are firms successful at selective hedging we analyze the corporate risk management policies of 44 companies in the gold mining industry firms tend to decrease hedging as prices move against them behavior contrary to that predicted by risk management theory these results along with new survey evidence suggest that firms attempt to time market prices so called selective hedging although estimates show a statistically significant ability of producers to favorably adjust hedge ratios this can be attributed to sample specific negative autocorrelation in gold prices economic gains to selective hedging are small and no evidence suggests that selective hedging leads to superior operating or financial performance

out of step out of office electoral accountability and house members voting does a typical house member need to worry about the electoral ramifications of his roll call decisions we investigate the relationship between incumbents electoral performance and roll call support for their party controlling for district ideology challenger quality and campaign spending among other factors through a series of tests of the 1956 1996 elections the tests produce three key findings indicating that members are indeed accountable for their legislative voting first in each election an incumbent receives a lower vote share the more he supports his party second this effect is comparable in size to that of other widely recognized electoral determinants third a member s probability of retaining office decreases as he offers increased support for his party and this relationship holds for not only marginal but also safe members

does corporate governance influence earnings management in latin american markets although us and european research has documented improvement in earnings quality associated with corporate governance characteristics the situation in latin america is questionable given the business environment in which firms operate which is characterized by controlling family ownership and weak legal protection the purpose of this study is to examine the relation between the internal mechanisms of corporate governance and earnings management measured by discretionary accrual we use a sample of listed latin american non financial companies from the period 2006 2009 our results show how in the latin american context the role of external directors is limited and that boards which meet more frequently take a more active position in the monitoring of insiders so showing a lower use of manipulative practices in addition we find a non linear relation between insider ownership and discretionary accruals also pointing to the fact that ownership concentration may be a manipulative practices constrictor mechanism only when the ownership of main shareholders is moderate the findings have important policy implications since this is to the best of our knowledge the first study to analyze the relation between the effectiveness of the government and the earnings management behavior as policy implications we document how when a country implements controls aimed at reducing corruption strengthening the rule of law or improving the effectiveness of government this leads to a reduction in firm earnings management

hedging and coordinated risk management evidence from thrift conversions we provide an explanation for hedging as a means of allocating rather than reducing risk we argue that when increases in total risk are costly firms optimally allocate risk by reducing increasing exposure to risks that provide zero positive economic rents our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion consistent with their increased abilities and incentives for risk taking they achieve this increase by hedging interest rate risk and increasing credit risk we provide some evidence that risk management activities are related to growth capacity and management compensation structure attained at conversion

evidence on corporate hedging policy this paper provides empirical evidence on the determinants of corporate hedging decisions the paper examines the evidence in light of currently mandated financial reporting require ments and in particular the constraints placed on anticipatory hedging data on hedging are obtained from 1992 annual reports for a sample of 3 022 firms out of the 771 firms classified as hedgers 543 firms disclose information in their annual reports on their hedging activities the remaining 228 firms report use of derivatives but no information on hedging activities based on the evidence i draw the following conclusions with respect to the models of hedging evidence is inconsistent with financial distress cost models evidence is mixed with respect to contracting cost capital market imperfections and tax based models and evidence uniformly supports the hypothesis that hedging activities exhibit economies of scale

tax policy and yardstick voting in flemish municipal elections recent theoretical papers develop political agency models in which voters compare tax policy with that in neighbouring jurisdictions in these yardstick competition models voters judge incumbents by comparing their policy with policy in neighbouring jurisdictions this paper reports an analysis of municipal elections in flanders during the period 1982 to 2000 and finds empirical evidence for yardstick voting incumbents are punished for higher tax rates importantly the electoral punishment also depends on tax rates in neighbouring municipalities higher rates in neighbouring municipalities are favourable for the incumbents

evaluating the reliability of current value estimates abstract the papers by muller and abk aboody barth and kasznik provide evidence on the reliability of estimates of assets current or market values muller finds that the decision to capitalize estimates of acquired brand values is influenced by contracting incentives suggesting that the reliability of these estimates is compromised by managerial manipulation abk find that estimates of fixed asset revaluations have a statistically significant association with both contemporaneous stock prices and future operating performance it is difficult to assess the implications of abk s results for the reliability of the revaluations because stock prices and operating performance are influenced by many other factors

great expectations financialization and bank bailouts in democracies accelerating financialization and rising societal wealth have meant that democratic governments increasingly provide bailouts following banking crises using a new long run data set we show that despite frequent and virulent crises before world war ii bank bailouts to protect wealth were then exceptionally rare in recent decades by contrast governments have increasingly opted for extensive bailouts well before the major interventions of 2007 2009 we argue that this policy shift is the consequence of the great expectations of middle class voters overlooked in existing accounts associated with the growing financialization of wealth rising leverage and accumulating ex ante financial stabilization commitments by governments these expectations are suggestive of substantially altered policy preferences and political cleavages since the 1970s when severe banking crises returned as an important threat to middle class wealth this pressure from below has led elected governments to provide increasingly costly bailouts with no historical precedent

empirical evidence on the relation between stock option compensation and risk taking abstract we examine whether executive stock options esos provide managers with incentives to invest in risky projects for a sample of oil and gas producers we examine whether the coefficient of variation of future cash flows from exploration activity our proxy for exploration risk increases with the sensitivity of the value of the ceo s options to stock return volatility eso risk incentives both eso risk incentives and exploration risk are treated as endogenous variables by adopting a simultaneous equations approach we find evidence that eso risk incentives has a positive relation with future exploration risk taking additional tests indicate that eso risk incentives exhibits a negative relation with oil price hedging in a system of equations where eso risk incentives and hedging are allowed to be endogenously determined overall our results are consistent with esos providing managers with incentives to mitigate risk related incentive problems

