INVESTING IN INSTITUTIONS

Robust institutional change is difficult to achieve. However, it is more difficult for some countries than others. We use data on 69 countries between 1870 and 2000 to show that political instability does not always affect growth outcomes. We then develop a simple model to explain this fact in which the likelihood that “good” institutions are abandoned during periods of political uncertainty depends on the opportunity cost of doing so. We operationalize our model by using contract intensive money as a proxy for this initial investment in growth‐enhancing institutions. Cross‐sectional and panel growth regressions support the model's predictions.     

The Australian Auditing and Assurance Standards Board after the Implementation of CLERP 9

This paper traces the establishment of the reconstituted Auditing and Assurance Standards Board (AUASB) as a result of the CLERP (Audit Reform and Corporate Disclosure) Act 2004, and its progress in developing auditing standards that are "in the public interest". The paper canvasses the composition of the AUASB, its transparency and due process, its relationship with the International Auditing and Assurance Standards Board and the Financial Reporting Council, and its resourcing and attitude to researching issues of importance in auditing. The paper discusses methods that might be used to provide evidence of the efficacy of the reforms to auditing standard-setting.     

The Function of the Auditor-General: Independence, Competence and Outsourcing – the Policy Implications

Privatisation, outsourcing or restructuring the public-sector audit office in Victoria will have implications - economic, political and even moral. The authors believe that a more competitive system will, if operational independence can be put in place, bring significant benefits to the people of Victoria and will be a model for other jurisdictions. While the implications are enormous, the challenges that will need to be dealt with are just as great.     

The Impact of Non-Serial Publications on Research in Accounting and Finance

This study examines the role of books and official Publications in accounting and finance research. From an analysis of thirteen leading journals for the year 1987–8 we report on the characteristics of such non-serial materials used by authors to support their research. We find that the accounting discipline in particular has become more open to influence from other disciplines. The individual perspectives of these thirteen journals can be partially revealed by their use of non-serial materials. Using cluster analysis we examine inter-journal variations in the disciplinary pattern of book citations and the distribution of citations to official bodies. Several relatively homogeneous groupings are identified.     

Does the Cost Paradox Preclude Technological Progress under Imperfect Competition?

We consider a two‐stage model of R&D/Cournot competition with isoelastic demand satisfying the cost paradox (i.e., that equilibrium profits increase with unit cost). The R&D process has a binary structure, with spillover effects. We provide a negative answer to the question in the title: Under noncooperative R&D, firms will conduct R&D for a broad parameter range, despite the presence of the cost paradox, as a result of being caught in a prisoner's dilemma. A second‐best social planner is shown to have a higher propensity for R&D than the noncooperative scenario. However, if firms engaged in any of the known R&D cooperation scenarios, the answer to the question in the title would become affirmative. It follows that R&D cooperation leads to lower producer and consumer surpluses. This constitutes a major departure from the conclusions of the standard R&D model. Therefore, R&D cooperation in such environments should not receive favorable antitrust treatment.     

COMPETING EXPLANATIONS OF U.S. DEFENSE INDUSTRY CONSOLIDATION IN THE 1990s AND THEIR POLICY IMPLICATIONS

Was the consolidation of defense industry in the 1990s driven by U.S. Department of Defense (DOD) directives, or was it driven instead by the same forces that drove consolidation in many other sectors of the U.S. economy in the 1990s? To better understand the roles of DOD policy and economy‐wide forces in shaping the U.S. defense industry, we test for structural breaks in defense industry and spending data and compare our findings to those relating to other sectors and the general economy. We identify structural breaks in the defense‐related data in the early 1980s and throughout the 1990s, roughly consistent with changes in the U.S. economy, including broader merger trends. Overall, our results are more consistent with the view that economy‐wide factors drove defense industry consolidation, largely independent of the DOD policy changes that occurred early in the 1990s. (JEL E0, C2, H0)     

Dissecting Earnings Recognition Timeliness

We dissect the portion of stock price change of the fiscal year that is recognized in reported accounting earnings of the year. We call this portion earnings recognition timeliness (ERT). The emphasis in our dissection is on empirical identification of two fundamental precepts of financial accounting: (1) the matching principle, which is manifested in the recognition of expenses in the same period as the related benefits (i.e., sales revenue) accrue; and (2) recognition of expenses in the current period due to changes in expectations regarding earnings of future periods (we refer to these expenses as the expectations element of expenses). Although the expectations element has implicitly been at the core of much of the recent empirical literature on asymmetry in the earnings/return relation, it has not been explicitly identified. This recent literature is based on the premise that bad news about the future leads to more recognition of expenses in the current period (such as write‐downs) whereas good news about the future tends to have a much lesser effect on expenses of the current period; asymmetry in the expenses/return relation is captured implicitly via the observation of asymmetry in the earnings/return relation (i.e., asymmetry in ERT). Since the ERT reflects the relation between sales revenue and returns, matched expenses and returns, as well as the relation between the expectations element of expenses and returns, a focus on the expectations element may lead to sharper inferences. Our straightforward empirical procedure permits a focus on this element.     

Implied Equity Duration: A Measure of Pandemic Shutdown Risk

Implied equity duration was originally developed to analyze the sensitivity of equity prices to discount rate changes. We demonstrate that implied equity duration is also useful for analyzing the sensitivity of equity prices to pandemic shutdowns. Pandemic shutdowns primarily impact short‐term cash flows, thus they have a greater impact on low‐duration equities. We show that implied equity duration has a strong positive relation to U.S. equity returns and analyst forecast revisions during the onset of the 2020 COVID‐19 shutdown. Our analysis also demonstrates that the underperformance of “value” stocks during this period is a rational response to their lower durations.     

Evidence from Archival Data on the Relation Between Security Analysts' Forecast Errors and Prior Forecast Revisions*

Abstract. This paper examines the association between analysts' forecast errors at the earnings announcement date and the revisions to those forecasts during the preceding year. The study is an initial effort to use archival data from expert decision makers to test behavioral theories that have support in laboratory environments. Consistent with findings of conservatism in laboratory experiments, we find that analysts systematically underweight new information. This finding is most pronounced when the analysts are consistently revising their estimates downward throughout the year. Résumé. Les auteurs examinent le lien entre les erreurs prévisionnelles des analystes à la date de déclaration des bénéfices et les révisions dont ces prévisions ont fait l'objet au cours de l'exercice précédent. Il s'agit là d'une première tentative d'utilisation des données d'archives des experts en matière décisionnelle dans le but de tester les théories comportementales qui ont été démontrées en laboratoire. Conformément aux observations faites en laboratoire en ce qui a trait à la prudence, les auteurs constatent que les analystes accordent systématiquement trop peu de poids à l'information nouvelle/Cette constatation est très marquée lorsque les analystes révisent continuellement leurs estimations à la baisse au cours de l'année.