations than are specialists in these functions using the concept of frontier production functions efficiency differences between firms with differing degrees of backward vertical integration are estimated backward vertical integration improves scale efficieny and reduces business risk significantly but it reduces both technical and overall economic efficiency this is the first comprehensive empirical test of the efficiency of vertical integration in the literature

estimation of stochastic frontier production function and technical inefficiency via the em algorithm with the definition that e v u being the composite error various alogrithms such as the davidon fletcher powell method are then used for finding the optimal values of the parameter vector 0 b ao oa once the estimates of 0 are obtained jondrow lovell materov and schmidt jlms 4 recently propose a method of decomposing the estimated error y b x into separate components v and u the proposed decomposition method is based on the derivation of the conditional distribution of ut given the composite