is voter competence good for voters information rationality and democratic performance a long research tradition in behavioral political science evaluates the performance of democracy by examining voter competence this literature got its start arguing that voters lack of information undermines a defense of democracy rooted in electoral accountability a more recent literature deepens the debate with some authors claiming that voters eectively use cues to substitute for information about candidates and policies and other authors claiming that voters are insuciently rational to do so we argue that regardless of its conclusions about voter competence this literature s singleminded focus on voter behavior is misguided we use a sequence of formal models to show that traditional intuitions are incomplete because they ignore the eect that changes in voter behavior have on the equilibrium behavior of politicians when this strategic interaction is taken into account increases in voter information or voter rationality sometimes make democratic performance better and sometimes makes democratic performance worse one simply cannot assess the implications of voter characteristics for democratic performance without also studying how those characteristics aect the

a fractionally cointegrated var analysis of economic voting and political support we use a fractionally cointegrated vector autoregressive model to examine the relationship between canadian political support and macroeconomic conditions this model is well suited for the analysis because it allows multiple fractional time series and admits simple asymptotic inference for the model parameters and tests of the hypotheses of interest in the long run equilibrium we find that support for the progressive conservative party was higher during periods of high interest rates and low unemployment while support for the liberal party was higher during periods of low interest rates and high unemployment we also test and reject the notion that party support is driven only by relative to the united states economic performance indeed our findings suggest that us macroeconomic variables do not enter the long run equilibrium of canadian economic voting political opinion poll support at all resume une application du modele vecteur autoregressif fractionnellement cointegre sur le vote economique et le support politique on utilise un modele du type vecteur autoregressif fractionnellement cointegre pour examiner la relation entre le support politique canadien et les conditions macroeconomiques le modele est bien adapte a l analyse parce qu il permet l usage de multiples series chronologiques fragmentees et une inference asymptotique simple des parametres du modele ainsi que des tests d hypothese pertinents en equilibre a long terme on decouvre que le support pour le parti progressiste conservateur a ete plus eleve au cours des periodes de hauts taux d interet et bas taux de chomage alors que le support pour le parti liberal a ete plus eleve au cours des periodes de bas taux d interet et de hauts taux de chomage on met au test l hypothese qu on rejette d ailleurs que la notion que le support politique est enclenche seulement par la performance economique du canada par rapport a celle des etats unis en fait les resultats suggerent que les variables macroeconomiques americaines n ont pas du tout d impact sur l equilibre a long terme du vote economique canadien support dans les sondages d opinion politique

health and democracy in spite of the inexorable march of democracy around the globe just how democratic institutions a ect human well being is open to debate the evidence that democracy promotes prosperity is neither strong nor robust moreover which aspects of policy making and human well being are promoted by democracies is still a subject of debate 1 even if correlations between democracy and outcome measures can be found there is an overriding di culty of interpreting them as causal e ects whether democracy matters per se or simply serves as a proxy for societal and political development presents a di cult problem for research in this area thinkers such as lipset 1959 have argued that democracy can thrive only when conditions are right if this is correct then becoming democratic may only serve as a proxy for these hard to measure cultural and societal preconditions this paper explores these issues further by reconsidering the link between democracy and health using panel data from a cross section of countries the

the economic consequences of discrete recognition and continuous measurement abstract discrete recognition is a long standing and ubiquitous accounting practice but it has been widely criticized for suppressing information and inducing accounting motivated transactions we study a model to examine the economic consequences of shifting away from discrete recognition to a continuous measurement approach without manipulation discrete recognition is less informative than the continuous approach however the continuous regime induces more manipulation the equilibrium informativeness is determined by both the accounting standard and endogenous manipulation discrete recognition is more informative than its continuous counterpart precisely when manipulation is a severe threat we respond to the recent call in kothari ramanna and skinner 2010 for using positive accounting theory to explain certain long standing accounting practices we also discuss the model s implications for fair value accounting

earnings management under price regulation empirical evidence from the spanish electricity industry abstract this paper analyses the effect of price regulation on the accounting policy of spanish electricity companies over the period 1991 2001 as predicted by the political costs hypothesis watts and zimmerman 1986 watts r l zimmerman j l 1986 positive accounting theory prentice hall englewood cliffs nj managers artificially reduce reported earnings when the government establishes tariff increases in this way companies attempt to diminish their political visibility and counteract social outcry arising from the government s decision several abnormal accruals models existent in the literature are used to obtain a proxy for managerial accounting discretion on earnings

business cycles and bank regulations what happens to bank provisioning a more comprehensive look at 49 countries numerous researchers provide evidence that many banks intend to increase their loan loss provisioning llp when the economy is in a downward trend however the answer whether banks provide sufficient provisions when the economy is in an upturn trend remains unsolved furthermore provisioning must be influenced not only by business cycles and bank earnings but also by the regulatory system nevertheless empirical research on this issue has been scarce thus this study intends to answer two questions shown above the evidence shows that with steady growth in both the economy and bank earnings the bank management will tend to increase llp whereas with a buoyant economy but negative growth in bank earnings the management will exhibit an inclination to reduce llp as regards the influence of bank regulation on provisions the evidence shows that under certain circumstances banks make more provision based on regulatory considerations this explains why bank regulations regarding llp across countries

interest rate risk management and the mix of fixed and floating rate debt we analyze the after swap mix of fixed and floating rate debt in a sample of non financial firms using hand collected data from a window of time when derivative positions were included in accounting disclosures to motivate the analyses we present a simple theoretical model that highlights the special features of interest rate risk consistent with the theory we find that firms that issue more fixed rate debt have higher liquidity ratios and lower operating income ratios we also document that individual firms actively vary the proportion of their fixed rate debt to a strikingly high extent there is a debate as to whether such variation should be interpreted as hedging or speculation we show that the firms more actively varying their debt mix respond to different hedging motives than those with low activity we then empirically motivate an alternative indicator of speculative activity co variation between ex post profitability of financial decisions and operating results

