What Constitutes Evidence of Discrimination in Lending?

We analyze a simple model of bank lending in order to ascertain what can be inferred from relative denial and default rates about lending discrimination. We show that if minority applicants are of lower average creditworthiness than majority applicants, then, contrary to a popular argument, a uniform, nondiscriminatory credit policy cannot simultaneously produce (i) higher denial rates for minority applicants, and (ii) equal default rates for minority and majority applicants. Moreover, we show that equality of denial or default rates always implies discrimination. In particular, equal denial (default) rates imply discrimination against majority (minority) applicants.     

Production targets

We analyze a dynamic model of quantity competition, where firms continuously adjust their quantity targets, but incur convex adjustment costs when they do so. Quantity targets serve as a partial commitment device and, in equilibrium, follow a hump‐shaped pattern. The final equilibrium is more competitive than in the static analog. We then use data on monthly production targets of the Big Three U.S. auto manufacturers and show a similar empirical hump‐shaped dynamic pattern. Taken together, this suggests that strategic considerations may play a role in setting auto production schedules, and that static models may misestimate the industry's competitiveness.     

Is There a Better Way to Examine Income Inequality?

Dividing U.S. tax returns into half‐millionaires (those reporting adjusted gross income (AGI) of $500,000 or more in a given year) and their complement allows greater use of IRS data on income sources than is possible with an analysis that examines a fixed percentage of returns, such as the top one percent. Contrary to popular perception and media rhetoric, the inflation‐adjusted difference between the reported AGI of half‐millionaires and the rest actually declined by 25 percent from 1993 to 2011. The income gap between half‐millionaires and other filers reflects differences in kinds of income, with half‐millionaires deriving a much larger fraction of their income from capital investments whose varying returns make that component of income—and thus the income of half‐millionaires—more volatile. The percentage of total tax returns filed by half‐millionaires in a given year and the percentage of their income derived from taxable gains reported on Schedule D account for virtually all of the variation in the half‐millionaire percentage of aggregate AGI. As this finding suggests, the expanding income share for half‐millionaires does not signify that some collection of privileged rich have become richer. The significant net growth in the percentage of filers who are half‐millionaires has been uneven because a significant proportion of their income derives from volatile Schedule D gains, which are higher during economic expansions and lower during recessions. The incomes of half‐millionaires—and especially millionaires—are anything but recession proof. But even with that volatile component of income included, when their percentage of returns doubles, their percentage of income less than doubles, consistent with declining income inequality.     

Job Market Signaling: What Drives the Productivity of Finance Ph.D.s?

We study the research productivity of new finance Ph.D.s as measured by the number of quality publications. A commonly accepted notion is that the highest ranked schools produce the candidates with the greatest potential for high‐quality publications. Our results, however, find publications or revisions in top‐tier journals during the doctoral program are a stronger measure of potential research productivity than the school attended. Our findings demonstrate how candidates outside of the top schools can signal their future research productivity. Even though we examine the specialized labor market, our results have broader implications for markets outside academics.     

Early Education and Children's Outcomes: How Long Do the Impacts Last?*

We evaluate the effects of undergoing any early education (before the compulsory starting age of 5) and of pre‐school on a cohort of British children born in 1958. In contrast to most available studies, we are able to assess whether any effects on cognition and socialisation are long‐lasting, as well as to estimate their net impact on subsequent educational attainment and labour market performance. Controlling for a particularly rich set of child, parental, family and neighbourhood characteristics, we find some positive and long‐lasting effects from early education. Specifically, pre‐compulsory education (preschool or school entry prior to age 5) was found to yield large improvements in cognitive tests at age 7, which, though diminished in size, remained significant throughout the schooling years, up to age 16. By contrast, attendance of pre‐school (nursery or playgroup) was found to yield a positive but short‐lived impact on test scores. The effects on socialisation appear to be more mixed: we found some positive, though short‐lasting, effects of pre‐compulsory education on teachers' reports of social adjustment (only at age 7); on the other hand, we found some adverse behavioural effects according to parental reports at age 7 which persisted up to age 11. In adulthood, pre‐compulsory education was found to increase the probabilities of obtaining qualifications and of being employed at age 33. For both pre‐compulsory education and pre‐school per se, we found evidence of a marginally significant 3–4 per cent wage gain at age 33.     

