the collateral channel how real estate shocks affect corporate investment abstract what is the impact of real estate prices on corporate investment in the presence of financing frictions firms use pledgeable assets as collateral to finance new projects through this collateral channel shocks to the value of real estate can have a large impact on aggregate investment to compute the sensitivity of investment to collateral value we use local variations in real estate prices as shocks to the collateral value of firms that own real estate over the 1993 2007 period the representative us corporation invests 0 06 out of each 1 of collateral jel d22 g31 r30

strategic behavior in contests comment almost by definition contests involve strategy this is especially true in contests between unevenly matched contenders in a recent article avinash dixit 1987 explored strategic commitment in contests between a favorite and an underdog the favorite is defined as the player whose chance of victory exceeds one half at the nash equilibrium an underdog s chance is less than one half dixit concludes that if the favorite has the opportunity to move first then he will overcommit effort compared with the nash equilibrium an important implication of the favorite overcommitting effort is that strategic behavior leads to greater social costs see gordon tullock 1980 the opposite holds if the underdog has the opportunity to move first this paper demonstrates that the favorite will never overcommit effort given endogenous order of moves the favorite finds it advantageous to wait until the underdog moves surprisingly the underdog s best strategy is not to wait but to make the first move throwing the first punch the equilibrium order of play is for the underdog to move before the favorite in this equilibrium one never observes overcommitment of effort consequently extending dixit s model to allow for endogenous order of moves suggests that strategic behavior in contests will lead to undercommitment compared with nash behavior

cooperative and noncooperative r d in duopoly with spillovers contrary to the usual assumption made in most oligopoly models relations among firms are seldom of a wholly cooperative or noncooperative type in many situations they compete in some fields while they cooperate in others an important example is the case of cooperative research efforts bringing fierce competitors together two types of agreement are observed first r d cooperation can take place at the so called precompetitive stage companies share basic information and efforts in the r d stage but remain rivals in the market place 1 a second type of agreement involves an extended collusion between partners creating common policies at the product level the usual justifications of this extension are the difficulties of protecting intellectual property the idea is then to allow partners who have achieved inventions together to also control together the processes and products which embody the results of their collaboration in order to recuperate jointly their r d investments 2 what could be expected from these types of agreement is a reduction in r d expenditures because of less wasteful duplication and a reduction of total production because of more reprinted from the american economic review 78 5 1133 1137 1988 center for operations research econometrics 1348 louvain la neuve belgium we are grateful to jean

cost reduction competition and industry performance in many markets firms compete over time by expending resources with the purpose of reducing their costs sometimes the cost reducing investments operate directly on costs in many instances they take the form of developing new products that deliver what customers need more cheaply therefore product development can have the same ultimate effect as direct cost reduction in fact if one thinks of the product as the services it delivers to the customer in the way that lancaster pioneered then product development often is just cost reduction

the changing time series properties of earnings cash flows and accruals has financial reporting become more conservative abstract this paper documents changes in the patterns of earnings cash flows and accruals over the last four decades in the absence of a generally accepted definition of conservatism a number of measures of reporting conservatism are identified and examined these measures rely on the accumulation of nonoperating accruals the timeliness of earnings with respect to bad and good news characteristics of the earnings distribution and the market to book ratio the patterns are consistent with an increase in conservative financial reporting over time the findings have implications for accounting standard setting regulation of financial information and financial statement analysis

investor valuation of the abandonment option abstract we investigate whether investors price the option to abandon a firm at its exit value theory prices this real option as an american put with both a stochastic strike price exit value and a stochastic value of the underlying security the value of cash flows the empirical implications are that firm value increases in exit value after controlling for expected going concern cash flows and that more generalizable assets produce more abandonment option value using discounted earnings forecasts to proxy for expected cash flows and prior literature to categorize asset generalizability we find strong support for the predictions of abandonment option theory

trade policy mix ipr protection and r d subsidies this paper analyses strategic r d policy under circumstances where intellectual property rights protection resulting from firms r d investment is not perfect by examining policy choices wherein a government chooses both r d subsidies and ipr protection levels simultaneously we show that it is optimal for a government to adopt sufficiently weak ipr protection and to subsidize r d investments of domestic firms inducing r d investment of foreign rival firms will increase the profits of domestic firms ce memoire analyse une politique strategique de r d quand la protection des droits de propriete intellectuelle dpi qui decoulent d investissements en r d par les entreprises est imparfaite en examinant les choix de politiques par lesquels un gouvernement definit simultanement les niveaux de subventions pour la r d et de protection de la propriete intellectuelle on montre qu il est optimal pour un gouvernement d adopter une protection des dpi suffisamment faible et de subventionner les investissements en r d des entreprises nationales susciter un accroissement des investissements en r d des entreprises etrangeres rivales devrait augmenter les profits des entreprises nationales

drexel burnham lambert s bankruptcy and the subsequent decline in underwriter fees abstract in the 1980s drexel burnham lambert dominated the underwriting of junk bonds with close to a 50 market share in 1990 drexel went bankrupt and was liquidated and the percentage underwriting fees for junk bonds subsequently dropped dramatically we present strong evidence that the exit of drexel burnham lambert and the resulting increase in competition for market share were major contributing factors to the decline in junk bond underwriter fees

