Accounting Ratios and the Cross‐section of Expected Stock Returns

Under clean‐surplus accounting, the log return on a stock can be decomposed into a linear function of the contemporaneous log return on equity, the contemporaneous log dividend–price ratio (if the stock pays a dividend), and both the contemporaneous and lagged values of the log book‐to‐market equity ratio. This paper studies the implications of this decomposition for the cross‐section of conditional expected stock returns. The empirical analysis reveals that the log accounting ratios capture cross‐sectional variation in both the conditional mean and conditional variance of log stock returns, which is consistent with the decomposition. It also brings fresh insights to the relation between firm size (market equity) and conditional expected stock returns. The evidence indicates that the conditional median return increases with firm size, while the conditional return skewness decreases with firm size. Empirically, the skewness effect outweighs the median effect, leading to the well‐documented inverse relation between size and average returns. The results of out‐of‐sample tests suggest that investors could use the information provided by the observed values of the log accounting ratios to formulate more effective portfolio strategies.     

Why does shareholder protection matter for abnormal returns after reported insider purchases and sales?

We use a unique data set of more than 240,000 reported insider transactions across 15 European countries and the USA to analyze the link between country-level shareholder protection and abnormal returns following insider trades. We show that abnormal returns after insider transactions are positively correlated with country-level shareholder protection against expropriation by corporate insiders, which supports the information-content hypothesis. Market reaction to insider purchases increases with shareholder protection because shareholder protection enhances the transparency and trustworthiness of insiders’ actions, and limits possibilities for direct profit diversion, so that more information is eventually reflected in stock prices. For insider sales, shareholder protection decreases their negative information content. We conjecture that this is due to the effect of greater transparency and trustworthiness strengthening the diversification and liquidity reasons for selling in better shareholder protection countries. We find limited support for the rent-extraction hypothesis that conjectures that shareholder protection is associated with insider trading dollar profits.     

Business and Professional Ethics in Transitional Economies and Beyond: Considerations for the Insurance Industries of Poland, the Czech Republic and Hungary

This paper examines several key aspects of the ethical environment facing the insurance industries of Poland, The Czech Republic and Hungary as they complete the transition from Communist insurance systems built upon state-owned monopolies to viable private domestic insurance markets, and then seek to harmonize their markets with the single insurance market of the European Union. Since many types of ethical problems encountered during the transition are unlikely to diminish significantly as a result of either privatization or regulation of the insurance markets of these countries, measures are identified that should help to improve the ethical environments of these markets.     

Multiple Comparisons with the Best: Bayesian Precision Measures of Efficiency Rankings

A large literature measures the allocative and technical efficiency of a set of firms using econometric techniques to estimate stochastic production frontiers or distance functions. Typically, researchers compute only the precision of individual efficiency rankings. Recently, Horrace and Schmidt (Journal of Applied Economics 15, 1–26, 2000) have applied sampling theoretic statistical techniques known as multiple comparisons with a control (MCC) and multiple comparisons with the best (MCB) to make statistical comparisons of efficiency rankings. As an alternative, this paper offers a Bayesian multiple comparison procedure that we argue is simpler to implement, gives the researcher increased flexibility over the type of comparison, and provides greater, and more intuitive, information content. For these methods and a parametric bootstrap technique, we carry out multiple comparisons of technical efficiency rankings for a set of U.S. electric generating firms, estimated using a distance function framework. We find that the Bayesian method provides substantially more precise inferences than obtained using the MCB and MCC methods.Jel Classification: C11, C32, D24.     

MEASURING PRODUCTIVITY

Abstract Quantifying productivity is a conditio sine qua non for empirical analysis in a number of research fields. The identification of the measure that best fits with the specific goals, as well as being data driven, is currently complicated by the fact that an array of methodologies is available. This paper provides economic researchers with an up‐to‐date overview of issues and relevant solutions associated with this choice. Methods of productivity measurement are surveyed and classified according to three main criteria: (i) macro/micro; (ii) frontier/non‐frontier and (iii) deterministic/econometric.     

Feasible estimation of firm‐specific allocative inefficiency through Bayesian numerical methods

Both the theoretical and empirical literature on the estimation of allocative and technical inefficiency has grown enormously. To minimize aggregation bias, ideally one should estimate firm and input‐specific parameters describing allocative inefficiency. However, identifying these parameters has often proven difficult. For a panel of Chilean hydroelectric power plants, we obtain a full set of such parameters using Gibbs sampling, which draws sequentially from conditional generalized method of moments (GMM) estimates obtained via instrumental variables estimation. We find an economically significant range of firm‐specific efficiency estimates with differing degrees of precision. The standard GMM approach estimates virtually no allocative inefficiency for industry‐wide parameters. Copyright © 2009 John Wiley & Sons, Ltd.     

THE TRANSITION TO A SINGLE INSURANCE MARKET IN THE EUROPEAN UNION

Abstract: The European single insurance market incorporates the member stales of the European Union (EU). The legal framework for the market was enacted on June 30, 1994. The framework provides, above all, for a closely integrated supervisory (regulatory) system, a single license for the whole market and single home country control. Currently, some significant obstacles are slowing the realization of the European single insurance market, while several important economic policy and public interest questions remain to be answered.     

Judicial checks on corruption in the United States

Judicial oversight provides an important check on executive and legislative power. Two components of judicial oversight have been identified in the literature: judicial independence and constitutional review. Recent research using country-level data indicates that the effectiveness of constitutional review is largely determined by the rigidity of the constitution. In this paper, I use state-level data to test whether judicial independence and constitutional rigidity are related to a specific type of abuse of power by government officials: corruption in office. Specifically, I fit negative binomial regressions in which the dependent variable is the number of officials convicted for corrupt acts and the independent variables are (i) measures of judicial independence, such as judges’ remuneration, method of appointment, and term length, along with various controls or (ii) measures of constitutional rigidity, such as legislative majorities required to propose constitutional amendments and provisions for constitutional conventions or constitutional initiatives, along with various controls. I find that, in general, states with higher levels of judicial independence and more rigid constitutions have lower levels of corruption per capita than states with the opposite characteristics.