Does the Management's Forecast of Merger Synergies Explain the Premium Paid,the Method of Payment,and Merger Motives?

I study a sample of 336 mergers and acquisitions (M&A) deals to investigate the effect of managements’ estimate of synergy on the reservation price and the payment method. I find that synergy does not explain the premium paid implying that it may have been announced to induce shareholders to endorse the deal. Acquiring firms are more likely to overpay if they have low growth potential, while the target firm is large, has higher premerger operating performance, and high growth potential. Acquirers may be serving their own self‐interests as they are more likely to exceed their reservation price if they receive low compensation and if entrenchment provisions are in place. I also find that these acquisitions lead to postmerger shareholders’ wealth destruction, which is more pronounced when acquirers overpay. I document that the greater the synergy and the acquirer firm‐specific overvaluation, the higher the likelihood of settling the deal with more shares.     

Should we Fear the Shadow? House Prices,Shadow Inventory,and the Nascent Housing Recovery

Although a broad-based increase in house prices has been observed over the past year, not everyone is convinced the rise of house prices will persist and lead to a steady recovery of the economy. The main reason for this skepticism is uncertainty about the “shadow inventory”: foreclosed homes held by investors or as REOs, which have not yet hit the market but likely will as market prices rise. The volume of shadow inventory itself in local markets is largely unknown, as is its impact on the housing market. This study quantifies the size of the shadow inventory and investigates the spatial impact of the out-flow of shadow inventory. The scope of our study is a set of housing markets (AZ, CA, and FL) that vary in both their historic housing price volatility as well as institutional factors - such as foreclosure law statutes - that may influence the relationship between the shadow inventory and house price dynamics. To address the endogeneity that characterizes the spatial interaction of house prices and the out-flow of the shadow inventory, we utilize a simultaneous equation system of spatial autoregressions (SESSAR). The model is estimated using measures of the shadow inventory derived from DataQuick’s national transaction history database and county-level house price indices provided by Black Knight. Lastly, because our estimate - as well as all other existing estimates - of the shadow inventory relies upon string matching algorithms to identify entry into and exit out of REO status, we validate the accuracy of our measures of REOs using loss mitigation data from the OCC Mortgage Metrics database.     

Expansion of commercial banking powers … or,universal banking is the cart,not the horse

This short essay deals with universal banking in an environment in which a government safety net (for example deposit insurance) results in a moral hazard problem for banks. It argues that universal banking significantly exacerbates the problem. Specifically, universal banking extends the distortion of incentives caused by moral hazard to other sectors of the economy.     

After the layoffs, what next?

Harry Denton, the CEO in this fictional case study, has been caught off guard. As the head of Delarks, a venerable department-store chain in the Midwest, he has engineered a remarkable turn-around in only a year. Sales have rebounded, and Wall Street is applauding. Sure, a few trees were felled in the process--to make room for new growth, Denton had to clear out 3,000 pieces of what he privately refers to as "dead-wood"--but he'd saved the company. Didn't people understand that? Not exactly. When Delarks's head of merchandising defects to a competitor, Denton is shocked to realize that many of the survivors, in fact, have had it with him and with the company. The last straw was the recent closing of the Madison store, which Denton announced without warning to anyone--not even the company's head of HR, Thomas Wazinsky, a supposedly trusted adviser. In the wake of that coup, store employees from Wichita to Peoria are wondering, Are we next? The rumor mill says that many of them are considering leaving before Denton can inflict the next blow. And senior managers are not immune to the fear and anger. Even Wazinsky, one of the few links to Delarks's proud past, confesses to Denton, "I'll bet you're thinking of firing me." Denton has to act--and fast. He calls a "town meeting" for the 600 employees of the St. Paul store. The plan: rally the troops. Instead, Denton is routed. Angry questions are hurled at the CEO, and he is forced to beat a hasty retreat through the back door. Five experts offer advice on how to revive morale at the successful but troubled company.     