alternative mechanisms for corporate control we examine performance and management characteristics of fortune 500 firms experiencing one of three types of control change internally precipitated management turnover hostile takeover and friendly takeover we find that firms experiencing internally precipitated management turnover perform poorly relative to other firms in their industries but are not concentrated in poorly performing industries in contrast targets of hostile takeovers are concentrated in troubled industries there is also weaker evidence that hostile takeover targets underperform their industry peers we interpret this evidence as consistent with the idea that the board of directors is capable of firing managers whose leadership leads to poor performance relative to industry but that an external challenge in the form of a hostile takeover is often required when the whole industry is in decline the evidence also indicates that firms run by a member of the founding family are less likely to experience either internally precipitated top management turnover or a hostile takeover on the other hand firms whose top management team is dominated by a single relatively young top executive while lacking in internal discipline are more likely to experience a hostile takeover this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

executive constraint political stability and economic growth previous studies have argued that democracy diminishes the extent to which leadership contests depress economic growth by reducing the violence and uncertainty attendant on such contests we recon

a statistical model for multiparty electoral data we propose an internally consistent and comprehensive statistical model for analyzing multiparty district level aggregate election data this model can be used to explain or predict how the geographic distribution of electoral results depends upon economic conditions neighborhood ethnic compositions campaign spending and other features of the election campaign or characteristics of the aggregate areas we also provide several new graphical representations for help in data exploration model evaluation and substantive interpretation although the model applies more generally we use it to help resolve an important controversy over the size of and trend in the electoral advantage of incumbency in great britain contrary to previous analyses which are all based on measures now known to be biased we demonstrate that the incumbency advantage is small but politically meaningful we also find that it differs substantially across the parties about half a percent for the conservatives 1 for the labor party and 3 for the liberal party and its successors also contrary to previous research we show that these effects have not grown in recent years finally we are able to estimate from which party each party s incumbency advantage is predominantly drawn

does hometown advantage matter the case of institutional blockholder monitoring on earnings management in korea this study uses a large sample of korean firms to examine institutional blockholders influence on corporate earnings management the korean market is an interesting setting to study institutional monitoring because it is dominated by chaebols which are characterized by ineffective internal governance mechanisms we find evidence that institutional blockholders deter opportunistic financial reporting and such activities are the most evident among domestic institutional blockholders foreign institutional blockholders especially those with short term investment objectives lead to more discretionary reporting our findings are robust to various empirical models and endogeneity checks moreover this study offers new insight into the proximity advantage of domestic institutional investors with regard to monitoring information it also highlights institutional investors roles in shaping corporate governance in emerging markets in which sound corporate governance has become increasingly important for firms long term sustainability one important policy implication is that regulatory authorities should aim to promote institutional investors participation in these markets

panacea pandora s box or placebo feedback in bank mortgage backed security holdings and fair value accounting we examine the relation between bank holdings of mortgage backed securities mbs and mbs prices theory suggests feedback between mbs holdings and underlying asset markets can be aggravated by mark to market accounting we measure feedback by the relation between asset returns and the changes in bank mbs holdings consistent with the existence of feedback effects related to mark to market we find that for banks with high mbs more nonperforming loans and lower total capital ratio changes in bank mbs positions are positively associated with changes in mbs prices and that this relation is reduced after the april 2009 mark to market rule clarification to assess the effect of feedback on shareholder value we test whether the stock price response of banks to the announcement of the mark to market accounting rule clarification is associated with the intensity of feedback behavior we find that the stock market reaction to the rule change is more positive for banks with more mbs higher nonperforming loans and higher pre rule change feedback we also find positive bond price reactions to the rule change overall our results suggest feedback related to mark to market accounting had a measurable effect on shareholder value 2011 published by elsevier b v

hedging speculation and shareholder value abstract we document that gold mining firms have consistently realized economically significant cash flow gains from their derivatives transactions we conclude that these cash flows have increased shareholder value since there is no evidence of an offsetting adjustment in firms systematic risk this finding contradicts a central assumption in the risk management literature that derivatives transactions have zero net present value and highlights an important motive for firms to use derivatives that the literature has hitherto ignored although we find considerable evidence of selective hedging in our sample the cash flow gains from selective hedging appear to be small at best

managerial overconfidence and corporate risk management abstract we examine whether managerial overconfidence can help explain the observed discrepancies between the theory and practice of corporate risk management we use a unique dataset of corporate derivatives positions that enables us to directly observe managerial reactions to their speculative gains and losses from market timing when they use derivatives we find that managers increase their speculative activities using derivatives following speculative cash flow gains while they do not reduce their speculative activities following speculative losses this asymmetric response is consistent with the selective self attribution associated with overconfidence our time series approach to measuring overconfidence complements cross sectional approaches currently used in the literature our results show that managerial overconfidence which has been found to influence a number of corporate decisions also affects corporate risk management decisions

benchmarking across borders electoral accountability and the necessity of comparison when the economy in a single country contracts voters often punish the government when many economies contract voters turn against their governments much less frequently this suggests that the international context matters for the domestic vote yet most research on electoral accountability assumes that voters treat their national economies as autarkic we decompose two key economic aggregates growth in real gross domestic product and unemployment into their international and domestic components and demonstrate that voters hold incumbents more electorally accountable for the domestic than for the international component of growth voters in a wide variety of democracies benchmark national economic growth against that abroad punishing rewarding incumbents for national outcomes that underperform outperform an international comparison tests suggest that this effect arises not from highly informed voters making direct comparisons but from pre benchmarking by the media when reporting on the economy the effect of benchmarked growth exceeds that of aggregate national growth by up to a factor of two and outstrips the international component of growth by an even larger margin implying that previous research may have underestimated the strength of the economy on the vote

