Sentimental Preferences and the Organizational Regime of Betting Markets

We analyze the price impact of sentimental bettor preferences within a bookmaker betting market. A theoretical model demonstrates that, under reasonable assumptions about the nature of demand in a market with strong competition, the bookmaker will offer lower prices for bets with comparatively stronger demand. Using a sample of more than 16,000 English soccer matches we find evidence that more favorable odds are extended to bets on more popular clubs and that this effect is amplified on weekends when sentimental bettors face lower opportunity costs to wager. Our findings help to explain why the market for sports gambling operates as a hybrid structure with bookmakers able to attract a considerable share of the betting volume, although identical contracts are traded on exchange markets at lower costs: the organizational design of a quote‐driven market enables the dealer to take advantage of sentimental bettor preferences.     

“Post‐Truth,” “Alternative Facts” and “Fakenomics”

South African companies are accused of hoarding profits to accumulate large amounts of “idle” cash, as well as of being the perpetrators of massive illegal capital flight. This paper argues that much of the claimed corporate cash is either offshore or belongs to banks. It reminds that bank deposits increase when companies borrow, not when they retain profits. It shows, too, that measures of massive capital flight actually reflect data errors. Exaggerating, through faulty methodology the extent to which companies have cash or may be involved in illegal capital flight is unhelpful. It exacerbates already‐fraught government‐business relations, and complicates the search for solutions to South Africa's economic problems.     

Changing Perceptions of Maturity Mismatch in the U.S. Banking System: Evidence from Equity Markets

We use the sensitivity of bank holding company equity returns to market interest rates as an indicator of perceived maturity mismatch. Based on data from 1990 to 2009, there is only weak evidence that market participants perceived banks to be effectively short‐funded. However, looking at 1990–1996 and 1997–2009 subsamples separately, our results suggest that U.S. commercial banks were perceived as short‐funded during the earlier time period but not the later. During this time of changing perceptions of maturity mismatch, banks were increasing their holdings of real estate loans as a share of total assets. We present evidence that, subsequent to 1996, market participants perceived real estate loans as having become effectively shorter‐term.     

“Exports‐at‐Risk”: The Effect of Multimarket Contact in International Trade

Despite a well‐established literature examining possible impacts on competition in oligopolistic markets from multimarket contact (MMC) among diversified firms, only recently have trade theorists considered the possible effects of MMC among exporters in limiting the anticipated procompetitive role of imports. This article presents a first effort to test the empirical importance of a measure of this MMC, called “exports‐at‐risk,” on import prices (unit‐values). Suggestive evidence of anticompetitive impacts of MMC among exporters is obtained for highly traded four‐digit harmonized system (HS) products within the broad category of “fats and oils.” Exporters in fats and oils seem to price higher in markets where they meet rivals with the ability to retaliate against their “exports at risk.”     

Discussion of “Relating Product Prices to Long‐Run Marginal Cost: Evidence from Solar Photovoltaic Modules”

My discussion of Reichelstein and Sahoo (2018) is organized into three parts. First, what is the context for this work? That is, what are the energy and climate stakes? Second, what does the paper do? I will re‐work the equation defining the components of long‐run marginal cost to better reflect what is actually estimated and to better highlight some important choices about how the different components are modeled. Third, and most importantly, how do the results inform business decisions and policy choices regarding energy and climate? What more do we need?     

Parents’ Use of Subsidiaries to “Push Down” Earnings Management: Evidence from Italy

We find evidence consistent with Italian nonlisted subsidiaries engaging in accrual and real earnings management, so that their listed parents can meet or beat benchmarks. Thus, the parent firm drives the earnings management of the subsidiaries. We identify parents that are more likely to have managed earnings as the ones that avoid a small loss or meet or beat analyst forecast by a few cents. Cross‐sectional analysis reveals that Big 4 auditors mitigate accrual earnings management at the subsidiary level and that family‐owned firms use earnings management through nonlisted subsidiaries mainly to avoid reporting losses. Finally, we find that parent firms communicate earnings management strategies to their subsidiaries using board proximity. Our evidence shows that business groups manage earnings differently from single firms, pushing earnings management down to subsidiaries. It also supports the monitoring role of Big 4 auditors in a business group setting and contributes to understanding financial reporting decisions in family‐owned firms.     

