The Impact of the 2008 Crisis on UK Prices: What We Can Learn from the CPI Microdata1

This paper takes the locally collected price quotes used to construct the CPI index in the UK for the period 1996–2013 and explores the impact of the Great Recession (2008‐9) on the pricing behaviour of firms. We develop a time series framework which captures the link between macroeconomic variables and the behaviour of prices in terms of the frequency of price change, the dispersion of price levels and the size, dispersion and kurtosis of price‐growth. We find strong evidence for inflation having an effect, but not output. The change in the behaviour of prices during the Great Recession is largely explained by the changes in inflation and VAT. Nevertheless, the magnitude of the inflation effect is sufficiently small that it need not influence monetary policy.     

The Impact of the 2008 Crisis on UK Prices: What We Can Learn from the CPI Microdata1

This paper takes the locally collected price quotes used to construct the CPI index in the UK for the period 1996–2013 and explores the impact of the Great Recession (2008-9) on the pricing behaviour of firms. We develop a time series framework which captures the link between macroeconomic variables and the behaviour of prices in terms of the frequency of price change, the dispersion of price levels and the size, dispersion and kurtosis of price-growth. We find strong evidence for inflation having an effect, but not output. The change in the behaviour of prices during the Great Recession is largely explained by the changes in inflation and VAT. Nevertheless, the magnitude of the inflation effect is sufficiently small that it need not influence monetary policy.     

Profit Margins,Adjustment Costs and the Business Cycle: An Application to Spanish Manufacturing Firms*

The objective of this paper is to investigate the cyclical behaviour of mark‐ups, using a panel of Spanish manufacturing firms over the period 1990–1998. Margins are estimated from the optimal conditions derived from the firm's optimisation problem, which assumes that labour inputs are subject to adjustment costs. A number of results emerge from the estimations. First, we find positive and asymmetric adjustment costs for permanent labour inputs. Second, price‐cost margins are markedly procyclical. Our estimates suggest that labour adjustment costs more than double the variability of average margins with respect to Lerner indexes. Third, we find differences in the parameters of the adjustment technology across industries which make markups of intermediate and production good industries more cyclical than consumer good industries. Finally, industry‐specific price‐cost margins are higher in more concentrated industries.     

An empirical assessment of assortative matching in the labor market

In labor markets with worker and firm heterogeneity, the matching between firms and workers may be assortative, meaning that the most productive workers and firms team up. We investigate this with longitudinal population-wide matched employer–employee data from Portugal. Using panel data methods, we quantify a firm-specific productivity term for each firm, and we relate this to the skill distribution of workers in the firm. We find that there is positive assortative matching, in particular among long-lived firms. Using skill-specific estimates of an index of search frictions, we find that the results can only to a small extent be explained by heterogeneity of search frictions across worker skill groups.     

The Multijurisdictional Disclosure System and Value of Equity Offerings

The Canada and US multijurisdictional disclosure system (MJDS) implemented in 1991 lowered the indirect barriers for investors and issuers by easing reporting and disclosure requirements for cross‐border issues. This paper examines the impact of the MJDS and related regulatory changes on Canada–US equity market segmentation using a sample of Canadian seasoned equity offerings in the 1991–1998 period. We find that the number of cross‐border issues by Canadian firms increased, and the typical negative stock price reaction that accompanies seasoned equity issues declined over time, supporting increased integration between the two markets after the MJDS. We also document that cross‐border issues experience about 1.4 per cent lower negative stock price reaction compared with domestic issues, consistent with Canada–US market segmentation. We find mixed support for Merton's (1987) investor recognition hypothesis. While Canadian firms cross‐listed in the US experience a less adverse price reaction to their cross‐border offerings compared with their non‐US‐listed peers, there is no significant difference between the two groups in the case of purely domestic issues.     

