The Demise of Investment Banking Partnerships: Theory and Evidence

In 1970 the New York Stock Exchange relaxed rules that prohibited the public incorporation of member firms. Investment banking concerns went public in waves, with Goldman Sachs the last of the bulge bracket banks to float. We explain the pattern of investment bank flotations. We argue that partnerships foster the formation of human capital and we use technological advances that undermine the role of human capital to explain the partnership's going‐public decision. We support our theory using a new data set of investment bank partnership statistics.     

Capital Commitment and Illiquidity in Corporate Bonds

We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, average trade execution costs have not increased notably over time. However, dealer capital commitment, turnover, block trade frequency, and average trade size decreased during the financial crisis and thereafter. These declines are attributable to bank‐affiliated dealers, as nonbank dealers have increased their market commitment. Our evidence indicates that liquidity provision in the corporate bond markets is evolving away from the commitment of bank‐affiliated dealer capital to absorb customer imbalances, and that postcrisis banking regulations likely contribute.     

Empirical comparison of subjective probability elicitation methods*

Abstract. The direct magnitude and bisection subjective probability elicitation methods are compared based on the environmental (relative frequency) accuracy of the resulting probabilities and the acceptability of the elicitation methods. Each subject utilized, and provided acceptability indications for, both methods. Interactive elicitation software, including histogram-like graphical displays of the probabilities for both elicitation methods, were provided to aid the subjects and provide for a more refined comparison of the methods. Second-year graduate business students, knowledgeable about both the task context and subjective probabilities, completed the experiment. Direct elicitation of probabilities provided significantly more accurate subjective probabilities than did the bisection method and the former method also was significantly more acceptable to the subjects.     

The sensitivity of financial distress prediction models to departures from normality*

Abstract. This research empirically investigated the effect of nonnormality on financial stress prediction. The analysis included the application of probit, logit and multiple discriminant analysis to prediction models found in previous literature, and also involved separate samples for both bankrupt and problem-status companies. Finally, the statistical techniques were evaluated under extreme conditions of nonnormality. Two basic procedures were used to modify the ratio distributions to achieve normality. These included a square-root transformation procedure and an outlier deletion procedure. Results were compared using both a univariate and a multivariate technique to identify and remove outliers. The results indicate the general sensitivity of the multiple discriminant analysis technique to departures from normality and the sensitivity of the logit and probit techniques to extreme nonnormality. The data indicate that researchers interested in assessing classification accuracy might benefit by testing for distributional sensitivity using procedures outlined in this research. Resumé. Les auteurs ont procédé à une analyse empirique de l'incidence des écarts par rapport à la normalité sur la prévision des contraintes financières. L'analyse comporte l'application du probit, du logit et de l'analyse à discriminants multiples aux modèles prévisionnnels que l'on trouve dans des publications, et l'on a eu recours à des échantillons distincts tant pour les sociétés en situation de faillite que pour les sociétés en difficulté. Enfin, les techniques statistiques ont été évaluees dans des conditions extrêmes d'écart par rapport à la normalité. Deux méthodes fondamentales ont été utilisées pour modifier les distributions de ratios de façon à parvenir à la normalité. Ces méthodes comprennent un procédé de transformation de la racine carrée et un procédé d'élimination des éléments isolés. Les résultats obtenus ont été comparés à l'aide d'une technique univariée ainsi que d'une technique multivariée pour repérer et supprimer les éléments isolés. Les résultats indiquent la sensibilité générale de la technique d'analyse à discriminants multiples aux déviations par rapport à la normalité et la sensibilité des techniques logit et probit aux écarts extrêmes par rapport à la normalité. Ces données révèlent que les chercheurs qui s'intéressent à l'évaluation de l'axactitude de la classification pourraient tirer profit d'une vérification de la sensibilité de la distribution au moyen des méthodes décrites par les auteurs.     

Comment on: “Distinguishing the two forms of the constant percentage learning curve model”

Abstract. Several points relating to the use of learning curves in management accounting are discussed and clarified. There is no underlying general theory that suggests that learning should follow a particular model in a particular situation. A number of more sophisticated models which are conceptually satisfying and have given good results in practice, but are not discussed in the management accounting literature, are briefly described. Some limitations on the methods suggested to identify the learning curve model and determine its parameters in a particular application are discussed. Some potential limitations in using derived models for estimation in practice are also presented. Résumé. L'auteur analyse et clarifie plusieurs points reliés à l'usage des courbes d'apprentissage en comptabilité de management. Aucune théorie générale sous-jacente ne suggère que l'apprentissage doive se conformer à un modèle particulier dans une situation particulière. L'auteur décrit brièvement des modèles plus raffinés, satisfaisants sur le plan conceptuel et ayant donné de bons résultats dans la pratique, mais que n'abordent pas les écrits en compatabilité de management. Il traite également de certaines des limitations des méthodes suggérées pour cerner le modèle de la courbe d'apprentissage et en déterminer les paramètres dans une application particulière. Enfin, il présente des limitations potentielles à l'usage de modèles dérivés aux fins d'estimation dans la pratique.     

THE GREAT DEPRESSION RECONSIDERED: IMPLICATIONS FOR TODAY

This paper reexamines the Great Depression of 1929–1933 within an analytical framework based on the terms of employment for labor. It shows that in areas such as the U.S. farm and Japanese industrial sectors where labor was employed organically—that is, as partners in common enterprise—costs proved flexible, prices fell, and output and employment held up in line with the predictions of Say's Law. Where labor was not employed organically—that is, labor was hired—output collapsed, unemployment mounted, and Say's Law failed. The apparent reason is that any hired input, capital or labor, demands downwardly rigid rates of pay. When demand softens, cost rigidity constrains price cuts, and firms must instead lay off labor. The paper also shows that given organic labor, even oligopolistic rivalry is sufficient to assure that prices will fall enough to sustain output and employment.     

The Variability of IPO Initial Returns

The monthly volatility of IPO initial returns is substantial, fluctuates dramatically over time, and is considerably larger during “hot” IPO markets. Consistent with IPO theory, the volatility of initial returns is higher for firms that are more difficult to value because of higher information asymmetry. Our findings highlight underwriters’ difficulty in valuing companies characterized by high uncertainty, and raise serious questions about the efficacy of the traditional firm‐commitment IPO process. One implication of our results is that alternate mechanisms, such as auctions, could be beneficial for firms that value price discovery over the auxiliary services provided by underwriters.