Predicting Long‐Term Financial Returns: VAR versus DSGE Model—A Horse Race

This paper considers a U.S. institutional investor who is implementing a long‐term portfolio allocation using forecasts of financial returns. We compare the predictive performance of two competing macrofinance models—an unrestricted vector autoRegression (VAR) and a fully‐structural dynamic stochastic general equilibrium (DSGE) model—for horizons up to 15 years. Although the performances are similar for short horizons, the DSGE model outperforms the VAR at forecasting financial returns in the long term. This model also generates substantially higher Sharpe ratios. Although it contains fewer unknown parameters, it benefits from economically grounded restrictions that help anchor financial returns in the long term.     

THE PROPERTY VALUE PREMIUM OF A PLACE OF WORSHIP

Using a unique data set of residential housing values, we improve on previous hedonic pricing and event studies literature to estimate the amenity effects of a new religious structure on local property values. We improve on previous research by extending our analysis with a pre‐ and post‐treatment model. Using a pre‐ and post‐treatment model, we do not find that the religious structure that we examined influenced the value of surrounding properties in the period after its completion. The results suggest that previous research using only post‐completion data may mischaracterize the amenity effects of religious structures. (JEL R3)     

Increasing Health Club Attendance Through Self-Prophecy

Prior research has shown that asking people to anonymously predict whether they will perform a socially desirable behavior increases their probability of performing the action (Sherman, 1980). This article extends the empirical base of the phenomenon in a consumer service context demonstrating that an anonymous prediction request can increase likelihood of performing a socially desirable real-world behavior (working out at a health club). The effect was also observed for the first time over an extended time period (six months). The article concludes with tentative theory-relevant generalizations regarding the phenomenon and directions for further research.     

Neither Romance Nor Regulation: Re‐evaluating Community

As the realm of the community has grown increasingly important in the contemporary political economy, the theoretical debates surrounding community have also grown in importance and volume. Too often this literature has been either celebratory or dismissive; either romanticizing the concept and thereby elevating it to primary rank as the focal point of societal initiatives, or objecting to its regulated limits and contradictions and thereby dismissing its importance and political utility. There are important contributions being made by both those who dismiss community and those who celebrate it. But for those interested in understanding the potential for emancipatory social change in the contemporary political economy of neoliberalism there are also severe limitations imposed by these perspectives. After critiquing these literatures and debates, we put forward an understanding of community that is neither dismissive nor celebratory, but instead argues that communities need to be understood as simultaneously products of both their larger, and largely external, contexts, and the practices, organizations and relations that take place within them. Thus, communities, because of their central place in capitalist political economies, can be vital arenas for social change. But they are also arenas that are constrained in their capacities to host such efforts.     

Auditor Sensitivity to Earnings Management*

Abstract. Generally accepted auditing standards, auditing textbooks, and firm audit manuals indicate that, other things equal, the presence of significant monetary incentives based on financial results increases the inherent risk of material misstatement, and higher inherent risk should ordinarily cause the auditor to exercise a heightened degree of professional skepticism in conducting the audit. This article addresses the following basic research question: Are auditors sensitive to management's incentives to manage earnings? Research that examines whether auditors distinguish between explanations provided by managers with different incentives is important because audit standards indicate that inquiry of management can assist the auditor in evaluating significant unexpected differences. Two experiments were conducted. The first experiment explored whether management-buyout-induced incentives to make income-decreasing accruals affect auditors' judgments of the probability that a material misstatement exists. As predicted, auditors were sensitive to these incentives. The second experiment explored whether bonus-induced incentives affect auditors' judgments of the probability that a material misstatement exists. The auditors agreed that bonus plans such as the one in the experiment create incentives for management to make income-increasing or income-decreasing accruals depending on the terms of the plan. However, the auditors' judgments were unaffected by whether the unexpected difference and management's incentives were congruent. The auditors opted for potential audit effectiveness rather than potential audit efficiency by assuming that—on balance—management had incentives congruent with the unexpected overstatement. Résumé. Selon les normes de vérification généralement reconnues, les manuels de vérification et les guides de vérification des cabinets comptables, toutes choses égales par ailleurs, la présence d'encouragements monétaires substantiels basés sur les résultats financiers accroît le risque inhérent d'inexactitudes importantes, et un risque inhérent supérieur doit normalement amener le vérificateur à exercer davantage de vigilance dans la réalisation de sa mission de vérification. L'auteur s'intéresse à la question fondamentale suivante: les vérificateurs sont-ils sensibles aux motivations de la direction à user d'astuces comptables aux fins de l'établissement des bénéfices? Les recherches visant à déterminer si les vérificateurs établissent une distinction entre les explications fournies par les gestionnaires dont les motivations sont différentes revêtent beaucoup d'importance, compte tenu du fait que les normes de vérification indiquent que les demandes de renseignements de la direction peuvent aider le vérificateur à évaluer les écarts inattendus appréciables. Deux expériences ont été menées. La première avait pour but de déterminer si les motivations à agir sur les comptes de régularisation de manière à réduire les bénéfices, induites par un rachat de l'entreprise par les cadres, ont une incidence sur les jugements des vérificateurs relatifs à la probabilité d'inexactitudes importantes dans les déclarations. Conformément aux prévisions, les vérificateurs se montrent sensibles à ces motivations. La seconde expérience visait à déterminer si les motivations induites par les primes ont une incidence sur les jugements des vérificateurs en ce qui a trait à la probabilité de l'existence d'inexactitudes importantes. Les vérificateurs conviennent que les systèmes de primes, comme celui de la seconde expérience, motivent la direction à agir sur les comptes de régularisation de façon à augmenter ou réduire les bénéfices, selon les conditions du système. Toutefois, les jugements des vérificateurs ne sont pas influencés par le fait que l'écart inattendu dans les bénéfices et la motivation de la direction sont reliés. Les vérificateurs optent pour l'efficacité potentielle de la vérification plutôt que pour son efficience potentielle, en supposant que, dans l'ensemble, la direction présente des motivations qui vont dans le sens des surestimations inattendues en matière de bénéfices.     

Defaults of Original Issue High-Yield Convertible Bonds

Recent studies using aging analysis have found high rates of default for rated, nonconvertible high-yield bonds. This paper examines the remainder of the market and concludes that rated and nonrated convertible high-yield bonds had significantly lower default rates. It also provides some evidence that nonrated, nonconvertible securities may have lower default rates. Even after controlling for issue size and coupon rates in a logit model, these differences remain statistically significant.