Multinationals' Offshore Operations,Tax Avoidance,and Firm‐Specific Information Flows: International Evidence

Using a large sample of multinational enterprises (MNEs) over the period 1999–2009, this study investigates whether and how offshore operations via offshore financial centers (OFCs) impact the extent to which firm‐specific information is incorporated into stock price, relative to common information. Our analyses show that, irrespective of whether a firm is a Type I offshore firm (directly having headquarters registered in OFCs) or a Type II offshore firm (indirectly setting up subsidiaries in OFCs), the amount of firm‐specific information flowing into stock price is lower for offshore firms than for non‐offshore firms. We also find that as offshore firms become more aggressive in their tax avoidance strategies, their stock prices impound a lower amount of firm‐specific information relative to common information. Finally, we find that a strong offshore proclivity also deters firm‐specific information flows, thereby driving up stock price synchronicity. Our results suggest that the opaque and complex nature of business and financial transactions in OFCs, coupled with their institutional characteristics, that is, weak and flexible legal enforcement, zero or extremely low taxation, and low litigation risk, provide offshore firms with not only stronger incentives but also the opportunities and means to adopt opaque disclosure policies and aggressive earnings management.     

Intertemporal pricing and price discrimination: a semiparametric hedonic analysis of the personal computer market

We apply a smooth coefficient semiparametric model to a unique high‐frequency data set to examine the intertemporal pricing of personal computers. Furthermore, we test whether firms charge differential component prices for their top performance personal computers and whether premium firms charge both a premium for all their computers and a premium for their top performance ones. We find nonlinear effects in the pricing of personal computer components. We also find that firms in general do not charge differential prices for the components of their top performance computers. In addition, high‐quality firms charge higher premia only for their most advanced products. Copyright © 2006 John Wiley & Sons, Ltd.     

Calendar synchronization of gasoline price increases

In many retail gasoline markets with Edgeworth price cycles, large and regular price increases occur on the same day of the week every week, that is, they are calendar synchronized. In this article, I test whether calendar synchronization leads to higher or lower consumer expenditures on gasoline compared to a world with cycles but without calendar synchronization. On one hand, firms may attempt to trigger price increases just prior to periods of normally high demand. On the other, consumers may be better able to predict and shift purchases to low price days of the cycle. Using high‐frequency gasoline volume data and matching it to high‐frequency price data, I find that the latter effect dominates. All else equal, consumer expenditures on gasoline fall with calendar synchronization in the study markets. I also calculate intertemporal price elasticities and find them to be high.     

Valuation ratios and long‐horizon stock price predictability

Using annual data for 1872–1997, this paper re‐examines the predictability of real stock prices based on price–dividend and price–earnings ratios. In line with the extant literature, we find significant evidence of increased long‐horizon predictability; that is, the hypothesis that the current value of a valuation ratio is uncorrelated with future stock price changes cannot be rejected at short horizons but can be rejected at longer horizons based on bootstrapped critical values constructed from linear representations of the data. While increased statistical power at long horizons in finite samples provides a possible explanation for the pattern of predictability in the data, we find via Monte Carlo simulations that the power to detect predictability in finite samples does not increase at long horizons in a linear framework. An alternative explanation for the pattern of predictability in the data is nonlinearities in the underlying data‐generating process. We consider exponential smooth‐transition autoregressive models of the price–dividend and price–earnings ratios and their ability to explain the pattern of stock price predictability in the data. Copyright © 2005 John Wiley & Sons, Ltd.     

Heterogeneous response of disaggregate inflation to monetary policy regime change: The role of price stickiness

This paper explores how a monetary regime change affects headline inflation via differential effects on various sectors in the economy. Using disaggregated CPI data for Canada, we find that the response to the adoption of inflation targeting (IT) was quite heterogeneous across sectors. While sticky-price sectors experienced a notable change in inflation dynamics following IT adoption, little structural change was observed in flexible price sectors. Our analysis based on a common factor model suggests that the structural changes in the sticky price sectors are driven by a decline in their responses to common aggregate shocks, including a monetary shock.     

