Why Do Managers Explain Their Earnings Forecasts?

Managers often explain their earnings forecasts by linking forecasted performance to their internal actions and the actions of parties external to the firm. These attributions potentially aid investors in the interpretation of management forecasts by confirming known relationships between attributions and profitability or by identifying additional causes that investors should consider when forecasting earnings. We investigate why managers choose to provide attributions with their forecasts and whether the attributions are related to security price reactions to management earnings forecasts. Using a sample of 951 management earnings forecasts issued from 1993 to 1996, we find that attributions are more likely for larger firms, less likely for firms in regulated industries, less likely for forecasts issued over longer horizons, more likely for bad news forecasts, and more likely for forecasts that are maximum type. Furthermore, attributions are associated with greater absolute price reactions to management forecasts, more negative price reactions to management forecasts (forecast news held constant), and a greater price reaction per dollar of unexpected earnings. Our findings hold after control for the aforementioned determinants of attributions and after control for other firm‐ and forecast‐specific variables that are often associated with security prices.     

Optimal Futures Positions for Large Banking Firms

In this paper, we extend earlier work on hedging models so that uncertainty about both deposit supply and loan demand is incorporated as well as random rates of return on loans and CD's. Our model suggests that the optimal forward position is the sum of three ratios that should be estimated simultaneously. Using bank-specific data, the optimal hedge ratios are estimated in both the pre-deregulation and deregulation subperiods. Our results show that previous studies of bank hedging with interest rate futures have greatly overstated (a) the volume of short futures positions that banks should take and (b) the degree of homogeneity of optimal hedge ratios across the banking system. Similarly, deregulation has not uniformly affected the interest rate risk borne by different institutions.     

GOVERNANCE AND VERTICAL INTEGRATION IN TEAM SPORTS

Antitrust law distinguishes vertical and horizontal restraints. A horizontal restraint is one which exists between competing firms supplying rival products in a market, and a vertical restraint is one which exists between firms that jointly contribute to supplying a particular product in a market. Horizontal agreements receive much closer antitrust scrutiny because they often enable firms to limit competition at the expense of consumers, while vertical restraints may be legal or illegal depending on whether they tend to enhance or reduce competition or the exploitation of market power. This paper argues that there are important vertical restraints that operate in sports leagues which have been mostly neglected in the literature but have a significant impact. We focus on intraleague restraints, where member clubs of a league agree to control the organization of league competition, and interleague restraints, where horizontal agreement such as the Reserve Clause relies on agreements not to compete for players competing in senior or junior leagues. ( JEL L83, L42, L44)     

Options,Short Sales,and Market Completeness

This paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales. The significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling. We also find significant effects on option prices, related to the short interest in the underlying stock. We then present evidence that options also increase information efficiency. Earlier work, that is replicated and extended here, has suggested that short sale constraints cause stock prices to underweight negative information. Options appear to reduce that effect.     

Food legislation in Britain: general principles and the evolution of the system

This paper reviews the development of food legislation in Britain. Two case studies relating to the legislation applying to bread and margarine are included. Five different sets of interest groups are identified as contributors to the establishment or amendment of compositional regulations.     

The Price Impact and Survival of Irrational Traders

Milton Friedman argued that irrational traders will consistently lose money, will not survive, and, therefore, cannot influence long‐run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact are two independent concepts. The price impact of irrational traders does not rely on their long‐run survival, and they can have a significant impact on asset prices even when their wealth becomes negligible. We also show that irrational traders' portfolio policies can deviate from their limits long after the price process approaches its long‐run limit.