Accounting Choice, Home Bias, and U.S. Investment in Non-U.S. Firms

This paper examines the relation between accounting choice and U.S. institutional investor ownership in non‐U.S. firms. We predict that U.S. investors exhibit home bias in their preference for accounting methods conforming to U.S. Generally Accepted Accounting Principles (GAAP) because such methods are more familiar, reduce information processing costs, and are perceived as higher quality. We find that firms exhibiting higher levels (changes) of U.S. GAAP conformity have greater levels (changes) of U.S. institutional ownership. Lead‐lag regressions suggest that increases in U.S. GAAP conformity precede increases in U.S. investment, but changes in U.S. institutional holdings do not precede changes in accounting methods. We also find that the positive relation between U.S. GAAP conformity and U.S. investment holds regardless of a firm's visibility to U.S. investors (e.g., American Depositary Receipt listing, stock index membership, analyst following, firm size). However, we find that U.S. GAAP conformity has a significantly greater impact among firms already visible to U.S. investors.     

Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default

Homeowners at risk of default face a debt overhang that reduces their incentive to invest in their property: in expectation, some value created by investments in the property will go to the lender. This agency conflict affects housing investments. Homeowners at risk of default cut back substantially on home improvements and mortgage principal payments, even when they appear financially unconstrained. Meanwhile, they do not reduce spending on assets that they may retain in default, including home appliances, furniture, and vehicles. These findings highlight an important financial friction that has stifled housing investment since the Great Recession.     

PERCEIVED MANAGERIAL DISCRETION: A STUDY OF CAUSE AND EFFECT

The notion that managers encounter differing levels of discretion across industries and organizations is becoming central to discussions of strategy formulation and implementation. However, discretion can be exercised or created only to the extent it is perceived, and theories of cognition and decision making suggest that managers’ perceptions of discretion may vary significantly. Despite the importance of perceptions to Hambrick and Finkelstein’s (1987) theoretical model of managerial discretion, no empirical tests examining perceived discretion have been published to date. Drawing on theories of issue interpretation and impression management, we find that managers differ systematically in the amount of discretion they perceive. Specifically, we find support for the predicted relationship between locus of control, a stable personality difference, and perceptions of managerial discretion. We also find that perceived discretion predicts managerial power, but only in situations in which the manager actually has little discretion. The dynamic model presented and tested here suggests that managers, in part through impression management activities and their ability to attend to critical contingencies, may both increase their power and enlarge their latitude for action. Implications for strategy formulation and implementation are discussed. © 1997 by John Wiley & Sons, Ltd.     

HAVE INSTITUTIONAL INVESTORS DESTABILIZED EMERGING MARKETS?

In the past few years, there has been a large increase in portfolio capital flows into emerging markets, mostly fueled by mutual funds and other institutional investors. Based on a simple variance ratio test, this paper finds that emerging stock markets as a group experienced a sharp increase in autocorrelation in total returns at a time when institutional investors began to expand significantly their holdings in these markets. These results are consistent with the view that institutional investor sentiment toward emerging markets as an asset class can at times play a critical role in determining asset prices, with shifts in sentiment resulting in periods of bubble-like booms and busts and asset price overshooting.     

The Changing Information Seeker: A Study of Attitudes Toward Product Test Reports–1970 and 1976

Systematic samples of subscribers to Consumer Reports were surveyed in 1970 and 1976 to obtain their evaluations of the information they had received. Responses are compared between the two years, stressing the environmental context of each measure. Attitudes toward characteristics of the information and satisfaction with Consumer Reports are found to be high in both years, but ratings are significantly less favorable in 1976. Implications for Consumers Union management, other policy-makers, and further research are discussed.     

Bad Times,Good Credit

Banks’ limited knowledge about borrowers’ creditworthiness constitutes an important friction in credit markets. Is this friction deeper in recessions, thereby contributing to cyclical swings in credit, or is the friction reduced, as bad times reveal information about firm quality? We test these alternative hypotheses using internal ratings data from a large Swedish cross-border bank and credit scores from a credit bureau. The ability to classify corporate borrowers by credit quality is greater during bad times and worse during good times. Soft and hard information measures both display countercyclical patterns. Our results suggest that information frictions in corporate credit markets are intrinsically countercyclical and not due to cyclical variation in monitoring effort. The presence of countercyclical information frictions provides a rationale for countercyclical provisions or capital in banks to smooth credit cycles.     

CALCULATING DEVELOPER CHARGES FOR URBAN INFRASTRUCTURE: A FEASIBLE METHOD FOR APPLYING MARGINAL COST PRICING

This paper considers the application of marginal cost pricing to the calculation of developer charges, also termed exactions or impact fees, in the contemporary urban environment. We derive an “ideal” measure of long-run marginal capacity cost (MCC) of urban infrastructure expansion. Given practical difficulties in estimating MCC, we develop an alternative Adjusted Amortization Method (AAM) with less onerous data requirements. Using a simulation model we compare the magnitudes of developer charges derived from the ideal MCC measure, our AAM method and three other common approaches to the measurement of MCC. Our results show that an adjusted version of the AAM formula performs very well.     

Economic Determinants and Information Environment Effects of Earnouts: New Insights from SFAS 141(R)

Contingent considerations (earnouts) in acquisition agreements provide sellers with future payments conditional on meeting certain conditions. Prior research provides evidence that acquiring firms use earnouts to minimize agency costs associated with acquisitions. Using earnout fair value information, recently mandated by SFAS 141(R), we provide new insights into the economic determinants to include earnout provisions in acquisition agreements, including motivations to resolve moral hazard and adverse selection problems, bridge valuation gaps, and retain target firm managers. We document variations in initial earnout fair value estimates and earnout fair value adjustments that correspond with these underlying motivations. We also provide evidence that target managers stay longer with the firm after the acquisition when earnouts are included primarily to retain target managers. Finally, we demonstrate that earnout fair value adjustments required by SFAS 141(R) provide valuable information to market participants and are negatively associated with the likelihood of contemporaneous and future goodwill impairments.     

Style‐Related Comovement: Fundamentals or Labels?

I find that economically meaningless index labels cause stock returns to covary in excess of fundamentals. S&P/Barra follow a simple mechanical procedure to define their Value and Growth indices. In doing so, they reclassify some stocks from Value to Growth even after their book‐to‐market ratios have risen, and vice versa. Such stocks begin to covary more with the index they join and less with the index they leave. Backdated constituent data from Barra reveal no such label‐related shifts in comovement during the 10 years prior to the actual introduction of the indices in 1992.