Management by the Numbers: A Formal Approach to Deriving Informational and Distributional Properties of “Unmanaged” Earnings

We explore the theoretical relation between earnings and market returns as well as the properties of earnings frequency distributions under the assumption that managers use unbiased accounting information to sequentially decide on real options their firms have and report generated earnings truthfully, with the market pricing the firm based on those reported earnings. We generate benchmarks against which empirically observed earnings‐returns relations and aggregate earnings distributions can be evaluated. This parsimonious model shows a coherent set of results: reported losses are less persistent than reported gains, decision making diminishes the S‐shaped market response to earnings and earnings relate to returns asymmetrically in the way documented by Basu [1997]. Furthermore, the implied frequency distribution of aggregate earnings is neither symmetric nor necessarily single‐peaked. Instead, it may exhibit a kink at zero and look similar to the plots reported by Burgstahler and Dichev [1997]. However, within our model, none of these phenomena are due to reporting noise, bias, or some undesirable strategic managerial behavior. They are the natural consequences of using past earnings as the basis for value increasing managerial decision making that in turn generates the future earnings on which future decisions will be based.     

On the Optimal Relation between the Properties of Managerial and Financial Reporting Systems

We develop a theoretical model of the firm that links properties (stewardship vs. valuation focus) of financial reporting regimes with the informational properties of optimal managerial accounting systems. We show that, contrary to the standard textbook proposition, properties of management and financial accounting systems are not independent. Significantly, we provide an explicit connection between exogenous and observable properties of a firm's financial reporting system and the quality of the managerial accounting system on which manager(s) base real economic decisions. As the quality of those economic decisions can also be inferred from publicly available data, our theory generates new opportunities for empirical managerial accounting research on large nonproprietary samples. Further, by being able to identify enhanced performance due to improved managerial accounting information, our theory provides opportunities to gain a better understanding of the link between particular managerial accounting practices and the quality of the information produced.     

Capital Regulation and Competition as a Moderator for Banking Stability

Capital regulation forces banks to fund a substantial amount of their investments with equity. This creates a buffer against losses but also increases the cost of funding. If higher funding costs translate into higher loan interest rates, the bank's assets are also likely to become more risky, which may destabilize the lending bank. This paper argues that the level of competition in the banking sector can determine whether the buffer or cost effect prevails. The endogenous level of competition may be crucial in determining the efficiency of capital regulation in undercapitalized banking sectors, with excess capacities and correlated risks.     

Strategic Effects of Regulatory Capital Requirements in Imperfect Banking Competition

This paper analyzes the competitive effects of regulatory minimum capital requirements on an oligopolistic loan market. Before competing in loan rates banks choose their capital structure, thereby making an imperfect commitment to a loan capacity. It is shown that due to this imperfect commitment, regulatory requirements not only increase the marginal cost of loan supply, but can also have a collusive effect resulting in increased profits. This paper derives the threshold value from which capital requirements can turn one round Bertrand competition into a two‐stage interaction with capacity commitment, leading to Cournot outcomes. Therefore, it provides theoretical support for the applicability of the Cournot approach when modeling imperfect loan competition.     

Purity and Dirt as Social Constructions: Environmental Health in an Urban Shantytown of Lagos

The focus of this article, on everyday life management, emerges from a theoretical discussion about culturally specific attitudes to environmental health. Local perceptions of purity and dirt in an urban shantytown of Lagos, Nigeria, are examined through a case study of the Amukoko urban district. The qualitative data is from two fieldwork phases carried out in 1998 and 2001 in Lagos, consisting of eleven in‐depth interviews, eight focus group discussions and participatory observations among Yoruba women and men. In different communities, perceptions of purity and dirt are not self‐evident in terms of their meaning, but reflect the commonly shared values and moral codes of the community. Our principle interest is in the ways in which household water is construed as pure, particularly in the context of daily routines which reveal how the avoidance of pollution and the order of things are organized in the community. These constructions of purity comply with local perceptions of dirt, sanitation and environmental risks within the wider health care practices prevalent in the mixed and hybrid urban culture of metropolitan Lagos. Results imply that reformulated definitions of sanitation, for example between disposable and non‐disposable elements, are adopted via culturally specific perceptions of purity. Le thème de cet article, sur la gestion du quotidien, est né d’une discussion théorique sur les différentes attitudes culturelles face à l’hygiène de l’environnement. A travers une étude de cas sur le quartier d’Amukoko, sont étudiées les perceptions locales de pureté et saleté dans un bidonville de Lagos. Les données qualitatives émanent de deux phases de terrain réalisées dans la capitale nigériane en 1998 et 2001, comprenant onze entretiens approfondis, huit séances en groupe de discussion et des observations participatives d’hommes et de femmes Yoruba. Dans plusieurs communautés, pureté et saleté ne sont pas des perceptions évidentes en termes de signification, reflétant plutôt des valeurs partagées et des codes moraux communautaires. Le but est ici de comprendre comment l’eau du foyer est jugée pure, notamment dans le cadre des tâches quotidiennes révélatrices de la façon dont les précautions anti‐pollution et l’ordre des choses sont organisés dans la communauté. Ces interprétations de la pureté corroborent les perceptions locales de la saleté, de l’hygiène publique et des risques environnementaux au sein des pratiques sanitaires globales appliquées dans la culture urbaine mixte et hybride de la métropole de Lagos. D’après les résultats, sont adoptées des définitions de l’hygiène publique reformulées via des perceptions de la pureté spécifiques au plan culturel (éléments jetables et non‐jetables, par exemple).     

Marketwide Private Information in Stocks: Forecasting Currency Returns

We present a model of equity trading with informed and uninformed investors where informed investors trade on firm‐specific and marketwide private information. The model is used to identify the component of order flow due to marketwide private information. Estimated trades driven by marketwide private information display little or no correlation with the first principal component in order flow. Indeed, we find that co‐movement in order flow captures variation mostly in liquidity trades. Marketwide private information obtained from equity market data forecasts industry stock returns, and also currency returns.