Introduction: Antitrust and Regulatory Update

Review of Industrial Organization -     

Explaining Real Commercial Rents Using an Error Correction Model with Panel Data

This paper presents rent models for retail and office property in the United Kingdom. Panel data are used covering eleven regions for 29 years, enabling us to overcome the limitations of a relatively short time series. We use an error correction model (ECM) framework to estimate long-run equilibrium relationships and short-term dynamic corrections. The combination of panel data and an ECM is an innovative approach that is still being developed in economics. We construct new supply series that combine infrequent stock data with more frequent construction data. Separate regional models are estimated for retail and office properties. The regions are then combined into a number of panels on the basis of the income and price elasticities in the long-run and short-run models. Unlike previous studies, we find no evidence of a board north–south divide between low growth and high growth regions. Like these studies we do find a London effect: in London, demand elasticities for space with respect to both price (rent) and income are much lower in magnitude. We conclude that, while the economic drivers may vary, there is no evidence of differences in the operation of the regional property markets outside London. Elasticities for retail and office are similar. Our final models are parsimonious with single measures of economic activity and of supply and always support the use of an ECM.     

Litigation, School Finance Reform, and Aggregate Educational Spending

In the past two decades, litigation in many U.S. stateshas triggered educational reform movements designed to reducethe inequalities in educational expenditures across school districts.This paper uses a panel data set across all the states from 1970–1990to examine the role of litigation and educational finance reformin determining the level of education funding in a flexible,dynamic setting. An important finding of our work is that litigationand reform have differential effects across the states, in somecases leading to increases while in other cases decreases inpredicted spending.     

The effects of precedents and client position on auditors' financial accounting policy judgment

This paper investigates whether precedents (content, perceived similarity, and source) and the client's preferred accounting policy affects audit partner and manager financial accounting policy judgments. The research employs a combination of an experiment with an analysis of archival data. The experimental results show clear support for precedent content and perceived precedent similarity affecting auditor judgment. The archival data analysis suggests that precedent source and client position may indirectly affect auditor judgment through the precedent generation process. Implications of these findings are discussed.     

Feedback loops, fair value accounting and correlated investments

This paper presents and tests a model of the price dynamics that arise when investors fail to recognize the redundancy of unrealized gains and losses (“UGLs”) that are correlated with the firm’s past returns. Consistent with the predictions of our model, our experiment shows that a firm’s prices and earnings become highly volatile when correlated investment is large and correlated UGLs are made salient by comprehensive income reporting. The results suggest that including correlated UGLs in performance numbers could induce violations of weak-form efficiency that exacerbate volatility in share prices and earnings.     

Financial control, managerial control and accountability: evidence from the British Cotton Industry, 1700–2000

The paper seeks to identify the underlying and long run historical determinants of accounting practices. These practices include the nature and relative importance of management and financial accounting techniques, together with the mediating roles of corporate finance and especially financial markets. To explain historical variation in the application of these techniques the paper introduces an analytical model. The model is based on the principles of historical materialism and hence comprises objective and subjective elements. Definitional categories are borrowed from Marx’s analysis of the workings of capitalism, and extended to include contexts where there is extensive socialization of capital, as manifested by the pooling of investments in liquid financial markets. To examine the detailed implications for accounting change, the model is then applied to a longitudinal case study of the British cotton textile industry. The paper shows that techniques of financial and managerial control and mechanisms of accountability can be explained by the dynamic interaction of capital centralization and capital socialization.     

Trust‐Preferred Securities and Insurer Financing Decisions

We analyze insurance holding company (IHC) issuance of trust‐preferred securities (TPS) from 1994 to 2013. We find that larger and more financially levered IHCs issued TPS in 1996 and 1997, as well as those that obtained financial strength ratings from A.M. Best. Abnormal stock price returns are positively related to financial distress costs, growth opportunities, and tax burden, but negatively related to size. Consistent with the pecking order theory, intent to use TPS proceeds to retire debt is positively related to abnormal stock returns, whereas intent to use proceeds to retire preferred equity is negatively related to abnormal stock returns.