Feedback loops, fair value accounting and correlated investments

This paper presents and tests a model of the price dynamics that arise when investors fail to recognize the redundancy of unrealized gains and losses (“UGLs”) that are correlated with the firm’s past returns. Consistent with the predictions of our model, our experiment shows that a firm’s prices and earnings become highly volatile when correlated investment is large and correlated UGLs are made salient by comprehensive income reporting. The results suggest that including correlated UGLs in performance numbers could induce violations of weak-form efficiency that exacerbate volatility in share prices and earnings.     

Degree of Integration Between Brent Oil Spot and Futures Markets: Intraday Evidence

We investigate the integration of oil spot and futures markets using matched, intraday data to avoid nonsynchronous trading issues. Our evidence indicates highly integrated spot and futures markets. Economic shocks that arise in spot markets are quickly transmitted to the futures markets approximately one-for-one. Most of the reaction occurs within minutes. Similarly, economic shocks arriving in futures markets are transmitted to spot markets one-for-one, once again, within minutes consistent with market efficiency. In general, our findings indicate well-functioning, well-integrated spot and futures oil markets that are informationally efficient and that perform the functions of both price discovery and risk transfer. To the best of our knowledge, this is the first article to work with precisely matched customized data in futures markets, specifically oil futures markets.     

Dissolving the stranglehold of the fix : A role for social construction in dealing with environmental dislocation

The current approach to environmental dislocation and innovation is characterized as ‘dualistic’. Dualism is described, implications worked through and the existence of another, ‘dialectical’ approach is proposed. A dialectical worldview, it is suggested, complements the strengths of dualism and extends our intellectual reach. Such a view encourages recognition of social and epistemological contexts of dualistic constructs and of the dislocations that arise when they are operationalized. It enables an extension of our involvement with the world from accountability to responsibility. Mundane examples are offered in which dialectical implications and social constructions are revealed, and shown to be an effective basis for resolving, or avoiding, dislocation.     

国外公共人力资源改革对我国公务员制度建设的启示

我国公共人力资源管理从1993年就在不断改革,但效果并不明显,这是因为我国有着悠久的历史和古老的文化,封建社会遗留下的种种治国用人之道,一直对我国的现代社会有着重要影响。然而当一个制度不适应环境时,问题就产生了。他山之石可以攻玉。本文通过介绍和分析以美国为典型的国外公共人力资源的改革,从中了解一些对于我国也同样有帮助的经验。在提出问题的基础上,阐述了如何用它山之石来攻玉。     

The role of generally accepted reporting methods in the public sector: An empirical test

This study explores the role of standard or generally accepted accounting and reporting methods in the public sector. It differs from prior studies that address public sector accounting issues in that it considers more directly how the political process influences decisions to report financial information. The primary contention is that adopting standard reporting methods reduces costs to public officials that arise from factors that characterize political markets. Empirical evidence based on data from the state governments is consistent with this contention, but theoretical and methodological problems restrict our ability to ascertain which specific factors are relevant.     

Financial constraints,endogenous markups,and self-fulfilling equilibria

Self-fulfilling equilibria and indeterminacy can easily arise in a simple financial accelerator model with reasonable parameter calibrations and without increasing returns in production. A key feature for generating indeterminacy in our model is the countercyclical markup due to the procyclical loan-to-output ratio. We illustrate, via simulations, that our financial accelerator model can generate rich business cycle dynamics, including hump-shaped output in response to demand shocks as well as autocorrelation in output growth rates.     

Markets change every day: Evidence from the memory of trade direction

We present empirical evidence that there are periodic, specifically daily, structural breaks in the trade direction time series process, a fact with implications for several key intra-day characteristics of markets. We suggest that breaks arise as a consequence of daily variation in order flow direction independently of intra-day events and as a consequence of a natural and widespread daily periodicity in the timing of investment decisions. Empirical implementation of our short memory AR model with daily level shifts captures the striking long horizon predictability of trade direction, performs better out-of-sample than the standard long memory ARFIMA alternative and is computationally easier to estimate.     

Financing constraint,over-investment and market-to-book ratio

In a simple symmetric information continuous-time model, we consider leverage as way to finance a fraction of the investment cost. We show that underinvestment cannot arise while overinvestment may and the room for overinvestment is negatively related with the fraction paid by equityholders. Finally, we show that our model predicts the (empirically observed) negative relation between the market-to-book ratio and the leverage ratio.     

