bread and butter issues in ecuadorian food policy a comparative advantage approach abstract the effects of policy interventions on price incentives and resource use in wheat and dairying are analyzed for the ecuadorian sierra from 1970 to 1983 a period of rapid economic growth induced by a boom in petroleum revenues exchange rate and trade policies combined with subsidized transport services and farm credit to substantially tax wheat producers while milk producers received significant subsidies consequently self sufficiency in wheat production fell from about 50 in 1970 to near zero in 1983 while imports of dairy products remained very low throughout this period of rapidly expanding demand for both bread and livestock products measures of comparative advantage are constructed to show that these price distortions have led to substantial inefficiency in resource use due to thewidening gap between private and social profitability for wheat and for dairying

analysts interim earnings forecasts evidence on the forecasting process existing empirical evidence indicates that analyst forecasts of corporate earnings do not meet the strict rationality standards prescribed by econometric tests of the rational expectations hypothesis 1 in this paper we address the question of whether the expectation formation process underlying analyst forecasts is adaptive or whether these forecasts are influenced by noninformational factors such as incentives arising from the market for their forecasts o brien 1988 lin and mcnichols 1993 francis and philbrick 1993 and dugar and nathan 1992 and interaction between judgmental and or statistical forecasting methods bunn and wright 1991 fan 1990 and hoerl and kennard 1970 the rejection of rational expectations gives rise to two views of the forecasting process of analysts the first based on an informational argument is that the forecasting process is adaptive marcet and sargent

the information content of annual earnings releases a trading volume approach this paper reports the results of an empirical examination of the relations between the volume of securities traded the magnitude of surprises in annual earnings announcements and firm size although early trading volume studies e g beaver 1968 kiger 1972 and foster 1973 replicated basic information content studies with findings similar to those based on security prices we should not expect that security price and trading volume research will continue to yield identical results when more refined hypotheses are tested trading volume reflects investors activity by summing all market trades whereas security prices reflect an aggregation or averaging of investors beliefs as a result we will on occasion observe differences between price and volume reactions to earnings announcements as did morse 1981 this study extends the recent trend toward tests of more refined hypotheses by using a larger sample to examine the associations between unexpected earnings firm size and trading volume and testing whether such associations can be generalized across fiscal year end dates and stock exchange listing my results show a continuous positive relationship between trading

analysts gaap earnings forecasts and their implications for accounting research abstract we use newly available gaap forecasts to document that traditionally identified gaap forecast errors contain 37 measurement error correcting for this measurement error we settle a long standing debate regarding investor preference for gaap versus non gaap earnings and provide strong evidence of a preference for non gaap earnings we also revisit the use of non gaap exclusions to meet analysts forecasts when gaap earnings fall short results indicate that 34 of these traditionally identified meet or beat firms are misidentified due to measurement error and this error masks evidence that firms more frequently exclude transitory rather than recurring expenses for meet or beat purposes

analysts forecasts as proxies for investor beliefs in empirical research abstract we analyze how analysts forecasts relate to investor beliefs and describe the implications of these relations for price and volume reactions to earnings surprises we show that dispersion among forecasts does not fully capture investor uncertainty we also show how the relations between market reactions and forecast properties differ under the alternative assumptions of exogenous and endogenous private information acquisition finally the analysis suggests refined tests for volume reactions at the time of an announcement our results indicate that the model is useful for understanding and interpreting empirical work and developing empirical tests of market reactions to announcements

management earnings forecasts and value of analyst forecast revisions this study examines the stock price reactions to analyst forecast revisions around earnings announcements to test whether preannouncement forecasts reflect analysts private information or piggybacking on confounding events and news we find that management earnings forecasts influence the timing and precision of analyst forecasts more importantly evidence suggests that prior studies finding of weaker stronger stock price responses to forecast revisions in the period immediately after before the prior quarter earnings announcement disappears once management earnings forecasts are controlled for to the extent that management earnings forecasts are public disclosures our results suggest that the importance of analysts information discovery role documented in prior studies is likely to be overstated this paper was accepted by wei jiang finance

analyst forecasts and herding behavior the use of analyst forecasts as proxies for investors earnings expectations is commonplace in empirical research an implicit assumption behind their use is that they reflect analysts private information in an unbiased manner as demonstrated here this assumption is not necessarily valid there is shown to be a tendency for analysts to release forecasts closer to prior earnings expectations than is appropriate given their information further analysts exhibit herding behavior whereby they release forecasts similar to those previously announced by other analysts even when this is not justified by their information these results are shown to have interesting empirical implications article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