why do firms smooth earnings we explain why a firm may smooth reported earnings greater earnings volatility leads to a bigger informational advantage for informed investors over uninformed investors if sufficiently many current shareholders are uninformed and may need to trade in the future for liquidity reasons an increase in the volatility of reported earnings will magnify these shareholders trading losses they will therefore want the manager to smooth reported earnings as much as possible empirical implications are drawn out that link earnings smoothing to managerial compensation contracts uncertainty about the volatility of earnings and ownership structure

effect of derivative accounting rules on corporate risk management behavior abstract i examine the effect of the accounting standard for derivative instruments sfas no 133 on corporate risk management behavior i classify a derivative user as an effective hedger eh firm if its risk exposures decreased after the initiation of the derivatives program and as an ineffective hedger speculator is firm otherwise i find that volatility of cash flows and risk exposures related to interest rate foreign exchange rate and commodity price decrease significantly for is firms but not for eh firms suggesting that is firms engaged in more prudent risk management activities after the adoption of sfas no 133

empirical tests of budget ratcheting and its effect on managers discretionary accrual choices abstract in this paper we investigate whether budgets ratchet using business unit data from a large multinational corporation we find evidence consistent with ratcheting where favorable budget variances result in performance budget increases that are larger than decreases associated with unfavorable variances of the same magnitude we argue that under ratcheting the cost of reporting positive transitory earnings surprises outweigh the short term benefits of the current period bonus consequently we hypothesize that managers make income decreasing discretionary accruals to offset transitory earnings surprises beyond the level expected under fixed budgets using a proxy for transitory earnings surprise we find evidence consistent with this hypothesis

the reliability of investment property fair value estimates abstract we investigate the reliability of mandatory annual fair value estimates for uk investment property we find that appraisal estimates understate actual selling prices and are considerably less biased and more accurate measures of selling price than respective historical costs investigations of managerial discretion over fair value reporting reveal that managers select among permissible accounting methods to report higher earnings time asset sales to smooth reported earnings changes smooth reported net asset changes and boost fair values prior to raising new debt finally we find that the reliability of appraisal estimates increases when monitored by external appraisers and big 6 auditors

sovereign debt migration pressure and government survival as soon as the sovereign debt crisis began it was widely understood that germany s response would dictate its ultimate resolution whereas the initial round of bailouts stabilized markets and pres

the use of foreign currency derivatives corporate governance and firm value around the world abstract this paper examines the impact of currency derivatives on firm value using a broad sample of firms from thirty nine countries with significant exchange rate exposure derivatives can be used for managers self interest for hedging or for speculative purposes we hypothesize that investors can appeal to a firm s internal firm level and external country level corporate governance to draw inferences on a firm s motive behind the use of derivatives since well governed firms are more likely to use derivatives to hedge rather than to speculate or pursue managers self interest consistent with this explanation we find strong evidence that the use of currency derivatives for firms that have strong internal firm level or external country level governance is associated with a significant value premium

optimal incentive contracts in the presence of career concerns theory and evidence this paper studies optimal incentive contracts when workers have career concerns concerns about the effects of current performance on future compensation we show that the optimal compensation contract optimizes total incentives the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers we find empirical support for this prediction in the relation between chief executive compensation and stock market performance

debt covenant violation and manipulation of accruals abstract this paper examines the abnormal accruals of a sample of 94 firms that reported debt covenant violations in annual reports we expect debt covenant restrictions to influence accounting choices in the year preceding and the year of violation time series and cross sectional models are used to estimate normal accruals in the year prior to violation both models indicate that abnormal total and working capital accruals are significantly positive in the year of violation there is evidence of positive abnormal working capital accruals after controlling for management changes and auditor going concern qualifications

smoothing income in anticipation of future earnings abstract recent theory argues that concern about job security creates an incentive for managers to smooth earnings in consideration of both current and future relative performance we find support for this theory our evidence suggests that when current earnings are poor and expected future earnings are good managers borrow earnings from the future for use in the current period conversely when current earnings are good and expected future earnings are poor managers save current earnings for possible use in the future however sensitivity analysis indicates that we cannot rule out selection bias as a potential alternative explanation for our findings

does hedging affect firm value evidence from a natural experiment we exploit an exogenous change in basis risk in the oil and gas industry to analyze the channels through which hedging affects firm value using a difference in differences framework we find that firms affected by a basis risk shock reduce investment have lower valuations sell assets and reduce debt our findings are driven by firms with ex ante high leverage overall our results provide evidence that reducing the probability of financial distress and underinvestment risk are first order channels through which hedging affects firm value received october 5 2015 editorial decision december 22 2016 by editor david denis

fair value accounting and managers hedging decisions real effect of fair value accounting we conduct two experiments with experienced accountants to investigate how fair value accounting affects managers real economic decisions in experiment 1 we find that participants are more likely to make suboptimal decisions e g forgo economically sound hedging opportunities when both the economic and fair value accounting impact information is presented than when only the economic impact information is presented or when both the economic and historical cost accounting impact information is presented this adverse effect of fair value accounting is more likely when the price volatility of the hedged asset is higher which is a situation where paradoxically hedging is more beneficial we find that the effect is mediated by participants relative considerations of economic factors versus accounting factors e g earnings volatility experiment 2 shows that enhancing salience of economic information or separately presenting net income not from fair value remeasurements reduces the adverse effect of fair value accounting our findings are informative to standard setters in their debate on the efficacy of fair value accounting

discussion of revalued financial tangible and intangible assets association with share prices and non market based value estimates barth and clinch 1998 henceforth bc like easton eddey and harris 1993 henceforth eeh examine the relation between asset revaluation data in the financial statements of australian firms and various value metrics a principal difference between the two studies is the choice of value metrics and the formulation of the regression models relating the revaluation data and these metrics the value metrics used by bc are price per share and a measure of intrinsic value per share most of this discussion will focus on the possible effects of scale in regressions that have price or value per share as the dependent variable my main point is that statistical associations between price balance sheet data and income statement data in these regressions may be a spurious effect of scale other issues raised at the conference included the expected magnitudes of the coefficient estimates from the regression analyses management motives for asset revaluations econometric issues associated with pooling a time series and cross section of data and reasons for use of independent valuations versus valuations by company directors since these issues were addressed in eeh and in the discussion of eeh by bernard 1993 i pay less attention to them in this discussion

empirical research on accounting choice abstract we review research from the 1990s that examines the determinants and consequences of accounting choice structuring our analysis around the three types of market imperfections that influence managers choices agency costs information asymmetries and externalities affecting non contracting parties we conclude that research in the 1990s made limited progress in expanding our understanding of accounting choice because of limitations in research design and a focus on replication rather than extension of current knowledge we discuss opportunities for future research recommending the exploration of the economic implications of accounting choice by addressing the three different reasons why accounting matters

