Jobless Recovery: A Time Series Look at the United States

We use vector auto regression models controlling for log differences in gross domestic product (GDP), the unemployment rate, and changes in the unemployment rate to show that following a recession, the rate of decrease in the unemployment rate significantly slowed over time. Controlling for GDP growth rates, we find two structural breaks indicating weaker recoveries in the unemployment rate over time, i.e. recoveries that are increasingly jobless. The first break is in 1959, and the second is in 1984 coinciding with the usual timing of the Great Moderation. Using the 7.85% unemployment rate at the end of 2012 and assuming average annual recovery growth of 2%, the structural breaks imply an additional two full years are necessary to return to a historical long-run average of 5.5%. We empirically explore possible causes proposed in the literature including industry composition, participation rates and social benefits. Demographic shifts in the labor force and changing industry composition appear to be the strongest contributors to jobless recovery.     

Public investment and reelection prospects in developed countries

A growing body of literature suggests that office‐motivated politicians manipulate fiscal policy instruments to enhance their reelection prospects. This article directly examines the impact of fiscal policy on incumbents’ reelection prospects by focusing on the impact of public investment. This impact is estimated using a panel of 20 countries belonging in Organisation for Economic Co‐operation and Development over the period 1972–1999. We find that the level of public investment in the earlier years of an incumbent's term in office improves their reelection prospects, whereas election year manipulation of public investment is neither rewarded nor punished. Our evidence also suggests that, after controlling for the level of deficit and public investment, the level of government revenue both in the election and nonelection years does not seem to affect reelection prospects. Moreover, we find that deficit creation during elections and in nonelection years are not rewarded by voters.     

On Determinacy and Learnability in a New Keynesian Model with Unemployment

We analyse determinacy and stability under learning (E‐stability) of rational expectations equilibria in a new Keynesian model of inflation and unemployment, where labour market frictions due to costs of hiring workers play an important role. We derive results for alternative specifications of monetary policy rules and alternative values of hiring costs as a percentage of gross domestic product. We find that in general the region of indeterminacy and E‐instability in the policy space increases with hiring costs. Thus, higher hiring costs – consistent with European and South African “sclerotic” labour market institutions – seem to play an important part in explaining inflation and unemployment instability. Moreover, under lagged data‐based rules, the area where monetary policy delivers both determinacy and E‐stability shrinks. These rules also perform worse according to these two dimensions when hiring costs go up. Finally, under expectations‐based rules an additional explosive region is introduced. For South Africa, a rule based on current data – not unlike the original Taylor rule – works better than a forward‐looking rule.     

MODELLING INFLATION IN SOUTH AFRICA: A MULTIVARIATE COINTEGRATION ANALYSIS

We employ an expectations augmented Phillips curve framework to investigate the link between inflation, unit labour costs, the output gap, the real exchange rate and inflation expectations. Using multivariate cointegration techniques, we find evidence consistent with mark‐up behaviour of output prices over unit labour costs. Most importantly, we find that the mark‐up in the South African economy is much higher than in the U.S. For South Africa we find a markup of about 30 per cent: three times as high as the 10 per cent markup found for the U.S.     

Firm Productivity,Innovation, and Financial Development

How do firm‐specific actions—in particular, innovation—affect firm productivity? What is the role of the financial sector in facilitating higher productivity? Using a rich firm‐level data set, we find that innovation is crucial for firm performance as it directly and measurably increases productivity. The impact of innovation on productivity is larger in less‐developed countries. Evidence of financial sector development influencing the innovation‐productivity link is weak, but the effect is difficult to identify due to correlation between indicators of a country's financial and nonfinancial development. Furthermore, we find evidence that the innovation effect on productivity is more significant for high‐tech firms than for low‐tech firms.     

An Integrated Corporate Governance Framework and Financial Performance in South African‐Listed Corporations

This paper investigates the relationship between an integrated corporate governance (CG) index and financial performance using a sample of 169 South African (SA)‐listed corporations between 2002 and 2007. We find a statistically significant and positive association between a broad set of good CG practices and financial performance. In a series of sensitivity analyses, we find that our results are robust to endogeneity, different financial performance proxies, alternative CG weighting scheme and firm‐level fixed effects. We further distinctively examine the link between complying with SA context‐specific stakeholder CG provisions and financial performance. In line with political cost and resource dependence theories, our results reveal a statistically significant and positive nexus between compliance with stakeholder CG provisions and financial performance.     