sunk costs financial markets and contestability abstract this paper analyzes the proposition that the theory or contestable markets will yield good predictions for markets in which sunk costs although present are unimportant two results are of interest 1 if costs are at all sunk incumbent firms will be able to engage in strategic behavior with respect to entrants 2 if no costs are sunk but firms finance investment by borrowing incumbent firms will be able to engage in strategic behavior with respect to entrants in these cases one must analyze strategic behavior of incumbent firms to analyze market performance

changes in the value relevance of earnings and book values over the past forty years this paper investigates systematic changes in the value relevance of earnings and book values over time we report three primary findings first contrary to claims in the professional literature the combined value relevance of earnings and book values has not declined over the past forty years and in fact appears to have increased slightly second while the incremental value relevance of bottom line earnings has declined it has been replaced by increasing value relevance of book values finally much of the shift in value relevance fiom earnings to book values can be explained by the increasing frequency and magnitude of one time items the increasing frequency of negative earnings and changes in average firm size and intangible intensity across time

conservatism and debt abstract despite the unquestionable influence of conservatism disagreement remains about what economic demands lead to financial reporting conservatism research examining lenders demands for reporting conservatism has been questioned for ignoring conservative contract modifications we document that these modifications exist but are not ubiquitous we find contract modifications are more likely when agency costs are higher and litigation tax and equity demands for conservatism are lower however we find a positive association between unexplained reporting conservatism and contract modifications suggesting contractual modifications alone do not fulfill lenders demands for conservatism

accounting conservatism and firm investment efficiency abstract we argue that conservatism improves investment efficiency in particular we predict that it resolves debt equity conflicts facilitating a firm s access to debt financing and limiting underinvestment this permits the financing of prudent investments that otherwise might not be pursued our empirical results confirm these predictions we find that more conservative firms invest more and issue more debt in settings prone to underinvestment and that these effects are more pronounced in firms characterized by greater information asymmetries we also find that conservatism is associated with reduced overinvestment even for opaque investments such as research and development

research and development with asymmetric firm sizes this article presents a theoretical model of research and development r d competition among firms the goal of the model is to simultaneously explain two empirical observations pertaining to the persistence of dominantfirms small firms make a disproportionate share of major innovations while largefirms tend to spend more in absolute terms on r d than smallfirms do in the model here firms choose investment levels and r d project riskiness in equilibrium a large firm invests more than a smaller firm but by choosing safer r d projects makes fewer major innovations

the contracting benefits of accounting conservatism to lenders and borrowers abstract this paper examines the ex post and ex ante benefits of accounting conservatism to lenders and borrowers in the debt contracting process i expect conservatism to benefit lenders ex post through the timely signaling of default risk as manifested by accelerated covenant violations and to benefit borrowers ex ante through lower initial interest rates consistent with these predictions i find that more conservative borrowers are more likely to violate debt covenants following a negative price shock and that lenders offer lower interest rates to more conservative borrowers

earnings quality in uk private firms comparative loss recognition timeliness abstract uk private and public companies face substantially equivalent regulation on auditing accounting standards and taxes we hypothesize that private company financial reporting nevertheless is of lower quality due to different market demand regulation notwithstanding a large uk sample supports this hypothesis quality is operationalized using basu s 1997 time series measure of timely loss recognition and a new accruals based method the result is not affected by controls for size leverage industry membership and auditor size or by allowing endogenous listing choice the result enhances understanding of private companies which are predominant in the economy it also provides insight into the economics of accounting standards

agency problems auditing and the theory of the firm some evidence agency problems auditing and the theory of the firm some evidenceauthor s ross l watts and jerold l zimmermansource journal of law and economics vol 26 no 3 oct 1983 pp 613 633published by the university of chicago pressstable url http www jstor org stable 725039accessed 29 06 2008 23 14

bank commercial loan markets and the role of market structure evidence from surveys of commercial lending abstract this paper seeks to test two tenets that underlie the current practice of antitrust analysis in banking the first is the view that bank commercial loan markets are local in nature and the second is the view that banks in more concentrated markets are more likely to engage in some form of noncompetitive behavior tests of both of these tenets are conducted using an extensive set of loan specific survey information not previously employed to address these issues results consistent with the existence of local banking markets and the dominance of competitive differences as an explanation for observed differences in loan rates are found

costly external finance corporate investment and the subprime mortgage credit crisis abstract we study the effect of the recent financial crisis on corporate investment the crisis represents an unexplored negative shock to the supply of external finance for non financial firms corporate investment declines significantly following the onset of the crisis controlling for firm fixed effects and time varying measures of investment opportunities consistent with a causal effect of a supply shock the decline is greatest for firms that have low cash reserves or high net short term debt are financially constrained or operate in industries dependent on external finance to address endogeneity concerns we measure firms financial positions as much as four years prior to the crisis and confirm that similar results do not follow placebo crises in the summers of 2003 2006 nor do similar results follow the negative demand shock caused by september 11 2001 the effects weaken considerably beginning in the third quarter of 2008 when the demand side effects of the crisis became apparent additional analysis suggests an important precautionary savings motive for seemingly excess cash that is generally overlooked in the literature