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

do artificial income smoothing and real income smoothing contribute to firm value equivalently abstract this paper examines the potential impacts of artificial smoothing abnormal accruals and real smoothing derivatives on firm value we find that the value of the firm decreases with the magnitude of abnormal accruals and increases with the level of derivative use moreover the accrual discount is more pronounced in firms with weak investor protection and the hedging premium is greater for poorly governed firms these results suggest that although managers can engage in real smoothing to improve the informativeness of firms earnings and thus reduce agency costs they might use artificial techniques to cosmetically improve the income stream in order to expropriate minority shareholders in further support of agency theories we report that poor corporate governance motivates the use of abnormal accruals and discourages derivative use

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

incumbent performance and electoral control in the pure theory of electoral competition citizens compare the platforms of the candidates and vote for the one whose platform is preferred candidate strategies are identified with promises about future performance in office models of this sort have been developed in both static mckelvey 1975 and dynamic kramer 1977 i settings and all appear to have the property that if the set of alternatives is large enough in some sense equilibrium platforms rarely exist but these models have another feature that is quite as disturbing as their instability in the static setting discussed by mckelvey little attention is paid to the possibility that once in office the politician s preferences may diverge from those of his constituents and that he may therefore choose policies at variance from his platform instead it is simply assumed that promises will be kept whether or not such behavior is congruent with the interest of the officeholder it is sometimes argued that an enforcement mechanism may exist to discipline politicians for failing to keep promises but without a specification of the mechanism it is not obvious that it would be in the interests of the

business groups and the determinants of corporate ownership this paper focuses on cross industry differences in the pattern of corporate ownership in the italian manufacturing and mining sectors the authors draw attention to factors responsible for the diffusion of ownership the paper relies on econometric estimates which confirm the role played by economies of scale r d intensity and specialization of human capital in shaping corporate ownership structures more importantly the econometric findings point out that the internal fund allocation function extensively performed by large diversified business groups significantly distorts the pattern of corporate ownership specifically in low tech industries where economies of scale are negligible and human capital is unspecialized when a considerable share of output is attributable to firms controlled by groups whose core activities demand substantial wealth the ownership share held by unrestricted residual claimants turns out to be well above the value one would otherwise expect the opposite phenomenon occurs in high tech scale intensive industries c 1996 academic press limited copyright 1996 by oxford university press

taking a view corporate speculation governance and compensation using responses to a well known confidential survey we study corporations use of derivatives to take a view on interest rate and currency movements characteristics of speculators suggest that perceived information and cost advantages lead them to take positions actively that is they do not speculate to increase risk by betting the ranch speculating firms encourage managers to speculate through incentive aligning compensation arrangements and bonding contracts and they use derivatives specific internal controls to manage potential abuse finally we examine whether investors reading public corporate disclosures are able to identify firms that indicate speculating in the confidential survey they are not derivative instruments can be used to hedge market risk exposures or to spec ulate on movements in the value of the underlying asset to hedge generally implies that the derivative position is taken with the intention of reducing risk to speculate generally implies that the derivative position is undertaken with the primary intention of making a profit or increasing risk speculation has a pejorative connotation in the financial press yet it is not clear that this repu tation is deserved in this paper we explore whether speculation is an activity that is optimal ex ante but for which we should expect to observe some large negative outcomes ex post or whether it is an activity that will decrease ex pected shareholder value to the benefit of agents of the firm that is whether it is evidence of an agency problem and governance failure the extant theoretical and empirical literature presents an abundance of ev idence about why firms should and do use derivatives to hedge 1 we know

diffusion or confusion clustered shocks and the conditional diffusion of democracy scholars observing clustering in transitions to democracy argue that democratization diffuses across borders as citizens in autocracies demand the same reforms they witness in neighboring states we disagree this article demonstrates that diffusion plays only a highly conditional role in democratization we advance and test an alternative two step theory of clustered democratization 1 economic and international political shocks which are clustered spatially and temporally induce the breakdown of authoritarian regimes then 2 democratic diffusion in turn influences whether a fallen dictatorship will be replaced by a democracy or a new autocracy diffusion despite playing an important role is insufficient to explain the clustering of transitions using data on 125 autocracies from 1875 to 2004 we show that economic crises trigger authoritarian breakdowns while diffusion influences whether the new regime is democratic or authoritarian

attribution error in economic voting evidence from trade shocks this article exploits the international transmission of business cycles to examine the prevalence of attribution error in economic voting in a large panel of countries from 1990 to 2009 we find that voters on average exhibit a strong tendency to oust the incumbent governments during an economic downturn regardless of whether the recession is home grown or merely imported from trading partners however we find important heterogeneity in the extent of attribution error a split sample analysis shows that countries with more experienced voters more educated voters and possibly more informed voters all conditions that have been shown to mitigate other voter agency problems do better in distinguishing imported from domestic growth jel e3 e6

voting and the economic cycle sophisticated voters assess incumbent competence by filtering out economic cycles which they do not like from trend growth which they do naive voters on the other hand respond only to raw economic growth this implies that voting in the aggregate should respond asymmetrically to the economic cycle upswings are rewarded by the naive but punished by the sophisticated downswings are punished by all voters using an established dataset of over 400 general elections we find that the incumbent vote share a responds differently to trend growth than to the cycle b does not respond significantly to positive variation in the economic cycle and c responds significantly and negatively to negative realizations in the economic cycle in contrast to standard formulations of the grievance asymmetry this asymmetric vote response is found to be independent of trend growth