Bohn's Test of Fiscal Sustainability of the American State Governments

The dramatic fall in state revenues during the Great Recession and the resultant large budget deficits accentuated concerns about state fiscal sustainability. I employ a model‐based approach proposed by 1998 to test for sustainability. In this approach, a positive and significant reaction of the ratio of primary surplus ratio (s) to lagged debt constitutes a sufficient condition for sustainability. Based on a panel of 48 contiguous states (1961–2008) and several model specifications, I find robust evidence in favor of sustainability. Further analysis suggests that the adjustment of the components of s to debt is asymmetric with the revenue side bearing a heavier burden than the spending side. The response of s is also found to be asymmetric with respect to the level of debt. Finally, the magnitude of the response is larger in states with a higher degree of fiscal stringency in general and “own‐revenue” and “no‐deficit‐carryover” provisions in particular.     

Growing Pains: Audit Quality and Office Growth

This study provides evidence on how local office growth affects audit quality. We predict that significant recent growth will temporarily stress office resources, leading to a negative relation between office‐level growth and audit quality. To test this prediction, we examine a sample of 17,062 firm‐year observations from 2005 to 2010. Results indicate a consistent negative relation between changes in volume of audit work and audit quality. Specifically, clients of offices that experience increases in workload over the prior year have greater absolute discretionary accruals as well as an increased likelihood of restatement. Our tests also indicate that the effect of office growth is transient and vanishes after one year. We find limited evidence that the size of the auditor's national network of offices partially mitigates the negative effects of office growth on audit quality. We further show that proxies for audit quality are negatively related to office‐level growth from new and existing clients. These findings are robust to controls for client and auditor characteristics as well as alternative specifications of growth. Taken together, evidence indicates that while larger offices provide higher audit quality, the benefits of office size are not realized immediately and rapid growth temporarily impairs audit quality. These results are informative to regulators concerned with audit quality and to practitioners charged with adjusting to office growth.     

Consumption externalities,market imperfections and optimal taxation

In a dynamic model with a keeping‐up‐with‐the Joneses preference and market imperfections, we attempt to investigate under what circumstances and for what reason the optimal tax should be state‐varying. We extend the Ljungqvist and Uhlig (2000) proposition to include preferences that exhibit non‐homotheticity. We show that a keeping‐up‐with‐the‐Joneses preference (a non‐intertemporally‐dependent preference) can lead the social planner to commit to a state‐contingent tax on labor income. Moreover, the optimal labor income tax can be either procyclical or countercyclical with respect to economic fluctuations, this crucially depending on whether the level of contemporaneous consumption increases or decreases the wedge between the intertemporal substitution elasticity of households and of the social planner.     

The Riskiness of Large Audit Firm Client Portfolios and Changes in Audit Liability Regimes: Evidence from the U.S. Audit Market*

We investigate whether the financial riskiness of large U.S. audit firm clienteles varied with the changing audit litigation liability environment during the period 1975‐99. Partitioning the period of study into four distinct periods (a benchmark period (1975‐84), a period of increasing concerns about litigation liability (1985‐89), a period of lobbying for reform (1990‐94), and a post‐relief period (1995‐99)), we find some evidence of risk decreases during 1985‐89, strong evidence of risk decreases during 1990‐94, and strong evidence of risk increases during 1995‐99. However, we also find that over the period of our study, a time during which Big 6 market shares grew appreciably, the proportion of litigious‐industry clients in Big 6 client portfolios grew at about the same rate as the proportion of such clients in the population. Moreover, the Big 6 share of the financially riskiest clients in the economy did not grow as fast as the overall Big 6 market share. In sum, although our evidence is consistent with the hypothesis that the riskiness of Big 6 client portfolios responded to changes in the audit litigation liability environment, we find no systematic evidence of a "race to the bottom" or "bottom fishing" by these firms in a bid to increase their market shares.     

