Output and employment growth in the Netherlands in the postwar period: A putty-clay approach

Summary An attempt has been made to estimate a putty-clay vintage model for the Netherlands in order to test the assumption, usually made in the Dutch vintage model discussion, of complementarity ex ante. The estimation led to the following conclusions: an elasticity of substitution of about 0.32, a planning period of 13 years and apart from the 1950s the existence of embodied labour-augmenting technical progress only. The model outcomes lead to the conclusion of capital shortage being the ruling phenomenon in the postwar period with only some short periods in the 1950s and the late-1960s of capital abundance. Since the late-1970s employment growth is not only depressed by too slow a growth of capacity demand for labour but also by the increasing underutilization of productive capacity. Part of this research has been made possible by a grant of the Netherlands Organization for the Advancement of Pure Research (ZWO) and the National Programme of Labour Market Research (NPAO). The authors are indebted to Professor Th. van de Klundert for valuable comments.     

A putty-clay vintage model for sectors of industry in the Netherlands

Summary A putty-clay vintage model has been estimated for five industrial sectors: food, beverages and tobacco manufacturing; textiles, clothing and footwear manufacturing; chemical industry and oil refineries; metal manufacturing, and total manufacturing. Substitutabilityex ante between labour and capital appeared to be small in the first four sectors, with textiles, clothing and footwear manufacturing as an exception. Substitutabilityex ante in total manufacturing industry is rather high: an elasticity of substitution of –0.74. Embodied technical progress is strong in all industrial sectors. In textiles, clothing and footwear manufacturing and in total manufacturing it is both labour- and capital-augmenting in nature. In the other sectors it is mainly of the labour-augmenting variety.This research has partly been made possible by a grant of the National Programme of Labour Market Research (NPAO). Advice by Professor Th. van de Klundert and Mr. A.H. van Zon is gratefully acknowledged.     

Finnish and Swedish business cycles in a global context

This paper evaluates the decisions made by the Finnish government to join EMU and the Swedish government not to join EMU in the early 1990s. Focusing on the characteristics of business cycles during the postwar period, we find that output fluctuations in Sweden and Finland are correlated to two measures of the international business cycle, a European and a non-European cycle. The Finnish cycle has become more synchronized to the European cycle but less synchronized to the non-EU cycle after 1999. For Sweden we find the opposite result. The decision by the Finnish government to join EMU on schedule is justified ex post but was not justified ex ante. Similarly, the decision by the Swedish government not to join EMU in 1999 seems to be justified ex post but was not justified ex ante. Our empirical evidence suggests that economic decisions based on historical data may not be optimal ex ante but they may be defensible ex post.     

British Capital and Merchandise Exports, 1870–1913: The Bilateral Case of New Zealand

The Ford thesis argued that there was a short‐term causal relationship between British overseas investment and British merchandise exports in the late nineteenth century. However, economic historians since Ford have found little empirical evidence in support of this argument. Using data on bilateral British lending, this article finds that such a relationship did exist, with British ex ante lending preceding merchandise exports by 2 years. A case study of New Zealand, which had an extraordinarily high share of Britain in its imports, reveals that the relationship was conditional upon the lending being allocated to social overhead capital.     

A multivariate analysis of DISC election decision

Conclusion This study found that the decision by management to establish a DISC unit may not be satisfactorily identified by the examination of the financial data on either anex ante orex post basis. However, examination of the responses to the questionnaires indicate differences in the perceptions of the management of the two groups are significantly different on a multivariate basis.A possible implication of this research effort is that the use of published financial data alone cannot adequately explain decisions made by management. Indeed, unless management's expectations are realized, use of published data alone may result in unwarranted conclusions.     

CAPE VERDE: THE CASE FOR EUROISATION

After a decade of a successful peg to the euro, the authorities of Cape Verde are considering the official euroisation of the country. For an ex ante economic evaluation of such a move, this paper assesses whether Cape Verde fulfills key economic criteria devised by the optimum currency areas literature, using as benchmark the comparable records of the 27 European Union (EU) countries. The answer is positive. Overall, we find that Cape Verde is not less suited for euroisation than some of the current euro area members and most of the remaining members of the EU.     