learning about voter rationality we model the accountability relationship between voters and politicians to clarify what can and can t be learned about voter rationality from existing evidence from the behavior literature we make two key points first we show that evidence on the electoral consequences of natural disasters and economic shocks typically interpreted as evidence for voter irrationality is consistent with a canonical model with rational voters second we show that the evidence on the electoral consequences of disaster response typically interpreted as evidence for voter rationality is consistent with the same model with irrational voters hence neither body of evidence can adjudicate between rational and irrational voting behavior we also derive new hypotheses that can better guide future empirical work attempting to assess voter rationality

financial constraints competition and hedging in industry equilibrium we analyze the hedging decisions of firms within an equilibrium setting that allows us to examine how a firm s hedging choice depends on the hedging choices of its competitors within this equilibrium some firms hedge while others do not even though all firms are ex ante identical the fraction of firms that hedge depends on industry characteristics such as the number of firms in the industry the elasticity of demand and the convexity of production costs consistent with prior empirical findings the model predicts that there is more heterogeneity in the decision to hedge in the most competitive industries

behind the scenes the corporate governance preferences of institutional investors we survey institutional investors to better understand their role in the corporate governance of firms consistent with a number of theories we document widespread behind the scenes intervention as well as governance motivated exit these governance mechanisms are viewed as complementary devices with intervention typically occurring prior to a potential exit we further find that long term investors and investors that are less concerned about stock liquidity intervene more intensively finally we find that most investors use proxy advisors and believe that the information provided by such advisors improves their own voting decisions

state ownership and the evolution of italian corporate governance state ownership pyramidal groups family trust and a minor role for banks and other financial institutions in the corporate governance of both large and small enterprises are the structural features of italian capitalism today this paper offers a critical analysis of state ownership by analysing the evolution of italian corporate governance since the second world war it concludes that full or majority state ownership of corporations can be effective in separating ownership and control during stages of powerfully accelerating growth and when shifts in the sectoral balance are needed that state owned enterprises must not be burdened with special social objectives and that the system is bound to degenerate without a functioning political market to guarantee democratic changes of parties and power and if the mission culture of public managers is eroded

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

are bureaucrats paid like ceos performance compensation and turnover of top civil servants abstract recent research explores the effect of financial and career incentives on public sector hiring processes and subsequent performance the reverse relation between performance and bureaucrats compensation and turnover has received only limited attention due to the distinct features of public sector organizations bureaucrats are traditionally argued to require either permanent positions and fixed wages or low powered performance incentives this article studies how the performance of top civil servants in norwegian local governments affects their compensation and turnover we thereby build on a unique new dataset over the period 1991 2014 our results indicate that better performing top civil servants obtain a higher compensation and are less likely to be replaced nonetheless these incentives remain low powered in line with agency theory prescriptions

interest rate derivatives at commercial banks an empirical investigation abstract i analyze the effects of bank characteristics and macroeconomic shocks on interest rate risk management behavior of commercial banks my findings are consistent with hedging theories based on cost of financial distress and costly external financing banks with higher probability of financial distress manage their interest rate risk more aggressively both by means of on balance sheet and off balance sheet instruments as compared to the derivative users the derivative non user banks adopt conservative asset liability management policies in tighter monetary policy regimes finally i show that the derivative non user bank s lending volume declines significantly with the contraction in the money supply derivative users on the other hand remain immune to the monetary policy shocks my findings suggest that a potential benefit of derivatives usage is to minimize the effect of external shocks on a firm s operating policies

voting in open economies the electoral consequences of globalization what are the electoral consequences of global market integration although recent discussions of politics and markets have much to say on globalization s implications for policy outcomes the impact of market integration on representative democracy has received scant attention this article addresses this omission we extend the globalization literature to develop two competing hypotheses regarding the influence of open economies on electoral accountability predictions are tested using a new data set covering elections from 75 countries over 27 years results support a government constraint hypothesis exposure to the world economy weakens connections between economic performance and support for political incumbents by redirecting concerns from the policy implications of globalization and toward its electoral consequences findings highlight the influence of voter perceptions and of vote seeking politicians in the politics of globalization

do changes in terms of trade impact election outcomes abstract we investigate whether luck is a relevant factor in election outcomes by analyzing how a country s change in terms of trade close to the election impacts the probability of reelection of the incumbent party we draw from economic and political data on countries around the world and find that changes in the terms of trade one year before the election affect the reelection probability import prices are the main drivers of the result and elections in non oecd countries are the most affected by terms of trade

heterogeneity in perceptions of national economic conditions empirical findings concerning economic voting differ according to the level of analysis employed a widely accepted explanation for the inconsistency between macroand microlevel evidence of economic voting is the high degree of random variation that plagues survey data according to this explanation aggregation purges individual level noise from mass opinions on policy issues and outcomes building on the research of bartels 1996 we debate the validity of this explanation by demonstrating that public evaluations of the national economy vary systematically with information media exposure political attitudes personal experiences and demographic characteristics furthermore we show that these sources of subjective heterogeneity produce systematic biases when national economic evaluations are aggregated these findings challenge a widely accepted notion that because error in individual level measures or expressions of preferences is random the aggregation of these individual measures ensures that they correctly represent the collective preference mpirical findings concerning the influence of the economy on political behavior differ depending on the level of analysis employed using aggregate level data numerous studies have established a statistical relationship between economic conditions and election outcomes or executive popularity e g kramer 1971 mackuen erikson and stimson 1992 on the basis of the macro level evidence alone one would have little reason to doubt that the economy matters in contrast individual level studies using survey data have produced only mixed evidence that voters consider economic conditions when evaluating the incumbent government and its leaders e g fiorina 1978 1981 kinder and kiewiet 1979 1981 moreover the strongest survey evidence of economic voting suggests that voters primarily care about national economic conditions not their personal financial situation this finding contradicts the egocentric theory posited by early macro level research that national economic indicators matter because they are correlated with personal financial circumstances the micro macro dichotomy in economic voting research reflects a similar dichotomy in research on voter sophistication and representation aggregate level studies tend to indicate that voters are reasonably well informed about the economy and make forward looking rather sophisticated voting decisions e g alesina londregan and rosenthal 1993 suzuki and chappell 1996 palmer and whitten 1999 these studies infer that mass political decisions conform to rational expectations or at least limited information rationality e g mackuen erikson and stimson 1992 in contrast to this macro level image of the voter individual level survey research has shown that the public in general has low levels of political sophistication lacking much knowledge of and interest in politics e g

