A Test of U. S. National Economic Policy in the Post-World War II Period

Abstract . This inquiry is an effort to evaluate the macroeconomic performance of the United States economy in the period after the close of World War II in terms of the macroeconomic goals to which national economic policy supposedly had been directed. That is, whether policy achieved full employment, price stability or an adequate rate of growth. Insofar as key indicators can be used as a basis for judgment—and there is, as yet, no scientific basis for measuring how far that reliance can be chanced—it would appear that policy was least successful in attaining full employment with price stability, or full employment, or price stability. In certain infrequent periods, growth seems to have occurred. But was its rate “adequate?” And did it result from policy? Analysis by key indicators may not tell us much, if anything; but it helps to delineate an approach toward policy-monitoring researchers need to cultivate.     

Relative Value Relevance of R&D Reporting: An International Comparison

This study examines the relative value relevance of R&D reporting in France, Germany, the UK and the USA. France and the UK allow conditional capitalization of R&D costs, whereas Germany and the USA (except for the software industry) require the full and immediate expensing of all R&D costs. The relative value relevance of R&D reporting under different R&D accounting standards are compared while controlling for the reporting environment. Test results suggest that the level of R&D reporting has a significant effect on the association of equity price with accounting earnings and book value. The reporting of total R&D costs provides additional information to accounting earnings and book value in Germany and the USA (expensing countries), and the allocation of R&D costs between capitalization and expense further increases the value relevance of R&D reporting in France and the UK (capitalizing countries), including firms in the US software industry.     

Alternative estimation method of earnings growth rate for PEGR strategy

The ambiguous return pattern for the PEGR (the ratio of the stock’s price/earnings to its estimated earnings growth rate) strategy has been documented in literature for the US stock markets. As stock prices and earnings per share (EPS) are objective data, earnings growth rate, however, is estimated by analyst whose method partial explains the PEGR vague return pattern. The purpose of this study is not to deny or substitute analysts’ estimation, but rather, to provide a simple and popular method, log-linear regression model, to forecast the earnings growth rate (G), and examine whether the typical PEGR effect, such as PER (price/earnings ratio) or PBR (price/book ratio) effect, exists by using our alternative estimation method. Our evidence indeed shows that returns on the lowest PEGR portfolio not only dominate over all higher PEGR portfolios, but also beat the market with stochastic dominance (SD) analysis, which is consistent with our prediction. Our results, at least, imply that using the log-linear regression model to construct the PEGR-sorted portfolios can benefit investors and the model is also a good choice for analysts in their forecasting.     

Corporate Governance and Accruals Earnings Management

This study examines the association between corporate governance and accruals earnings management using a corporate governance index consisting of 55 individual corporate governance measures. Prior literature has focused primarily on certain individual corporate governance measures, overlooking the multidimensional character of corporate governance. Based on a sample of firms listed on the Athens, Milan and Madrid Stock Exchanges, we find an inverse relationship between corporate governance and earnings management. Corporate governance provisions seem to constrain the tendency of management to manage earnings leading to higher credibility for financial statements. Additional tests suggest that the negative relationship holds for large and middle capitalization firms but not for the small capitalization sample. In addition, corporate governance provisions limit upwards but not downwards earnings management. This study emphasizes the multilevel character of corporate governance and suggests the usage of comprehensive measures of corporate governance in the academic research. This study also stresses the importance of introducing corporate governance mechanisms in order to ensure the integrity of the financial reporting process. Practitioners are expected to evaluate the corporate governance provisions that each firm has put in place, whereas policy makers are expected to mandate the application of a wide range of corporate governance mechanisms. Copyright © 2011 John Wiley & Sons, Ltd.     

Capitalization of R&D and the Informativeness of Stock Prices

Abstract

This paper presents both a new approach to studying the consequences of accounting choice and a unique sample to examine the effects of accounting choice in the R&D context. We investigate the effect of firms' decision to capitalize R&D expenditures on the amount of information about future earnings reflected in current stock returns, as captured by the association between current-year returns and future earnings (FERC). We use a sample of UK firms, which includes both R&D capitalizers and expensers. An important feature of our tests is our use of a two-equation system to control for the endogeneity of the accounting choice (i.e. self-selection). Proponents of capitalization claim that it enables management to better communicate information about the success of projects and their probable future benefits. Consistent with this, we find that capitalization is associated with higher FERC than expensing.     

