Vertical control of a distribution network—an empirical analysis of magazines

How does an upstream firm determine the size of its distribution network, and what is the role of vertical restraints? To address these questions, we develop two empirical entry models. In the benchmark coordinated entry model, the upstream firm sets market‐specific wholesale prices and implements the first best. In the more realistic restricted/free entry model, the upstream firm only sets a uniform wholesale price. As a second‐best solution, it restricts entry in markets where business stealing (encroachment) is high, and allows free entry elsewhere. We apply the model to magazine distribution, and assess the profitability of alternative vertical restraints. Banning restricted licensing reduces profits only slightly, so the business rationale for restricted licensing should not be sought in the prevention of encroachment. Furthermore, market‐specific wholesale prices implement the first best, but the profit increase would be small, providing a rationale for the commonly observed uniform wholesale prices. Finally, uniform franchise fees are much less effective than a uniform wholesale price to cope with local market differences.     

Regulating bidder participation in auctions

Regulating bidder participation in auctions can potentially increase efficiency compared to standard auction formats with free entry. We show that the relative performance of two such mechanisms, a standard first‐price auction with free entry and an entry rights auction, depends nonmonotonically on the precision of information that bidders have about their costs prior to deciding whether to participate in a mechanism. As an empirical application, we estimate parameters from first‐price auctions with free entry for bridge‐building contracts in Oklahoma and Texas and predict that an entry rights auction increases efficiency and reduces procurement costs significantly.     

Optimal product variety in radio markets

A vast theoretical literature explores inefficient market structures in free‐entry equilibria, and previous empirical work demonstrated that excessive entry may obtain in local radio markets. We extend that literature by relaxing the assumption that stations are symmetric, allowing for endogenous horizontal and (unobserved) vertical station differentiation. We find that, in most broadcasting formats, a social planner who takes into account the welfare of market participants eliminates 50%–60% of the observed stations. In 80%–94.9% of markets where high‐quality stations are observed, welfare could be unambiguously improved by converting one such station into low‐quality broadcasting, suggesting local overprovision of quality.     

Product differentiation and efficiencies in the retail banking industry

We empirically quantify the welfare implications of bank entry in the United States between 2000 and 2008. We use a fully structural framework that combines a differentiated demand model with an endogenous product model to investigate the market outcomes. We find no evidence for under- or over-entry. Compared with the socially efficient outcome, there is a mild welfare loss resulting from banks entering wrong locations in product space. Compared with the observed outcome, consumer surplus drops by 20–38% and bank profits decline by 48–59% when banks are homogeneous. Therefore product differentiation significantly improves welfare under free entry.     

Sequential procurement auctions and their effect on investment decisions

We characterize the optimal mechanism and investment level in an environment where (i) two projects of independent costs are purchased sequentially, (ii) the buyer can commit to a two‐period mechanism, and (iii) the winner of the first project can invest in a cost‐reducing technology between auctions. We show that, in an attempt to induce more competition in the first period, the optimal mechanism gives an advantage to the first‐period winner in the second auction. As a result of this advantage, the first‐period winner invests more than the socially efficient level. Optimal advantages, therefore, create two different channels for cost minimization in buyer‐supplier relationships.     

Lobbying and Uniform Disclosure Regulation

This study examines the costs and benefits of uniform accounting regulation in the presence of heterogeneous firms that can lobby the regulator. A commitment to uniform regulation reduces economic distortions caused by lobbying by creating a free‐rider problem between lobbying firms at the cost of forcing the same treatment on heterogeneous firms. Resolving this tradeoff, an institutional commitment to uniformity is socially desirable when firms are sufficiently homogeneous or the costs of lobbying to society are large. We show that the regulatory intensity for a given firm can be increasing or decreasing in the degree of uniformity, even though uniformity always reduces lobbying. Our analysis sheds light on the determinants of standard‐setting institutions and their effects on corporate governance and lobbying efforts.     

The social costs of unit banking restrictions

Many U.S. commercial banks are prohibited from establishing more than one full service office location. In the absence of free entry to the banking industry, this constraint may force unit banks to operate with a socially inefficient combination of inputs. Moreover, entry to the industry in unit banking states may be more difficult than in branching states, where market entrants need not necessarily acquire a new charter. If so, existing unit banks could price their output above marginal social cost, earning excess profits and imposing allocational inefficiencies. This paper demonstrates empirically that unit banking restrictions in the United States impose statistically and economically significant deadweight social costs.     