firm valuation earnings expectations and the exchange rate exposure effect consistent with previous research we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar we investigate the possibility that this failure is due to mispricing lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms suggesting that mispricing does occur a simple trading strategy based upon these results generates significant abnormal returns corroborating evidence from returns around earnings announcements as well as errors in analysts forecasts of earnings is also provided it is a widely held view that exchange rate movement should affect the value of a firm standard economic analysis implies that the profitability and value of most u s firms with foreign sales or operations abroad should increase decrease with an unexpected depreciation appreciation of the dollar as expected foreign currency cash flows translate into larger smaller u s

exchange rate and wage price dynamics a theoretical analysis and an econometric investigation abstract this paper is an attempt to analyze inflation dynamics in a small open economy as the result of the interaction between wage and price determination behaviors and the interest rate exchange rate feedback in the context of dornbusch s model an extended version of this model is specified and analyzed formally then the model is estimated for five oecd countries using a full information maximum likelihood technique finally simulations of the effect of monetary shocks are presented for four countries

security analyst superiority relative to univariate time series models in forecasting quarterly earnings abstract this paper provides evidence of security analyst sa superiority relative to univariate time series ts models in predicting firms quarterly earnings numbers and shows that sa forecast superiority in our sample is attributable to 1 better utilization of information existing on the date that ts model forecasts can be initiated a contemporaneous advantage and 2 use of information acquired between the date of initiation of ts model forecasts and the date when sa forecasts are published a timing advantage

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

price smoothing and inventory this paper explains the phenomenon of price rigidity or price smoothing as the outcome of the optimal inventory policy of a multi period profit maximizing firm under demand and output uncertainties price smoothing may be manifested in two forms first price changes may be moderated with respect to those implied by the demand function and second the firm may choose to restrict price fluctuations by establishing upper and or lower bounds on prices we show that the extent of the asymmetry in price smoothing depends on the relationship between the inventory holding cost and the backlog penalty cost our model accommodates a wide range

do inventory and gross margin data improve sales forecasts for u s public retailers firm level sales forecasts for retailers can be improved if we incorporate cost of goods sold inventory and gross margin defined by us as the ratio of sales to cost of goods sold as three endogenous variables we construct a simultaneous equations model estimated using public financial and nonfinancial data to provide joint forecasts of annual cost of goods sold inventory and gross margin for retailers using historical data we show that sales forecasts from this model are more accurate than consensus forecasts from equity analysts further the residuals from this model for one fiscal year are used to predict retailers for whom the relative advantage of model forecasts over consensus forecasts would be large in the next fiscal year our results show that historical inventory and gross margin contain information useful to forecast sales and that equity analysts do not fully utilize this information in their sales forecasts

relative food prices under structural adjustment preliminary findings from latin america abstract this article examines the effects of changes in policies concerning exchange rates and consumer subsidies on relative prices of staple foods in selected latin american countries in countries where previously high subsidies on imported foods were reduced sharply or eliminated during the 1980s prices of imported tradables have risen relative to prices of domestically produced foods elsewhere the impact of structural adjustment programmes has not been very clear and more in depth research is needed

bond and stock market response to unexpected earnings announcements this study examines whether earnings changes convey information in bond markets and finds a significant positive negative reaction to unexpected earnings increases decreases the results are consistent whether earnings announcements precede or follow dividend announcements thus earnings surprises convey information to bond markets and changes in firm value are split among bondholders and stockholders this is in contrast to evidence from studies examining unexpected dividend announcements where bond price reaction is asymmetric cross sectional analysis reveals that bond excess returns are positively related to earnings surprises i introduction stock market reaction to earnings announcements has received significant attention in the finance and accounting literature ball and brown 1968 brown 1978 watts 1978 aharony and swary 1980 and fried and givoly 1982 are some ofthe studies that observe a revision of stock prices associated with the release of earnings information lev 1989 provides a survey of research in this area the explanation for the above empirical findings is that unexpected earnings provide new information about future cash flows furthermore the classical discounted cash flow model predicts a revision in firm value that is the present value of expected future cash flows whether this increased firm value accrues to stockholders and bondholders is an empirical issue past research on the information content of earnings has focused solely on stock price behavior and finds at least part of the benefits accrue to stockholders in this study we examine the bond market reaction to unexpected quarterly earnings announcements the study is unique for several reasons first dividends repurchases and earnings are eonsidered primary mechanisms used by manage ment to convey information about future cash flows to securityholders recent

