The role of ethics in executive compensation: Toward a contractarian interpretation of the neoclassical theory of managerial renumeration

The topic of Chief Executive Officer (CEO) compensation has been a focus of interest for many years. The purpose of this article is to explore the ethical dimensions of various generally accepted theories of CEO renumeration. We argue that a contractarian approach, based on the Kantian ethical framework, can be used to augment the existing contingent pay models.While the neoclassical economic model of the firm views the maximization of the shareholders' wealth as the sole responsibility of top management, a contractarian approach regards the balancing of various stakeholders' interests as the primary task of top management. Ethical problems emerge when there are divergent, yet equally justifiable interests which compete in order to channel organizational resources to meet their own needs. In this situation, given the inherent ambiguities and ever present possibilities of multiple perspectives, it may not always be feasible to provide a categorical answer to the question of whether the CEO's decisions are ethical. We suggest that a broad interpretation of the neoclassical theory of the firm, one that is grounded in Kantian and contractarian ethics, can serve as a basis for a reconciliation of different theories of executive compensation.Linda L. Carr, a certified public accountant, has held positions as an auditor in public accounting and as a controller in industry. Her thesis examines the determinants of executive compensation in large and small firms.Moosa Valinezhad is assistant professor of economics in Western Kentucky University, where he teaches international economics, microeconomics, and statistics. Dr. Valinezhad has a deep interest in the interdisciplinary aspects of economics. His recent article in theJournal of Economic Issues explores the importance of sociopolitical forces for the monetary approach to the balance of payment.     

Does confidence data help forecast business cycles? New evidence from Canada

This paper assesses the contribution of confidence – or sentiment – data for predicting Canadian economic slowdowns. A probit framework is applied to an indicator of the status of the Canadian business cycle produced by the OECD. Explanatory variables include all available Canadian data on sentiment (from four distinct surveys) as well as macroeconomic and financial data. Sentiment data are introduced either as individual variables, as simple averages (such as confidence indices) and as confidence factors extracted from larger datasets containing all available sentiment data. Results indicate that the full potential of confidence data for forecasting Canadian business cycles obtains when factor models are used and all confidence data are utilized.     

Cross-Country Evidence on the Ability of the Nominal Interest Rate to Predict Inflation

This paper examines the viability of using short-term interest rates to forecast inflation as implied by the Fisher hypothesis. A major problem with this approach lies in the implicit assumptions that the real interest rate is constant and that the relationship between inflation and interest rate does not change over time. We demonstrate, using quarterly data for four OECD countries, that by relaxing these assumptions and allowing for seasonality in the inflation rate it is possible to obtain a model with a high degree of forecasting accuracy and efficiency.
JEL Classification Numbers: C22, C52, E31.     

The Profitability of Option‐Based Contrarian Strategies: An Empirical Analysis

Short‐selling restrictions limit investors' opportunities to profit from contrarian strategies in equity markets. We examine the proposition that incorporating options into contrarian strategies constitute a viable alternative to investors when short‐selling restrictions are in place. In particular, we combine equities with the call and put options traded on the Australian Stock Exchange to investigate the profitability of contrarian strategies in the hybrid market and options market alone. We assess the practical issues in the execution of these approaches, including testing for the effects of limited liquidity and transaction costs. We also investigate how fundamental factors (such as dividend yield, firm size, book‐to‐market ratio, earnings per share, price‐earnings ratio, value stocks, and market conditions) affect contrarian portfolios. The results show that employing options can enhance the profitability of contrarian strategies under certain market conditions.     

The random walk versus unbiased efficiency: can we separate the wheat from the chaff?

Abstract:

In the issue under investigation the wheat cannot be separated from the chaff because all we have is chaff. The random walk and unbiased efficiency are equally bad forecasters that should not be used as benchmarks for measuring forecasting accuracy. The simulation and econometric results show that when two forecasters are not independent they produce forecasts of similar quality, in which case it is erroneous to use the forward rate as a forecaster and the spot rate as a benchmark. Theoretical and intuitive explanations are presented for why the random walk and unbiased efficiency produce poor-quality forecasts that are almost identical. The failure of unbiased efficiency is explained primarily in terms of the post Keynesian view of the forward exchange rate.     

Demand Estimation in the Presence of Stochastic Trend and Seasonality: The Case of Meat Demand in the United Kingdom

If budget shares have stochastic trend or seasonality or both, then demand equations based on the assumption of deterministic trend and deterministic seasonality will be mis-specified. We test this proposition by estimating a Linearized Almost Ideal (LAI) demand system for meat demand in the United Kingdom using Harvey's structural time series methodology. We demonstrate that the model specification allowing for stochastic trend and deterministic seasonality performs best in terms of diagnostic tests and goodness of fit measures. It is also shown that the model with stochastic trend is better at out-of-sample forecasting.     

A Cross-Country Comparison of Okun's Coefficient

In this paper Okun's law is tested for the G7 countries in order to compare the responsiveness of unemployment to economic growth. Cyclical unemployment and output are extracted using Harvey's structural time series model. Okun's coefficient is estimated by OLS, rolling OLS, and SUR. The coefficient seems to be highest for North America and lowest for Japan, a result that can be explained in terms of differences in labor market rigidities. The rising absolute value of the coefficients over time indicated by the results of rolling OLS is explained in terms of labor market reform.J. Comp. Econom.,June 1997,24(3), pp. 335–356. La Trobe University, Bundoora, Victoria 3083, Australia.     

The demise of the ARC journal ranking scheme: an ex post analysis of the accounting and finance journals

The recent abolition of the ARC journal ranking scheme is indicative of some problematical features of journal ranking in general and the ARC scheme in particular. An alternative citation‐based ranking scheme is applied to the accounting and finance journals to highlight some loopholes in the abandoned ARC scheme and provide some suggestions for how to proceed with ERA 2012. By re‐ranking journals according to their citation indices, it is demonstrated that the ARC ranking placed a large number of journals where they do not belong. As a result, the ARC scheme induced some adverse behavioural changes with respect to preferred publication outlets.