The role of lockups in takeover contests

We examine breakup fees and stock lockups as devices for prospective target firms to encourage bidder participation in takeover contests. Unless bidding costs for the first bidder are too high, breakup fees provide for the socially desirable degree of competition and ensure the efficient allocation of the target to the highest‐valued buyer in a takeover auction. In contrast, stock lockups permit the target firm to subsidize entry of a new bidder at the expense of an incumbent bidder. Stock lockups induce too much competition when offered to a second bidder and too little competition when offered to a first bidder. Despite their socially wasteful properties, target management would favor stock lockups, as they induce takeover competition at least cost to the target.     

Do Socially Responsible Index Investors Incur an Opportunity Cost?

We construct index‐tracking portfolios using integer programming and then compare the tracking errors and performances of portfolios formed from an unrestricted and socially screened stock universe. We find that one can construct a portfolio of socially responsible stocks that deliver market performance. Thus, the exclusion of a set of stocks from consideration does not exhaust the existence of efficient index‐tracking portfolios, especially when the exclusionary screen is for nonfinancial reasons. Our results are robust to various specifications in constructing the portfolio, for example, number of stocks included in the portfolio and weighting schemes, and robust to alternative tracking error measurement; we show that the difference induced from conducting socially responsible screen is never statistically significant.     

Regulatory competition and rules/principles‐based regulation

This paper analyses how regulatory competition affects principles‐based and rules‐based systems of regulation. Competition between regulators creates the possibility of regulatory arbitrage that generates a race to the bottom by regulators that is socially harmful. We derive the welfare effects of such competition and the regulatory response to these effects, in particular, regulatory harmonisation. We find, however, that regulators can adopt harmful regulatory harmonisation. These effects can make coordination efforts in developing global regulation socially desirable. We demonstrate, moreover, that corporate lobbying is not always harmful: it can both encourage and discourage socially desirable regulation.     

Do Bank Relationships Affect the Firm's Underwriter Choice in the Corporate‐Bond Underwriting Market?

This paper studies the effect of bank relationships on underwriter choice in the U.S. corporate‐bond underwriting market following the 1989 commercial‐bank entry. I find that bank relationships have positive and significant effects on a firm's underwriter choice, over and above their effects on fees. This result is sharply stronger for junk‐bond issuers and first‐time issuers. I also find that there is a significant fee discount when there are relationships between firms and commercial banks. Finally, I find that serving as arranger of past loan transactions has the strongest effect on underwriter choice, whereas serving merely as participant has no effect.     

The business case for regulation of corporate social responsibility and accountability

This paper develops an alternative (or supplementary) theoretical justification for the regulation of corporate social responsibility (CSR) and social and environmental accounting and reporting (SEAR) to the justification contained in the extant academic literature. It does this by demonstrating how, contrary to the dominant business discourse, increased regulation designed to protect the social and environmental interests of a range of stakeholders can also serve to enhance corporate economic performance and shareholder value.

The theoretical perspectives developed in this paper are drawn from Beck's and Giddens’ theories on reflexive modernity, and indicate that reflexively appropriated knowledge can be a key factor in developing socially constructed understandings of the social and environmental risks to a range of stakeholders inherent in business operations.

In situations where voluntary self-regulation of CSR and SEAR has been ineffective in preventing corporate actions and decisions that have resulted in damaging social and environmental consequences, processes of reflexivity can substantially increase public awareness of the level of risk they face from corporate operations. Such increased perceptions of risk can lead to a loss of trust in an individual corporation or a whole industrial sector, and this can be exacerbated where stakeholders begin to actively seek out alternative risk discourses to inform themselves about possible risks of which they were previously unaware. We argue that effective statutory regulation could avoid these outcomes, and the loss of shareholder economic value that can flow from these outcomes.     

The Effect of Socially Responsible Investing on Portfolio Performance

More and more investors apply socially responsible screens when building their stock portfolios. This raises the question whether these investors can increase their performance by incorporating such screens into their investment process. To answer this question we implement a simple trading strategy based on socially responsible ratings from the KLD Research & Analytics: Buy stocks with high socially responsible ratings and sell stocks with low socially responsible ratings. We find that this strategy leads to high abnormal returns of up to 8.7% per year. The maximum abnormal returns are reached when investors employ the best‐in‐class screening approach, use a combination of several socially responsible screens at the same time, and restrict themselves to stocks with extreme socially responsible ratings. The abnormal returns remain significant even after taking into account reasonable transaction costs.     

Triple‐entry accounting with blockchain: How far have we come?

Although double‐entry accounting has been used for more than 600 years, today’s era of disruptive technological change utilising blockchain and FinTech has led to the emergence of another promising accounting method: triple‐entry accounting. This paper explores triple‐entry accounting, from its conception to the current state of play, using three case studies. We find that: (i) in a blockchain ecosystem, for some accounts, business entities will only need to perform a single entry internally and the opposite entry will be recorded in a public shared ledger; and (ii) triple‐entry accounting is a new and a more efficient way to address fundamental trust and transparency issues that plague current accounting systems. Triple‐entry accounting with blockchain, when properly implemented, can fundamentally improve accounting.     

