The Effect of Accounting Restatements on Earnings Revisions and the Estimated Cost of Capital

This paper examines the effect of accounting restatements on a firm's cost of equity capital. We show that, on average, accounting restatements lead to both decreases in expected future earnings and increases in the firm's cost of equity capital. Depending on the model used, relative percentage increases in the cost of equity capital average between 7 and 19% in the month immediately following a restatement. The relative increase in the cost of capital dissipates as time passes and after controlling for analyst forecast biases, but continues to average between 6 and 15% in the most conservative setting. We also show that restatements initiated by auditors are associated with the largest increase in the cost of capital, and that firms with greater leverage experience greater increases in their cost of capital. Overall, our evidence is consistent with accounting restatements lowering the perceived earnings quality of the firm and increasing investors' required rates of return.     

Aid, policy and growth in post-conflict societies

Countries emerging from civil war attract both aid and policy advice. This paper provides the first systematic empirical analysis of aid and policy reform in the post-conflict growth process. It is based on a comprehensive data set of large civil wars, and covers 17 societies that were in their first decade of post-conflict economic recovery. We first investigate whether the absorptive capacity for aid is systematically different in post-conflict countries. We find that during the first 3 post-conflict years absorptive capacity is no greater than normal, but that in the rest of the first decade it is approximately double its normal level. Thus, ideally, aid should phase in during the decade. Historically, aid has not, on average, been higher in post-conflict societies, and indeed it has tended to taper out over the course of the decade. We then investigate whether the contribution of policy to growth is systematically different in post-conflict countries, and in particular, whether particular components of policy are differentially important. For this we use the World Bank policy rating database. We find that growth is more sensitive to policy in post-conflict societies. Comparing the efficacy of different policies, we find that social policies are differentially important relative to macroeconomic policies. However, historically, this does not appear to have been how policy reform has been prioritized in post-conflict societies.     

Relationship of Planning and Control Systems with Strategic Choices: A Closer Look

The study finds that relative to others, firms pursuing the Prospector-like strategy (high innovation) have lower financial results uncertainty, a more long-term orientation for decision making, and more decentralized control. As well, the tightness of budgetary control is found to be negatively correlated with financial results uncertainty. Thus, we are able to reproduce in our study the result that Prospector type firms have tighter budgetary control, which many have found puzzling previously, and point to the relation between strategy and financial results uncertainty as an explanation for the result.Based on a sample of large firms in Singapore, the study also finds the impact of the 1997–1998 Asian crisis is correlated with the intensity with which the Prospector-like strategy was pursued.     

Catching up with the Americans

This paper develops an international version of the consumption-based capital asset pricing (CCAPM), which we refer to as “catching up with the Americans.” Previous CCAPM research develops the concept of “catching up with the Joneses,” where a representative economic agent exhibits higher marginal utility of consumption as a result of higher past per capita consumption in his own country. Catching up with the Americans, on the other hand, is an international habit-preference hypothesis. It extends the idea of catching up with the Joneses by stating that consumers of non-U.S. countries gain higher marginal utility of consumption as a result of higher past American consumption growth. Contrary to much of the CCAPM literature, we test this version of the model using long bond rates rather than equity returns. However, like most of the previous research on the CCAPM, the catching up with the Americans model fails to explain the relationship between consumption and asset returns.     

MODELING THE TERM STRUCTURE FROM THE ON‐THE‐RUN TREASURY YIELD CURVE

We propose a new model to estimate the term structure of interest rates using observed on‐the‐run Treasury yields. The new model is an improvement over models that require a priori knowledge of the shape of the yield curve to estimate the term structure. The general form of the model is an exponential function that depends on the estimation of four parameters fit by nonlinear least squares and has straightforward interpretations. In comparing the proposed model with current yield‐curve‐smoothing models, we find that, for the data used, the proposed model does best overall in terms of pricing accuracy both in sample and out of sample. JEL classification: E43, G12     

Import Protection Bias

Rodrik (1995) notes that trade regimes tend to be biased towards import protection, while the standard political economy models either yield no prediction on the bias of the trade regime or predict, counterfactually, a bias towards the export sector. This constitutes an important shortcoming in the political economy of trade literature. In this paper, the Grossman and Helpman (1994 ) “Protection for Sale” model is extended by adding government expenditure. This expenditure may be financed via a combination of tariff revenue and a distorting wage tax. In addition to the government expenditure, export subsidies need to be financed either via tariff revenue or a distorting wage tax. With this addition, plausible values of the model's parameters yield import protection bias.