co determination and innovation this paper examines the effect of the german co determination law of 1976 mitbestg on the innovative activity of german firms co determination applies to firms with 2 000 employees or more data from 1971 1976 and 1981 1990 on 148 firms are used to compare the number of patents granted to co determined firms before and after the introduction of the law several control variables are applied and in particular in order to avoid a possible bias from specific effects of firm size we compare the co determined firms with others before and after 1976 the results do not support the view that co determination slows down technological progress and reduces innovativity

implications for gaap from an analysis of positive research in accounting based on extant literature we review the positive theory of gaap the theory predicts that gaap s principal focus is on control performance measurement and stewardship and that verifiability and conservatism are critical features of a gaap shaped by market forces we recognize the advantage of using fair values in circumstances where these are based on observable prices in liquid secondary markets but caution against expanding fair values to financial reporting more generally we conclude that rather than converging u s gaap with ifrs competition between the fasb and the iasb would allow gaap to better respond to market forces

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

an empirical test of the incentive effects of deposit insurance the case of junk bonds at savings and loan associations this paper analyzes how financial markets reacted to s l diversification into junk bonds the authors report that junk bond holdings are positively correlated with both the volatility of s l equity returns and the interest rates paid on large cds next they examine the impact of junk bonds on equity returns for poorly capitalized s ls greater risk taking increases the value of deposit insurance and should lead to higher stock returns however a well capitalized institution that increases junk bond holdings should not experience stock price gains the authors find that this is the case for the sample of s ls they studied copyright 1994 by ohio state university press

a two stage model of research and development with endogenous second mover advantages this paper describes a simple two stage model of research and development in which the winner of the research stage has the option of moving first in the development stage some unexpected results emerge in equilibrium the leader in the development stage invests less than each follower and is consequently least likely to collect the patent moreover the leader receives a lower expected payoff than each of the followers thus there are endogenous second mover advantages using a game of timing in which the identity of the stackelberg leader is determined to link the two stages i find that firms face quite different incentives in the research stage although the leader invests less than each follower in the research stage as well the leader enjoys higher expected revenue from the complete two stage game than does each follower the equilibrium is inefficient because there is a lag between the time at which research is completed and the time at which development is begun and because aggregate investment is inefficiently asymmetrically distributed across firms

conditionally conservative fair value measurements abstract firms measure fair values using level 2 or 3 inputs when items do not trade in liquid markets limiting market discipline over the measurements we provide evidence that firms holding higher proportions of financial instruments measured at level 2 and 3 fair values report more conditionally conservative comprehensive income attributable to fair value measurements consistent with firms trying to mitigate investors discounting of the measurements we further predict and find that this conditional conservatism 1 increases with governance mechanisms that increase the strength and persistence of firms incentives to report conservatively and 2 decreases with firms earnings management incentives

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

foreign entry into underwriting services evidence from japan s big bang deregulation we examined the effect of foreign entry into bond market underwriting activity using issue level data from the japanese samurai and euro yen bond markets we found that the fees charged by japanese underwriters were higher on average than those of foreign underwriters but the difference could be explained by conditioning on issue characteristics our results also suggest that bond issuers sorted properly across underwriters as switching across underwriter nationalities would be expected to result in higher fees however the savings enjoyed by firms issuing with foreign underwriters were modest and statistically insignificant while those of firms issuing with japanese underwriters were substantial and statistically significant this result suggests that japanese underwriters priced their services aggressively over the sample period perhaps in an effort to retain or gain market share this conjecture is supported by a matching exercise that examined the liberalization of foreign underwriter access to the samurai bond market using euro yen bond issues as a control foreign entry led to a statistically and economically significant decrease of 16 basis points on average in underwriting fees in the samurai bond market overall our results suggest that the international market for japanese bond underwriting services was partially segmented by nationality as issuers appear to have preferred habitats but that liberalization increased overall market competition

general equilibrium with free entry a synthetic approach to the theory of perfect competition the purpose of this essay is to explain a new theory of perfect competition that synthesizes the arrow debreu mckenzie and marshallian theories and summarizes the recent work of a large number of researchers the synthetic theory provides a logically precise general equilibrium framework that can be used both for positive analysis as well as to form a basis for the classical theorems of welfare economics in these aspects it follows the adm theory however as in the marshallian theory there is free entry in the form of an unbounded pool of firms which have access to the existing technology also as in the marshallian theory the average cost curves available to each firm are u shaped in contrast to both the marshallian and the adm theories we do not take price taking as a hypothesis we use the term perfect competition to describe a situation in which firms are arbitrarily small relative to the markets in which they are involved the firms in our model correctly perceive the effect of the amount that they place on the market on prices and they act to maximize profit with this in mind perfectly competitive equilibria are defined as the limit points of equilibria as firms become small relative to the market and following cournot we observe that as firms become small their ability to influence price disappears a new condition is identified which is important for the viability of competitive markets loosely speaking this condition requires that prices provide the proper entry signals for firms if one thinks of each firm as associated with the use of an unpriced and nondivisible resource sometimes referred to as entrepreneurship then in equilibrium the returns to that factor must fall with entry and rise with exit not only the stability theorems of the synthetic theory but also the existence theorem reject the application of the competitive model to a regime in which entry drives up and exit reduces the profit of similar firms