Role of Insolvency Practitioners in the UK Pre‐pack Administrations: Challenges and Control

The pre‐pack administrations (‘pre‐packs’) in the UK have repeatedly been criticised for allowing the exploitation of certain types of unsecured creditors. In this context, the role of the administrators (who are qualified insolvency practitioners) is one of the key elements. This article examines the new challenges brought by the pre‐pack strategy to the conventional role of insolvency practitioners as the administrators. It suggests that the pre‐determination nature of pre‐packs is likely to make the administration proceedings less manager‐displacing in practice than the formal rules would suggest. Although this tendency can be expected to facilitate information gathering during the rescue negotiations, it raises urgent questions with respect to the potential alignment of interests between the inside players that may impair the impartiality of the administrators. In response to such challenges, the article argues that, in spite of the recent proposals of introducing drastic statutory regulation to control the controversy of the pre‐pack practice, a proportionate way is to see how the existing control mechanisms can contribute more in reinforcing the independence of administrators. Copyright © 2012 John Wiley & Sons, Ltd.     

SIX CHALLENGES IN DESIGNING EQUITY-BASED PAY

The past two decades have seen a dramatic increase in the equitybased pay of U.S. corporate executives, an increase that has been driven almost entirely by the explosion of stock option grants. When properly designed, equity‐based pay can raise corporate productivity and shareholder value by helping companies attract, motivate, and retain talented managers. But there are good reasons to question whether the current forms of U.S. equity pay are optimal. In many cases, substantial stock and option payoffs to top executives–particularly those who cashed out much of their holdings near the top of the market–appear to have come at the expense of their shareholders, generating considerable skepticism about not just executive pay practices, but the overall quality of U.S. corporate governance. At the same time, many companies that have experienced sharp stock price declines are now struggling with the problem of retaining employees holding lots of deep‐underwater options. This article discusses the design of equity‐based pay plans that aim to motivate sustainable, or long‐run, value creation. As a first step, the author recommends the use of longer vesting periods and other requirements on executive stock and option holdings, both to limit managers' ability to “time” the market and to reduce their incentives to take shortsighted actions that increase near‐term earnings at the expense of longer‐term cash flow. Besides requiring “more permanent” holdings, the author also proposes a change in how stock options are issued. In place of popular “fixed value” plans that adjust the number of options awarded each year to reflect changes in the share price (and that effectively reward management for poor performance by granting more options when the price falls, and fewer when it rises), the author recommends the use of “fixed number” plans that avoid this unintended distortion of incentives. As the author also notes, there is considerable confusion about the real economic cost of options relative to stock. Part of the confusion stems, of course, from current GAAP accounting, which allows companies to report the issuance of at‐the‐money options as costless and so creates a bias against stock and other forms of compensation. But, coming on top of the “opportunity cost” of executive stock options to the company's shareholders, there is another, potentially significant cost of options (and, to a lesser extent, stock) that arises from the propensity of executives and employees to place a lower value on company stock and options than well‐diversified outside investors. The author's conclusion is that grants of (slow‐vesting) stock are likely to have at least three significant advantages over employee stock options:

• ? they are more highly valued by executives and employees (per dollar of cost to shareholders);
• ? they continue to provide reasonably strong ownership incentives and retention power, regardless of whether the stock price rises or falls, because they don't go underwater; and
• ? the value of such grants is much more transparent to stockholders, employees, and the press.

     

Monopolistic screening under learning by doing

This article investigates the design of incentives in a dynamic adverse selection framework where agents' production technologies display learning effects and agents' learning rates are private knowledge. In a simple two‐period model with full commitment available to the principal, we show that whether learning effects are over‐ or underexploited crucially depends on whether more efficient agents also learn faster (so costs diverge through learning effects) or whether it is the less efficient agents who learn faster (so costs converge). We further show that an overexploitation of learning effects can occur also if the full‐commitment assumption is relaxed.     

The Efficacy of Regulation Fair Disclosure

This paper examines the impact of Securities and Exchange Commission's Regulation Fair Disclosure (FD) on information leakage around voluntary management disclosures. We find a positive correlation between stock returns two days before and after the voluntary disclosure in the pre‐Regulation FD period, but not in the post‐Regulation FD period. After Regulation FD is implemented, pre‐announcement abnormal return as a percentage of total return decreases by 26.1% (21.4%) for large firms with good (bad) news, suggesting that the amount of information leakage reduces for these firms. These findings provide support for the premise and the intended purpose of the regulation for large firms.     