toward a model of risk in declining organizations an empirical examination of risk performance and decline scholars who study organizational decline have argued that declining organizations reduce or eliminate their riskier activities such as innovation further they cite reduced risk taking as a primary contributor to further decline scholars with an interest in risk per se come to the opposite conclusion low performing firms often take more risks than other firms and such risks reduce subsequent performance this study attempts to resolve these conflicting views by examining the risk of firms in decline our model based on cyert march s cyert r m j g march 1963 a behavioral theory of the firm prentice hall englewood cliffs nj behavioral theory of the firm includes six basic variables 1 performance 2 slack 3 aspirations 4 expectations 5 risk income stream uncertainty and 6 organization size as a measure of decline the estimated model includes prior levels of risk and performance in the risk and performance equations respectively as controls this study uses data on 34

oil exports agrarian change and the rural labor process the ecuadorian sierra in the 1970s abstract the rapid expansion of the ecuadorian economy in the 1970s was contingent on the growth of oil exports although the benefits were largely distributed in the urban sector the impact on the rural sierra was significant urban consumer demand led to an expansion in food production while the high growth rates in the urban services and construction sectors provided employment opportunities for temporary migrants from the rural sector as a consequence the small farm economy of the sierra was able to reproduce itself despite continuing asset scarcity there was no marked increase in the number of landless households this has now been reversed by the severe recession that has occurred since 1980 real incomes have now fallen below their 1970 level in the small farm sector

analysts conflicts of interest and biases in earnings forecasts analysts earnings forecasts are influenced by their desire to win investment banking clients we hypothesize that the equity bull market of the 1990s along with the boom in investment banking business exacerbated analysts conflicts of interest and their incentives to strategically adjust forecasts to avoid earnings disappointments we document shifts in the distribution of earnings surprises and related changes in the market s response to surprises and forecast revisions the evidence for shifts is stronger for growth stocks where conflicts of interest are more pronounced however shifts are less notable for analysts without ties to investment banking and in international markets

career concerns of banking analysts we study how career concerns influence banking analysts forecasts banking analysts first last earnings forecast of the year is relatively more optimistic pessimistic for a bank that could be their future employer this pattern is not observed when the same analysts forecast earnings of banks unlikely to be their future employer we use the global settlement as an exogenous shock on career concerns and show that this forecast pattern is more pronounced after the settlement moreover we find evidence that analysts benefit from this behavior as analysts that are more biased in their forecasts of potential future employers are more likely to move to a higher reputation bank

loss function assumptions in rational expectations tests on financial analysts earnings forecasts abstract prior research concludes that financial analysts do not process public information efficiently in generating their earnings forecasts the ordinary least squares ols regression based tests used in prior studies assume implicitly that analysts face a quadratic loss function in contrast we argue that analysts likely face a linear loss function and hence try to minimize their absolute forecast errors we conduct and compare rational expectations tests using these two alternative loss functions we reproduce most prior findings of forecast inefficiency with ols regressions but find virtually no evidence of forecast inefficiency with least absolute deviation regressions where we explicitly assume a linear loss function

autoregressive modeling of earnings investment causality the purpose of this paper is to empirically test the relationships between corporate earnings and investment in particular the study investigates whether knowledge of past investments improves the prediction of future earnings beyond predictions that are based on past earnings alone similarly it investigates whether knowledge of past earnings improves the prediction of future investments beyond knowledge of past investments alone this is the empirical definition of granger causality the empirical results show that the bivariate past series of earnings and investments is superior to the univariate series in predicting future investments but not in predicting future earnings

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

the relative and complementary performance of analyst and security price based measures of expected earnings abstract this paper evaluates the relative performance of ibes consensus financial analyst forecasts and forecasts based upon the anticipatory behaviour of security prices according to two criteria a the accuracy of earnings growth predictions and b the contemporaneous association between unexpected earnings and security returns during the forecast year results are presented for firms in differing size groups measured here by market capitalization the results indicate that neither forecast source is superior to the other in terms of either criterion there is however significant complementarity of financial analyst and price based forecasts

earnings surprise research synthesis and perspectives an investigation of the relation between earnings surprise and three empirical anomalies the p e effect the size effect and the value line enigma indicates that the standardized unexpected earnings sue effect appears to be separate and distinct from each of the three the relations between the sue phenomenon and firm risk the appropriateness of the earnings expectations model and the role of transaction costs are also investigated the sue phenomenon is not attributable to inappropriate risk adjustment use of the wrong earnings expectations model or ignoring transaction costs the sue effect may be partly explained by analysts behavior and is both predictable and profitable the sue effect has also been observed in japan

automated earnings forecasts beat analysts or combine and conquer prior studies attribute analysts forecast superiority over time series forecasting models to their access to a large set of firm industry and macroeconomic information an information advantage which they use to update their forecasts on a daily weekly or monthly basis a timing advantage this study leverages recently developed mixed data sampling midas regression methods to synthesize a broad spectrum of high frequency data to construct forecasts of firm level earnings we compare the accuracy of these forecasts to those of analysts at short horizons of one quarter or less we find that our midas forecasts are more accurate and have forecast errors that are smaller than analysts when forecast dispersion is high and when the firm size is smaller in addition we find that combining our midas forecasts with analysts forecasts systematically outperforms analysts alone which indicates that our midas models provide information orthogonal to analysts our results provide preliminary support for th