a comparison of optimal tariffs and welfare under no lobbying domestic lobbying and domestic foreign lobbying whether and what type of the lobbying induced trade policies can improve the domestic welfare we show that as compared to the case of no lobbying and the case of domestic lobbying the domestic foreign lobbying may achieve the lowest tariff and may also realise the highest welfare for the domestic country our finding provides a theoretical explanation to the prevalent lobbying competition between asian firms and us firms in usa recently we argue that the domestic foreign lobbying may contribute to a freer trade in the domestic country and lobbying competition may be one of the strongest forces pushing for trade liberalisation

accounting conservatism and managerial risk taking corporate acquisitions abstract watts 2003 and ball and shivakumar 2005 argue that accounting conservatism decreases managerial incentives to make negative net present value investments i develop and test a new hypothesis that accounting conservatism is associated with managers making less risky investments i find that under more conservative accounting managers make less risky acquisitions and that firms with accounting based debt covenants drive this association this result is consistent with conservative firms avoiding risky investments because of the potential for large losses to trigger debt covenants conservatism reducing risk shifting can in part explain debt holders demand for conservative accounting

estimation and empirical properties of a firm year measure of accounting conservatism we estimate a firm year measure of accounting conservatism examine its empirical properties as a metric and illustrate applications by testing new hypotheses that shed further light on the nature and effects of conservatism the results are consistent with the measure c score capturing variation in conservatism and also predicting asymmetric earnings timeliness at horizons of up to 3 years ahead cross sectional hypothesis tests suggest firms with longer investment cycles higher idiosyncratic uncertainty and higher information asymmetry have higher accounting conservatism event studies suggest increased conservatism is a response to increases in information asymmetry and idiosyncratic uncertainty

r d cooperation with asymmetric spillovers this paper analyses r d cooperation with asymmetric spillovers it is shown that the change in r d by a firm following cooperation is proportional to the gap between the spillover rate transmitted by that firm and a critical level of spillovers in consequence cooperation increases total r d investments when the average of firms spillover rates is sufficiently high whereas with symmetric spillovers cooperation is always beneficial to firms with asymmetric spillovers only a very limited range of spillovers makes cooperation beneficial to both firms asymmetries also create a potential conflict between maximizing total welfare and maximizing effective cost reduction jel classification l13 o33 cooperation en r d avec effets de retombee asymetriques ce memoire analyse l effet de la cooperation en r d quand il y a des asymetries dans les effets externes technologiques on montre que le changement dans la r d d une entreprise a la suite de la cooperation est proportionnel a l ecart entre l externalite transmise par cette entreprise et une valeur critique de l externalite en consequence la cooperation augmente les investissements totaux en r d quand le taux de retombee moyen est suffisamment eleve alors que la cooperation est toujours benefique lorsque les externalites sont symetriques les asymetries rendent la cooperation non benefique pour au moins l une des entreprises pour un vaste eventail de parametres les asymetries peuvent aussi creer un conflit potentiel entre la maximisation du bien etre total et la maximisation des reduction de couts effectifs

investment bank reputation and the price and quality of underwriting services the relation between investment bank reputation and the price and quality of bond underwriting services is studied here after controlling for endogeneity in issuerunderwriter matching i find that reputable banks obtain lower yields and charge higher fees but issuers net proceeds are higher these relations are pronounced in the junk bond category in which reputable banks underwriting criteria are most stringent these findings suggest that banks underwriting decisions reflect reputation concerns and are thus informative of issue quality they also suggest that economic rents are earned on reputation and thereby provide continued incentives for underwriters to maintain reputation in capital markets investment banks play the important role of bridging firms that need capital with investors that seek investment opportunities intermediation services are valuable first because the banks specialization in the sales and marketing of securities helps lower the issuers transactional costs of borrowing but perhaps more importantly investment banks can provide value through their role in lowering the issuers informational cost of capital this role arises from the information asymmetry that typically exists between insiders the issuing firms and outsiders the investors in security issuance events such an information gap as akerlof demonstrated in his classic 1970 paper at best causes investors to discount the securities and at worst can threaten the existence of the market investment banks standing between the insiders and the outsiders seem to be in the perfect position to reduce information asymmetry and lower the cost of capital that issuers would otherwise have to pay but how does an investment bank solve its own information problem visa vis the investor one solution is the reputation capital at stake for the intermediary a key difference between investment banks and ordinary issuers lily hua fang is from finance area insead this paper is based on a chapter of my dissertation i am indebted to my advisors gary gorton robert holthausen andrew metrick david musto and ayako yasuda for their guidance and support i owe special thanks to an anonymous referee whose insightful comments helped me improve the paper greatly i also want to thank franklin allen john core petra todd jay ritter and robert stambaugh the editor for valuable feedback comments and suggestions from seminar participants at boston college insead

