RELATIONSHIPS,COMPETITION AND THE STRUCTURE OF INVESTMENT BANKING MARKETS*

It is well known that competition can destroy incentives to invest in firm‐specific relationships. This paper examines how the tension between relationships and competition is resolved in the investment banking market, which for decades has been characterized by both relationships and competition. The model studies the impact on relationships of four different dimensions of competition: non‐exclusive relationships, competition from arm's‐length intermediaries, non‐price competition, and endogenous entry. The analysis shows how market equilibrium adjusts so that relationships are sustained in the face of such competition. Banks are shown to establish relationships without either local or aggregate monopoly power. The model rationalizes two distinct empirical regularities of market structure: the invariance of market concentration to market size; and a pyramidal market structure with an oligopoly comprising similar‐sized players at the top and a large number of small banks at the bottom. The analysis may also shed light on the industrial organization of other professional service industries.     

Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence

We show that a life‐cycle model with realistically calibrated uninsurable labor income risk and moderate risk aversion can simultaneously match stock market participation rates and asset allocation decisions conditional on participation. The key ingredients of the model are Epstein–Zin preferences, a fixed stock market entry cost, and moderate heterogeneity in risk aversion. Households with low risk aversion smooth earnings shocks with a small buffer stock of assets, and consequently most of them (optimally) never invest in equities. Therefore, the marginal stockholders are (endogenously) more risk averse, and as a result they do not invest their portfolios fully in stocks.     

Taxes and Corporate Policies: Evidence from a Quasi Natural Experiment

We document important interactions between tax incentives and corporate policies using a “quasi natural experiment” provided by a surprise announcement that imposed corporate taxes on a group of Canadian publicly traded firms. The announcement caused a dramatic decrease in value. Prospective tax shields partially offset the losses, adding 4.6% to firm value on average, and vary with the tax status of the marginal investor. Further, firms adjust leverage, payout, cash holdings, and investment in response to changing tax incentives. Overall, the event study and time series evidence supports the view that taxes are important for corporate decision making.     

Factors That Affect Understanding of Social Responsibility Accounting*

Many social responsibility/sustainable development (SR/SD) issues affecting accounting policies and standards will have to be addressed by present and future accountants. This paper investigates qualitative factors that may impede the learning of, and attitudes toward, SR/SD. While Gordon (1998) examined exposure to SR/SD, the present study contributes to the literature in several ways. First, to overcome one of the limitations of Gordon's study, noted by her, matched pair responses (n = 198) to pre‐ and post‐study questionnaires are employed in this study. These responses are analyzed using t‐statistics, cluster analysis, and multivariate analysis. Second, three factors not previously examined that may affect learning of SR/SD (number of economics courses taken, gender, and grade point average) are explored in this paper. The positive conclusion is that exposure to SR/SD had more influence on learning, understanding, and attitudes than did pre‐existing demographic and educational background variables with the exception of grade point average. As a surrogate for intelligence or ability to learn, grade point average was found to be highly significant in a multivariate model. An appreciation that ability to learn affects understanding and attitudes is important for instructors in both continuing professional education and university/college accounting.     

Interactions of Corporate Financing and Investment Decisions: A Dynamic Framework

This article analyzes the interaction between a firm's dynamic investment, operating, and financing decisions in a model with operating adjustment and recapitalization costs. Using numerical analysis, we solve the model for cases that highlight interaction effects. We find that higher production flexibility (due to lower costs of shutting down and reopening a production facility) enhances the firm's debt capacity, thereby increasing the net tax shield value of debt financing. While higher financial flexibility (resulting from lower recapitalization costs) has a similar effect, production flexibility and financial flexibility are, to some extent, substitutes. We find that the impact of debt financing on the firm's investment and operating decisions is economically insignificant.