Accounting licensure,quality, and the “cadillac effect”

Empirical evidence from several professions suggests that licensing laws usually do not enhance the quality of service received by consumers, as alleged by licensing advocates. Moreover, licensing often reduces the availability of low-cost service to low-income consumers (the “Cadillac Effect”). This study applies these concerns to public accountancy. By comparing the malpractice coverage and fee structure of certified public accountants with their noncertified counterparts, the study finds that accounting licensure 1) is not related to service quality, and 2) may result in small businesses having to incur higher costs for accounting services.     

Predicting premiums for the market, size, value, and momentum factors

This paper investigates the out-of-sample predictability of monthly market as well as size, value, and momentum premiums. We use a sample from each of the US and the Swiss stock markets between 1989 and 2007. Using the Swiss sample provides an important new perspective as the repeated evaluation of the same (US) data set leads to data mining problems. To avoid data mining in our predictability study, we test both statistical significance and robustness in the two samples. Our key results are as follows. We find no robust indication that the market premium is predictable, which is also true for the momentum and value premiums. It cannot be excluded that the results from the US may be caused by data mining in light of the results from the Swiss sample. However, the size premium seems to be somewhat predictable, due to the credit spread. We theorize that there are three possible reasons for this rare evidence for predictability. First, predictability may have disappeared over the last decade, as academic research made the respective information public. Second, predictability seems, as we demonstrate, not to be robust to the choice of methodology. Third, robustness tests in the Swiss sample reveal that many of the supposedly statistically significant interrelations from the US sample may be attributed to randomness, which, in that case, would be data mining. Therefore, we think that future discussions of predictability should address the issue of data mining by applying robustness tests.

Tax structure,size of government,and the extension of the voting franchise in Western Europe, 1860–1938

We study the consequences of the extension of the voting franchise for the size of (central) government and for the tax structure in ten western European countries, 1860–1938. The main hypothesis under investigation is that the impact of the franchise extension on the tax structure is conditional on tax collection costs. We find that the share of direct taxes (including the personal income tax) is positively affected by the franchise extension, but only if relative tax collection costs are below a given threshold. We use literacy as a proxy for the cost of levying a broad-based income tax. We also show that the gradual relaxation of income and wealth restrictions on the right to vote contributed to growth in total government spending and taxation.      

Changing Perceptions of the Role of the Company Auditor, 1840–1940

One advantage of studying history is to explain present practice or at least to help place current phenomena in perspective. This paper seeks to explore two related themes which have proved problematic from the earliest times of company auditing in the UK: the nature of the auditor's responsibility; and the public's perception of his role. The conventional view is that auditors were initially concerned mainly with fraud detection, and that it was not until the 1930s that greater emphasis was devoted to the verification of financial statements. This study suggests that statement verification was the primary audit concern in relation to public companies as early as the 1830s, though we acknowledge that later in the century more emphasis was placed on fraud detection. We therefore see the current debate over the auditor's responsibility as merely the latest movement in a continuing and fluctuating theme. We also show that the profession has encountered great difficulty in reconciling public expectations with the practicalities of auditing. General confusion over the role of the auditor has existed to such an extent that it has been difficult even for the profession to reach agreement on the main purpose of company auditing, and the message to be sent to the investing public. In these endeavours, the accounting profession was at the same time both helped and hindered by legal developments.     

Contagion from the crises in the Euro-zone: where,when and why?

The prevalence of contagion between the Euro-zone countries and other European countries since the Greek crisis of 2009 is now well – known, but the factors that influence the pattern of this contagion are not well understood. We investigate this question both within Europe and beyond to the USA and Japan, using an asymmetric M-GARCH model that focuses on extreme values of the risk premia on government bonds. We compare these extreme values with news of major events and find that they are highly correlated. We find a different pattern of contagion emanating from Ireland compared to the other crisis countries of Greece, Italy, Portugal and Spain. We also examine the factors that have made countries vulnerable to contagion and find that financial factors are more important than trade ones. However, intra-Euro-zone trade has also been a significant factor between the major Euro-zone economies. There is little evidence that global factors affect contagion between EU member states, but some evidence that nominal exchange rate movements offer a degree of insulation from contagion for the non-Euro zone states.     