The effects of uncertainty on investment and the expected long-run capital stock

This paper examines the effects of output price uncertainty on the optimal investment behavior of a risk-neutral competitive firm with a constant returns to scale production function. In the presence of convex costs of adjustment, investment is an increasing function of q, the shadow price of capital. Given the current price of output, we find that increased uncertainty will raise the current rate of investment. Increased uncertainty will also increase the expected long-run capital stock if the price of output is serially uncorrelated. However, if the price of output is serially correlated, then the direction of the effect of increased uncertainty on the expected long-run capital stock depends on the curvature of the marginal adjustment cost function. In this case, we obtain results which are directly opposite of the results in the literature and we locate the flaw in the existing analysis.     

Accounting Choice and Earnings Quality: The Case of Software Development

In this study I explore how accounting choice affects earnings quality in the software development industry. SFAS No. 86, which requires capitalization of software development costs (SDC), is the only exception in the US to SFAS No. 2, which requires immediate expensing of all research and development (R&D) expenditures. Aboody and Lev (1998) suggest that capitalized SDC are value-relevant. Thus, expensing of these costs might introduce noise into earnings. However, it has been suggested that future benefits associated with SDC are highly uncertain (Software Publishers Association). Consequently, capitalization might introduce noise into earnings by capitalizing unproductive expenditures. Hence, it is not clear how managers' choice between capitalization and expensing will affect earnings quality. I first find that there is a decline in the quality of earnings in the software industry after the adoption of SFAS No. 86, whereas no such decline is observed in other high-tech industries. Second, I find that, within the software industry, the quality of earnings for expensers is greater than for capitalizers. Finally, I find that, among the capitalizers, those with a large increase in software capital have lower earnings quality than others. Overall, the results suggest that capitalization of software costs does not improve earnings quality.     

Long-run risk and hidden growth persistence

An extensive literature has analyzed the implications of hidden shifts in the dividend growth rate. However, corresponding research on learning about growth persistence is completely lacking. Hidden persistence is a novel way to introduce long-run risk into standard business-cycle models of asset prices because it tightly intertwines the cyclical and long-run frequencies. Hidden persistence magnifies endogenous changes in the forecast variance of the long-run dividend growth rate despite homoscedastic consumption innovations. Not only does changing forecast variance make discrimination between protracted spells of anemic growth and brief business recessions difficult, it also endogenously induces additional variation in asset price discounts due to the preference for early uncertainty resolution.     

Capitalization and Community Size

Studies often show taxes and public services capitalized into house prices, but no one has tested whether the rate of capitalization depends on community size. The theoretical model of W. H. Hoyt (1999, Regional Science and Urban Economics, 29, 155–171), predicts that capitalization occurs, but that the rate of capitalization is weaker in large communities. Hoyt's model is tested empirically using a house price hedonic framework. The tax capitalization results are less clear, but the school quality and crime results firmly support the model's predictions. Using both school districts and municipalities to measure communities, larger communities weaken the rate of capitalization.     

Optimal harvesting under resource stock and price uncertainty

We analyze partial and complete depletion harvesting policy under resource stock and price uncertainty and risk neutrality. We state a set of weak conditions under which the optimal policy can be characterized by a single threshold and show that the value can be expressed in a separable form where price volatility affects the value through the risk adjusted growth rate. Both higher price and stock volatility decrease the value when the correlation between the driving Brownian motions is negative. With no correlation the optimal policy is independent of price volatility while higher stock volatility increases the harvesting threshold.     

Capitalizing Research & Development: Signaling or Earnings Management?

This paper analyzes the capitalization of Research & Development (R&D) expenditures under International Financial Reporting Standards (IFRS). Discretionary R&D capitalization can be exercised by managers to signal private information on future economic benefits to the market. It can, however, also serve as opportunistic earnings management. We analyze a unique, hand-collected sample of highly R&D intensive German IFRS firms during 1998–2012. We find that market values are not associated with capitalized R&D for the overall sample, indicating that earnings management may be a concern. We identify firm-years for which R&D capitalization is possibly used for pushing their earnings above a specific threshold (e.g. analysts' forecasted earnings, prior year's earnings). Our results show that both the decision to capitalize and how much to capitalize are strongly associated with benchmark beating. Consistently, we find that market values are negatively associated with capitalized R&D for firms who are likely to use capitalization for benchmark beating (about one third of the overall sample). On the other hand, the market values R&D capitalization positively for well-performing firms, for which capitalizing does not matter to beat an earnings benchmark (about half of the overall sample). This finding is robust to controls for endogeneity, various deflators, and different measures for earnings management.     