Environmental policies,national culture,and stock price crash risk: Evidence from renewable energy firms

This study investigates the impact of country‐level environmental performance and national culture on the stock price crash risk of renewable energy firms. Employing a large sample of 626 renewable energy firms across 31 countries, we find a significant nonlinear relationship between country‐level environmental performance and crash risk. National culture dimensions are found to strongly predict the crash risk of renewable energy firms, particularly after the global financial crisis. On the contrary, national culture dimensions and environmental policies are observed to not exert any significance in explaining the crash risk of fossil fuel firms. Our results are robust with respect to alternative measures of stock price crash risk and the endogeneity of national culture dimensions. Overall, the findings of this paper contribute to the environmental economics literature by providing new evidence regarding the role of societal and environmental factors in explaining the stock price crash risk of energy firms.     

Market Risk Disclosures and Investment Efficiency: International Evidence from the Gulf Cooperation Council Financial Firms

This study examines the association between market risk disclosures (MRDs) and the investment efficiency of financial firms from six emerging markets in the Gulf Cooperation Council (GCC) region. Based on a sample of 553 firm‐year observations over the 2007–2011 period, we find that MRDs are significantly and negatively associated with both under‐investment and over‐investment and that this association is more pronounced for larger firms. We also find that the association between MRDs and under‐investment is moderated during periods of economic distress such as the Global Financial Crisis of 2008 and that the association between MRDs and over‐investment is magnified during periods of reduced financial distress. Our results are consistent with the idea that MRDs reduce information asymmetry, which ultimately improves investment efficiency. We contribute to the literature in an emerging market context by providing empirical evidence on the association between MRDs and investment efficiency across six emerging GCC capital markets. This study also fills a gap in the literature by providing evidence on the factors affecting the investment efficiency of financial firms.     

Global Engagement and Returns Volatility

This paper finds that a greater reliance on foreign market sales increases the volatility of firms’ stock returns, using high‐frequency data for publicly listed Japanese manufacturing firms over the period 2000–10. The two margins of global engagement we consider, namely, exports and sales via foreign affiliates (horizontal foreign direct investment), have both a positive and economically significant effect on firm‐level volatility. We find, however, that increasing the intensity of sales through foreign affiliates has a stronger effect on volatility than a similar change in export intensity. We also uncover evidence consistent with the notion that firms’ need to use external finance to cover the substantial costs involved in reaching foreign consumers can be an important channel through which firms’ participation in international markets increases their exposure to economic uncertainty.     

On the Empirical Failure of Purchasing Power Parity Tests

Empirical research on the validity of the purchasing power parity (PPP) condition is generally based on real exchange rates built using the consumer price index (CPI), but fails to provide clear support to PPP. In this paper we show theoretically that, even if the law of one price (LOP) holds for traded goods, CPI‐based real exchange rates are not mean reverting, and are neither stationary nor integrated. Therefore, both unit root and stationarity tests should reject their null. Our theoretical results are validated both by simulations and an empirical application. Copyright © 2014 John Wiley & Sons, Ltd.     

Real and Accrual‐Based Earnings Management in the Pre‐ and Post‐IFRS Periods: Evidence from China

The purpose of this study is to investigate the prevalence of both accrual‐ and activities‐based earnings management for Chinese A‐share firms surrounding the adoption of substantially IFRS‐convergent accounting standards. Since 2007, all listed A‐share firms in China have been required to comply with a new set of accounting standards that have substantially conformed to IFRS. The new reform also produced a set of new auditing standards and internal control reporting requirements. Based on a sample of 4,050 firm‐year observations from 2002 to 2011, we find that Chinese firms in the post‐IFRS period (2007–2011) are less likely to engage in accrual‐based earnings management. The magnitude of discretionary accruals also declines after IFRS adoption. In response, we see firms turning to real activities manipulation as a substitute for upward earnings management. The reduction in accrual‐based earnings management could stem from higher quality accounting standards associated with IFRS adoption and/or concurrent changes in the governance regimes introduced with the IFRS mandate. A further analysis, however, indicates that the benefits of IFRS adoption in curbing upward accrual‐based earnings manipulation are not evenly distributed across firms. Specifically, the benefit diminishes for firms that are controlled by Chinese central or local governments, are located in less developed regions, and that have weak financial performance and therefore subject to delisting status. We also find that the benefit is less pronounced for manufacturing firms than for their non‐manufacturing counterparts.     

