Market Structure, Strike Activity, and Union Wage Settlements

We attempt a synthesis of the industrial relations market structure hypothesis with the modern asymmetric information theory of wage and strike outcomes. The industrial relations literature contains arguments indicating that wage settlements should be positively related to the degree of product market sales concentration and the degree of product market coverage by the union. In our empirical analysis of the periods 1970–1980 (strikes) and 1976–1980 (wages), we find that the relation between trade-adjusted sales concentration and wage settlements is positive at low and intermediate levels of concentration but negative at the highest levels of concentration. The relation is always negative for strike probabilities. We also find that the trade-adjusted per cent of the product market covered by the same union and the percentage covered by other unions are positively related to both wage settlements and strike probabilities.     

Estimating the Tax Advantage of Corporate Debt

This paper presents estimates of the effective tax value of incremental interest deductions for corporations taking into account that they may not be able to utilize all their interest deductions fully because of either insufficient taxable income or the availability of nondebt tax shields. After describing particular features of the tax code which may drive a wedge between statutory and effective tax rates for debt finance, we present estimates using the Treasury Corporate Tax Model of effective tax rates for a variety of industry groupings. Our estimates suggest that the after-tax cost of debt varies widely across industries.     

140 Million Forgotten Consumers—The Life Insurance Policyholders of America

The life insurance disclosure movement has focused almost entirely on point-of-sale disclosure, to the virtual exclusion of post-sale disclosure. Life insurance companies are therefore under pressure to provide attractive point-of-sale information. Some of the methods used to achieve this objective adversely affect long-time policyholders. Emphasis should be placed on the need for post-sale disclosure, and policyholders should be educated on how to perform their own evaluations. Publicity should be given to companies whose actions improve the position of long-time policyholders, and to companies whose actions adversely affect long-time policyholders.     

Second Chances: Subprime Mortgage Modification and Redefault

We examine how the structure of mortgage modification affects the likelihood that the mortgage redefaults over the next year. We focus on pre‐HAMP (Home Affordable Modification Program) subprime modifications where the borrower was seriously delinquent and the monthly payment was reduced. The average redefault rate over the year following the modification is 56%. Redefault rates decline with the magnitude of reduction in monthly payments, and redefault rates decline more when the payment reduction is achieved through principal forgiveness as compared to lower interest rates.     

ON THE EQUIVALENCE OF NET PRESENT VALUE AND MARKET VALUE ADDED AS MEASURES OF A PROJECT'S ECONOMIC WORTH

The metric Economic Value Added, or EVA, has recently become quite popular for analyzing company balance sheets, determining executive compensation packages and even project selection. The analysis entails comparing net after-tax operating profit against the allocated cost of capital for a given period. This paper shows, in general, that Market Value Added (MVA), which is the present value of a series of EVA values, is economically equivalent to the traditional NPV measure of worth for evaluating an after-tax cash flow profile of a project if the cost of capital is used for discounting. Additionally, insight is provided into the rationale behind EVA analysis through an interpretation of its capital and income allocation procedure for investment projects.     

READERS’ FORUM AUTOMOBILE REPLACEMENT CASE STUDIES FOR ENGINEERING ECONOMY CLASSES

Case studies have long been used to supplement material in engineering economy courses. To develop these studies is difficult in that the amount of information provided to the student may either trivialize the project or complicate it beyond reason. However, with the wealth of information on the Worldwide Web, this task has become easier. A case study involving the replacement of automobiles is presented and classroom experiences are shared.     

Audit Partners’ Role in Material Misstatement Resolution: Survey and Interview Evidence

Auditors are expected to identify and resolve material misstatements (MMs) in management's financial statements. However, beyond the audit opinion, the audit process is opaque. To address this, we independently survey 462 audit partners and interview 24 audit partners, CFOs, and audit committee members on how partners assess and address MM risk, resolve MMs, and the consequences of MMs. Partners identify MMs in approximately 9% (15%) of public (private) engagements and use qualitative factors to waive apparent MMs. Loan covenant and going-concern issues increase MM risk more than earnings benchmark issues. Partners point to a variety of both auditor and client factors as threats to audit effectiveness. Partners often rely on rapport with management and involve the national office and audit committee in resolving MMs. Partner incentives around restatements are context specific. Our results provide new insights into the auditor's role in financial reporting that are relevant to academics, practitioners, and regulators.     

Household Use of Open-End Credit to Finance Risk

The use of open-end consumer credit to finance risk is becoming increasingly popular, but has long been overlooked in the literature on household risk management. This paper derives explicit conditions under which credit financing is superior to insurance policies, product service plans, and self-insurance as a means of financing risk. Implications for consumers, manufacturers, insurers, creditors, and public policymakers are discussed.     

New Measures of Union Organizing Effectiveness

This study compares union organizing activity and success in the United States and Canada. Based largely on certification data for the period 1976–1985, he results indicate there was a substantial decline in union organizing effectiveness in the United States and the Canadian unions were more active and successful in recruiting new members than their American counterparts. The evidence suggests that labor policy in Canada is more supportive of union organizing and the achievement of first collective agreements.