Long-run underperformance following private equity placements: The role of growth opportunities

Our results show that the post-offering performance of private equity issuers is related to growth opportunities. We find significant long-run underperformance in stock returns following private placements only for firms with high Tobin's q. High-q firms experience not only poor stock price performance but also poor operating performance. Low-q firms, in contrast, do not display significant stock price or operating underperformance. We further examine three potential explanations for this relation: over-investment in assets by managers, investor skewness preference, and over-optimism about earnings prospects. Our results are consistent with the view that investors are overly optimistic about the prospects of high growth firms.     

Contracting on the Stock Price and Forward-Looking Performance Measures

Abstract

We examine the use of earnings, forward-looking performance measures and stock prices in managerial compensation. When the firm's owner and its manager have identical time preferences, the stock price is not useful for motivating the manager, as it is a noisy aggregation of a forward-looking measure and future earnings. In contrast, when the owner and the manager have conflicting time preferences, the noisy stock price is useful for contracting. If the manager has no access to banking and cannot trade the firm's shares, the timeliness of the stock price dominates the extra risk imposed by its noise. At the same time, forward-looking performance measures (such as customer satisfaction) can induce a desirable allocation of management effort between the short term and long term more efficiently than the stock price can. Forward-looking performance measures and the stock price are thus not direct substitutes in rewarding farsighted effort.     

Estimating the Precision of Information on Earnings and Non-earnings Announcement Days,and Its Relation with the Cost of Equity

ABSTRACT

Using daily stock returns, we estimate the precision of information during earnings and non-earnings announcement days, and find that although the precision of information in daily stock returns increases during earnings announcement days, it explains less of the variation in expected returns than the precision of information on non-earnings announcement days. Our findings suggest that the precision of earnings disclosures has a small effect on the cost of equity relative to the precision of information on other days of the year.     

Local Economic Structure and Growth

Abstract

This paper tests how the local economic structure—measured by local sector specialization, competition and diversity—affects growth of manufacturing sectors. Most of the empirical literature assumes that in the long run more productive regions will attract more workers and use employment growth as a measure of local productivity growth. However, this approach is based on strong assumptions, such as those of national labour markets and homogeneous labour. This paper shows that if we relax these assumptions, regional adjusted wage growth is a better measure of productivity growth than employment growth. This measure is used in order to study regional growth in Portuguese regions between 1985 and 1994. Evidence is found of MAR externalities in some sectors and no evidence of Jacobs or Porter externalities in most of the sectors. These results are at odds with the findings for employment-based regressions, which show that regional concentration and the region's size have a negative effect in most of the sectors. It is also shown that simply using regional wage growth would overstate the effect of regional concentration and competition on long-run growth.     

Nominal rigidities equilibria in a non-Ricardian economy

I consider a cash-in-advance economy with nominal price rigidities. Nominal interest rates are the cost of liquidity and fiscal policy sets nominal transfers that affect the distribution of wealth. Under a fiscal policy associated with an unequal distribution of wealth and for policies of low or even zero interest rates, coordination failures exist, that is, involuntary unemployment persist even if prices are set at full employment levels. Coordination failures exist if and only if nominal rates are below a threshold. Moreover, I demonstrate the following result on welfare: full employment allocations at a nominal rate equal to the threshold (high liquidity costs) are better, in terms of welfare, from unemployment allocations at any non-negative interest rates below the threshold. On the other hand, under a sufficiently progressive fiscal system that reduces the inequality in the wealth distribution, coordination failures do not exist.     

Amenities in an urban general equilibrium model

This paper has presented a general equilibrium Tiebout-median voter model. The model was solved numerically for prices and distributions of consumers which correspond to equilibria, and the results of the numerical solution of the model were used to evaluate the HES and Yinger Propositions. That complete capitalization always occurs means that the HES Proposition is false; Yinger's Proposition is misdirected since complete capitalization occurs regardless of the presence or absence of amenities (although amenities affect the equilibrium solutions). We have argued that capitalization is never appropriately measured by price differentials in a general equilibrium model.     