On the social usefulness of fractional reserve banking

In this paper we argue that if monetary policy has insufficient deflation, private agents have incentives to set up alternative payment systems like fractionally backed bank deposits, which pay interest on the means of payment. In a competitive environment with free entry, these alternative systems are inherently fragile in the sense that they are subject to socially costly bank runs. These social costs are not internalized by private individuals and banks and may exceed their social benefits. We argue that as communication technologies improve, the social benefits of fractional reserve banking decrease, but the private benefits may still exceed the private costs so that such systems continue to be used. In such situations, 100% reserve requirements are optimal.     

Preferences,entry, and market structure

We provide a unified approach to imperfect (monopolistic, Bertrand, and Cournot) competition when preferences are symmetric over a finite but endogenous number of goods. Markups depend on the Morishima elasticity of substitution and on the number of varieties. The comparative statics of free‐entry equilibria is examined, establishing the conditions for markup neutrality with respect to income, market size, and productivity. We compare endogenous and optimal market structures for several non‐CES examples. With a generalized linear direct utility, the markup can be constant and optimal under monopolistic competition, and nonmonotonic in the number of firms under Bertrand or Cournot competition.     

The affect heuristic and stock ownership: A theoretical perspective

We consider asset prices and informational efficiency in a setting where owning stock confers direct utility due to an affect heuristic. Specifically, holding equity in brand name companies or those indulging in “socially desirable” activities (e.g., environmental consciousness) confers positive consumption benefits, whereas investing in “sin stocks” yields the reverse. In contrast to settings based on wealth considerations alone, expected stock prices deviate from expected fundamentals even when assets are in zero net supply. Stocks that yield high direct utility are, on average, more informationally efficient as they stimulate more entry into the market for these stocks and, consequently, more information collection. The analysis also accords with a value effect, high valuations of brand‐name stocks, abnormally positive returns on “sin stocks,” volume premia in the cross‐section of returns, proliferation of mutual funds and ETFs, and yields untested implications. If, as psychological literature suggests, agents derive greater utility from successful companies by “basking in reflected glory,” then asset prices react to public signals non‐linearly, leading to booms and busts, as well as crashes and recoveries.     

Evolution of Bilateral Capital Flows to Developing Countries at Intensive and Extensive Margins

Motivated by the rise in capital flows to low‐income countries (LICs), we examine the nature of these flows and the factors affecting foreign investors' decision. Recognizing the presence of fixed investment costs, we analyze capital flows at both intensive and extensive margins. To fix ideas, we resort to the gravity literature for the estimating relationships which we embed into a two‐tier econometric framework with cross‐sectional dependence. Our main finding is that market entry costs are statistically and economically very detrimental to LICs. We also obtain the gravity‐type relationship for the destination income unconditionally but not after conditioning on relevant variables, as well as establish labor productivity as a robust attractor of capital inflows.     

Risk-Neutral Parameter Shifts and Derivatives Pricing in Discrete Time

We obtain a large class of discrete‐time risk‐neutral valuation relationships, or “preference‐free” derivatives pricing models, by imposing a simple restriction on the state‐price density process. The risk‐neutral stock‐return and forward‐rate dynamics are obtained by changing only a location parameter, which can be determined independent of the preference and true location parameters. The Gaussian models of Rubinstein (1976) , Brennan (1979) , and Câmera (2003) , and the gamma model of Heston (1993) are all special cases. The model provides simple relationships between expected returns and state‐price density parameters analogous to the diffusion case.     

The Effects of Alternative Justification Memos on the Judgments of Audit Reviewees and Reviewers

Prior research on justification has typically focused on the differences in judgments between auditors required, or not required, to justify their decisions. However, justification memos can be prepared using different approaches. In this study we examine the impact of using three justification memos: supporting, balanced, and component. Using a comprehensive control environment case based on an actual client that experienced fraud, we find that the justification memo used can affect the judgments of auditors preparing the memos as well as the judgments of auditors who review their work. Specifically, the results indicate that auditors using an unrestricted component memo, who were required to write memos for components of their task by providing important positive and negative evidence, thought that the firm's control environment was more likely to prevent fraud as compared with the supporting and balanced memo groups. Additional analyses suggest that the reason for this result is that an unrestricted component memo focuses auditors' attention on a larger percentage of positive control environment characteristics when a firm's underlying evidence set is mostly positive. This may be problematic because firms can have more positive than negative control environment characteristics, even when fraud is present.