incumbent behavior vote seeking tax setting and yardstick competition this paper develops a model of the political economy of tax setting in a multijurisdictional world where voters choices and incumbent behavior are determined simultaneously voters are assumed to make comparisons between jurisdictions to overcome political agency problems this forces incumbents into a yardstick competition in which they care about what other incumbents are doing we provide a theoretical framework and empirical evidence using u s state data from 1960 to 1988 the results are encouraging to the view that vote seeking and tax setting are tied together through the nexus of yardstick competition

anticipatory income smoothing a re examination abstract this paper reassesses evidence of anticipatory income smoothing reported in defond and park dp j accounting econom 23 1997 115 in light of knowledge about measurement error in discretionary accrual estimates we argue that the method dp use to measure un managed earnings mechanically biases the evidence in a manner consistent with anticipatory income smoothing using an approximate randomization approach we find that dp s results cannot be distinguished from those achieved when discretionary accruals are randomly assigned to firm years in our sample overall these results show that the backing out approach to measuring un managed earnings is ineffective in testing earnings management hypotheses

corporate risk management integrating liquidity hedging and operating policies we analyze the value created by a dynamic integrated risk management strategy involving liquidity management derivatives hedging and operating flexibility in the presence of several frictions we show that liquidity serves a critical and distinct role in risk management justifying high levels of cash we find that the marginal value associated with derivatives hedging is likely to be low though we explain why some empirical studies find a higher value we explore the complex interactions between operating flexibility and financial risk management finding that substitution effects are nonmonotonic and are affected by operating leverage the nature of operating flexibility and the effectiveness of the hedging instrument this paper was accepted by jerome detemple finance

the effect of ethical orientation and professional commitment on earnings management behavior the purpose of this study is twofold the first objective is to examine the impact of an individual s ethical ideology and level of professional commitment on the earnings management decision the second objective is to observe whether the presence of a personal benefit affects an individual s ethical orientation or professional commitment within the context of an opportunity to manage earnings using a sample of 375 undergraduate business majors our results suggest a significant relationship between an individual s ethical orientation and decision making further participants with higher levels of professional commitment seem to be less likely to engage in earnings management behavior and less likely to behave opportunistically these results have the potential to add to our understanding of certain behaviors in entry level personnel and should be of interest to managers practitioners academicians and researchers

does basel ii affect the market valuation of discretionary loan loss provisions we use a sample of banks from 24 european countries to investigate whether the adoption of the basel ii capital accord in 2008 affects the market valuation of discretionary loan loss provisions dllps although basel ii lowers the incentives of internal ratings based irb banks to recognize income increasing dllps in an opportunistic manner it has no such impact on the remaining banks which adopt the standardized methodology we use this setup in a difference in difference did design where standardized banks act as a control group our evidence supports the three hypotheses that for irb relative to standardized banks basel ii is associated with i less income increasing dllps and ii less income smoothing via dllps which enhances the informational content of dllps about future loan losses and leads to iii higher market valuation of dllps our findings are timely and have policy implications for future regulatory developments in the banking industry

on interdependent supergames multimarket contact concavity and collusion abstract following bernheim and whinston 1990 this paper addresses the effects of multimarket contact on firms ability to collude real world imperfections tend to make firms objective function strictly concave and market supergames interdependent firms payoffs in each market depend on how they are doing in others then multimarket contact always facilitates collusion it may even make collusion sustainable in all markets when otherwise it would not be sustainable in any the effects of conglomeration are discussed multigame contact is shown to facilitate cooperation in supergames other than oligopolies as long as agents objective function is submodular in material payoffs journal of economic literature classification numbers c72 d43 l13 l21

compensation incentives and the duality of risk aversion and riskiness the common folklore that giving options to agents will make them more willing to take risks is false in fact no incentive schedule will make all expected utility maximizers more or less risk averse this paper finds simple intuitive necessary and sufficient conditions under which incentive schedules make agents more or less risk averse the paper uses these to examine the incentive effects of some common structures such as puts and calls and it briefly explores the duality between a fee schedule that makes an agent more or less risk averse and gambles that increase or decrease risk with the growing interest in executive compensation and agency problems

managerial incentives and collusive behavior abstract i characterize the effects of empirically observed managerial incentives on long run oligopolistic competition when managers have a preference for smooth time paths of profits as revealed by the empirical literature on income smoothing manager led firms can sustain collusive agreements at lower discount factors capped bonus plans and incumbency rents with termination threats make collusion supportable at any discount factor independent of contracts duration when managers have these preferences incentives and demand fluctuates price wars during booms need not occur the most collusive price may then be pro cyclical