discussion of acquisition profitability and timely loss recognition by j francis and x martin abstract francis and martin 2009 test whether accounting conservatism induces managers to make better acquisition decisions this discussion highlights three main issues first the hypothesized links between conservatism and future investments are potentially incomplete in particular the possibility that conservatism can have dysfunctional outcomes if acquisition decisions are based on anticipated earnings effects is ignored second the evidence is insufficient to infer a causal relation between conservatism and acquisition profitability third the hypothesis development fails to indicate whether timely loss recognition or the asymmetric timeliness of loss versus gain recognition is the more appropriate measure of conservatism given the context

research joint ventures and optimal r d policy with asymmetric information abstract when to allow research joint ventures rjvs or not is an important instrument in the development of an optimal r d policy the regulator however is unlikely to know all the relevant information to regulate r d optimally the extent to which there exist appropriability problems between the firms is one such variable that is private information to the firms in the industry in a duopoly setting we analyze the characteristics of a second best r d policy where the government can either allow rjvs or not and give lump sum subsidies to the parties involved the second best r d policy without subsidies will either block some welfare improving rjvs or allow some welfare reducing ones with lump sum subsidies the second best policy trades off the expected subsidy cost with allowing welfare decreasing rjvs or blocking welfare increasing ones

original issue high yield bonds aging analyses of defaults exchanges and calls this paper presents an aging analysis of 741 high yield bonds and finds default exchange and call percentages substantially higher than reported in earlier studies by december 31 1988 cumulative defaults are 34 percent for bonds issued in 1977 and 1978 and range from 19 to 27 percent for issue years 1979 1983 and from 3 to 9 percent for issue years 1984 1986 exchanges are also a significant factor although they often are followed by default moreover a significant percentage of high yield debt 26 47 percent for 1977 1982 has been called by december 31 1988 approximately one third of the bonds issued in 1977 1982 has defaulted or been exchanged and an additional one third had been called on average only 28 percent of these issues are still outstanding there is no evidence that early results for more recent issue years differ markedly from issue years 1977 to 1982

is the market surprised by poor earnings realizations following seasoned equity offerings we examine the stock price reaction to earnings announcements in the five years following seasoned equity offerings seos on average post seo earnings announcements are met with a significantly negative abnormal stock price reaction although this negative reaction accounts for a disproportionately large portion of long run post seo abnormal stock returns on average abnormal stock price reactions to post seo earnings announcements are reliably negative only within the smallest quartile of equity issuers for small firms therefore these findings are broadly consistent with the hypothesis that firms issue equity when the market overestimates the firm s future earnings perfomance

cooperative and noncooperative r d in duopoly with spillovers comment claude d aspremont and alexis jacquemin 1988 employ a simple yet elegant symmetric duopoly model of r d and spillovers to compare several equilibrium concepts these concepts include 1 the two stage noncooperative solution 2 the two stage mixed game 3 the two stage fully cooperative solution 2 and 4 the social planner s optimum 3 for each of the cases stated above they computed the equilibrium levels of output q q1 q2 and r d xl x2 x and the required second order conditions they report i for large spillovers i e b 0 5 x x x and q q q q and ii for small spillovers i e 3 x 2x x and q q q q where x denotes a firm s r d level q denotes total industry output denotes the social optimum denotes the fully cooperative model the noncooperative two stage case and the mixed game 3 is the spillover parameter here we show that comparing the pure cooperative and the pure noncooperative solutions as defined by d aspremont and jacquemin is only meaningful when the noncooperative solution is stable that is when spillovers are not too small we find that for very small spillovers in our example this occurs when 3 0 17 the d aspremont jacquemin observation holds because the noncooperative model is unstable the importance of this result rests on the fact that even though the output reaction functions cross correctly when 3 0 17 the r d reaction functions do not when 0 17 0 41 stability obtains but r d levels are higher in the noncooperative case than the fully cooperative one for large spillovers the d aspremont jacquemin result is confirmed moreover we find that the introduction of spillovers in the case of the noncooperative model tends to promote stability in the case of the cooperative model however as the level of spillovers is increased an equilibrium ceases to exist

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

the degree of spillovers and the number of rivals for maximum effective r d abstract the amount of cost reduction or effective r d that results in a symmetric sequential nash equilibrium with quadratic payoffs and differentiated goods is shown to increase with spillovers in oligopolies with a few rivals and to achieve a maximum for spillovers that are not perfect in industries with many firms similar tendencies apply for consumer surplus profits and static welfare more rivals typically lead to reduced investments output and profitability while consumer surplus and welfare increase or at least do not decrease limited entry in markets with a few rivals may enhance innovative investments profitability and consumer surplus if only product differentiation and spillovers are sufficiently high and r d costs sufficiently low too many rivals will then again lead to reductions and a decrease in static welfare

persistence of leadership in product innovation in a firm model of vertical product differentiation three distinct patterns of market shares emerge as an equilibrium outcome reflecting three distinct strategies in respect of timing of the introduction of new products the main novelty relative to the existing literature on vertical product differentiation lies in the incorporation of learning by doing this assumption generates stability of market share patterns over a sequence of product innovations copyright 1992 by blackwell publishing ltd

strategic r d policy this paper uses a natural extension of lee and wilde s 1980 model to show that the outcome of technological competition between firms or countries depends on the resolution of two forces the profit incentive and the competitive threat using a duopoly model of a patent race the paper illustrates that by understanding the relative strength of these two forces one can not only go a long way to understanding the outcome of these races but also obtain crucial insights into the desirability of various r d policies the particular example considered in the paper is the subsidizing of r d effort copyright 1989 by royal economic society

