Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations

We investigate Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholder rights exhibit significant stock market underperformance. If the relation between poor governance and poor returns is causal, we expect that the market is negatively surprised by the poor operating performance of weak governance firms. We find that firms with weak shareholder rights exhibit significant operating underperformance. However, analysts' forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market. Our results are robust to controls for takeover activity. Overall, our results do not support the hypothesis that weak governance causes poor stock returns.     

Wealth and Risk Effects of Adopting Deposit Insurance in Canada: Evidence of Risk Shifting by Banks and Trust Companies

This paper confirms that adopting explicit deposit insurance expanded risk-shifting incentives for Canadian Banks and Trust Companies. By transferring responsibility for monitoring non-systematic risk to the Canadian Deposit Insurance Corporation (CDIC), deposit insurance eliminated the compensation previously paid to large-block stockholder monitors. This transfer fueled a redistribution of insured-institution stock from poorly diversified large-block shareholders to diversified investors. Also, subsequent changes in market volatility support the hypothesis that CDIC insurance and the absorption of catastrophic risk it provided reduced systematic risk in the stock market as a whole even as it increased non-systematic risk in the banking and trust-company sector.     

HOW MUCH DO STUDENTS MATTER? APPLYING THE OAXACA DECOMPOSITION TO EXPLAIN DETERMINANTS OF ADEQUATE YEARLY PROGRESS

The federal government and many state governments have recently passed legislation that punishes school districts for not showing consistent improvement in standardized test scores. This article measures the extent to which school performance reflects student characteristics. After splitting schools in the state of Washington based on adequate yearly progress, the authors find that an overwhelming percentage of the difference between high- and low-performing schools is explained by characteristics beyond the control of school administrators. Thus legislation designed to penalize poorly performing schools may hurt students who are most in need of academic aid. (JEL I2 )     

THE IMPACT OF TRADE AND INVESTMENT AGREEMENTS ON AUSTRALIA'S INWARD FDI FLOWS

International trade and investment agreements are one of the primary instruments of global financial liberalisation. They are enacted to enhance the flows of foreign direct investment (FDI) between signatories by reducing regulatory barriers to investment; promoting stable host investment environments; and guaranteeing investors against non‐commercial risk. As a net capital importer, Australia has sought to attract FDI through participation in such accords since the early 1980s. This paper examines the determinants of Australia's inward FDI flows—focussing specifically on the effects of trade and investment agreements. Using panel data, we find that both bilateral trade and bilateral and multilateral investment agreements attract FDI flows into Australia, thereby indicating that the policy of enticing FDI through participation in these accords is quite possibly effective.     

An Experimental Assessment of the Effects of Two Alcoholic Beverage Health Warnings Across Countries and Binge-Drinking Status

In recent years, alcohol-related problems on college campuses have been well documented. This research examines how two different alcoholic beverage health warnings placed on the label of a fictitious brand of beer influence alcohol-related risk perceptions, attitudes and intentions, and characterizations of problem-drinking behaviors of binge and non-binge drinkers in Australia and the United States. The consumer welfare implications of our findings, which show that the dependent measures are influenced by both main and interaction effects, are discussed.     

Earnings Quality, Insider Trading, and Cost of Capital

Previous research argues that earnings quality, measured as the unsigned abnormal accruals, proxies for information asymmetries that affect cost of capital. We examine this argument directly in two stages. In the first stage, we estimate firms' exposure to an earnings quality factor in the context of a Fama‐French three‐factor model augmented by the return on a factor‐mimicking portfolio that is long in low earnings quality firms and short in high earnings quality firms. In the second stage, we examine whether the earnings quality factor is priced and whether insider trading is more profitable for firms with higher exposure to that factor. Generally speaking, we find evidence consistent with pricing of the earnings quality factor and insiders trading more profitably in firms with higher exposure to that factor.     

The Stock Market's Reaction to Unemployment News: Why Bad News Is Usually Good for Stocks

We find that on average, an announcement of rising unemployment is good news for stocks during economic expansions and bad news during economic contractions. Unemployment news bundles three types of primitive information relevant for valuing stocks: information about future interest rates, the equity risk premium, and corporate earnings and dividends. The nature of the information bundle, and hence the relative importance of the three effects, changes over time depending on the state of the economy. For stocks as a group, information about interest rates dominates during expansions and information about future corporate dividends dominates during contractions.