The “LIFO Reserve” and the Value of the Firm: Theory and Empirical Evidence*

Abstract. A valuation approach is used to examine the effect of the LIFO inventory method on the relation between the market value of a firm's stock and the book value of equity. The paper develops three competing hypotheses that have different predictions regarding the relation between the LIFO reserve and the market value of equity. Results indicate a significant negative relation between the LIFO reserve and the value of equity, inconsistent with the pricing of LIFO reserves as unbooked assets, but consistent with a model that views the LIFO reserve as a measure of the effect of increases in factor input prices on firm value. Résumé. Les auteurs ont recours à une évaluation pour examiner l'incidence de la méthode DEPS de détermination du coût des stocks sur la relation entre le cours de l'action d'une société et sa valeur comptable. Ils élaborent trois hypothèses concurrentes qui débouchent sur des prédictions différentes en ce qui a trait à la relation entre la réserve résultant de l'utilisation de la méthode DEPS et la valeur marchande de l'entreprise. Les résultats indiquent une relation négative significative entre cette réserve et la valeur comptable de l'entreprise, relation qui ne concorde pas avec le prix de ladite réserve que l'on voudrait assimiler à un actif non comptabilisé, mais qui cadre avec un modèle selon lequel la réserve résultant de l'utilisation de la méthode DEPS est considérée comme une mesure de l'incidence des hausses du prix des intrants sur la valeur de l'entreprise.     

A Multiperiod Model and Experimental Evidence of Independence and “Lowballing”*

Abstract. Auditors, regulators, and academics are interested in the pricing practice of “lowballing” and its relationship to auditor independence. Several analytical models have examined these issues. However, these theories have gone untested primarily due to a lack of field data concerning important environmental variables. In this study, a multiperiod model of lowballing and independence is developed and tested in laboratory markets via the experimental economics methodology. The study contributes to the literature in two respects. First, it represents one of the first studies providing empirical evidence and theory testing of the relationship between lowballing and independence. Second, the model presents a new rationale for low-ball pricing and its relationship to auditor independence. Lowballing and impairment of independence, occurring without exogenous transaction costs, are caused by positing cross-sectional variation in audit cost and quality and an informational advantage that accrues to an incumbent auditor-client pair regarding future variation in these audit dimensions. The model is operationalized in a multiperiod laboratory market consisting of multiple sellers and buyers. Sixteen markets are conducted to test price and reporting predictions of the model. The markets strongly exhibit lowballing behavior, but the exact price predictions are generally not supported. The markets also support reporting predictions, with sellers deviating from truthful reporting (impairing their independence) only when additional future profits are greater than the additional cost of misreporting. Data availability. The laboratory market data used in this paper are available from the authors upon request.     

The “news view” of economic fluctuations: Evidence from aggregate Japanese data and sectoral US data

This paper uses aggregate Japanese data and sectoral US data to explore the properties of the joint behavior of stock prices and total factor productivity (TFP) with the aim of highlighting data patterns that are useful for evaluating business cycle theories. The approach used follows that presented in [Beaudry, P., Portier, F., 2004. News, stock prices and economic fluctuations. Working paper 10548. NBER]. The main findings are that (i) in both Japan and the US, innovations in stock prices that are contemporaneously orthogonal to TFP precede most of the long-run movements in total factor productivity and (ii) such stock prices innovations do not affect US sectoral TFPs contemporaneously, but do precede TFP increases in those sectors that are driving US TFP growth, namely durable goods, and among them equipment sectors. J. Japanese Int. Economies 19 (4) (2005) 635–652.