information asymmetry valuation and the corporate spin off decision we empirically analyze the information hypothesis that the separation of a rm s divisions into independently traded units through a spin o enhances value because it mitigates information asymmetry about the rm consistent with this hypothesis we nd that rms that engage in spin o s have higher levels of information asymmetry compared to their industry and size matched counterparts and the information problems decrease signi cantly after the spin o the gains around spin o s are positively related to the degree of information asymmetry and this relation is more pronounced for rms with fewer negative synergies between divisions finally rms with higher growth opportunities and rms in need of external capital show a higher propensity to engage in spin o s they also raise more capital following a spin o which is consistent with the view that

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

exchange rate dynamics an empirical investigation this paper estimates a reduced form exchange rate equation whose estimates are used to address questions on exchange rate overshooting intermediate run exchange rate dynamics and long run proportionality relationships between relative money supplies and exchange rates based on swiss u s data from the period 1973 79 the major findings are that following a monetary shock there is short run exchange rate overshooting by a factor of about two and that subsequent exchange rate adjustments to a new long run equilibrium take longer than 2 years and exhibit nonmonotonic patterns

the rewards to meeting or beating earnings expectations abstract this paper finds that firms that meet or beat current analysts earnings expectations mbe enjoy a higher return over the quarter than firms with similar quarterly earnings forecast errors that fail to meet these expectations further such a premium to mbe although somewhat smaller exists in the cases where mbe is likely to have been achieved through earnings or expectations management the findings also indicate that the premium to mbe is a leading indicator of future performance this premium and its predictive ability are only marginally affected by whether the mbe is genuine or the result of earnings or expectations management

earnings announcements and attention constraints the role of market design abstract we identify a new channel market makers attention constraints through which earnings announcements for one stock affect the liquidity of other stocks when some stocks handled by a designated market maker have earnings announcements liquidity is lower for non announcement stocks handled by the same market maker with the largest effects coming from earnings surprises and stocks with high earnings response coefficients half of the liquidity decline reflects attention constraints binding on the individual market maker and the other half is explained by the market maker s inventory we further find that a market design change that increases automation alleviates the liquidity effect of attention constraints despite an increase in the number of stocks allocated to each market maker

consensus forests of corporate earnings analysts forecasts and time series methods an alternative to using a single forecasting method is to average the forecasts made by various methods in this paper we examine empirically combinations of financial analysts forecasts and forecasts from time series methods in order to predict corporate earnings per share we conclude that on average the primary forecasting advantages of analysts over time series methods based on annual data appear to occur over short forecast horizons less than a year neither analysts nor other time series methods substantially outperform a random walk prediction of no change when forecasts are made near the beginning of the fiscal year for predictions in the first half of the fiscal year there is evidence of forecasting benefits from combining time series and analysts forecasts especially if there are few analysts forecasts

managers earnings forecasts and intra industry information transfers abstract the effect that voluntarily disclosed managers earnings forecasts have on the security prices of the announcing firms and other firms in the same industry is examined the results are consistent with information content in managers forecasts and with information transfer between forecast firms and other firms in the industry these inferences are drawn from firms abnormal returns computed from single and two index pricing models where the latter includes market and industry indexes interestingly while a positive information transfer is evident with market model residuals once industry cross sectional covariation in firms returns is removed no directional relation is apparent

adjustment to monetary policy and devaluation under two tier and fixed exchange rate regimes abstract the purpose of this paper is to determine whether a two tier exchange rate regime is more effective than a fixed rate regime in increasing a country s ability to pursue an independent monetary policy the analysis compares adjustment to a monetary policy and to a devaluation in the two exchange rate regimes in a portfolio model under imperfect assets substitutability it is shown that a two tier exchange rate regime is capable of reducing the current account effects of monetary injection or devaluation only in the long run in the short run however we can get a larger current account response under a two tier regime these results reflect the trade off between quantity and price adjustment