Connected VCs and strategic alliances: Evidence from biotech companies

We study a new channel through which portfolio companies benefit from ties among venture capitalists (VCs). By tracing individual VCs' investment and syndication histories, we show that VCs' ties improve companies' access to strategic alliance partners. While existing studies demonstrate that alliances are more frequent among companies sharing the same VC, we provide evidence that alliances are also more frequent among companies indirectly connected through VC syndication networks. In addition, our results suggest that VCs' ties mitigate asymmetric information problems that arise when alliances are formed. Finally, strategic alliances between companies from connected VCs' portfolios tend to perform well. We demonstrate that this type of alliance is associated with higher IPO chances. We also address alternative explanations and related endogeneity concerns.     

Credit market frictions and political failure

We study how an excessively favorable regulatory environment for banks could arise even with a perfectly competitive credit market in a median voter world. In our occupational choice model with heterogeneous wealth endowments, market failure due to unobservability of entrepreneurial talent endogenously creates a misalignment between surplus maximizing reforms and reforms that are preferred by the median voter, who is a worker. This is in contrast to the world without market failure where the electorate unanimously vote in favor of surplus maximizing institutional reforms. This paper illustrates how market failure could lead to political failure even in the benchmark political system that is free from capture by interest groups.     

The Risk‐Sharing Implications of Disaster Insurance Funds

We study the risk‐sharing implications that arise from introducing a disaster insurance fund to the cat insurance market. Such a form of intervention can increase efficiency in the private market, and our design of disaster insurance suggests a prominent role of catastrophe reinsurance. The model predicts buyers will increase their demand in the private market, and the seller will lower prices to such an extent that their revenues decrease upon introduction of disaster insurance. We test two predictions in the context of the Terrorism Risk Insurance Act (TRIA). It is already known that the introduction of TRIA led to negative abnormal returns in the insurance industry. In addition, we show this negative effect is stronger for larger and for low‐risk‐averse firms—two results that are consistent with our model. The seller’s risk aversion plays an important role in quantifying such feedback effects, and we point toward possible distortions in which a firm may even be overhedged upon introduction of disaster insurance.     

The Demand for Accounting Conservatism for Management Control

We show that conservative financial reporting arises naturallyin principal-agent settings as a means of efficiently motivating agentswhen the penalties that can be imposed on agents are limited. Weconsider an accounting system whose reports are used for contracting andwhose parameters are controlled by the principal. One advantage of our model is that the information system we describe has the accountingcharacteristic of mapping unbiased underlying information about the firminto a reduced message space. The principal can choose how that mappingoperates, i.e., conservatively, liberally, or neutrally. When penaltiesare sufficiently limited (a limited liability setting), we show that theaccounting system designed by the principal is always conservative. Alternatively, in an unlimited liability setting, any bias in the systemdepends on random circumstances, and we would not expect accountingconservatism to arise as a pervasive and enduring phenomenon.     

Trigger happy or gun shy? Dissolving common‐value partnerships with Texas shootouts

The operating agreements of many business ventures include clauses to facilitate the exit of joint owners. In so‐called Texas Shootouts, one owner names a single buy‐sell price and the other owner is compelled to either buy or sell shares at that named price. Despite their prevalence in real‐world contracts, Texas Shootouts are rarely triggered. In our theoretical framework, sole ownership is more efficient than joint ownership. Negotiations are frustrated, however, by the presence of asymmetric information. In equilibrium, owners eschew buy‐sell offers in favor of simple offers to buy or to sell shares and bargaining failures arise. Experimental data support these findings.     

Optimal pricing barriers in a regulated market using reflected diffusion processes

We consider a class of one-dimensional (1D) reflected stochastic differential equations (SDEs). Such reflected SDE models arise as the key approximating processes in a regulated financial market system, and our main goal is to determine the set of optimal pricing barriers. We consider the running cost associated with the deviation of the process from the desired target level, and also the control cost from the interventions in an effort to keep the process inside the boundaries. Both a long-time average (ergodic) cost criterion and an infinite horizon discount cost criterion, where the discount factor is allowed to vary from one period to another, are studied, with numerical examples illustrating our main results.     

