Financial Structure and Corporate Behavior in Japan and the US: insulation versus integration with speculative pressures

This paper examines the impact of speculative financial markets on corporate behavior under the Japanese and US financial systems. While both countries experienced speculative financial booms during the 1980s, real sector corporate decision making was relatively insulated from such activity in Japan by its bifurcated capital markets: high-turnover trading of much equity coexists with another segment in which large blocks of firms equity and debt are held long term, by capital suppliers who are strategic business allies. In the American system, in contrast, fluid and impersonal stock trading leaves firms vulnerable to the impact of short term price movements. This avenue for speculative financial market pressures has militated toward reduced time horizons and financial ratio-based decision criteria in the US corporate sector. The main implication is that mechanisms must be found for insulating American corporate decision making from speculative pressures. Rather than attempting to mimic the undemocratic role played by banks and other buysiness insiders in Japan, US policy makers should achieve a similar insulating effect by vesting more power in corporate constituences other than shareholders—especially employees. An approach built around ‘democratic stakeholder governance’ is proposed.     

Simpler Probabilistic Population Forecasts: Making Scenarios Work

The traditional high-low-medium scenario approach to quantifying uncertainty in population forecasts has been criticized as lacking probabilistic meaning and consistency. This paper shows, under certain assumptions, how appropriately calibrated scenarios can be used to approximate the uncertainty intervals on future population size and age structure obtained with fully stochastic forecasts. As many forecasting organizations already produce scenarios and because dealing with them is familiar territory, the methods presented here offer an attractive intermediate position between probabilistically inconsistent scenario analysis and fully stochastic forecasts.     

Camouflaged Indicators of Earnings Management†

Abstract

We argue that, in response to increased scrutiny and greater attention to accruals versus sales, firms become more likely to engage in accrual conversion (AC) cash management aimed at aligning cash and accruals with earnings and sales (e.g. by factoring of receivables). In doing so, they reduce the statistical power of standard indicators of accrual-based earnings management – in effect, camouflaging their earnings management activity. This proposition is of interest because many influential papers on earnings management have utilized accrual-based indicators to reach their conclusions. Our results indicate that firms indeed became more likely to engage in AC cash management after the passage of the Sarbanes-Oxley Act (SOX), and that this tendency was particularly pronounced among firms with strong incentives (or enhanced ability) to perform and hide earnings management. In particular, our findings suggest that the post-SOX decrease in standard measurements of accrual-based earnings management, identified in prior research, is partially attributable to firms’ increased engagement in AC cash management activity.     

A model of public sector wage determination

The paper presents an empirical model of wage determination in the public sector that leads to the specification of a system of interrelated wage equations for municipal employees, which allows for occupational and geographic interdependence of wages. The model also considers the influence of public employee unions, municipal government form, and monopsony power of local governments on the wages of municipal employees. Several variants of the derived system of equations are estimated based upon 1967 cross-section data for 478 cities, and the policy implications of the results are discussed.     

Conditional Persistence of Earnings Components and Accounting Anomalies

We suggest that the failure of investors to distinguish between an earnings component's autocorrelation coefficient (unconditional persistence) and the marginal contribution of that component's persistence to the persistence of earnings (conditional persistence) provides a partial explanation of post‐earnings‐announcement drift, post‐revenue‐announcement drift, and the accrual anomaly. When the conditional persistence of revenue surprises is high (low) relative to its unconditional persistence, both the post‐earnings‐announcement drift and the post‐revenue‐announcement drift are high (low), because investors’ under‐reaction to revenues and earnings is stronger when the persistence of revenue surprises is more strongly associated with the persistence of earnings surprises. Also, the mispricing of accruals decreases substantially when the conditional persistence of accruals is high relative to its unconditional persistence, because investors’ over‐reaction to accruals is mitigated when the persistence of accruals is indeed more strongly associated with the persistence of earnings. Our findings also suggest that financial analysts’ failure to distinguish between unconditional and conditional persistence of revenues and accruals results in more biased revenue and earnings predictions.     

The leverage effect and the basket-index put spread

Benchmark models that exogenously specify equity dynamics cannot explain the large spread in prices between put options written on individual banks and options written on the bank index during the financial crisis. However, theory requires that asset dynamics be specified exogenously and that endogenously determined equity dynamics exhibit a “leverage effect” that increases put prices by fattening the left tail of the distribution. The leverage effect is larger for puts on individual stocks than for puts on the index, thus increasing the basket-index spread. Time-series and cross-sectional variation in the leverage effect explains option prices well.     

The (un)importance of geographical mobility in the Great Recession

Unemployment during and after the Great Recession has been persistently high. One concern is that the housing bust reduced geographical mobility and prevented workers from moving for jobs. We characterize flows out of unemployment that are related to geographical mobility to construct an upper bound on the effect of mobility on unemployment between 2007 and 2012. The effect of geographical mobility is always small: Using pre-recession mobility rates, decreased mobility can account for only an 11 basis points increase in the unemployment rate over the period. Using dynamics of renter geographical mobility in this period to calculate homeowner counterfactual mobility, delivers similar results. Using the highest mobility rate observed in the data, reduced mobility accounts for only a 33 basis points increase in the unemployment rate.     

Theoretical perspectives on strategic environmental management

Strategic Environmental Management (SEM) incorporates into firms' core strategies the transformation of products and processes that they believe an environmentally concerned society will increasingly demand. Significant threads have to do with the discovery of cost savings and market opportunities from reducing environmental impacts. SEM, like the environmental regulation hypothesis associated with Michael Porter, implies that society's efforts to reduce external environmental costs often lead to identification of hitherto-ignored or undeveloped profit possibilities. This would be surprising from the standpoint of neoclassical economic theory, to the extent that SEM utilizes available information about the potential costs and benefits of projects. Within the framework of evolutionary, capabilities-based theories of the firm, however, this discovery and its exploitation in SEM make perfect sense. Capabilities theory would imply that firms' intrinsic path dependence may previously have obscured such opportunities. This paper examines the theory of SEM, its implications for neoclassical and capabilities theories of the firm, and survey results drawn from the author's work with member companies in a regional pollution prevention roundtable. RID="*" IDI have enjoyed the able and insightful research assistance of Justin Vernon. Cooperation from the companies that participated in the survey, and financial support from Allegheny College and its Center for Economic and Environmental Development, are gratefully acknowledged. Reviewers for this journal provided numerous, valuable suggestions. Responsibility for the material herein remains mine alone.     

Forecasting inflation in the 1980s

Refined forecasting techniques are rendered practically useless in the face of the current instabilities in the international system—and the repercussions these could have on domestic economies. Currently, there is no convincing forecast of the probable medium-term course of stagflation. Nor is there likely to be while the money markets are faced with the problems of recycling OPEC surpluses and funding the debts of less developed countries. This heavily interdependent and fragile system could easily be shaken by unpredicted shocks. Domestic economies will continue, through their links with it, to be subject to the vagaries of a system beyond their control or forecasting abilities.     

Local public goods and private suppliers: Musical suburbs replayed

This paper deals with the existence of private market suppliers in a standard local public goods model. The result of this modification can be a cycling process instigated by rich households rather than poor households. The theoretical model provides empirical implications for capitalization studies and policy implications for the provision and financing of local public goods including education.