Accounting Students’ Planning,Writing, and Performance on a Time‐Constrained Case Analysis: Effects of Self‐Talk and Prior Achievement

When writing a case analysis, most students first allocate time to plan the content and structure of their response, and then proceed to write with differing degrees of urgency, the outcomes of which are case responses of differing quality. This study examines the extent to which planning time influences writing urgency and, ultimately, the quality of case responses in a time‐constrained setting. It also investigates whether these behaviors and outcomes depend on students’ frame of mind, by experimentally inducing differing types of pre‐examination self‐talk. Analyses show that planning time was negatively associated with writing urgency; students who spent more time planning subsequently wrote with less urgency. Writing urgency was positively associated with case response quality and, after controlling for differences in writing urgency, planning time was positively associated with response quality. Results indicate that different planning and writing behaviors can be induced by different forms of self‐talk prior to the writing task. Relative to interrogative self‐talk (“Will I …?”), exclamatory self‐talk (“I will …!”) caused higher‐achieving students to spend more time planning, but then write with less urgency and subsequently produce lower‐quality case responses. Conversely, after engaging in exclamatory rather than interrogative self‐talk, lower‐achieving students spent less time planning but then wrote with greater urgency and produced higher‐quality responses. These results indicate that (i) planning significantly affects writing and performance, (ii) students can influence their own planning behavior through pre‐task self‐talk, but (iii) pre‐task self‐talk can be beneficial or detrimental depending on students’ prior achievement.     

Hedging with Two Futures Contracts: Simplicity Pays

We propose to use two futures contracts in hedging an agricultural commodity commitment to solve either the standard delta hedge or the roll‐over issue. Most current literature on dual‐hedge strategies is based on a structured model to reduce roll‐over risk and is somehow difficult to apply for agricultural futures contracts. Instead, we propose to apply a regression based model and a naive rules of thumb for dual‐hedges which are applicable for agricultural commodities. The naive dual strategy stems from the fact that in a large sample of agricultural commodities, De Ville, Dhaene and Sercu (2008) find that GARCH‐based hedges do not perform as well as OLS‐based ones and that we can avoid estimation error with such a simple rule. Our semi‐naive hedge ratios are driven from two conditions: omitting exposure to spot price and minimising the variance of the unexpected basis effects on the portfolio values. We find that, generally, (i) rebalancing helps; (ii) the two‐contract hedging rules do better than the one‐contract counterparts, even for standard delta hedges without rolling‐over; (iii) simplicity pays: the naive rules are the best one–for corn and wheat within the two‐contract group, the semi‐naive rule systematically beats the others and GARCH performs worse than OLS for either one‐contract or two‐contract hedges and for soybeans the traditional naive rule performs nearly as well as OLS. These conclusions are based on the tests on unconditional variance ( Diebold and Mariano, 1995 ) and those on conditional risk ( Giacomini and White, 2006 ).     

Mergers and Acquisitions Accounting and the Diversification Discount

q‐based measures of the diversification discount are biased upward by mergers and acquisitions and its accounting implications. Under purchase accounting, acquired assets are reported at their transaction value, which typically exceeds the target's pre‐merger book value. Thus, measured q tends to be lower for the merged firm than for the portfolio of pre‐merger entities. Because conglomerates are more acquisitive than focused firms, their q tends to be lower. To mitigate this bias, I subtract goodwill from the book value of assets and a substantial part of the diversification discount is eliminated. Market‐to‐sales‐based measures do not have this bias.     

Loan commitments and the management of uncertain credit demand

We provide an explanation for loan commitments unrelated to borrower creditworthiness. In our model, banks can use loan commitments to reduce uncertainty regarding their own future funding needs. Given a cost advantage to banks that can acquire such information, there exists an equilibrium demand for commitments by riskneutral firms. The purchase of the loan commitment and the choice of contract terms reveals the buyer's private information regarding future credit needs. In order to ensure the sorting of the a priori indistinguishable applicants according to their private information, we show that a usage fee applied to the commitment holder's unused credit line is necessary.     

Contracting for information under imperfect commitment

We study optimal contracting under imperfect commitment in a model with an uninformed principal and an informed agent. The principal can commit to pay the agent for his advice but retains decision‐making authority. Under an optimal contract, the principal should (i) never induce the agent to fully reveal what he knows—even though this is feasible—and (ii) never pay the agent for imprecise information. We compare optimal contracts under imperfect commitment to those under full commitment as well as to delegation schemes. We find that gains from contracting are greatest when the divergence in the preferences of the principal and the agent is moderate.     

Fifty‐seven Curious Defects in Haswell and Langfield‐Smith (2008): A Comment

Haswell and Langfield‐Smith (2008) (HLS) catalogue 57 ‘serious defects' in International Financial Reporting Standards (IFRS) and conclude that IFRS dilute pre‐IFRS Australian accounting standards. They question the adoption of the Australian IFRS protocol. I review each of their 57 ‘serious defects' and classify them as (1) where the defect existed in pre‐IFRS Australian standards; (2) where the defect is trivial rather than serious; or (3) where HLS ignore the possibility of alternative explanations. In most cases the alternative explanations can be found in IFRS and, unlike the arguments of HLS, have been through process. Alternatively the argument provided by HLS had been through due process and discarded. I conclude that HLS is neither a serious empirical study nor a well‐reasoned a priori analysis. It is simply a catalogue of personal assertions. The conclusions they reach on IFRS are not possible from evidence they provide.     

