Material weakness disclosures and restatement announcements: The joint and order effects

We examine differences in stock price, option volatility, and litigation reactions to restatement announcements that are associated with a material weakness (MW) disclosure. Contrasted with restatements that are not associated with any MW disclosure, our analyses reveal that firms that announce both a restatement and an associated MW experience significantly more negative market returns, greater implied volatility, and higher likelihood of class action lawsuits. Separating the restatements into timely reporters, where the MW precedes the restatement, and non‐timely reporters, where the MW is concurrent with or follows the restatement, we find that timely reporters experience more negative returns at the time of the restatement, relative to non‐timely reporters, suggesting that investors perceive the early MW disclosure to signal more pervasive control‐related problems. Interestingly, we find that timely and non‐timely reporters are equally likely to be sued, consistent with the argument that wrongdoing (through either a timely or non‐timely MW disclosure) provides stronger grounds for establishing scienter. However, timely reporters appear to secure more favorable litigation outcomes: they face higher likelihood of lawsuit dismissals and pay much lower settlements, compared to non‐timely reporters. Overall, our evidence provides new insights into how market participants incorporate information about internal control weaknesses into their perceptions regarding the economic implications of financial restatements, and financial reporting quality.     

Targeted advertising as a signal

This study presents a signaling model of advertising for horizontally differentiated products. The central ingredients of the model are two important characteristics of advertising—targeting, and noisy information content. The theory yields interesting results about the informational role of targeted advertising, and its consequences. First, targeting can itself serve as a signal on product attributes. Second, the effectiveness of targeting depends not only on firms knowing consumer preferences, but on consumers knowing that firms know this. This creates a distinction between strategies of targeting and personalization. Third, the effectiveness of targeting in equilibrium may (far) exceed the information contained directly in the targeted message. Fourth, information content is not, however, superfluous. Specifically, when ads contain no information, a targeting equilibrium does not exist. Together, these results reveal how advertising conveys information both through the content of the message and the firm’s choice of advertising medium. Furthermore, the model is robust to the various critiques of prior work on ads-as-signals: namely, that ad content is irrelevant, ad exposure is unnecessary, and the choice of ads as signals is inherently arbitrary.

Ownership structures of U.S. joint ventures in the 1980S

A firm's choice between sole and joint ventures in a foreign market is subject to various market-specific and firm-specific influences. This study draws upon the transaction cost and bargaining power theoretical frameworks to identify and measure some of these influences. A logistic regression model was employed to examine the relative influences of the main and interaction effects of the independent factors on ownership structures employed for new foreign subsidiaries by U.S. firms in the 1980s.     

KALDORIAN DEMAND FUNCTIONS AND THE RETURN TO CAPITAL: AN ANALYSIS IN A TRADE THEORETIC FRAMEWORK

Abstract.  This paper shows that under certain plausible conditions capital accumulation raises the return to capital. A three good trade theoretic model with Kaldorian demand functions is used to establish this result. This proposition is also independent of the assumption of diminishing return to capital a key feature of endogenous growth theory. Our result sheds light on the high rates of investment and growth that many East Asian economies have achieved.     

Weak Property Rights and Holdup in R&D

We study how the sequence of financing of R&D varies according to the ease with which property rights over knowledge can be defined. There are two financiers: a venture capitalist (VC) and a corporation. The knowledge acquired in costly research becomes embodied in the researcher's human capital, and she may hold up the financier and walk away with the project to develop it elsewhere. The main results are: (1) When property rights are strong, research is always funded by the VC, development is performed efficiently, and breakaways from the VC to the corporation are observed in equilibrium. (2) When property rights are weak, projects may be financed by the VC or the corporation, or may remain unfunded. (3) When property rights are weak, no breakaways occur in equilibrium; local spillovers and strong product market competition increase the likelihood that research projects will get funding. (4) The equilibrium sequence of R&D finance need not be first-best efficient. (5) In equilibrium, and controlling for the strength of property rights, VCs finance projects that are more profitable on average.     

On The Log-Linear Analysis Of Multiple Response Data

Log-linear procedures have been recommended for analyzing data that are in the form of counts or frequencies (Iacobucci and McGill 1990). In its current form, the recommended procedure does not deal with multiple response data (i.e., more than one thought per response category). The paper proposes analytical modifications that researchers need to consider when fitting models with this type of data. The problems and recommended modifications are illustrated with two distinct data sets. The first involves consumers' attribution responses to negative word-of-mouth communication about a brand whereas the second pertains to consumers' cognitive responses toward an advertisement. Results in each case indicate that researchers may generate erroneous conclusions about the significance of estimated parameters if the recommendations are ignored.     

R&D Reporting Biases and Their Consequences*

The immediate expensing of research and development (R&D) expenditures is often justified by the conservatism principle. However, no accounting procedure consistently applied can be conservative throughout the firm's life. We therefore ask the following questions: (1) When is the expensing of R&D conservative and when is it aggressive, relative to R&D capitaliza‐tion? (2) What are the capital‐market implications of these reporting biases? To address these questions we construct a model of profitability biases (differences between reported profitability under R&D expensing and capitalization) and show that the key drivers of the reporting biases are the differences between R&D growth and earnings growth (momentum), and between R&D growth and return on equity (ROE). Companies with a high R&D growth rate relative to their profitability (typically early life‐cycle companies) report conservatively, while firms with a low R&D growth rate (mature companies) tend to report aggressively under current generally accepted accounting principles. Our empirical analysis, covering the period 1972‐2003, generally supports the analytical predictions. In the valuation analysis we find evidence consistent with investor fixation on the reported profitability measures: we detect undervaluation of conservatively reporting firms and overvaluation of aggressively reporting firms. These misvaluations appear to be corrected when the reporting biases reverse from conservative to aggressive and vice versa. This evidence is consistent with behavioral finance arguments about investor cognitive biases.     

TOURISM AND REGIONAL IMMISERIZATION

Abstract.  This paper analyzes the consequences of tourism in rural and urban areas on regional incomes, welfare and urban unemployment using a generalized Harris Todaro model. In this model two urban and two rural goods are produced. A distinguishing characteristic of this model is that the urban non-traded good is not consumed in the rural region and, similarly, the rural non-traded good is not consumed in the urban region. The most important result we obtain is that a tourist boom in the urban region may immiserize the rural area. Hence the welfare interests of rural and urban consumers may be in conflict as a result of tourist expansion in the urban region.