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 role of potential competition in industrial organization potential competition has been recognized as a mechanism to control the exploitation of market power at least since the work of j b clark 1902 but it was not until 50 years later that economists most notably joe bain and paolo sylos labini refocused attention on the idea with inputs from the theories of imperfect competition optimal control and dynamic games their work evolved into ever more sophisticated models of the reactions of existing competitors to the threat of new competition although the most appropriate models of competitive interaction are those which begin with a specific industry a number of theories have been proposed which attempt to develop more general conclusions my purpose in this paper is to develop an understanding of the strengths and limitations of these alternative theories by examining the available theoretical empirical and institutional knowledge rather than attempt the sisyphean task of recounting every model which relates conditions of entry and market performance i have partitioned the analysis into four major schools of thought according to their most central propositions these are the traditional model of limit pricing dynamic limit pricing the theory of contestable markets and the market efficiency model traditional limit pricing models rest on the assumption that firms respond to entry but are able to earn persistent profits when the structural characteristics of markets make entry difficult dynamic limit pricing is similar but emphasizes that markets can only be temporarily protected from entry contestability theory in its pure form asserts that potential competition is as effective as actual competition in controlling market performance the efficient markets hypothesis broadly interpreted states that markets are workably competitive and that the market structure reflects differential efficiency not strategic behavior while one can construct many other hypotheses about potential competition these classifications

investment bank reputation information production and financial intermediation we model reputation acquisition by investment banks in the equity market entrepreneurs sell shares in an asymmetrically informed equity market either directly or using an investment bank investment banks who interact repeatedly with the equity market evaluate entrepreneurs projects and report to investors in return for a fee setting strict evaluation standards unobservable to investors is costly for investment banks inducing moral hazard investment banks credibility therefore depends on their equity marketing history investment banks evaluation standards their reputations underwriter compensation the market value of equity sold and entrepreneurs choice between underwritten and nonunderwritten equity issues emerge endogenously

how did the notional interest deduction affect belgian smes capital structure the recently introduced risk capital allowance in belgium which allows a notional interest deduction to be denoted nid hereafter on a firm s adjusted equity for tax purposes has mitigated the tax discrepancy between equity and debt financing to our knowledge we provide the first empirical study of the extent to which this regulation has resulted in a strengthening of small and medium sized enterprises to be denoted smes hereafter solvency which was one of its most prominent objectives results from logit regressions reveal that the probability of adopting the nid is higher for lowly leveraged smes smes without experience with the tax exempt investment reserve and smes with a sound knowledge of the notional interest deduction regulation results on the impact of the nid on the capital structure of smes based on panel and first differences regressions reveal that this measure did not result in a significant change of smes leverage in view of the discussion regarding the optimal tax and legislative framework that governments should put in place poutziouris et al j small bus enterp dev 6 1 7 25 1999 these results cast doubt on the risk capital allowance as it stands now being the right government instrument to contribute at least in the short term to creating a pro enterprising tax and legislative climate for smes we conclude by providing some general suggestions for improving the effectiveness of the risk capital allowance

william j baumol an entrepreneurial economist on the economics of entrepreneurship william j baumol is the 2003 winner of the international award for entrepreneurship and small business research throughout his career baumol has urged the profession to pay attention to the instrumental role of entrepreneurship in economic renewal and growth at the same time he has insisted that economists continue to use their usual tool box when the purview of analysis is extended to entrepreneurship hence baumol can be characterized as a revolutionary from within in this article we present and discuss baumol s research contribution in the areas of entrepreneurship and small business economics notably from a growth perspective in addition to placing his work in these areas into the wider context of his full contribution we emphasize baumol s findings that growth cannot be explained by the accumulation of various factors of production per se human creativity and productive entrepreneurship are needed to combine the inputs in profitable ways as a result an institutional environment that encourages productive entrepreneurship and human experimentation becomes the ultimate determinant of economic growth

strategic investment with asymmetric spillovers this paper investigates the implications of asymmetric spillovers on noncooperative strategic investments in a duopoly with quadratic pay offs a unique equilibrium in the announcement of the leader follower role exists in the case where one firm absorbs large spillovers while the other at most is able to receive only small spillovers the leader in this equilibrium is the firm that absorbs the large spillovers other asymmetries in initial costs or efficiency in research and development do not affect this outcome

european competition policy in manufacturing and services a two speed approach the paper examines whether differences in the nature of competition between manufacturing and service activities are reflected by similar differences in ec competition the two differences between manufacturing and services which are mainly emphasized are local versus global competition and regulatory controls the paper finds that the implementation of ec competition policy instruments has differed significantly between manufacturing and services in terms of both the time profile and the type of instrument it also finds that the conflicts between competition industrial and trade policies are generally far greater in manufacturing than in services because trade offs between competition and competitiveness are less likely in the latter copyright 1993 by oxford university press