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

block trading and information revelation around quarterly earnings announcements the author investigate the empirical importance of information revelation in the pricing of block trades in particular he examine whether block prices are correlated with the unexpected part of firms quarterly earnings for his sample of block trades information revelation does indeed appear to be a significant factor shortly before earnings announcements article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a note on the effectiveness of security analysts forecasts abstract the purpose of this note is to examine the effectiveness of security analysts forecasts diversified sample of 159 firms with a 1980 1982 post sample estimation period the results of this study indicate the analysts forecasts produce statistically significant excess returns

are risk averse agents more optimistic a bayesian estimation approach our aim is to analyze the link between optimism and risk aversion in a subjective expected utility setting and to estimate the average level of optimism when weighted by risk tolerance this quantity is of particular importance since it characterizes the consensus belief in risk taking situations with heterogeneous beliefs its estimation leads to a nontrivial statistical problem we start from a large lottery survey 1 536 individuals we assume that individuals have true unobservable characteristics and that their answers in the survey are noisy realizations of these characteristics we adopt a bayesian approach for the statistical analysis of this problem and use an hybrid mcmc approximation method to numerically estimate the distributions of the unobservable characteristics we obtain that individuals are on average pessimistic and that pessimism and risk tolerance are positively correlated as a consequence we conclude that the consensus belief is biased towards pessimism

do bright line earnings surprises really affect stock price reactions several influential studies have concluded that earnings surprises just to the right or to the left of a hypothesized bright line produce distinct price reactions compared with surrounding earnings surprises because they convey special meaning in this study we examine whether previous inferences of asymmetric stock price reactions to bright line surprises are observed when empirical tests are designed to be consistent with a rational expectations equilibrium focusing on a small range of earnings surprises around hypothesized bright lines we find no evidence of asymmetric price reactions once investors ex ante expectation of bias in earnings surprises is controlled results from additional tests yield support for the external validity of the theoretical framework underlying our bright line pricing tests our findings suggest simple refinements to traditional bins comparison and regression tests for asymmetric price reactions to bright line earnings surprises which account for necessary conditions imp

monetary policy under dual exchange rates abstract this paper finds that the introduction of dual exchange rates gives the monetary authority greater independence from external constraints than it would otherwise enjoy the monetary authority is able to influence the level of aggregate demand in the short run and to sterilize the effects of temporary foreign disturbances in addition the paper finds that dual rates insulate the domestic economy fully from foreign interest rate changes but do not provide insulation from speculative disturbances

intraindustry information transfers associated with management forecasts of earnings this study documents information transfers associated with the sign and magnitude of the changes in earnings expectations conveyed by management forecasts that is the management forecast of one firm discloser generates unexpected price reactions for firms nondisclosers similar to the forecaster the results are consistent with information transfers documented for releases of actual earnings foster 1981 and sales announcements olsen and dietrich 1985 1 these results build on prior management forecast research that has documented a link between the sign and magnitude of the changes in earnings expectations conveyed by management forecasts and the unexpected share returns price reactions of forecasting firms ajinkya and

dispersion of financial analysts earnings forecasts and the option model implied standard deviations of stock returns this study examines whether the information implied by simultaneous levels of option and stock prices specifically the implied standard deviation of returns reflects other contemporaneously available information the independent contemporaneous measure considered is the observed dispersion across several financial analysts at a point in time in the forecasts of earnings per share for a given firm the results indicate that implied standard deviations clearly reflect the contemporaneous dispersion in analysts forecasts incrementally i e beyond the information contained in the historical time series of returns various tests of the black scholes option pricing model have appeared in the literature the basic formulation posits the price of a call option to be a function of the simultaneous market price of the underlying stock the instantaneous variance of the stock s rate of return the exercise price and time to maturity of the option and the risk free interest rate studies by black and scholes 2 galai 8 chiras and manaster 4 and macbeth and merville 12 used the formula to explain the observed prices of options to a successful degree in these tests all the information needed by the formula was directly observable except the instantaneous stock return variance which was measured as the time series variance of historical stock returns manaster and rendleman 14 inverted the procedure to calculate implied stock prices and implied standard deviations of stock returns simultaneously and showed that such implied prices contain information regarding equilibrium future stock prices that is not fully reflected in observed stock prices another set of studies see latane and rendleman 11 chiras and manaster 4 schmalensee and trippi 16 among others examined the properties of the implied instantaneous variance or standard deviation of stock returns that falls out of the formula when the values of all remaining variables are supplied in a test of the predictive ability of such implied standard deviations isd s chiras and manaster 4 found that for predicting future actual time series standard deviations fsd s of stock returns the isd s were superior predictors relative

the superiority and disciplining role of independent analysts abstract we show that although forecasts of independent analysts are less accurate ex post they yield forecast errors that are more strongly associated with abnormal stock returns this suggests that forecasts of independent analysts are superior to those of nonindependent analysts in representing ex ante market expectations we also show that forecasts of nonindependent analysts become more accurate and less biased and produce forecast errors more strongly associated with abnormal stock returns when independent analysts are following the same firms than when they are not this suggests that the presence of independent analysts disciplines the behavior of nonindependent analysts