does option compensation increase managerial risk appetite this paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls under the manager s optimal policy the option ends up either deep in or deep out of the money as the asset value goes to zero volatility goes to infinity however the option compensation does not strictly lead to greater risk seeking sometimes the manager s optimal volatility is less with the option than it would be if he were trading his own account furthermore giving the manager more options causes him to reduce volatility managers with convex compensation schemes play an important role in financial markets this paper solves for the optimal dynamic investment policy for a risk averse manager paid with a call option on the assets he controls the paper focuses on how the option compensation impacts the manager s appetite for risk when he cannot hedge the option position on one hand the convexity of the option makes the manager shun payoffs that are likely to be near the money under the optimal policy the manager either significantly outperforms his benchmark or else incurs severe losses furthermore in examples of optimal trading strategies asset volatility goes to infinity as asset value goes to zero yet option compensation does not strictly lead to greater risk seeking as asset value grows large or if the evaluation date is far away the manager moderates asset risk for example if the manager has constant relative risk aversion crra asset volatility converges to the merton constant as asset value goes to infinity in some situations the manager actually chooses a lower asset volatility than he would if he were investing on his own because the leverage inherent in his option magnifies his exposure to the asset volatility in addition with all constant or decreasing absolute risk averse utility functions from the hyperbolic absolute risk averse hara class giving the manager more options causes him to reduce asset volatility in the crra case for example the manager targets a fixed volatility for his personal

the two sides of derivatives usage hedging and speculating with interest rate swaps existing cross sectional findings on nonfinancial firms use of derivatives that are usually interpreted as the result of hedging may alternatively be due to speculation panel data examinations can distinguish between derivatives practices that endure over time and are therefore more likely to result from hedging and those that are more transient thus more consistent with speculation our decomposition results indicate that hedging of interest rate risk is concentrated among high investment firms consistent with costly external finance simultaneously firms appear to use interest rate swaps to manage earnings and to speculate when their executive compensation contracts are more performance sensitive

managerial optimism and earnings smoothing abstract this paper empirically examines how ceo optimism affects earnings smoothing and earnings surprises the main finding is that optimistic managers smooth earnings more than rational managers and are associated with smaller in absolute value earnings surprises a possible theoretical explanation is offered for these results based on a combination of the torpedo effect the innate behavior of optimists and the risk of litigation prosecution for over reporting earnings

additional evidence on bonus plans and income management abstract we extend healy 1985 by examining the relation between discretionary accruals and bonus plan bounds for a sample of 102 firms for the 1980 1990 period contrary to healy we find that when earnings before discretionary accruals fall below the lower bound managers select income increasing discretionary accruals and vice versa we believe that our results are more consistent with the income smoothing hypothesis than with healy s bonus hypothesis however mechanical selection bias in portfolio formation cannot be entirely ruled out as an alternative explanation for our results

don t stand so close to me spatial contagion effects and party competition in this article we bring together elements from the literatures on economic voting and spatial voting to gain theoretical leverage on the combined role of clarity of responsibility party policy positions and economic performance in elections building on evidence of voter knowledge we develop a theory of spatial contagion effects to explain how factors drawn from both of these literatures combine to shape changes in support for political parties we test this theory with a spatial autoregressive model of party competition in 23 nations from 1951 to 2005 as expected we find evidence of strong spatial contagion effects in elections with low clarity of responsibility

sources of bias in retrospective decision making experimental evidence on voters limitations in controlling incumbents are citizens competent to assess the performance of incumbent politicians observational studies cast doubt on voter competence by documenting several biases in retrospective assessments of performance however these studies are open to alternative interpretations because of the complexity of the real world in this article we show that these biases in retrospective evaluations occur even in the simplified setting of experimental games in three experiments our participants 1 overweighted recent relative to overall incumbent performance when made aware of an election closer rather than more distant from that event 2 allowed an unrelated lottery that affected their welfare to influence their choices and 3 were influenced by rhetoric to give more weight to recent rather than overall incumbent performance these biases were apparent even though we informed and incentivized respondents to weight all performance equally our findings point to key limitations in voters ability to use a retrospective decision rule

corporate governance in brazil corporate governance is an issue of growing importance in developing economies as many firms pass through significant transformations due to the combined forces of sociopolitical changes technological progress and economic trends toward globalization these elements along with the structural characteristics of developing economies such as less developed capital markets and governmental interventionism draw a picture for corporate governance practices that may in some aspects be fundamentally different from the practices found in european or north american contexts in this paper we review and discuss the state of corporate governance practices in brazil focusing on how the governance structure of brazilian firms has been subjected to important changes in the recent past and how even more changes are expected to happen

an explanation for accounting income smoothing it is widely believed that corporate managers often engage in income smoothing taking actions to dampen fluctuations in their firms publicly reported net income one reason given for this is that managers think that investors pay more for a firm with a smoother income stream see ronen and sadan 1981 while there have been many empirical studies attempting to document whether or not income smoothing actually occurs there has been little exploration of why a manager might rationally want to smooth his firm s income explaining why smoothing might be observed and how it can result in an increased stock price is the focus of this paper in two recent studies lambert 1984 and dye 1988 demonstrate in agency settings that a risk averse manager who is precluded from borrowing and lending in the capital markets has an incentive to smooth his firm s reported income in this paper in contrast it is shown that within a market setting an incentive exists for a manager to smooth income that is independent of either risk aversion or restricted access to capital markets the market setting is also useful in that it allows for the analysis of the effect of income smoothing on stock prices it is shown here that if a manager can choose which of two periods to recognize certain income he may prefer the choice that is expected to

employment insecurity incumbent partisanship and voting behavior in comparative perspective we argue that occupational unemployment rates by informing perceptions of economic insecurity serve as a salient and powerful heuristic for aggregate economic performance consequently high and

on the determinants of corporate hedging finance theory indicates that hedging increases firm value by reducing expected taxes expected costs of financial distress or other agency costs this paper provides evidence on these hypotheses using survey data on firm s use of forwards futures swaps and options combined with computstat data on firm characteristics of 169 firms in the sample 104 firms use hedging instruments in 1986 the data suggest that firms which hedge face more convex tax functions have less coverage of fixed claims are larger have more growth options in their investment opportunity set and employ fewer hedging substitutes