An information-based trade off between foreign direct investment and foreign portfolio investment

The paper develops a model of foreign direct investments (FDI) and foreign portfolio investments (FPI). FDI enables the owner to obtain refined information about the firm. This superiority, relative to FPI, comes with a cost: a firm owned by the FDI investor has a low resale price because of asymmetric information between the owner and potential buyers. The model can explain several stylized facts regarding foreign equity flows, such as the larger ratio of FDI to FPI inflows in developing countries relative to developed countries, and the greater volatility of FDI net inflows relative to FPI net inflows.     

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.     

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.     

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.     

Good disclosure,bad disclosure

We study real-efficiency implications of disclosing public information in a model with multiple dimensions of uncertainty where market prices convey information to a real decision maker. Paradoxically, when disclosure concerns a variable that the real decision maker cares to learn about, disclosure negatively affects price informativeness, and in markets that are effective in aggregating private information, this negative price-informativeness effect can dominate so that better disclosure negatively impacts real efficiency. When disclosure concerns a variable that the real decision maker already knows much about, disclosure always improves price informativeness and real efficiency. Our analysis has important empirical and policy implications for different contexts such as disclosure of stress test information and regulation of credit ratings.     

The Use of Intangible Benefits for Promoting Contested Policies: The Case of Geopolitical Benefits and the Israeli Gas Policy

ABSTRACT

The evaluation of many contested projects and policies often includes intangible benefits. Geopolitics represents one type of intangible benefit. Despite a few examples on the use of geopolitics to promote contested projects, there is a gap in the literature on how geopolitical argumentation is constructed for the purpose of promoting resource-based policies. Hence, the aim of this study is to use an Israeli case study to examine how geopolitical constructs are used to promote competing energy policies concerning recent gas discoveries and to provide rudimentary insights on the implications for policy making. It was found that the geopolitical rationale was an appealing rhetorical device for all players as it is both unquantifiable and hence difficult to disprove and is rooted in the Israeli societal context. As a result, coalitions built their own geopolitical rationales, each with its own rhetorical tools. These literary tools were often embedded in narratives of power and geographical language with emotional resonance. Yet, the Israeli case demonstrates that geopolitical constructs come at a detrimental price as they promote censorship and exclusion of the public from the process.     

Mutual fund flows and fluctuations in credit and business cycles

Several measures of credit-market booms are known to precede downturns in real economic activity. We offer an early indicator for all known measures of credit booms. Our measure is based on intra-family flow shifts towards high-yield bond mutual funds. It predicts indicators such as growth in financial intermediary balance sheets, increase in shares of high-yield bond issuers, and downturns of various measures of credit spreads. It also directly predicts the business cycle by positively predicting GDP growth and negatively predicting unemployment. Our results provide support for the investor demand-based narrative of credit cycles and can be useful for policymakers.     

A contextual analysis of the impact of managerial expectations on asymmetric cost behavior

Review of Accounting Studies - We examine the effect of managerial expectations on asymmetric cost behavior in the context of resource adjustment costs and unused resource constraints. Our results...     

Trading frenzies and their impact on real investment

We study a model in which a capital provider learns from the price of a firm's security in deciding how much capital to provide for new investment. This feedback effect from the financial market to the investment decision gives rise to trading frenzies, in which speculators all wish to trade like others, generating large pressure on prices. Coordination among speculators is sometimes desirable for price informativeness and investment efficiency, but speculators' incentives push in the opposite direction, so that they coordinate exactly when it is undesirable. We analyze the effect of various market parameters on the likelihood of trading frenzies to arise.     

Activist arbitrage: A study of open-ending attempts of closed-end funds

This paper documents frequent attempts by activist arbitrageurs to open-end discounted closed-end funds, particularly after the 1992 proxy reform which reduced the costs of communication among shareholders. Open-ending attempts have a substantial effect on discounts, reducing them, on average, to half of their original level. The size of the discount is a major determinant of whether a fund gets attacked. Other important factors include the costs of communication among shareholders and the governance structure of the targeted fund. Our study contributes to the understanding of the actions undertaken by arbitrageurs in financial markets beyond just pure trading.