the information content of earnings revenues and expenses in this paper we model risk adjusted returns at earnings announcements as a function of unexpected revenues and unexpected expenses in order to test for the information content of the components of earnings as well as for their incremental information content over earnings we use value line vl forecasts of earnings and revenues as a proxy for the market s expectation of these numbers and as a basis for the market s expectation of expenses we find both revenues and expenses have information content that is incremental to earnings we also model riskadjusted returns as a function of earnings and revenues to compare our findings with previous research that used a martingale model to derive expected revenues consistent with previous research we find no incremental information content in revenues in this formulation however we find information content in both earnings and revenues when expectations are taken from vl forecasts wilson 1986 found that investors used the earnings and revenues released at the preliminary announcement date to forecast the accruals and funds subsequently disclosed in the annual report or 10 k however he found no evidence of information content for revenues at this date wilson used prior periods revenues cash from operations current and noncurrent accruals and capital expenditures to predict revenues using

information content and the speed of stock price adjustment the process by which security prices adjust to the release of new information is an area of study which has received much attention in accounting and finance in finance the main interest has been whether prices adjust in a rapid and unbiased manner to new information in accounting the focus has been more on whether different accounting disclosures have information content the study reported here combined both interests in that we investigated the speed of adjustment of releases of information which had different degrees of information content as illustrations dann mayers and rabb 1977 tested the sensitivity of a block trade trading rule to the speed of price adjustments this rule first suggested by grier and albin 1973 is based on the assumption that abnormal returns can be earned by purchasing shares at the block price and selling at that day s closing price dann mayers and rabb hereafter dmr found that unless one could purchase the stock within five minutes of the block trade the profitability of the grier and albin rule was seriously impaired they also found the market price to be an unbiased estimate of the closing price within 15 minutes of the block trade similarly hillmer and yu 1979 devised an alternative test for the speed of price adjustment based on a cumulative sum technique they illustrated the technique by testing for shifts in the parameters of the distributions of price changes and of transaction frequencies around five information events two earnings announcements and three defense

prediction performance of earnings forecasts the case of u s multinationals prior accounting research has provided evidence of the information content of a company s actual or predicted accounting earnings prior studies have also found that factors such as firm size industry or systematic risk influence the accuracy of the earnings predictions this study investigates the accuracy and the consensus among forecasters of earnings estimates for u s domestic and u s multinational corporations companies were classified into a domestic or multinational type for this research following the criteria established by statement of financial accounting standards no 14 for required disclosure of foreign operations the empirical results indicate that the accuracy of earnings forecasts is significantly lower for purely domestic firms than for u s based multinationals likewise the level of consensus in earnings estimates submitted by financial analysts is significantly lower for u s domestic than for u s multinational firms

predicting forecast errors through joint observation of earnings and revenue forecasts abstract we propose a simple method to infer the forecast error associated with quarterly estimates of earnings and revenue before the firm announces realized earnings and revenue the method uses estimates of the profit margin implied by an analyst s forecasts of both earnings and revenue to identify forecasts that are likely to be optimistic or pessimistic the ability to anticipate forecast error permits a trading strategy that exploits the average market reaction following positive and negative earnings and revenue surprises

on the theory of the firm underlying empirical models of aggregate price behavior recent empirical work on aggregate and industrial price behavior has been conducted within the framework of a static neo classical theory of price formation 2 the purpose of this paper is to propose a more general theoretical framework for analyzing price behavior the proposed framework is neo classical in its basic characteristics but unlike the recent literature it is based on a dynamic theory of firm behavior in which decisions on price inventories and the capital stock are integrated to serve as a basis for comparison with the model developed here it is useful to state briefly the main propositions of the static neo classical model the model presumes that the typical firm behaves as if it were a simple monopolist that faces competitive factor input markets and sets its price so as to maximize current profits assuming a log linear demand function and production function the model yields the result that the firm s long run optimal price policy in general is

financial analysts forecasts of earnings a better surrogate for market expectations abstract the specification of the market expectation of accounting numbers is a common feature of many empirical studies in accounting and finance givoly and lakonishok 1979 found that financial analysts forecasts have information content this study evaluates the quality of analysts forecasts as surrogates for the market expectation of earnings and compares it with that of prediction models commonly used in research results indicate that prediction errors of analysts are more closely associated with security price movements suggesting that analysts forecasts provide a better surrogate for market expectations than forecasts generated by time series models the study also identifies factors that might contribute to the performance of the financial analysts forecasts the broadness of the information set employed by analysts and to a lesser extent their reliance on information released after the end of the fiscal year appear to be important contributors to their performance