Information asymmetries and craft guilds in pre‐modern markets: evidence from Italian proto‐industry

This article analyses the relationship between guilds and information asymmetries using a large database of quality disputes from early modern Italy. It finds that a high‐quality urban textile industry was able to solve externalities using a range of ex ante and ex post monitoring mechanisms based on private market relationships and fair sanctions which effectively reduced adverse selection and information asymmetries. Instead, when guilds did use their quality regulations, the effect of the guild on information asymmetries and the industry as a whole was generally negative, by providing mechanisms that could be manipulated by entrenched interest groups for rent‐seeking purposes.     

Is there an Anglo-American corporate governance model?

This paper questions the existence of an Anglo-American model of corporate governance and capitalism. Significant differences between the UK and US models of corporate governance are identified. The UK is a principles orientated system based more on voluntary codes operated on a ‘comply or explain’ basis, whilst the US system is more rules based and litigious. The UK focuses more on ex ante protection of ‘outside’ shareholders, whilst the US focuses on ex post protection of share traders. Institutional investors are expected to play a more prominent and wide ranging role in corporate governance in the UK than the US, though the evidence on their voting behaviour and wider ‘engagement’ activity is not readily available. The explosion of private equity led leveraged buy-out activity in the mid 2000s challenges the efficiency of both models and could be a harbinger of a ‘new capitalism’; relying more on incentive compatible remuneration packages and less on public disclosure and market discipline. Alternatively, it could simply be driven by the tax advantages currently enjoyed by debt over equity, the special deferred capital gains (‘carried interest’) tax treatment enjoyed by private equity, low (long as well as short term) real interest rates (‘cheap money’), and rising equity prices.     

A Re-Examination of Financial Analysts' Differential Earnings Forecast Accuracy*

Abstract. This research re-examines whether there are differences in the forecast accuracy of financial analysts through a comparison of their annual earnings per share forecasts. The comparison of analyst forecast accuracy is made on both an ex post (within sample) and an ex ante (out of sample) basis. Early examinations of this issue by Richards (1976), Brown and Rozeff (1980), O'Brien (1987), Coggin and Hunter (1989), O'Brien (1990), and Butler and Lang (1991) were ex post and suggest the absence of analysts who can provide relatively more accurate forecasts over multiple years. Contrary to the results of prior research and consistent with the belief in the popular press, we document that differences do exist in financial analysts' ex post forecast accuracy. We show that the previous studies failed to find differences in forecast accuracy due to inadequate (or no) control for differences in the recency of forecasts issued by the analysts. It has been well documented in the literature that forecast recency is positively related to forecast accuracy (Crichfield, Dyckman, and Lakonishok 1978; O'Brien 1988; Brown 1991). Thus, failure to control for forecast recency may reduce the power of tests, making it difficult to reject the null hypothesis of no differences in forecast accuracy even if they do exist. In our analysis, we control for the differences in recency of analysts' forecasts using two different approaches. First, we use an estimated generalized least squares estimation procedure that captures the recency-induced effects in the residuals of the model. Second, we use a matched-pair design whereby we measure the relative forecast accuracy of an analyst by comparing his/her forecast error to the forecast error of another randomly selected analyst making forecasts for the same firm in the same year on or around the same date. Using both approaches, we find that differential forecast accuracy does exist amongst analysts, especially in samples with minimum forecast horizons of five and 60 trading days. We show that these differences are not attributable to differences in the forecast issuance frequency of the financial analysts. In sum, after controlling for firm, year, forecast recency, and forecast issuance frequency of individual analysts, the analyst effect persists. To validate our findings, we examine whether the differences in the forecast accuracy of financial analysts persist in holdout periods. Analysts were assigned a “superior” (“inferior”) status for a firm-year in the estimation sample using percentile rankings on the distribution of absolute forecast errors for that firm-year. We use estimation samples of one- to four-year duration, and consider two different definitions of analyst forecast superiority. Analysts were classified as firm-specific “superior” if they maintained a “superior” status in every year of the estimation sample. Furthermore, they were classified as industry-specific “superior” if they were deemed firm-specific “superior” with respect to at least two firms and firm-specific “inferior” with respect to no firm in that industry. Using either definition, we find that analysts classified as “superior” in estimation samples generally remain superior in holdout periods. In contrast, we find that analysts identified as “inferior” in estimation samples do not remain inferior in holdout periods. Our results suggest that some analysts' earnings forecasts should be weighted higher than others when formulating composite earnings expectations. This suggestion is predicated on the assumption that capital markets distinguish between analysts who are ex ante superior, and that they utilize this information when formulating stock prices. Our study provides an ex ante framework for identifying those analysts who appear to be superior. When constructing weighted forecasts, a one-year estimation period should be used because we obtain the strongest results of persistence in this case.     