Exports,foreign direct investment,and the costs of corporate taxation

This paper develops a model of a monopolistically competitive industry with extensive and intensive investment and shows how these margins respond to changes in average and marginal corporate tax rates. Intensive investment refers to the size of a firm’s capital stock. Extensive investment refers to the firm’s production location and reflects the trade-off between exports and foreign direct investment as alternative modes of foreign market access. The paper derives comparative static effects of the corporate tax and shows how the cost of public funds depends on the measures of effective marginal and average tax rates and on the elasticities of extensive and intensive investment. The paper was presented in 2006 at the German public finance meeting in Giessen; the Institute for Advanced Studies in Vienna; the ESF/CEPR Workshop on Outsourcing, Migration and the European Economy in Rome; the University of St. Gallen; the Graduate Institute for International Studies in Geneva, and in 2007 at the International Monetary Fund in Washington, DC, the CESifo Area Conference in Public Sector Economics in Munich and the 63rd IIPF Congress in Warwick. I appreciate stimulating comments by Michael Devereux and seminar participants and, in particular, by the discussants Andreas Haufler and Nadine Riedl, an anonymous referee and the editor Richard Cornes.     

Government spending,interest rates,prices, and budget deficits in the United Kingdom, 1701–1918

The British data from the early 1700s through WWI provide an unmatched opportunity for studying temporary changes in government purchases. Temporary increases, which appeared mainly as wartime spending, raised long-term interest rates, but significantly increased the growth rates of money and prices only during suspensions of the gold standard (1797–1821 and 1914–1918). Temporary changes in military spending accounted for the bulk of budget deficits; over the sample of more than 200 years, I found only two major non-war deficits — one associated with compensation payments to slaveowners in 1835–1936 and the other with a dispute over the income tax in 1909–1910. Interest rates did not react much to these ‘exogenous’ deficits.     

Model uncertainty,recalibration, and the emergence of delta–vega hedging

We study option pricing and hedging with uncertainty about a Black–Scholes reference model which is dynamically recalibrated to the market price of a liquidly traded vanilla option. For dynamic trading in the underlying asset and this vanilla option, delta–vega hedging is asymptotically optimal in the limit for small uncertainty aversion. The corresponding indifference price corrections are determined by the disparity between the vegas, gammas, vannas and volgas of the non-traded and the liquidly traded options.     

‘Above the fray’: Interests,discourse and legitimacy in the audit field

Legitimacy is a crucial concern for the institutional field of auditing, given its reliance on perceived legitimacy for its political mandate and license to practice, in addition to its wider credibility and trust amongst stakeholders such as clients, investors and the public. In this paper, we explore the role of interest-discourse in the discursive strategies of legitimization in the audit field. We develop an Ethnomethodologically informed Discourse Analysis (EDA) perspective that enables us to theorise how institutional actors account for interests as a means for de-legitimization and re-legitimization. We ask: how do institutional actors in the audit field establish who or what is ‘above the fray’ and who or what is ‘interested’? We illustrate our argument by examining how the ‘Big Four’ audit firms handled a ‘crisis of legitimacy’ in the accountancy profession following the recent financial crisis, focussing in particular on a Parliamentary inquiry into market concentration in the audit industry in the UK. First, we show how de-legitimization is achieved through the discursive strategies of stake attribution, stake interrogation and stake mis-alignment. Second, we show how re-legitimization is achieved through the discursive strategies of stake inoculation, stake confession, stake alignment and stake transcendence. We conclude by examining the implications of the discursive processes we have studied for the future of the audit field in the UK.     

