Urban Vibrancy and Corporate Growth

We find that a firm's investment is highly sensitive to the investments of other firms headquartered nearby, even those in very different industries. A firm's investment also responds to fluctuations in the cash flows and stock prices (q) of local firms outside its sector. These patterns do not appear to reflect exogenous area shocks such as local shocks to labor or real estate values, but rather suggest that local agglomeration economies are important determinants of firm investment and growth.     

When Does Information Asymmetry Affect the Cost of Capital?

This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.     

IFRS Practices and the Persistence of Accounting System Classification

The earliest paper on international classification of accounting systems is one hundred years old. For about fifteen years from the late 1960s, many papers on the subject were published. One feature of several of the classifications was the dichotomous split of countries into Anglo and continental European. This has been extensively debated. This paper prepares a classification based on the accounting policy choices made by the largest listed companies of eight countries in 2008/9. All the companies were using the same reporting rules, International Financial Reporting Standards (IFRS). This classification by IFRS practices shows the same two groups as a classification of national practices drawn up in 1980, despite 30 years of harmonization. None of the classifications above or the more recent ones was based on the actual accounting practices of companies in annual reports. This has several disadvantages, as the paper investigates. This paper's classification is the first to be based on accounting practices, as well as being the first in the IFRS era. The paper also investigates the implications of the persistent differences in practices for assessing the success of the IASB's whole project on improving comparability of financial statements.     

How Large Are Housing and Financial Wealth Effects? A New Approach

This paper presents a simple new method for measuring “wealth effects” on aggregate consumption. The method exploits the stickiness of consumption growth (sometimes interpreted as reflecting consumption “habits”) to distinguish between immediate and eventual wealth effects. In U.S. data, we estimate that the immediate (next quarter) marginal propensity to consume from a $1 change in housing wealth is about 2 cents, with a final eventual effect around 9 cents, substantially larger than the effect of shocks to financial wealth. We argue that our method is preferable to cointegration‐based approaches, because neither theory nor evidence supports faith in the existence of a stable cointegrating vector.     

Chief Executive Officer Equity Incentives and Accounting Irregularities

This study examines whether Chief Executive Officer (CEO) equity‐based holdings and compensation provide incentives to manipulate accounting reports. While several prior studies have examined this important question, the empirical evidence is mixed and the existence of a link between CEO equity incentives and accounting irregularities remains an open question. Because inferences from prior studies may be confounded by assumptions inherent in research design choices, we use propensity‐score matching and assess hidden (omitted variable) bias within a broader sample. In contrast to most prior research, we do not find evidence of a positive association between CEO equity incentives and accounting irregularities after matching CEOs on the observable characteristics of their contracting environments. Instead, we find some evidence that accounting irregularities occur less frequently at firms where CEOs have relatively higher levels of equity incentives.     

INFERENCE FOR DOMINANCE RELATIONS

The use of partial orders has been popularized as a way to conduct social evaluations using only minimal normative assumptions. Generically, this process involves comparing continuously indexed curves that are uniquely determined by the cumulative distributions of the individual attributes under study. In the literature on income poverty and inequality, for example, pairwise comparisons of entire income distributions and their respective Lorenz curves are routinely performed in order to characterize rankings of poverty, inequality, and welfare. In this article, we focus on the inferential problem that arises whenever such comparisons are made in the absence of census data. Statistical inference in these situations is particularly complex due to the fact that comparing curves invariably gives rise to four possibilities: the true population curves are equal, the first curve lies below the second, the second lies below the first, or the curves cross. To address this four‐decision problem, we introduce a two‐stage test that has good power and fine control over misclassification error rates.     

Sell‐Side School Ties

We study the impact of social networks on agents’ ability to gather superior information about firms. Exploiting novel data on the educational background of sell‐side analysts and senior corporate officers, we find that analysts outperform by up to 6.60% per year on their stock recommendations when they have an educational link to the company. Pre‐Reg FD, this school‐tie return premium is 9.36% per year, while post‐Reg FD it is nearly zero. In contrast, in an environment that did not change selective disclosure regulation (the U.K.), the school‐tie premium is large and significant over the entire sample period.     

The Impact of House Prices on Consumer Credit: Evidence from an Internet Bank

This paper shows that house price fluctuations can have a significant impact on credit availability. Data from Prosper.com, a peer‐to‐peer lending site that matches borrowers and lenders to provide unsecured consumer loans, indicate that homeowners in states with declining house prices experience higher interest rates, greater credit rationing, and faster delinquency. We find especially large effects for subprime borrowers whose balance sheets are likely most exposed to asset price declines. This evidence suggests that asset price fluctuations can play an important role in determining credit conditions and are thus a potentially significant mechanism for propagating macroeconomic shocks.     

Estimates of the Underground Economy in Australia

In an age of tighter government regulation, many individuals and businesses are distorting our notion of the size of the Australian economy by actively participating in the underground economy. The consequences are clear: policy makers have imperfect knowledge on the state of economic affairs. Although there exists considerable international literature on the size of the underground economy, academics and public officials alike appear to have paid little attention to the extent of illicit economic behaviour in Australia. The aim of this paper is to provide the first known time-series estimate of the size of the Australian underground economy and to illustrate that its existence has implications for the nature of the business cycle in Australia.     

Urban Crime and Labor Mobility

Two municipalities within a metropolitan statistical area (MSA) determine the level of local law enforcement. Enforcement reduces and diverts crime. The former confers a spillover benefit; the latter a spillover cost. When labor is mobile, welfare necessarily declines: if enforcement is too high (low) under labor immobility, it is raised (reduced) further under mobility. If municipalities have different enforcement costs, mobility reduces welfare for the high‐cost municipality and for the MSA, but the effect is ambiguous on the low‐cost municipality. Finally, when residents choose between productive and criminal activities, enforcement is more likely to be overprovided.