Analysing the risks of individual and collective intentionality

The risk assessment of complex systems often seems to neglect the way in which intentions, collective and individual, are central to our explanations of how risk arises in such systems. Contradictions among the intentions of different actors, for example, are typically an important part of our understanding of how organizations break down. Moreover, risk assessment practice pays little attention to the reflexive problem of how intentions for the risk assessment itself can themselves become problematic. This study was an attempt to develop a framework to support reasoning about intentionality, both individual and collective, during risk assessment. The framework broadly follows a process of 1) identifying the main social objects in a system, 2) asking what are the collective intentions for these objects in terms of the functions that are conferred on them, 3) asking what obligations and powers these create, and 4) asking what risks of organizational dysfunction can then arise. The approach was applied in a case study of aviation ramp operations. Its main value is as a formative rather than a summative kind of analysis.     

Rethinking tomorrow's cities: Emerging issues on city foresight

Rethinking tomorrow's cities now, builds our capacity to act with foresight and create resilient and liveable places. I use methods from the futures studies field, particularly macrohistory, to provoke our current patterns of city making. From macrohistory, the grand patterns of social change reveal some of the key systems dynamics influencing the rise and fall of cities in civilisation. The key urban system dynamics in the broadest sense provide a meta-framework of emerging issues shaping new urban challenges or opportunities for our towns and cities. The hope drawn from the past and present is to focus our urban interventions in the key areas to create future cities of wonder and purpose. The implications of the emerging issues (critical focus areas of city foresight) that arise from the macrohistorical analysis are discussed using the case study of the Maroochy 2025 community visioning project.2025 is a community driven project to develop shared visions and action plans for the Maroochy Shire¹ towards the year 2025, for the purpose of creating an empowering and community owned response to the challenges facing them locally and globally.     

International differences in IFRS policy choice: A research note

Building on literature that suggests motives and opportunities for national versions of IFRS practice, we examine whether there are systematic differences in IFRS accounting policies between countries. Using information from the annual reports of companies in the blue chip indices of the largest five stock markets that use IFRS, we reject a null hypothesis that IFRS practice is the same across countries. For 16 accounting policy issues, we find instead significant evidence that pre‐ IFRS national practice continues where this is allowed within IFRS. By this, we document the existence of national patterns of accounting within IFRS. We also point out some policy implications that arise from our findings.     

Bank credit constraints for women‐led SMEs: Self‐restraint or lender bias?

We test the existence of possible gender biases affecting firm behavior in demanding and obtaining bank credit using a cross‐country sample of European small‐ and medium‐sized enterprises (SMEs). We show consistent evidence that female‐led firms are more likely than their male counterparts to refrain from applying for loans. When they apply, female‐led enterprises do not seem to face gender discrimination from the lender. Interestingly, however, signs of gender bias appear to arise during the upside phase of the economy. Overall, our study provides support for policy actions aimed at reducing the frictions faced by women‐led SMEs when accessing credit markets.     

Risk and the Endogenous Economist: Some Comparisons of the Treatment of Risk in Physics and Economics

This is a talk, rather than a research or survey paper. Very little of what I say will be original, but I wish to stimulate discussion on a set of issues that arise from the nature of risk and that I consider problematic to our profession. The paper is not exhaustive of references and many of my arguments have been treated elsewhere. However, I suspect few will have approached the issues from the same starting point and assembled them in the same way.     

Cost behavior and executive bonus compensation

Prior literature provides compelling evidence of an asymmetric relation between executive bonus compensation and earnings performance. In particular, this literature reports that compensation committees assign greater weight to good (positive) earnings performance than poor (negative) earnings performance. Taken together, the prior literature provides strong support for critics who claim that compensation committees blindly protect executives from earnings underperformance. We further examine this issue by investigating whether a firm's cost behavior (i.e., the relation between expenses and sales) provides an explanation for the apparent inefficiency in executive compensation contracts. Our evidence suggests that executives are rewarded more for increases in ROA that arise from normal cost behavior than other increases in ROA consistent with these increases being perceived as more persistent. In contrast, we do not find such a relationship for decreases in ROA which suggests that executives are largely shielded from decreases in ROA that follow normal cost behavior. We examine two factors suggested by the prior literature, expected future sales and the extent of capacity utilization, which may provide an explanation for why executives are shielded from normal cost behavior decreases in ROA. When these additional factors are included in our empirical models, our evidence suggests that the asymmetric relation between changes in CEO bonus compensation and increases and decreases in earnings performance documented in prior literature goes away. That is, our results suggest that compensation committees do not blindly protect executives for earnings underperformance. On the contrary, our evidence suggests that these committees take into account other non-earnings information when deciding how much weight to give to a decrease in earnings and that executive compensation may not be as inefficient as suggested by prior research.