Have the GIPSI settled down? Breaks and multivariate stochastic volatility models for,and not against,the European financial integration

We investigate the integration of the European peripheral financial markets with Germany, France, and the UK using a combination of tests for structural breaks and return correlations derived from several multivariate stochastic volatility models. Our findings suggest that financial integration intensified in anticipation of the Euro, further strengthened by the EMU inception, and amplified in response to the 2007/2008 financial crisis. Hence, no evidence is found of decoupling of the equity markets in more troubled European countries from the core. Interestingly, the UK, despite staying outside the EMU, is not worse integrated with the GIPSI than Germany or France.     

How Do Investment,Fundamentals, and Stock Prices Relate Around the World?

We assemble a novel data set of industry panel data for the corporate sector and the entire economy across a number of countries to explore the connection between investment and stock prices. The link is present in all samples, in both the aggregate and industry dimensions, and increases with stock market development. Fundamentals are less related to prices in underdeveloped markets but are similarly related to investment everywhere. Thus, the active informant interpretation does not seem to be the main force behind the stock market–investment relationship. In addition, industries that are more dependent on equity finance, and where investors are strongest, exhibit higher sensitivity to prices, especially in developed markets.     

Understanding the Backus–Smith puzzle: It's the (nominal) exchange rate,stupid

Backus, Kehoe and Kydland (BKK 1992) demonstrated that if international capital markets are complete, consumption growth correlations across countries should be higher than their corresponding output growth correlations. In stark contrast to the theory, however, in actual data the consumption growth correlation is lower than the output growth correlation. By assuming trade imperfections due to non-traded goods, Backus, D.K., Smith, G.W. [1993 Consumption and real exchange rates in dynamic economies with non-traded goods. Journal of International Economics 35(3–4), 297–316] showed that there is an additional impediment at work that can lower the consumption growth correlation. While their argument was successful in partially explaining the puzzlingly low cross country correlation of consumption growth rates, it contributed to generating another puzzle because the data forcefully show that consumption growth is negatively correlated with the real exchange rate, which is also a violation of the theory. Using data for OECD countries, we decompose real exchange rate growth into its nominal exchange rate growth and inflation differential components, and find that nominal exchange rate movements are the main source for the Backus-Smith puzzle. We demonstrate the robustness of this finding by examining sub-samples of the data, by allowing for imperfect risk sharing due to ‘rule of thumb’ consumers, and by examining intranational data across the U.S. states where the nominal exchange rate is fixed.     

Short sales,long sales,and the Lee–Ready trade classification algorithm revisited

Asquith et al. (2010) conclude that short sales are often misclassified by the Lee–Ready algorithm. The algorithm identifies most short sales as buyer-initiated, whereas the authors posit that short sales should be overwhelmingly seller-initiated. Using order data to identify true trade initiator, we document that short sales are, in fact, predominantly buyer-initiated and that the Lee–Ready algorithm correctly classifies most of them. Misclassification rates for short and long sales are near zero at the daily level. At the trade level, misclassification rates are 31% using contemporaneous quotes and trades and decline to 21% when quotes are lagged one second.     

Does the Nobes Cycle Exist,and if so,What Does it Signify?

This article provides an alternative analysis of the recent evidence provided by Nobes concerning the existence of cycles in accounting standard setting. We disagree with Nobes' interpretation on three grounds. (1) We do not believe that the theory of the ‘Nobes Cycle’ in accounting standard-setting is specified adequately to explain any cyclical behaviour in the degree of standardisation of ASC pronouncements. (2) Nor do we believe that the empirical evidence advanced by him justifies the view that the cycles exist in reality. The pattern seems to be substantially influenced by ASC's mode of operation and consultative process. (3) The single ‘degree of standardisation’ measure adopted by Nobes offers only a very partial view of changes in the quality of corporate reporting practice. We argue that the direction of standards and the quality and volume of disclosure are at least as important. Judging by the latter, we suggest that the ASC was highly successful.