Investments,wages, prices and demand for labour

Summary Since 1971 the employment in the Netherlands has continuously decreased. Apart from the decrease caused by the recent depression, particularly in the year 1975, the decrease is a more pronounced continuation of a tendency which is manifest already in a number of years before. In this paper an attempt is made to explain the structural development of employment by means of a clay-clay vintage model. It appears that the unfavourable development of employment is connected with the accelerated growth of real labour costs in the past decade.This article is a translation of a revised and somewhat extended version of a paper published earlier in Dutch: H. den Hartog and H. S. Tjan,Investeringen, lonen, prijzen en arbeidsplaatsen, Central Planning Bureau, Occasional Paper, 1974/2, The Hague, 1974. This revised version of the clay-clay vintage model was introduced into a much more complete model of the economy of the Netherlands in: H. den Hartog, Th. C. M. J. van de Klundert and H. S. Tjan, De structurele ontwikkeling van de werkgelegenheid in macro-economisch perspectief, inWerkloosheid, Preadviezen van de Vereniging voor de Staathuishoudkunde, The Hague, 1975.     

Some Reflections on the Interactions between the Bank of England's Forecasts and the MPC's Policy Decisions

This paper makes three main points. First, whereas the Monetary Policy Committee's forecasts of inflation and output growth in the UK are comparatively accurate, they cannot forecast deviations around trend, except at short horizons. Second, this is primarily because they adjust policy, the short-term interest rate, to drive inflation/output back to trend at their forecast horizon. This is not apparent when using a Taylor-rule using ex post forecasts, since these are published after taking account of policy changes. I use a rule of thumb to re-engineer estimates of the ex ante forecasts, upon which the policy decision was based. Also, because of the lengthy lags in the transmission mechanism, Central Bank decision-makers relate their interest decisions, not to current variables, but to forecast values for future inflation and output, with a forward-looking interest rate reaction function of the form:

State-Building in Resource-Rich Economies

One of the most significant differences between developing countries and today’s advanced states is the fact that many developing countries rely heavily on one or several natural resources. That such dependence shapes the state’s ability to tax—its fiscal capacity—is commonly argued in the political science and applied development literatures. This paper approaches the issue from an economic angle. Our analytical foundation builds upon a novel theoretical framework, and allows us to model fiscal capacity as an ex ante investment under uncertainty. For our panel of 30 hydrocarbon-rich economies, instrumental-variables results provide strong empirical support for our theoretical proposition: resource intensification weakens state-building by impeding the state’s fiscal capacity. This result provides an inaugural validation of the economic analytics of state-capacity determinants: understanding these determinants serves to build stronger states and support sustainable paths of development. Our result also suggests that one of the main tools of fiscal policy-analysis in resource-rich economies, namely optimal taxation, could gain in practical relevance by incorporating capacity-constraints into the analytical fiscal-framework.     

Control of sampling risks in auditing*

Abstract. This paper systematically analyzes the factors that affect sampling risks of the two major classes of statistical estimators in auditing. It develops three approaches for identifying when a particular estimator is preferred ex ante. It also provides a simulation analysis of ex ante-ex post sampling risk differences. The paper concludes that dollar-unit sampling may be more widely used than previous research has indicated. Résumé. Cet article analyse de façon systématique les facteurs d'influence du risque échantillonnal attaché aux deux grandes catégories d'estimateurs statistiques en vérification. Trois approches sont développées afin d'identifier les circonstances où un estimateur particulier s'avère préférable ex ante. Une analyse de simulation portant sur les différences de risque échantillonnai ex ante et ex post est également présentée. Cet article conclut que la méthode d'échantillonnage en unités monétaires semble plus utilisée que ce que la recherche antérieure laisse entendre.     