Effect of Interest Rate Subsidies on Firm Performance and Investment Behavior during Economic Recession: Evidence from Vietnam

This paper aims to quantitatively evaluate the microeconomic consequences of the 4‐percent interest rate subsidy program, the main component of the Vietnamese Government's economic stimulus package in 2009, which was intended to assist recovery from the global economic and financial recession. Our analyses based on the Provincial Competitive Index 2009 survey and accounting data of firms listed on Vietnam's two stock exchanges show that firms that received subsidized loans were more likely to increase labor, to expand investment and to possess optimistic business plans. However, we find evidence that not all business activity generated by the stimulus led to productivity increases: a non‐trivial proportion of subsidized loans were not used to invest in production or expansion, but for speculative activities such as real estate and stock market trading.     

The Impact of Multinational Presence on Domestic Investment: Firm‐Level Evidence from South Korea

In order to analyze the effects of foreign multinationals' presence on domestic firms' investment, we use a detailed firm level data set from South Korea for the 2006–2014 period. We combine it with the input‐output tables provided by the Bank of Korea to construct industry level measures of multinational presence in sectors that are horizontally and vertically linked, and estimate dynamic investment equations that are augmented with these foreign presence measures. We find a positive and significant effect of foreign presence in both horizontally and vertically linked industries on domestic firm's investment rate, with larger effects arising from multinational presence in the supplying sectors. Quantitatively, a 2 percentage point increase in the presence of multinational suppliers increases the domestic firm's investment rate by 3.24 percentage points. We also find that this effect is larger for small and medium firms, private firms, nonexporters, firms that are not part of a chaebol, and for firms in external finance dependent industries. A similar 2 percentage point increase in the foreign presence in downstream sectors increases the investment rate of domestic suppliers by 0.55 percentage points. This effect is larger if the domestic firm is part of a chaebol, or is in a less external finance dependent industry. Investment increase by 0.53 percentage points following a 2 percentage point increase in horizontal linkages.     

Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices

Prior research shows that grocery stores reduce prices to compete with Walmart Supercenters. This study finds evidence that the competitive effects of two other big‐box retailers—Costco and Walmart‐owned Sam's Club—are quite different. Using city‐level panel grocery price data matched with a unique data set on Walmart and warehouse club locations, we find that Costco entry is associated with higher grocery prices at incumbent retailers and that the effect is strongest in cities with small populations and high grocery store densities. This is consistent with incumbents competing with Costco along nonprice dimensions, such as product quality or quality of the shopping experience. We find no evidence that Sam's Club entry affects grocery stores' prices, consistent with Sam's Club's focus on small businesses instead of consumers.     

Direct Evidence on Sticky Information from the Revision Behavior of Professional Forecasters

We provide evidence on the sticky‐information model of Mankiw and Reis ( 2002 ) by examining how often individual professional forecasters revise their forecasts. We draw interest rate and unemployment rate forecasts from the monthly Wall Street Journal surveys. We find evidence that forecasters frequently leave forecasts unchanged but revise more often the larger the changes in the information set; additionally, the information sensitivity of revision frequencies increased after 2007. We also find that, on average, forecasters in our sample revise more frequently than found in previous research but that revised forecasts are not consistently more accurate.     

How Do Retailers Price Beer During Periods of Peak Demand? Evidence from Game Weeks of the German Bundesliga

This article considers retail beer pricing during game weeks of the German Bundesliga. German consumers exhibit a high degree of brand‐loyalty in their preference for regionally crafted beers, and we exploit the regional brand‐loyalty of German beer consumers to identify brand‐level demand shocks for beers preferred by the home team's fans and visiting team's fans during Bundesliga game weeks. We find retailer price adjustments at the category level mask a considerably more nuanced pricing behavior at the brand level. Retailers in regions hosting Bundesliga games significantly increase beer prices at the category level during game weeks; however, at the brand level, we find retailers selectively discount prices on the home team's sponsored beers and systematically raise prices on the visiting team's sponsored beers. Our findings are consistent with a “tourist–natives” model of retail pricing during periods of increased demand in the German beer market.     

Does FIN 48 Improve Firms' Estimates of Tax Reserves?

This paper examines whether the increased accounting guidance and reporting requirements of FIN 48 impact the adequacy and accuracy of tax reserves and the effect of auditor‐provided tax services on tax reserves. While we do not find FIN 48 affected the adequacy or accuracy of tax reserves on average, FIN 48 eliminated the differences in the tax reserve adequacy of firms with and without auditor‐provided tax services that existed prior to its adoption. We also find evidence of less premature releasing of tax reserves post‐FIN 48. Our evidence is consistent with an increase in the comparability of reserves for firms that do and do not purchase auditor‐provided tax services, consistent with one of the FASB's objectives for FIN 48.     