a model of the natural rate of unemployment since the publication of edmund phelps volume the new macroeconomics has treated the labor market as a dynamic process of rational search by unemployed workers for available vacancies wages are viewed as at least potentially flexible though free contracting between workers and firms may lead to fixed wages in the short run imperfect information is a crucial element of the theory for it implies both a need for contracting and a need for rational search rather than simple market clearing in each period a positive rate of frictional unemployment may exist in equilibrium denoted as the natural rate this unemployment is due to the frictions in the search process and imperfections in information rather than to any deficiency in aggregate demand milton friedman defined the natural rate as the level that would be ground out by the walrasian system of general equilibrium equations provided there is embedded in them the actual structural characteristics of the labor and commodity markets including market imperfections stochastic variability in demands and supplies the cost of gathering information about job vacancies and labor availabilities the costs of mobility and so on p 8 this paper reexamines the micro foundations of the natural rate in a model of labor market equilibrium in which turnover flows and imperfect information are explicitly considered workers may quit their current jobs to enter the unemployment pool in order to search among available vacancies for a more preferred position firms economize on turnover by an appropriate wage policy

stock dividends stock splits and signaling this paper provides evidence that firms signal their private information about future earnings by their choice of split factor split factors are increasing in earnings forecast errors after controlling for differences in pre split price and firm size furthermore price changes at stock dividend and split announcements are significantly correlated with split factors holding other factors constant and with earnings forecast errors these correlations suggest that management s choice of split factor signals private information about future earnings and that investors revise their beliefs about firm value accordingly the analysis also suggests however that announcement returns are significantly correlated with split factors after controlling for earnings forecast errors this suggests that earnings forecast errors measure management s private information about future earnings with error that split factors signal other valuation relevant attributes or that a signaling explanation is incomplete researchers have long puzzled over the role of stock splits and stock dividends a stock dividend or split increases the number of equity shares outstanding but has no effect on shareholders proportional ownership of shares it is therefore puzzling that firms engage in these transactions and even more so that stock prices rise on average when these transactions are announced as grinblatt masulis and titman 1984 document the significant positive announcement effects led grinblatt masulis and titman hereafter gmt to hypothesize that firms signal information about their future earnings or equity values through their split decisions to date this hypothesis has met with limited support gmt conclude that the announcement returns cannot be explained by forecasts of imminent increases in cash dividends because they observe similar stock price behavior in firms that do not pay dividends our study provides further evidence on the signaling hypothesis by testing whether stock dividends and splits convey information about future earnings and by testing whether the split factor itself is the signal the notion that the split factor may act as a signal has institutional as well as theoretical support practitioners have long contended that the purpose of stock splits is to move a firm s share price into an optimal trading range baker and gallagher 1980 who surveyed chief financial officers of firms that split their shares report that 94 of their sample indicated their stock splits moved their

additional evidence on the information content of management earnings forecasts prior studies have documented that management earnings forecasts which exceed expected earnings good news forecasts are associated with significant positive abnormal stock returns on average when publicly released however no significant negative abnormal returns are observed immediately surrounding the release of management forecasts which are defined as bad news these findings conflict with the results to date on price reactions associated with earnings announcements for example ball and brown 1968 found that good news bad news annual earnings announcements are associated with positive negative abnormal returns in the months preceding and including the annual earnings announcement foster 1977 reported similar findings for quarterly earnings announcements beaver clarke and wright 1979 found a positive ordinal association between the magnitude of unexpected earnings the difference between actual earnings and expected earnings

insulation properties of a two tier exchange market in a portfolio balance model when countries peg their currencies to those of their major trading partners they expose themselves to interest sensitive and speculative capital flows that can undermine their ability both to maintain their exchange rate and to pursue an independent monetary policy some countries notably france italy and the belgo luxembourg economic union bleu experimented with two tier exchange rates in the early 1970s in the hopes of insulating their economies from the effects of international capital flows while at the same time protecting foreign trade from exchange rate fluctuations france and italy soon abandoned the experiment but the bleu continues to maintain separate exchange markets with separate exchange rates for current and capital account transactions the commercial exchange rate which relates to the market for current account transactions is generally pegged by the authorities the financial exchange rate determined in the market for capital account transactions is usually free to fluctuate 1 this paper investigates how well a two tier exchange market insulates a small open economy from foreign disturbances taking into account recent developments in the theory of exchange rate determination work by branson 1977 dornbusch 1976 and kouri 1976 suggests that the short run equilibrium value of the exchange rate is determined along with interest rates by demand and supply in the markets for financial assets this asset market or portfolio balance approach to exchange rate determination is particularly well suited to a study of the two tier exchange market one can view the financial exchange rate as a relative asset price it is among the variables that equilibrate asset markets and it is determined in the short run in those asset markets previous theoretical work on the two tier exchange market has generally been within the mundellian framework the financial exchange rate has been treated as equating a flow demand and supply of foreign exchange the asset market approach has the advantage of carefully distinguishing between stocks and flows in particular it treats demands for assets as stock demands that are realized instantaneously so that actual holdings of assets always reflect the desired composition of the portfolio disturbances to portfolio equilibrium create immediate stock adjustments as portfolios are rebalanced causing instantaneous changes in endogenous market clearing variables in addition disturbances alter the rate of accumulation the flow of financial assets over time portfolio balance models of two tier exchange rates can be found in dornbusch 1976 and decaluwe and steinherr 1976 but they differ from the one presented here dornbusch partitioned the exchange market so that interest income a current account transaction was channelled through the financial market that segmentation yields a different expected rate of return on foreign

