Asset specificity,capital intensity and capital structure: An empirical test

Capital investment and capital financing decisions interact. To resolve current controversies in investment-leverage-growth relationships requires an integrated industrial organization/financial economics empirical model of profit margins, capital investment intensity, leverage and risk. Using cumulative future losses in discontinued operations to measure the asset specificity of the firm's investments, empiricai results support a complementary (positive) relationship between debt and investment, the debt financing of verifiable contemporaneous growth, equity financing of future growth and the debt financing of specific assets. This evidence rejects the transactions cost theory of capital structure in Fortune 500 firms.     

Contemporaneous verification of language: evidence from management earnings forecasts

Research documents that linguistic tone is incrementally informative about stock returns. What remains a puzzle is the mechanism by which investors can assess its credibility. We examine whether contemporaneous information in management earnings forecasts serves as a timely alternative to ex post verification. We document that ex post verifiable quantitative news in unbundled forecasts, and characteristics of the linguistic tone itself, affect investors’ pricing of tone. Consistent with higher quality signals enhancing the credibility of contemporaneous lower quality signals, we find that quantitative news verifies the associated linguistic tone; when the two signals have the same sign, the price effect of tone is stronger. Furthermore, the pricing attenuation of tone is increasing in the imprecision of the quantitative forecast, suggesting that lower forecast quality compromises the quantitative signal’s credibility enhancement. Managerial incentives to inflate tone lead to the verification effect being greater for optimistic language, while management’s use of hyperbole results in attenuation of the tone’s pricing.     

Political Risk and Irreversible Investment

The objective of this article is two-fold. First, we developa theoretical model to investigate the impact of political riskon irreversible investment. Second, we apply our model to ananalysis of the effects of risk of separation of the provinceof Quebec from the Canadian federation. We model the probabilityof a regime switch using the properties of the electoral processand examine the response of investment to changes in the riskof separation. We consider the impact of investors' perceptionof the risk of separation and financial market volatility separately.We show that political risk has a depressing impact on investmenteven if the "bad" regime has never been observed in the sample.(JEL Codes: E22, D92, O16, O11)     

Human extinction scenario frameworks

It is a natural human instinct to wonder about the future. Some have long speculated about the various events that could potentially lead to the extinction of the human race. While a dark subject, the point of exploring factors that could drastically impact the ability to sustain life on our planet has utility in preparing for events of this nature. It is in the spirit of learning how to change before catastrophe strikes that such wondering occurs.     

Are price limits really bad for equity markets?

Despite widely documented criticisms, price-limit rules are present in many equity markets around the world. Using a game-theoretic model, we argue that, if the cost of monitoring a market is high, price-limit rules are beneficial. Empirical tests based on a cross section of 43 equity markets across five continents support our theoretical prediction. We find that the probability of the existence of price-limit rules is greater in markets that incur higher monitoring costs due to poorer business disclosure, more corruption and less efficiency in legal, regulatory and technological environments.     

Knowledge-Based Simulation for Business Process Redesign

This research focuses on knowledge-based simulation modeling for process redesign. Though the proposed technique can be utilized for ‘starting with a clean slate’, it is particularly well suited for situations where an existing process is already documented, and an attempt is being made to improve or redesign this process. We present a methodology that utilizes the basic process structure (represented in a matrix form), and using a rule-based knowledge acquisition system, interacts with the analyst to construct the process knowledge base. Once all the knowledge has been acquired, the system automatically generates an executable simulation model. Major benefits of this algorithmic approach include (1) reduced model building time, (2) increased analyst productivity, and (3) the assurance that basic process characteristics are not accidentally omitted in the simulation model. To test the validity and applicability of the proposed technique a prototype system has been developed that generates simulation programs in SLAM.© 1997 John Wiley & Sons, Ltd.     

Managerial utility-maximizing operating decisions under compound demand risk

This paper examines the demand and cost conditions under which utility maximizing pricing-risk and advertising-risk relationships are determinate. The structure of the firm's demand uncertainty captures both uncertain customer arrivals and uncertain individual customer demand. In addition to standard demand restrictions and constant marginal cost, determinate results depend upon the degree of managerial risk-aversion, the correlation between individual demand and customer arrival disturbances, the firm's cost fixity, and bounded product differentiation effects of advertising. The symmetry between price-cuts and advertising as demand-increasing costs is extensively examined; firm equilibrium requires that price-cuts not be an inferior input for increasing demand.     

The structure of coalitional power under probabilistic group decision rules

The paper extends the work of S. Barbera and H. Sonnenschein on probabilistic social welfare functions by permitting quasi-transitive and/or acyclic probabilistic social preferences. Allowing for quasi-transitivity it is shown that the social decision rule is characterized by a subadditive veto power structure. Gibbard's result on oligarchy is shown to be a special case. Similarly, Sen's theorem on Paretian Liberals is shown to be implied by the power structure in the acyclic case.     

RCA indices,multinational production and the Ricardian trade model

The practice of using Revealed Comparative Advantage (RCA) Indices to determine the flow of goods trade among countries is well established. But an important issue that demands attention is whether the RCA indices reflect the essentials of comparative advantage theory. Deb and Basu Foreign Trade Rev 46(3):3–28, (2011) examined the consistency of alternative RCA indices with the Heckscher-Ohlin theory of comparative advantage, leaving scope for re-examination of the indices in the context of the Ricardian comparative advantage theory, which insists on relative factor productivity differences among countries contrary to Heckscher-Ohlin’s relative factor endowment differences. The other issue which has been overlooked in much of the existing literature is the importance of value-added trade. With the growing importance of global production chains, RCA indices based on gross export values may not portray an accurate picture of the underlying comparative advantage of countries. In this context, adjusting the RCA indices to incorporate domestic value-added in exports seems to be quite relevant. This paper explores the consistency of RCA indices based on domestic value-added in exports with the Ricardian theory of comparative advantage using a panel data approach. A brief review on the structures of alternative RCA indices is also provided. The Log-of-Balassa index is found to be the best performer in this empirical examination, although the deficiencies of the index for cross-country or cross-commodity comparison must be acknowledged. The index of Yu et al. Ann Reg Sci 43(1):267–282, (2009) does possess the latter feature but in our study its performance is quite poor and hence its consistency with the Ricardian theory of comparative advantage is questionable.