Household borrowing and metropolitan housing price dynamics – Empirical evidence from Helsinki

This article argues that, especially in the absence of sufficient direct data on credit constraints, it is reasonable to add a household debt variable in an empirical model studying housing price dynamics. This is because household borrowing is likely to reveal information regarding the credit constraints faced by households. Moreover, debt may also give information on expected income growth and interest rate movements. The aim of this study is to examine empirically if household borrowing data, indeed, is of importance in a dynamic housing price model. In line with the prior expectations, it is found that housing appreciation in the Helsinki Metropolitan area is Granger caused by the household debt-to-GDP ratio both in the short and in the long run. Causality from the housing market to credit, in turn, seems to run only through a cointegrating long-run relation. While the estimated long-run relation between housing prices, income and debt-to-GDP ratio appears to have remained stable through the sample period (1975Q1-2006Q2), the short-run dynamics changed somewhat due to the financial liberalization in the late 1980s. The stability of the long-run relation implies that the loan data are able to cater, at least to a notable extent, for the effect of the changes in Finnish households’ liquidity constraints on housing demand. In line with previous literature, it is also found that housing price adjustment is sluggish and includes notable backward-looking features.     

A dymimic model of housing price determination

This paper presents and estimates a model of the resale housing market. The data are a cross-section of monthly time series obtained from the multiple-listing service for a suburb of San Diego. The model is specified and estimated as a dynamic multiple indicator multiple cause system of equations where the capitalization rate is taken to be an unobservable time series to be estimated jointly with the unknown parameters. These are estimated by maximum likelihood using an EM algorithm based upon Kalman filtering and smoothing.The specification of the model features hedonic equations for each house sale and a dynamic equation for the capitalization rate which is constrained to make the expectation of prices equal the present value of the net returns to home ownership whenever the economic variables stabilize at steady state values. Out of steady state, the capitalization rate slowly adapts to new information.The model attributes a large portion of housing price increases of the 1970's to a fall in the capitalization rate which in turn was driven by rental inflation, tax rates and mortgage rates. Post-sample simulations indicate an initial flattening of housing inflation rates and later a fall brought on by the increase in steady state capitalization rates. In-sample simulations show that although both Proposition 13 and the inflation induced rise in the marginal income tax rates provided partial explanations for the fall in capitalization rates, the single most important factor was the acceleration in price of housing services which interacted with the tax treatment of home ownership to produce an amazing 18% average annual rate of price increase over the last seven years of the 1970's.     

World Economic Prospects Monthly

Overview: Financial turmoil will not derail expansion

• ? The further run of broadly positive economic news has been overshadowed by the recent financial market turmoil. We do not expect the latter to be the catalyst for any notable economic slowdown and have left our world GDP growth forecast for 2018 unchanged at 3.2%, which would be the strongest result since 2011, up from an estimated 3.0% in 2017.
• ? January survey data continued to strike a positive tone. Indeed, the global composite PMI rose to its highest level during the current upswing and points to a further acceleration in global GDP growth. Meanwhile, less timely world trade data showed strong growth in November after a weaker performance in September and October.
• ? Of course, these developments predate recent financial market developments. The key issue is whether the equity market sell‐off triggers significant spillovers to the wider economy. If the market reversal is to have notable repercussions, it will need to morph from a tantrum into a full‐blown crisis. For now, we still expect interest rates generally to edge higher, with three rate hikes still seen in the US this year.
• ? Despite the recent fall, equity prices are still up sharply compared with a few months ago and earnings growth remains solid. Against this backdrop, further weakness would probably require an additional trigger, such as a sustained rise in bond yields in response to a reassessment of the inflation and monetary policy outlook. Although inflation concerns have risen recently, our view remains that price pressures will rise only gradually in the advanced economies and that the upside risks to both inflation and bond yields remain well contained.
• ? The upshot is that recent events have not prompted us to reassess the outlook for this year or beyond. We continue to expect world GDP growth to pick up to 3.2% this year, reflecting strong growth in both the advanced economies and the emerging markets. And our forecast for 2019 is also unchanged at 2.9%. In turn, world trade growth remains quite strong, helped by the weaker US$, but is seen slowing to 5% this year from just over 6% in 2017, with a further modest easing to 4.3% in 2019.