earnings management to avoid earnings decreases and losses this paper provides evidence that firms manage reported earnings to avoid earnings decreases and losses specifically in cross sectional distributions of earnings changes and earnings we lind unusually low frequencies of small decreases in earnings and small losscs and unusually high frequencies of small increases in earnings and small positive income we find evidence that two components of earnings cash flow from operations and changes in working capital are used to achieve increases in earnings we present two theories based on stakeholder use of information processing heuristics and prospect theory about the motivation for avoidance of earnings decreases and losses

asymmetric timeliness of earnings market to book and conservatism in financial reporting abstract using an accounting conservatism theory that reflects accounting s role in practice we investigate the relation between two extensively used measures of conservatism asymmetric timeliness of earnings and the market to book ratio mtb we predict and observe that when asymmetric timeliness is measured cumulatively over long periods its relation with end of period mtb is positive when asymmetric timeliness is measured over short periods its dependence on beginning of period composition of equity value ev is responsible for its negative association with mtb further asymmetric timeliness appears to measure conservatism more efficiently when it is estimated cumulatively over multiple periods

the relation between earnings and cash flows abstract a model of earnings cash flows and accruals is developed assuming a random walk sales process variable and fixed costs and that the only accruals are accounts receivable and payable and inventory the model implies earnings better predict future operating cash flows than current operating cash flows and the difference varies with the operating cash cycle also the model is used to predict serial and cross correlations of each firm s series the implications and predictions are tested on a 1337 firm sample over 1963 1992 both earnings and cash flow forecast implications and correlation predictions are generally consistent with the data

cooperative r d between vertically related firms with spillovers abstract this paper analyzes the effects of cooperative r d in two vertically related duopolies which are two final good manufacturers and two input suppliers with horizontal and vertical spillovers vertical r d cartels yield a larger social welfare than non cooperative r d and if the horizontal spillover rate between the input suppliers is not sufficiently high than horizontal r d cartels technological improvement is accelerated by forming vertical research joint ventures rjvs whether or not their member firms r d decisions are coordinated vertical rjv cartels yield the largest social welfare when the vertically related firms can coordinate their r d decisions and or share useful knowledge fully

international differences in the timeliness conservatism and classification of earnings in this paper we analyze differences in the timeliness of income recognition between the u s and u k gaap financial reporting regimes building on previous work in the area we focus on the links between current reported earnings and current and past changes in market value in the light of basu 1997 we present a formal model in which the response of reported earnings to changes in market value varies according to whether the value change is good news or bad this model yields a number of insights with regard to the definition and measurement of earnings conservatism we also report evidence indicating that controlling for cross jurisdictional classification differences affects comparisons of earnings timeliness and earnings conservatism specifically we find that apparent differences in conservatism between the u s and u k accounting regimes are sensitive to the inclusion or exclusion of extraordinary items in u k accounting earnings recent research documents significant variation in the information content of earnings across international gaap regimes e g alford et al tlancaster university tuniversity of manchester the research support of the eco

contestable markets and the theory of industry structure alreview articleo phe new book by william j baumol john c panzar and robert d willig is the culmination of several years of research on the related problems of understanding multiproduct cost structures and their implications for competition and market performance it is a significant book for several reasons the empirical reality that forms the starting point for the theoretical work is i think widely recognized to be important cost structures constitute one of the foundations of competitive strategy and strongly influence industry structure notwithstanding this fact the amount of microeconomic theory directed toward competitively relevant attributes of costs has been if not minimal then certainly more limited than the subject deserves in fact prior to the work of our authors economists and business strategists did not have a language or a set of concepts with which to talk precisely about scale economies in a multiproduct setting we now have at least the beginnings of such a language and a body of theory that provides a grammar for using it the theory of contestable markets was the subject of baumol s presidential address at the american economic association meetings in washington in december 1981 both the theory and its presentation have generated controversy useful controversy i think because it helps clarify issues that need attention i shall have remarks to offer later in this review concerning the normative and descriptive relevance of the contestable markets hypothesis my plan for this review is as follows i begin by outlining some of the principal definitions and propositions of the theory this outline should not be mistaken for a complete summary of the book but the economist who has not yet read the book needs a reasonably detailed picture of the approach few of the propositions require long proofs in fact once they are stated the proofs are often simple exercises having outlined some of the principal concepts i comment upon their usefulness for understanding markets and finally i conclude by suggesting some ways in which the general subject may be pursued from this point forward

discussion of an economic framework for conservative accounting and bushman and piotroski 2006 abstract we offer an economic framework for generating predictions about the demand for conservative accounting reports we define conservatism as more timely recognition of losses than gains as a result of the costs and benefits of reporting verifiable information by managers and or firms being asymmetric we also discuss bushman and piotroski s interpretation of the speeds of good news recognition and incremental bad news recognition in basu type regressions as separate signals about accounting conservatism finally we suggest avenues for future research that seeks to investigate the links between institutions and contracts and between contracts and conservatism

non discretionary conservatism evidence and implications a large body of accounting research finds that various contracting incentives lead managers to engage in conservative accounting practices we extend existing research by modeling the impact of extant accounting rules on conservative accounting accounting rules typically require assets to be written down when their fair values drop sufficiently below their book values we document evidence of the resulting non discretionary conservatism and show that it appears to explain some of the results from previous research on contracting incentives

