Volatility surfaces: theory,rules of thumb,and empirical evidence

Implied volatilities are frequently used to quote the prices of options. The implied volatility of a European option on a particular asset as a function of strike price and time to maturity is known as the asset's volatility surface. Traders monitor movements in volatility surfaces closely. In this paper we develop a no-arbitrage condition for the evolution of a volatility surface. We examine a number of rules of thumb used by traders to manage the volatility surface and test whether they are consistent with the no-arbitrage condition and with data on the trading of options on the S&P 500 taken from the over-the-counter market. Finally we estimate the factors driving the volatility surface in a way that is consistent with the no-arbitrage condition.     

The Amount and Timing of Goodwill Write-Offs and Revaluations: Evidence from U.S. and U.K. Firms

This paper investigates criticisms that U.S. GAAP had given firms too much discretion in determining the amount and timing of goodwill write-offs. Using 1,576 U.S. and 563 U.K. acquisitions, we find little evidence that U.S. firms managed the amount of goodwill write-off or that U.K. firms managed the amount of revaluations (write-ups of intangible assets). However, our results are consistent with U.S. firms delaying goodwill write-offs and U.K. firms timing revaluations strategically to avoid shareholder approval linked to certain financial ratios.     

Modelling creative destruction: Technological diffusion and industrial structure change to 2050

Future disruptive, pervasive technologies will have important consequences for industrial structure, economic growth and the environment. Drawing on theories of technological diffusion, industrial evolution and long-term technological change this paper explores the effect of the development and diffusion of two future pervasive technologies on five industrial sectors in three regions during the 21st century in terms of their effect on economic structural change. Through semi-structured interviews with over 100 experts in the two technologies, the paper quantifies the effects of future biotechnologies and nanotechnologies on the industrial structure of the EU, USA and China in 2020 and 2050. The paper finds that as a result of the development and diffusion of future biotechnologies and nanotechnologies, some industries grow whilst others decline and some new ones emerge. The evidence suggests that the effect is different across countries and time; whereas the experts commonly believe that effect of the technologies on the industrial structure of the EU and US is likely to be similar, the effect in China is considered to be less by 2020 but the same as in the EU and US by 2050. This finding has important implications for the location of production, economic growth and energy demand in the future.     

Who cooks the books in China,and does it pay? Evidence from private,high‐technology firms

Research summary: We document the extent of fraudulent reporting among 467 private Chinese technology companies. Comparing the financial statements concurrently submitted to two different state agencies, we demonstrate a systematic gap in reported profit figures in the two sets of books. We find: (1) more than half the sampled companies report incentive‐compatible, materially discrepant profit numbers to the two agencies; (2) politically connected companies are approximately 18 percent more likely to commit fraud and those with venture capital backing are 19 percent more likely to do so; and (3) it pays to cheat. We estimate that companies who “cook” their books have considerably higher odds of receiving an innovation grant. Especially given its prevalence, we conclude that fraud can be a source of performance differential for emerging market companies. Managerial summary: We document that more than half of a sample of 467 private, Chinese technology companies engage in fraudulent financial reporting. By comparing the financial statements companies concurrently submitted to two different state agencies, we demonstrate a systematic gap in reported profit figures in the two sets of books. Relative to the companies without these attributes, we find that politically connected companies are approximately 18 percent more likely to commit fraud and those with venture capital backing are 19 percent more likely to do so. Furthermore, we show that it pays to cheat. We estimate that companies who “cook” their books have considerably higher odds of receiving a government‐sponsored innovation grant. Therefore, fraud can be a source of performance differential for emerging market companies. Copyright © 2015 John Wiley & Sons, Ltd.     

Network Effects in the Governance of Strategic Alliances

We argue that the stock of prior alliances between participantsin the biotechnology sector forms a network that serves as agovernance mechanism in interfirm transactions. To test howthis network substitutes for other governance mechanisms, weexamine how equity participation and pledged funding in strategicalliances vary with two features of the way alliance participantsare positioned in the network of past deals: proximity, or howclose two firms are to one another in the network; and centrality,or how deeply a firm is embedded in the network. As centralityand proximity increase, equity participation (measured by sizeand propensity) diminishes, whereas pledged funding increases.     

TESTING TIMES FOR CENTRAL BANKS – IS THERE ROOM FOR AUSTRIAN IDEAS AT THE TOP TABLE?

Central banks are facing an unprecedented test in the wake of the credit crisis. We briefly outline prevailing theoretical frameworks and argue that central bankers effectively have a choice between three separate frameworks: Vienna, Cambridge and Chicago. Despite Austrian economics being the least acknowledged we survey increasing exposure in mainstream media, suggesting a role for a more explicit use. We provide implications for policy‐makers and claim that Austrian ideas have a place at the top table of policy debate.