Impact of the Information Asymmetry Between Managers and Owners Under Oligopoly

We show, using a Hotelling (1929) model with Laffont and Tirole (1986) firms, that under duopoly, the information asymmetry caused by the separation of ownership and control has two effects on owners’ incentives to induce effort. Information asymmetry raises the marginal cost of inducing effort, which decreases efforts and increases prices. Since all firms’ prices increase, this leads to a change in the expected demand of each firm, and thus in the marginal benefit of inducing effort, which may amplify or mitigate the initial impact. As a consequence, information asymmetry may induce some firms to increase efforts and lower prices. More surprisingly, it may increase both ex post and ex ante social welfare.     

Evaluating Monetary Policy Options

We present a procedure for evaluating ex ante the effects of alternative paths of a monetary policy tool (the federal funds rate in our illustrations) on output and the price level within a variant of a widely used vector autoregressive model of the U.S. economy. This exercise is a supplement to, or even an alternative to, analysis that relies on a particular structural model. Illustrations of the method are provided by evaluating the effects of changes in the funds rate target. Additionally, the Taylor rule is used to generate target funds rates for different target inflation rates, and the effects of these are evaluated.     

Redesigning the Aid Contract: Donors’ Use of Performance Indicators in Uganda

The perceived failure of traditional (ex ante) conditionality has led to proposals for using performance indicators as a basis for aid allocations (ex post conditionality). In this article we assess the role of performance indicators and their impact on the aid contract between donors and the government of Uganda. In Uganda the use of performance indicators has radically changed donor–recipient relations, by improving both program monitoring and donor coordination. It has, however, not yet fundamentally changed the incentive structure in the aid “contract.” To improve the incentive structure we propose a distinction between indicators used for monitoring and those designed to guide aid allocations.     

The case for price level or inflation targeting—What happened to monetary policy effectiveness during the Japanese disinflation?

This paper examines whether price level or inflation targeting would have been appropriate policy choices for Japan during its disinflation and deflation period. We employ Markov switching and structural vector autoregressions, together with structural IS equations, to investigate monetary policy effectiveness during the Japanese disinflation. We find evidence of regime switching in the mid-1990s in a model including the nominal policy interest rate. When monetary policy shocks are identified by using the McCallum rule for monetary base, a monetary expansion is found to have a statistically significant impact on prices. Moreover, a lower real ex ante interest rate can still stimulate the economy despite the zero lower bound on nominal interest rates.     

Determinants of the Returns-Earnings Correlation*

Abstract. The weak correlation between accounting earnings and security returns documented by numerous empirical studies is an issue of concern in current accounting research. Given that price is determined not solely by accounting earnings but also by other sources of information about future earnings, this paper focuses on the relation between earnings and other information to understand the returns-earnings association. The analysis indicates that current earnings exhibit high explanatory power for returns if they correlate with expected future earnings (or with other information that reflects expected future earnings). A high price-to-earnings (P/E) ratio coupled with a high return on equity (ROE) can ex ante indicate earnings growth, and the earnings of firms with these attributes are positively correlated with future earnings. The high-growth subset obtains an impressive returns-earnings R² of 31 percent and an earnings coefficient of 6.17, demonstrating that it is possible to identify firms whose earnings are strongly correlated with returns using a parsimonious set of firm characteristics. Résumé. La faible corrélation entre les bénéfices comptables et le rendement des titres de placement sur laquelle se sont penchés de nombreux auteurs d'études empiriques retient aujourd'hui l'attention des chercheurs en comptabilité. Le cours des titres étant déterminé non seulement par les bénéfices comptables mais aussi par d'autres sources d'information relative aux bénéfices futurs, l'auteur s'intéresse ici à la relation entre les bénéfices et d'autres renseignements, dans le but d'expliquer le lien entre rendement et bénéfices. L'analyse révèle que les bénéfices courants ont un pouvoir explicatif élevé à l'égard du rendement si ce dernier est en corrélation avec les bénéfices futurs prévus (ou avec d'autres renseignements indicateurs des bénéfices futurs prévus). Un ratio cours/bénéfice élevé associé à un rendement des capitaux propres élevé peut indiquer, ex ante, une croissance des bénéfices, et les bénéfices des entreprises qui possèdent ces caractéristiques sont en corrélation positive avec les bénéfices futurs. Le sous-groupe des entreprises à forte croissance obtient un R² étonnant de 31 pour cent, résultat d'une analyse de régression du rendement par rapport aux bénéfices, et un coefficient de bénéfices de 6,17, ce qui démontre qu'il est possible de déterminer quelles sont les entreprises dont les bénéfices présentent une forte corrélation avec le rendement, lorsqu'on utilise un ensemble parcimonieux de caractéristiques des entreprises.     