A Firm-Specific Analysis of the Exchange-Rate Exposure of Dutch Firms

We examine the relationship between exchange‐rate changes and stock returns for a sample of Dutch firms over 1994–1998. We find that over 50 per cent of the firms are significantly exposed to exchange‐rate risk. Furthermore, all firms with significant exchange‐rate exposure benefit from a depreciation of the Dutch guilder relative to a trade‐weighted currency index. This result confirms that firms in open economies, such as the Netherlands, exhibit significant exchange‐rate exposure. We collect unique information on the most relevant individual currencies for each firm with respect to their influence on firm value. Our results indicate that the use of a trade‐weighted currency index and the use of individual exchange rates are complements. We also measure the determinants of exchange‐rate exposure. As expected, we find that firm size and the foreign sales ratio are significantly and positively related to exchange‐rate exposure. In contrast with our hypothesis, off‐balance hedging using derivatives has no significant effects. Finally, in line with theory, we find that exposure is significantly reduced through on‐balance sheet hedging, i.e., through foreign loans and by producing in factories abroad.     

Estimating the distribution of welfare effects using quantiles

This paper proposes a framework to model welfare effects that are associated with a price change in a population of heterogeneous consumers. The framework is similar to that of Hausman and Newey (Econometrica, 1995, 63, 1445–1476), but allows for more general forms of heterogeneity. Individual demands are characterized by a general model that is nonparametric in the regressors, as well as monotonic in unobserved heterogeneity, allowing us to identify the distribution of welfare effects. We first argue why a decision maker should care about this distribution. Then we establish constructive identification, propose a sample counterparts estimator, and analyze its large‐sample properties. Finally, we apply all concepts to measuring the heterogeneous effect of a change of gasoline price using US consumer data and find very substantial differences in individual effects across quantiles.     

Price Stickiness in the US and Europe Revisited: Evidence from Internet Prices*

This paper compares price stickiness on the Internet and in traditional brick‐and‐mortar stores and examines differences across five countries: France, Germany, Italy, the UK and the US. Contrary to conventional retail prices, we find that Internet prices change less often in the US than in EU countries. However, this does not hold for all product categories. Second, prices on the Internet are not necessarily more flexible than prices in brick‐and‐mortar stores. Third, our dataset reveals substantial heterogeneity in the frequency of price changes across Internet shops. Finally, panel logit estimates suggest that the likelihood of observing a price change is a function of both state‐dependent and time‐dependent factors.     

Price dispersion and optimal price categories with limited memory consumers

In this paper, we study consumers with limited memory and examine the effects of their price categorization on the pricing strategies of competing firms. The valuations of consumers are assumed to be heterogeneous. We find that it is possible to observe price dispersion even when each firm charges a single price if the consumers categorize prices non‐optimally. Moreover, we demonstrate that the likelihood of a price dispersion outcome is reduced when consumers with limited memory set up the price categories optimally. These findings suggest that the consumers' limited memory and their sub‐optimal behavior, that is, their inability to choose price categories optimally can be a reason for observed price dispersion.     

Comovements and asymmetric tail dependence in state housing prices in the USA: A nonparametric approach

We reexamine the methods used in estimating comovements among US regional home prices and find that there are insufficient moments to ensure a normal limit necessary for employing the quasi‐maximum likelihood estimator. Hence we propose applying the self‐weighted quasi‐maximum exponential likelihood estimator and a bootstrap method to test and account for the asymmetry of comovements as well as different magnitudes across state pairs. Our results reveal interstate asymmetric tail dependence based on observed house price indices rather than residuals from fitting autoregressive–generalized autoregressive conditional heteroskedasticity (AR‐GARCH) models.