The valuation implications of human capital in transactions on and outside the exchange

We examine the valuation implications of human capital both for a broad sample of firms and for subsamples of high-technology firms and low-technology firms. Our results suggest that the market appears to value compensation expenses not as expenses but as if they serve as a proxy for a human asset that is omitted from the balance sheets. The findings are consistent with human capital comprising a more sizable portion of the value of high-technology firms than of low-technology firms. The findings also indicate that compensation expenses are valued differently from other expense components of income. Markedly, despite critical differences between investors on the exchange and those buying shares in transactions outside the exchange (controlling interests, information asymmetry, etc.), their assessment of the enhanced value of a firm attributable to human capital is shown to be relatively similar. The results in this study are consistent with compensation expenses creating a valuable intangible asset, hence suggesting that reform in the accounting treatment of these expenses is of critical importance.     

Information uncertainty and auditor reputation

This paper explores the relationship between information uncertainty and auditor reputation revealed by the failure of Arthur Andersen (AA). AA’s reputation deteriorated considerably when it announced on January 10, 2002, that it had shredded documents related to its audit of Enron. AA’s demise was sealed on March 14, 2002, with its indictment for obstruction of justice. We find that on these dates the clients of AA and other Big Five auditors that are characterized by higher information uncertainty experience relatively larger share price declines compared to clients with lower information uncertainty. The findings suggest that the market relies more heavily on auditor reputation for higher information uncertainty firms, which implies that the value of an audit is greater when a firm is harder to value. Our results highlight the importance of information uncertainty in financial markets: where there is a shock to auditor reputation, firms with greater information uncertainty suffer the largest losses.     

The effect of patent expiration on the market position of drugs

A sample of 12 major drugs is used to examine the effect of patent expiration on market shares and prices in the US market. The results indicate that patent expiration has, at least for the first few years, only a small effect on the market shares and prices of the original drags. Efforts to increase price competion in drug markets, however, may change this situation in the future. The declining effective patent period for drugs and the declining profitability of drug innovation raise the concern that efforts to foster price competition might result in lower levels of innovation.     

The government's revenue from money creation and the inflationary effects of a decline in the rate of growth of G.N.P.

This paper studies the inflationary consequences of an exogenous decline in the rate of growth of G.N.P. The Government's insistance on keeping its revenue from money creation unaffected results in a compensating increase in the inflation tax, due to the loss of revenue stemming from the decline in growth. It is shown that the magnitude of the necessary compensating increase in the rate of inflation depends crucially on the specification of the demand for money. Based on a Cagan type demand for money, we present the inflationary consequences of a decline in the rate of growth for Israel, six O.E.C.D. countries, and Argentina.