On the comparison of dollar-unit and stratified mean-per-unit estimators

Abstract. The paper discusses the findings reported by Smieliauskas (1986) and expands on them. It focuses on the dominance criterion for cost efficiency and on the usefulness of power curves for stratified mean-per-unit estimators. The analyses lead to the conclusions that: (1) while an audit plan which dominates another is associated with lower cost, a plan with lower cost does not necessarily dominate: (2) the distribution function of the t statistic becomes normal for sufficiently large samples, but the approach to normality is not necessarily uniform as sample size increases; (3) large sample size is required for nominal confidence levels to be a good approximation to the true confidence level, and the true confidence level can move temporarily farther from the nominal level as the sample size increases; and (4) the lack of reliability of ex ante power curves for the stratified mean-per-unit estimator makes it difficult to decide which power curve dominates. Résumé. Cet article discute des résultats publiés par Smielauskas (1986) et les extrapole. Il met l'accent sur le critère de dominance pour l'efficacité des coûts et sur l'efficacité des courbes de puissance pour les estimateurs de moyenne-par-unité stratifiée. Les analyses portent à conclure que: (1) même si un programme de vérification dominant par rapport à un autre est associé à un coût inférieur, un programme à coût inférieur n'est pas nécessairement dominant; (2) la fonction de distribution de la statistique t tend vers la normale pour des échantillons suffisamment grands, mais ce rapprochement vers la normalité n'est pas nécessairement uniforme à mesure que la taille de l‘échantillon devient plus grande; (3) un échantillon de grande taille est requis afin que les seuils de confiance “nominaux” constituent une bonne approximation du seuil de confiance “réel”, et le seuil de confiance “réel” peut s’éloigner temporairement du seuil de confiance “nominal” à mesure que s'accroît la taille de l‘échantillon; et (4) l'absence de fiabilité des courbes de puissance ex ante pour l'estimateur de moyenne-par-unité stratifiée rend ardue la sélection de la courbe de puissance dominante.     

Post-Enron Implicit Audit Reporting Standards: Sifting through the Evidence

Summary The accounting scandals and the demise of Andersen have increased auditors’ ex ante business risk. As a result, stock markets revised downward the value of the external audit (Callen and Morel (2002); Chaney and Philipich (2002); Krishnamurthy et al. (2002); Asthana et al. (2003)). One commonsensical reaction on behalf of auditors should have been to apply the existing rules more carefully and, thus, issue more non-clean opinions on the financial statements they have audited. This is exactly what we see. Closer scrutiny reveals that the higher incidence of non-clean audit opinions is not due to the (substantial) changes in the audit client list or their balance sheets. This study mirrors earlier results where auditors relaxed their standards following a drop in business risk (Geiger and Raghunandan, (2001), (2002); Francis and Krishnan, (2002)).Authors are listed just by alphabetical order. We gratefully acknowledge useful comments from participants at the 2004 American Accounting Association Midyear Auditing Section conference, and outstanding suggestions from an anonymous referee for De Economist. Any remaining errors are ours.