The Role of Pension Business Benefits in Institutional Block Ownership and Corporate Governance*

We investigate whether potential pension contracting benefits lead institutions that provide pension services to acquire ownership blocks in firms and the implications of such blockholdings on the firms' corporate governance. We use the 2006 Pension Protection Act, which expanded pension participation in certain states, as a quasi-exogenous shock and find an increase in block ownership by pension-providing institutions in firms with substantial operations in affected states. Further, we find that the acquisition of a large block increases the likelihood that the institution will provide future pension services to the firm. With regard to corporate governance, we find that the acquisition of large pension blockholdings is associated with higher CEO pay and lower CEO turnover following poor financial performance. However, contrary to the prediction of the private benefits hypothesis, we do not find consistent evidence that large pension blockholdings are associated with declining firm profitability, suggesting that pension institutions are incentivized to exert monitoring to preserve the investment value of their blockholdings. Overall, our evidence is consistent with pension service institutions acquiring ownership blocks to obtain pension contracts, but our evidence does not support the prediction that they use their influence to compromise shareholder value.     

Parents’ Use of Subsidiaries to “Push Down” Earnings Management: Evidence from Italy

We find evidence consistent with Italian nonlisted subsidiaries engaging in accrual and real earnings management, so that their listed parents can meet or beat benchmarks. Thus, the parent firm drives the earnings management of the subsidiaries. We identify parents that are more likely to have managed earnings as the ones that avoid a small loss or meet or beat analyst forecast by a few cents. Cross‐sectional analysis reveals that Big 4 auditors mitigate accrual earnings management at the subsidiary level and that family‐owned firms use earnings management through nonlisted subsidiaries mainly to avoid reporting losses. Finally, we find that parent firms communicate earnings management strategies to their subsidiaries using board proximity. Our evidence shows that business groups manage earnings differently from single firms, pushing earnings management down to subsidiaries. It also supports the monitoring role of Big 4 auditors in a business group setting and contributes to understanding financial reporting decisions in family‐owned firms.     

The Relation between Analysts' Forecasts of Long‐Term Earnings Growth and Stock Price Performance Following Equity Offerings*

In this paper we evaluate the role of sell‐side analysts' long‐term earnings growth forecasts in the pricing of common equity offerings. We find that, in general, sell‐side analysts' long‐term growth forecasts are systematically overly optimistic around equity offerings and that analysts employed by the lead managers of the offerings make the most optimistic growth forecasts. In additional, we find a positive relation between the fees paid to the affiliated analysts' employers and the level of the affiliated analysts' growth forecasts. We also document that the post‐offering underperformance is most pronounced for firms with the highest growth forecasts made by affiliated analysts. Finally, we demonstrate that the post‐offering underperformance disappears once we control for the overoptimism in earnings growth expectations. Thus, the evidence presented in this paper is consistent with the “equity issue puzzle” arising from overly optimistic earnings growth expectations held at the time of the offerings.     

Evidence of Manager Intervention to Avoid Working Capital Deficits

We study managers’ interventions in financial reporting by examining working capital deficits, measured as current ratios less than 1.0. Current ratios represent important balance sheet liquidity indicators to lenders and creditors, and have an identifiable and naturally occurring reference point at 1.0, analogous to the profit/loss income statement reference point. We find that distributions of reported current ratios of both U.S. and non‐U.S. firms exhibit a discontinuity at 1.0. For U.S. firms, we find that the discontinuity increases with exogenous increases in the cost of credit in the economy, and that determinants of the likelihood to achieve a given current ratio are diagnostic precisely at the 1.0 discontinuity location but not at other nearby locations in the current ratio distribution. U.S. firms that avoid working capital deficits report lower proportions of inventory and higher proportions of accounts receivable in current assets and, when credit is tight, higher proportions of cash, consistent with managers increasing sales volume so as to capitalize profit margins and thereby increase current assets. For non‐U.S. firms, the discontinuity is more pronounced for observations from common law countries, a proxy for jurisdictions where financial reports are more intended to provide decision‐useful information. The evidence suggests that managers intervene to achieve a balance sheet reporting objective that stems from stakeholder use of reference points.