Credible discovery,settlement, and negative expected value suits

We introduce discovery into a model of settlement and negative expected value (NEV) suits under asymmetric information. The option to conduct discovery has several important effects. First, because discovery is cheaper than litigation, it reduces the defendant's incentive to settle under asymmetric information. Second, discovery must be credible. Because discovery is more valuable the greater the uncertainty it resolves, this introduces a credibility constraint on pre‐discovery settlement offers. This can further reduce the probability and size of a defendant's pre‐discovery settlement offer. Lastly, discovery reduces the ability of NEV plaintiffs to use asymmetric information to extract significant settlements from defendants.     

Competition and Cooperation among Exchanges: Effects on Corporate Cross‐Listing Decisions and Listing Standards

In recent years, many European companies have listed on the New York Stock Exchange (NYSE), and companies from emerging market countries such as Israel, China, and India have listed not only on the NYSE, but on various other American and European exchanges such as the Nasdaq and the London Stock Exchange (LSE). At the same time, growing competition among exchanges has led to consolidation of the industry through mergers and alliances. In this article, the authors explore the main factors in corporate listing decisions as well as the expected effects on listing standards of both the growing competition and the recent wave of alliances and mergers among exchanges. When choosing an exchange, corporate issuers are likely to consider the listing requirements and reputations of the exchanges, as well as the sophistication of investors who trade on those exchanges and the extent of their knowledge of the firm's industry and business. As a general rule, value‐maximizing companies can be expected to list on the most reputable exchange they can, but may also choose listings (in some cases, dual or multiple listings) on less reputable (typically local) exchanges with more investors who are familiar with the issuer's industry or products. When setting their listing standards, publicly traded exchanges devote considerable attention to finding the optimal listing and disclosure standards, and may consider adjusting them to changes in circumstances. The setting and enforcement of the appropriate listing standards are the main determinant of an exchange's reputation, which in turn determines the kinds of companies that will choose to list on it. Exchanges with the highest listing standards and reputations are likely to work hard to maintain them, while exchanges with lesser reputations will seek to carve out niches by making opportunistic use of lower (though not too low) listing standards while possibly seeking alliances or mergers. But if less reputable exchanges use their lower listing standards (and fees) as a means of competing for listings with other exchanges, this will not necessarily lead to a “race to the bottom” in listing standards. Moreover, a merger between two exchanges is likely to result in a higher listing standard for the combined exchange than for (at least one of) the pre‐merger exchanges.     

A new century approach for alcohol screen in the insurance industry

Several recent studies point to the value of using combinations of biochemical markers for the identification of alcohol abuse. The Early Detection of Alcohol Consumption (EDAC) test uses a statistical method that combines the results of several routine laboratory tests to form a metabolic fingerprint for each subject. In this study, we evaluated the use of the EDAC test as a screening tool to assess heavy drinking in insurance applicants. The EDAC was calculated by linear discriminate function analysis using the results of 14 routine tests including liver enzymes, lipids, proteins, and blood sugars. We collected and analyzed 1680 random samples at Heritage Laboratories (Olathe, Kan). Alcohol Detection Services (Brookfield, Wis) and Millennium Strategies (Madison, Wis) collaborated in the data analysis and interpretation of laboratory tests results. Ninety-three percent of applicants showed a negative EDAC test. The 7% (n = 134) who screened positive for the EDAC test were then reflexed to carbohydrate deficient transferin (CDT) and whole blood associated acetaldehyde (WBAA). Sixteen percent (22/134) showed a positive confirmatory test. Among these 16% of subjects, 41% (9/22) showed no elevations in liver enzymes or HDL-C results. Four of these subjects were among the top one third with the highest elevations for the CDT test in the entire group and one of them was positive for both the CDT and WBAA tests. These results suggest that the EDAC screen may provide an efficient alternative screening tool for the identification of heavy alcohol consumption not HBA as it identifies applicants with both normal or abnormal liver enzymes and HDL-C.     

Delegation and dynamic incentives

Using an agency model, we show how delegation, by generating additional private information, improves dynamic incentives under limited commitment. It circumvents ratchet effects and facilitates the revelation of persistent private information through two effects: a play‐hardball effect, which mitigates an efficient agent's ratchet incentive, and a carrot effect which reduces an inefficient agent's take‐the‐money‐and‐run incentive. Although delegation entails a loss of control, it is optimal when uncertainty about operational efficiency is large. Moreover, delegation is more effective with production complementarity. We also consider different modes of commitment to yield insights into optimal organizational boundaries.