Common Divisors,Payout Persistence,and Return Predictability

In the finance and accounting literature, the use of a common divisor in the dependent and independent variables of ordinary least‐squares regressions is commonplace. What goes less recognized, however, is that their use induces spurious correlation between the regression variables and invalidates standard testing procedures. This paper analyses the common divisor problem by outlining analytical results concerning the expected R² and providing a simulation procedure that generates test statistics from which critical values can be drawn. To illustrate the procedure, we re‐investigate payout yield return predictability findings that have appeared in the literature and show that the results are spurious.     

The Interaction between Internal Control Assessment and Substantive Testing in Audits for Fraud*

We examine the interaction between internal control assessments and substantive testing in a model of fraud detection. The purpose of our study is to examine a two‐stage model of the auditor‐manager interaction in which the auditor assesses the “likelihood” or possibility of fraud in the first stage and conducts substantive tests in the second stage. We examine the allocation of audit resources across these two distinct facets of the audit. We find that, regardless of the auditor's allocation, the probability of undetected fraud remains the same, but the allocation of some audit resources to internal control assessment may provide cost savings for the auditor.     

What Factors Lead Management to Support or Oppose Employee Participation—With and Without Works Councils? Hypotheses and Evidence from Germany

This paper provides the first econometric analysis to distinguish between works councils in establishments where managers have a positive or negative view toward employee involvement in decision making. We similarly distinguish between establishments where no council is present in which management supports or does not support worker participation. We stress the potential role of works councils and participation in motivating employees. Our theoretical analysis and empirical results from German manufacturing establishment data show that the structure of the workforce, principal‐agent problems between owners and managers, collective bargaining, direct employee involvement, human resource management practices, and market strategy and innovativeness all play important roles. Some conflicting conclusions in the works council literature may be due to the failure to distinguish among industrial relations participation regimes characterized by cooperative or uncooperative relationships between works councils and management.     

Precautionary Saving and Endogenous Labor Supply with and without Intertemporal Expected Utility

We analyze precautionary saving behavior in a framework with labor and nonlabor income risks, an endogenous supply of labor, and a representation of preferences that disentangles attitudes toward risk, attitudes toward intertemporal substitution, and ordinal preferences for consumption and leisure. This preference structure allows us to disentangle and to describe in an intuitive way the different forces that determine precautionary saving “in the small” and “in the large.”     

Legitimating Inequality: Fooling Most of the People All of the Time

Over the three decades leading up to the crisis of 2008, inequality dramatically increased in the United States and Great Britain. What stands out, but is seldom noted, is that this occurred within democracies where the relative losers—the overwhelming majority—could in principle have used the political system to block or reverse rising inequality. Why did they not do so? A glance at history reveals that peoples have only very infrequently contested inequality because they were led to believe that their inferior status in terms of income, wealth, and privilege was just, that it was not really so bad, or that it was necessary for their future well‐being. Ideological systems legitimated a status quo of inequality, or in more modern times even increasing inequality. This article surveys the manner in which inequality has been historically legitimated, first predominantly by religion, then predominately by economic thought. Attention is then focused on the manner in which contemporary economic science and its popular interpretations in the media have served to legitimate inequality in the U.S. since the mid‐1970s. The article concludes with a reflection on the unique conditions that enable the legitimation of inequality to be delegitimated.     

The Priority Structure of Corporate Liabilities

Most discussions of corporate capital structure effectively assume that all debt is the same. Yet debt differs by maturity, covenant restrictions, conversion rights, call provisions, and priority. Here, we examine priority structure across a sample of 4995 COMPUSTAT industrial firms from 1981 to 1991. We analyze the variation in the use of capital leases, secured debt, ordinary debt, subordinated debt, and preferred stock both as a fraction of the firm's market value and as a fraction of total fixed claims. Our evidence provides consistent support for contracting cost hypotheses, mixed support for tax hypotheses, and little support for the signaling hypothesis.     

Australia and the Pacific Economy*

The industrialization and growth of East Asian countries has shifted the centre of world trade and economic activity towards the Pacific. There has already been a huge redirection of Australia's trade and external economic interests towards the region, based importantly on the emergence of Japan as a major economic power. Australia's future economic prospects will be significantly determined by how it manages its trade policy interests in the context of continuing East Asian industrialization. The most promising Australian trade policy approach is one which allies Australia's trading interests to those of East Asian countries in seeking to maintain an open non-discriminatory trade regime, supportive of the transformation of trade specialization necessary to the industrialization of resource-deficient countries, and which marries that objective to the liberalization of her own and Pacific country markets.