Assessing causal economic explanations

Recent years have witnessed a growing interest in causal realismin the methodology of economics. Some of this literature reflectsa strong scepticism about the existence of sharp event-regularitiesor ‘laws’ in the economic realm and, accordingly,about the prospects for the covering-law approach to explanationthat dominates modern economic theory. This paper outlines analternative, causal, approach to economic explanation and attemptsto answer an important question often asked about it: how shouldcausal economic explanations be assessed?     

The Foreign Exchange Rate Exposure of Nations

Following the well-known approach by Adler and Dumas (Financ Manage 13(2):41–50, 1984), we evaluate the foreign exchange rate exposure of nations. Results based on data from 27 countries show that national foreign exchange rate exposures are significantly related to the current account and financial account balance variables of corresponding economies.     

Contingent convertibles. Solving or seeding the next banking crisis?

A recent proposal to enhance banking stability recommends the use of contingent convertibles (CoCos). Since these hybrid securities are mandatorily converted into equity when banks are in need of a recapitalization, they are credited for reducing banks’ likelihood of financial distress. In this paper, we show within a continuous-time framework that this allegedly beneficial impact hinges critically on the assumption of complete contracts. If contracts are incomplete in the sense that manager-owners enjoy discretion over the risk of the investment program, our analysis shows that CoCo bonds always distort risk taking incentives. Our main contribution is to demonstrate that there exist conditions under which CoCo bond financing increases investors’ wealth, but also increases the bank’s probability of financial distress, so that the banking system as a whole will be destabilized. Thus, individually rational decisions can have systemically undesirable outcomes. Further results indicate that CoCos should be used only in conjunction with devices to control risk shifting incentives.     

REACTIONS TO REGULATION OF ACCOUNTING FOR GOODWILL

Regulations designed to achieve “uniformity in practice” in Australian firms' reporting of goodwill were first adopted in 1985 with the introduction of AAS18. Because of the requirement to amortise purchased goodwill, a number of firms either did not comply or took evasive actions to mitigate the effects of the standard. This paper documents and explains the pre-regulation cross-sectional variation in accounting practices. Reactions to the set of regulations introduced between 1985 and 1989 are then described and explained through a longitudinal study of accounting policy choice. We develop hypotheses which explain why the goodwill accounting rules reversed relations between the accounting methods adopted by firms and both the earnings effect of compliance and the market value of the firm's goodwill. The results are confirmatory.     

Disclosure of reserve quantum in the extractive industries

We explore why some firms in the extractive industries disclose mineral reserve quantum in their annual reports and others do not. We propose that the firms' reserve disclosure policies are a function of the extent of information asymmetries, as well as information production, litigation and proprietary costs. More specifically, we propose that a firm's decisions to disclose reserves in the annual report are a function of the stage of the firm's operations, use of project financing, and the cost of measuring reserves. Empirical tests are confirmatory.     

Books and Notes

The paper presents the history of input–output tables in Cyprus, outlines the use made of these tables and sketches the future plans for the expansion and development of input–output statistics.