Underwriter reputation,earnings management and the long‐run performance of initial public offerings

This study contributes to the extant literature on the nature of earnings management surrounding initial public offerings (IPOs) by investigating the role of underwriter reputation. We argue that prestigious underwriters will protect their reputation by carefully monitoring and certifying financial information on IPO firms, thereby limiting any potential earnings manipulation. As a result, those IPO firms that are associated with more prestigious underwriters are likely to exhibit substantially less‐aggressive earnings management. Conversely, we find the existence of a negative relationship between earnings management and the post‐offer performance of an IPO firm’s stocks only for those firms associated with less‐prestigious underwriters.     

The Sophisticated and the Simple: the Profitability of Contrarian Strategies

A variety of variables have been used to form contrarian portfolios, ranging from relatively simple measures, like book‐to‐market, cash flow‐to‐price, earnings‐to‐price and past returns, to more sophisticated measures based on the Ohlson model and residual income model (RIM). This paper investigates whether: (i) contrarian strategies based on RIM perform better or worse than those based on the Ohlson model; (ii) contrarian strategies based on more sophisticated valuation models (e.g. Ohlson and RIM) perform much better than the relatively simpler ranking variables that have been used so extensively in the finance literature. Given that the RIM and Ohlson models require greater information inputs and technical know‐how, and make different implicit assumptions on future abnormal earnings, it is important to ascertain if they offer significantly greater contrarian profits to outweigh the increased costs that they entail. Indeed, our surprising finding is that simple cash flow‐to‐price measures appear to do almost as well as the more sophisticated alternatives. One would have expected the sophisticated models to significantly outperform the simple cash flow to price model for the reasons given by Penman (2007) .     

Reconsidering the Relationship between Inflation and Relative Price Variability

It has long been popularly believed that the relationship between inflation and relative price variability (RPV) is positive and stable. Using disaggregated CPI data for the United States and Japan, however, this study finds that the relationship is neither linear nor stable over time. The overall relationship is approximately U‐shaped around a nonzero threshold inflation rate. RPV therefore changes not with the inflation rate per se, but with the deviation of inflation from the threshold inflation rate. More importantly, the relationship is by no means stable over time but instead varies significantly in a way that coincides with regime changes of inflation or monetary policy. The relationship was positive during the period of high inflation of the 1970s and the early 1980s, as has been documented by a number of previous studies, whereas it takes a U‐shape profile during the Great Moderation. The results are robust to the use of core inflation, which excludes the traditionally volatile prices of food and energy. This paper then presents a modified version of the Calvo‐type sticky price model to describe the observed empirical regularities. Simulation experiments show that the modified Calvo model fits the data well, and that the underlying relationship hinges upon the degree of price rigidity, which is systematically related to inflation regime. For countries and periods with low inflation rates, the relationship takes a U‐shape as price adjustment is more sticky. In a high‐inflation environment, when price setting becomes more flexible, the U‐shaped profile vanishes.     

Come Rain or Shine: Evidence on Flood Insurance Purchases in Florida

This article provides a detailed analysis of the operation of the National Flood Insurance Program (NFIP) in Florida, which accounts for 40 percent of the NFIP portfolio. We study the demand for flood insurance with a data set of more than 7.5 million NFIP policies‐in‐force (the largest ever studied) for the years 2000–2005, as well as all NFIP claims filed in Florida. We answer four questions: What are the characteristics of the buyers of flood insurance? What types of contracts (deductibles and coverage levels) are purchased? What are the determinants of claims payments? How are prices determined and how much does NFIP insurance cost?     

Noise Trading and the Management of Operational Risk; Firms,Traders and Irrationality in Financial Markets*

abstract Efficient market models cannot explain the high level of trading in financial markets in terms of asset portfolio adjustment. It is presumed that much of this excessive trading is irrational ‘noise’ trading. A corollary is that there must either be irrational traders in the market or rational traders with irrational aberrations. The paper reviews the various attempts to explain noise trading in the finance literature, concluding that the persistence of irrationality is not well explained. Data from a study of 118 traders in four large investment banks are presented to advance reasons why traders might seek to trade more frequently than financial models predict. The argument is advanced that trades do not simply occur in order to generate profit, but it does not follow that such trading is irrational. Trading may generate information, accelerate learning, create commitments and enhance social capital, all of which sustain traders' long term survival in the market. The paper treats noise trading as a form of operational risk facing firms operating in financial markets and discusses approaches to the management of such risk.     

Vacaciones y licencias en países desarrollados: los Estados Unidos a la zaga en cuanto a equilibrio entre vida profesional y vida familiar

Los autores comparan las normativas sobre vacaciones y licencias susceptibles de facilitar el equilibrio entre vida profesional y familiar de Australia, Canadá, República de Corea, Estados Unidos, Europa occidental y Japón utilizando un índice compuesto para clasificarlas. Los Estados Unidos figuran en último lugar: la concesión de vacaciones anuales al trabajador no es obligatoria y las licencias por motivos familiares se limitan a 12 semanas al año. Este bajo nivel de reglamentación podría deberse, según los autores, a una concepción mercantilista del empleo sumada a la creencia de que empleador y trabajadores tienen idéntica capacidad de negociación, visión no compartida por las demás democracias industrializadas.     

Real Asset Valuation under Imperfect Competition: Can We Forget About Market Fundamentals?

Real assets are usually valued by computing the stream of profits they can bring to a price‐taking firm in a liquid market. This method ignores market fundamentals by assuming that all the relevant information is included in the spot price. Our article analyses the bias resulting from such an approach when the market is imperfectly competitive. We propose a stylised two‐period model of the natural gas market with no uncertainty, focusing on strategic interactions between two types of oligopolistic players—pure traders and suppliers with downstream customers—who have access to storage. We show that the true value of storage capacity is not the same for traders and for suppliers. Comparing the latter value with the traditional price‐taking valuation reveals a systematic bias that tends to induce underinvestment.     

Liberty and the Post‐utilitarian Society

Utilitarian foundations for limited government are shaky insofar as they assume rational and consistent individuals. Recently economists’ assumption of rational actors has come under sustained attack. Behavioural economics has suggested that people are plagued by irrational biases and inconsistencies. These developments have led to a post‐utilitarianism which is held to justify paternalistic interventions by the state via ‘sin taxes’, direct bans or new obligations. Individual responsibility is seriously undermined, as is faith in markets. Supporters of individual freedom need to move away from utilitarian reasoning, reassert core values of autonomy and responsibility, and define strict limits on the scope of government intervention.     

Executives’ Orientations as Indicators of Crisis Management Policies and Practices*

ABSTRACT The paper examines effects of executives’ orientations on crisis management awareness and practices, drawing on the simplicity and paradox management theories. It is suggested that a focus on single‐sided management constitutes an antecedent of crisis proneness. Employing a set of key corporate domains and based on a holistic organizational approach, the study aims at assessing the extent to which companies are crisis prone or prepared. In a sample of 82 Istaeli business and not‐for‐profit organizations it was found that human resource management, strategy, structure, and unlearning factors significantly predicted crisis preparedness. These results suggest that unlearning, despite a mere allusion to this correlate in the simplicity and paradox management theories, correlates better with crisis preparedness. By contrast, traditional strategy‐related and structural effects were marginally related to crisis management policies. Implications and suggestions for further research are proposed.