asymmetric timely loss recognition adverse shocks to external capital and underinvestment evidence from the collapse of the junk bond market abstract using the collapse of the junk bond market in the early 1990s as an exogenous shock to external capital i document in both difference in differences and triple difference designs that speculative grade firms that recognize economic losses in a timely manner experience a smaller reduction in investment following the collapse the effect is more pronounced for speculative grade firms with a low level of asset liquidation value using the excess bond premium as a proxy for fluctuations in the supply of capital i also extend the generalizability of my findings to a broader sample of 84 421 firm years over the 1972 2011 period

an analysis of value destruction in at t s acquisition of ncr abstract at t s 7 5 billion acquisition of ncr decreased the wealth of at t shareholders by between 3 9 billion and 6 5 billion and resulted in negative synergies of 1 3 to 3 0 billion we find that at t paid a documented 50 million and possibly as much as 500 million to satisfy pooling accounting thus boosting eps by roughly 17 but leaving cash flows unchanged we conclude that at t s decision to acquire ncr in what the market perceived as a value destroying transaction was related at least in part to the 1984 consent decree with the department of justice that led to the break up of at t

cash flow asymmetry causes and implications for conditional conservatism research earnings asymmetric timeliness captures both accrual and operating cash flow cfo asymmetric timeliness because recognition of operating cash flows does not reflect differential verification thresholds for recognizing unrealized gains versus losses cfo asymmetry adds noise or bias to tests of conditional conservatism we show that cfo asymmetry is predictable in the cross section and varies systematically with life cycle characteristics removing cfo from earnings and using accruals based measures of asymmetric timeliness eliminates several biases that prior studies have attributed to other sources moreover accrual asymmetric timeliness varies in the cross section as theory predicts going forward we recommend researchers use accruals based asymmetric timeliness measures when testing for conditional conservatism

enjoying the quiet life corporate governance and managerial preferences much of our understanding of corporations builds on the idea that managers when they are not closely monitored will pursue goals that are not in shareholders interests but what goals would managers pursue this paper uses variation in corporate governance generated by state adoption of antitakeover laws to empirically map out managerial preferences we use plant level data and exploit a unique feature of corporate law that allows us to deal with possible biases associated with the timing of the laws we find that when managers are insulated from takeovers worker wages especially those of white collar workers rise the destruction of old plants falls but the creation of new plants also falls finally overall productivity and profitability decline in response to these laws our results suggest that active empire building may not be the norm and that managers may instead prefer to enjoy the quiet life

asset salvageability and the potential for trade restraint through merger this article evaluates impact of asset salvageability on the profitability of restraint of trade through industrial combination in the case of merger either for monopoly or market dominance a postmerger price equal to the premerger competitive price is proved a reasonable possibility even in a declining industry where noncompetitive pricing is unlikely to attract new firms raising prices after merger may prove suboptimal in cases where a postmerger price increase is optimal asset salvageability is shown to have a restraining effect on the magnitude of the increase

contestability reconsidered the meaning of market exit costs abstract this paper analyses the main result of the contestable market approach namely that potential competition reaches its maximum power if market entry and exit is costless and newcomers can use the hit and run strategy different time lag structures are considered average cost pricing turns out to be no equilibrium if there are no market exit costs furthermore exit costs don t necessarily create a barrier to entry but may even strengthen the discipline arising from the threat of entry

the effect of incomplete information about future technological opportunities on pre emption abstract in this paper we model the strategic choice of investment by an incumbent firm facing competition from a potential entrant and the uncertain prospect of technological development the model presented extends the basic dixit model into two directions it allows for production over two periods and introduces uncertainty about the technology available in the second we show that the incumbent does not necessarily prefer to pre commit irreversibility of investment creates in fact an option value of retaining flexibility and the strategic gains from pre commitment must be compared with the option value for strategic investment to be chosen the strategic use of investment can also explain the observed inertia of incumbent firms in the adoption of new technologies compared to new entrant firms

optimal departures from marginal cost pricing focuses on departures from marginal cost pricing optimal allocation or resources level of tax revenue that will be collected by the government theorems developed for resource allocation ebsco

the price concentration relationship in banking the commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior as argued by the structure performance hypothesis or by the greater efficiency of firms with dominant market shares as argued by the efficient structure hypothesis by examining the price concentration relationship instead of the profit concentration relationship this paper tests the structure performance hypothesis in a manner that excludes the efficient structure hypothesis as an alternative explanation of the results the results strongly support the structure performance hypothesis and are robust with respect to model specification measurement of concentration and econometric technique copyright 1989 by mit press

stackelberg leadership as a natural solution under cost uncertainty this paper analyzes a differentiated duopoly model with cost uncertainty in an environment where information sharing is prohibited the duopolists can commit themselves to be a stackelberg leader or follower at the time when they know the distribution but not the actual values of their own and the rival s costs in a natural stackelberg situation the firms agree on the assignment of roles and neither prefers the bayesian nash equilibrium an natural stackelberg situation is shown to be possible under quantity but not price competition total expected welfare is higher in the natural stackelberg situation than in the nash equilibrium copyright 1990 by blackwell publishing ltd