The Geography of Equity Analysis

I provide evidence that geographically proximate analysts are more accurate than other analysts. Stock returns immediately surrounding forecast revisions suggest that local analysts impact prices more than other analysts. These effects are strongest for firms located in small cities and remote areas. Collectively these results suggest that geographically proximate analysts possess an information advantage over other analysts, and that this advantage translates into better performance. The well‐documented underwriter affiliation bias in stock recommendations is concentrated among distant affiliated analysts; recommendations by local affiliated analysts are unbiased. This finding reveals a geographic component to the agency problems in the industry.     

INFLUENCE, ELECTIONS, AND THE VALUE OF A VOTE IN THE U.S. HOUSE OF REPRESENTATIVES

This paper investigates the extent to which interest groups use their campaign contributions to affect election outcomes as opposed to influencing candidate policy choices directly. It also reveals how much value interest groups place on gaining one more favorable vote in the House of Representatives. The empirical estimates suggest that gaining influence dominates helping favored candidates win the election as a means to affect defense spending policies. Political action committees differ in interesting ways, however, with the more ideological peace groups placing greater emphasis on changing electoral outcomes than do investor lobbies representing the defense industry.     

Accounting for Flexibility and Efficiency: A Field Study of Management Control Systems in a Restaurant Chain*

While some field studies have suggested that management control systems can be used simultaneously to make organizations more efficient and more flexible, the contingency literature has found it difficult to address this issue in the absence of a clear and comprehensive typology for analyzing more processual uses of management control systems. This paper distinguishes between enabling and coercive (Adler and Borys 1996) uses of management control systems. Coercive use refers to the stereotypical top‐down control approach that emphasizes centralization and preplanning. In contrast, enabling use seeks to put employees in a position to deal directly with the inevitable contingencies in their work. The design principles that underlie the enabling use of management control systems are repair, internal transparency, global transparency, and flexibility. Through a detailed analysis of a single‐case field study carried out over a two‐year period, we illustrate how management pursued the objectives of efficiency and flexibility by using management control systems in enabling ways. We suggest that the four design principles of enabling use can facilitate field studies of management control systems, but that they can also be used to define an enabling typology for contingency researchers to analyze the ways in which organizations simultaneously pursue efficiency and flexibility through their management control systems.     

Regional Effects of Exchange Rate Fluctuations

We exploit differences across U.S. states' exposure to trade to study the effects of changes in the exchange rate on economic activity. Across states, trade-weighted exchange rate depreciations are associated with increased state exports, reduced state unemployment, and higher state hours worked. The effects are particularly strong during periods of economic slack. A multiregion model with interstate trade and labor flows, calibrated to match state-level trade data and migration flows, replicates the empirical relationship between exchange rates and unemployment. The high degree of interstate trade plays an important role in transmitting shocks across states in the first year, whereas interstate migration shapes cross-sectional patterns in later years. We use the model to study the regional effects of tariffs in the United States. The model suggests that a 25% Chinese import tariff on U.S. goods would be felt throughout the United States, even in states with small direct linkages to China, raising unemployment rates by 0.2 to 0.7 percentage points in the short run.     

Beyond Random Assignment: Credible Inference and Extrapolation in Dynamic Economies

We derive analytical relationships between shock responses and theory-implied causal effects (comparative statics) in dynamic settings with linear profits and linear-quadratic stock accumulation costs. For permanent profitability shocks, responses can have incorrect signs, undershoot, or overshoot depending on the size and sign of realized changes. For profitability shocks that are i.i.d., uniformly distributed, binary, or unanticipated and temporary, there is attenuation bias, which exceeds 50% under plausible parameterizations. We derive a novel sufficient condition for profitability shock responses to equal causal effects: martingale profitability. We establish a battery of sufficient conditions for correct sign estimation, including stochastic monotonicity. Simple extrapolation/error correction formulas are presented.     

Book Reviews

Companion to Contemporary Economic Thought by DAVID GREENAWAY, MICHAEL BLEANEY and IAN M.T. STEWART (eds.), (London, New York: Routledge, 1991, pp xii and 858, ISBN 0 415 02612 1. International Adjustment and Financing. the Lessons of 1985–1991 by C. FRED BERGSTEN, (ed.), (Washington: Institute for International Economics, 1992), pp xiii and 335, US $34.95 hardback, US $24.95 softback, ISBN 0 88132 142 7 and 0 88132 112 5. Financial Instability and the International Debt Problem by GEORGE MCKENZIE and STEPHEN THOMAS (Basingstoke: Macmillan, 1992), pp ix and 211, $40 hardback, ISBN 0 333 46419 2. Down in The Dumps, Administration of the Unfair Trade Laws by RICHARD BOLTUCK and ROBERT E. LIT AN (eds.), (Washington, DC: The Brookings Institution, 1991). pp xii and 350, US $34.95 hardback, US $15.94 softback, ISBN 0 8157 1020 8, 0 8157 1019 4. Industrial Reform in Socialist Countries, From Restructuring to Revolution by IAN JEFFRIES (Aldershot: Edward Elgar Publishing Ltd., 1992), pp x and 294, $45.00 hardback, ISBN 1 85278 380 X.     

Competing for Attention: Lobbying Time‐Constrained Politicians

We develop a model of lobbying in which a time and resource constrained policymaker first chooses which policy proposals to learn about, before choosing which to implement. The policymaker reviews the proposals of the interest groups who provide the highest contributions. We study how policy outcomes and contributions depend on policymaker constraints and the design of the “Contest for Attention.” Among other results, awarding attention to the highest contributors generally guarantees the first best policy outcome. It can also lead to the highest possible contributions, suggesting that a policymaker may not need to sacrifice policy in order to maximize contributions. Our results also give insight into other settings where agents compete for a decision maker's attention.     

A VARMA Analysis of the Causal Relations Among Stock Returns,Real Output,and Nominal Interest Rates

Previous research has documented a negative relation between common stock returns and inflation. Recently, Fama 3 and Geske and Roll 6 have argued that this relation results from a more fundamental one between real activity and expected inflation. Stock returns, they argue, signal changes in real activity, which in turn affect expected inflation. However, unlike Fama, Geske and Roll argue that changes in real activity result in changes in money supply growth, which in turn affect expected inflation. Empirical tests have analyzed separately each link in the proposed causal chain. In this article, we investigate simultaneously the relations among stock returns, real activity, inflation, and money supply changes using a vector autoregressive moving average (VARMA) model. Our empirical results strongly support Geske and Roll's reversed causality model.     

EMPIRICAL IMPACT OF PUBLIC INFRASTRUCTURE ON THE JAPANESE ECONOMY*

We study the impact of public capital investment on individual sectors of the Japanese economy using time‐series data for the period of 1970–1998. We employ a production function approach and also estimate a dynamic VAR/ECM model. We find significant differences in the employment effects, output effects and private investment effects across sectors. Public capital investment has a positive effect on employment in the finance, insurance and real estate (FIRE), manufacturing, construction and utilities sectors; on private investment in the FIRE, agriculture, transportation, trade and services sectors; and on output in the mining, FIRE, trade and manufacturing sectors.