firm characteristics and analyst following abstract this paper examines the major determinants of the number of analysts following a firm a simple model of analyst following is proposed and several firm characteristics are suggested that are likely to influence the extent of a firm s analyst following by either affecting the aggregate demand for or supply of analyst services or both for the firm almost all of these characteristics are found to be strongly significant in affecting the extent of analyst following of firms and the empirical results generally accord well with economic intuition

inefficiency in analysts earnings forecasts systematic misreaction or systematic optimism a rational analysis of analyst behavior predicts that analysts immediately and without bias incorporate information into their forecasts several studies document analysts tendency to systematically underreact to information underreaction is inconsistent with rationality other studies indicate that analysts systematically overreact to new information or that they are systematically optimistic this study discriminates between these three hypotheses by examining the interaction between the nature of information and the type of reaction by analysts the evidence indicates that analysts underreact to negative information but overreact to positive information these results are consistent with systematic optimism in response to information the literature on financial analysts defines the phrase forecast inefficiency to mean forecasts that fail to accurately incorporate new information on a timely basis and or that are biased these forecasts have also been described as irrational or suboptimal prior studies report inefficiency in analysts forecasts finding that they are upwardly biased and inaccurately reflect available information some studies conclude from this that analysts underreact to information other studies conclude that analysts overreact if markets treat analysts forecasts as both rational and statistically optimal then inefficient forecasts could have important implications for the efficiency of pricing in securities markets in this paper we reexamine the apparent tendency of analysts to misinterpret earnings information the intent of this study is to discriminate between three hypotheses 1 that analysts systematically underreact to new earnings information 2 that analysts systematically overreact to new earnings information and 3 that analysts are systematically optimistic in their reactions for hypotheses 1 and 2 the direction of the misinterpretation i e underor overreaction is independent of the nature of the information received in contrast hypothesis 3 predicts that analysts are optimistic in interpreting

price inertia and policy ineffectiveness in the united states 1890 1980 this paper introduces a new approach to the empirical testing of the lucas sargent wallace lsw policy ineffectiveness proposition which compares the lsw hypothesis with an alternative that states that prices respond fully in the long run but only gradually in the short run to nominal aggregate demand disturbances the empirical equations estimated for a new set of quarterly data extending back to 1890 exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal gnp the paper compares and tests three alternative methods of introducing persistence effects into the lsw framework

real exchange rate overshooting and the output cost of bringing down inflation implementing a gradualist policy of monetary contraction in an open economy with a freely floating exchange rate but with nominal inertia in domestic labor costs can lead to prompt and substantial changes in the nominal and real exchange rate one of the virtues claimed for such exchange rate overshooting however is its immediate effect on the price level and so on domestic wage and price inflation in this paper we show that in a model which is super neutral and has nominal inertia in both the level of labor costs and their trend or core rate of growth this early overshooting of the exchange rate does not succeed in cutting the output costs of reducing steady state inflation those output and unemployment costs which are initially avoided by over valuing the currency have to be paid later when this overvaluation is corrected relative to other policies which achieve the same effect on steady state inflation exchange rate overshooting brings inflation down more quickly this abstract was borrowed from another version of this item

testing a causal model of corporate risk taking and performance the determinants of organizational risk taking and its impact on economic performance are critical issues in strategic management using a model that included risk performance performance expecta

14 week quarters many firms define their fiscal quarters as 13 week periods for these firms each fiscal year contains 52 weeks which leaves out one two day s a year to compensate one extra week is added to every fifth sixth year consequently one quarter therein comprises 14 weeks we find evidence of predictable stock returns and forecast errors in 14 week quarters which suggests that investors and analysts do not on average adjust their expectations for the extra week the ease with which 14 week quarters can be predicted and expectations adjusted suggests a surprising lack of effort on the part of investors and analysts