The Impact of Union Wage Concessions on Union Premiums

Previous research showing that union wage premiums actually rose from the late 1970s to the mid-1980s suggests that concession bargaining was more media hype than the result of a fundamental change in collective bargaining. Our study found that nonrandom attrition of workers from the union sector does lead to an upward bias in the measured growth of union premiums, but concession bargaining was not a sufficiently widespread occurrence to reduce the size of union premiums during the sample period.     

A Simple Formula for the Expected Rate of Return of an Option over a Finite Holding Period

Under conditions consistent with the Black-Scholes formula, a simple formula is developed for the expected rate of return of an option over a finite holding period possibly less than the time to expiration of the option. Under these conditions, surprisingly, the expected future value of a European option, even prior to expiration, is shown equal to the current Black-Scholes value of the option, except that the expected future value of the stock at the end of the holding period replaces the current stock price in the Black-Scholes formula and the future value of a riskless invesment of the striking price replaces the striking price. An extension of this result is used to approximate moments of the distribution of returns from an option portfolio.     

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.     

Nonparametric Tests of Alternative Option Pricing Models Using All Reported Trades and Quotes on the 30 Most Active CBOE Option Classes from August 23, 1976 through August 31, 1978

The tests reported here differ in several ways from those of most other papers testing option pricing models: an extremely large sample of observations of both trades and bid-ask quotes is examined, careful consideration is given to discarding misleading records, nonparametric rather than parametric statistical tests are used, reported results are not sensitive to measurement of stock volatility, special care is taken to incorporate the effects of dividends and early exercise, a simple method is developed to test several option pricing formulas simultaneously, and the statistical significance and consistency across subsamples of the most important reported results are unusually high. The three key results are: (1) short-maturity out-of-the-money calls are priced significantly higher relative to other calls than the Black-Scholes model would predict, (2) striking price biases relative to the Black-Scholes model are also statistically significant but have reversed themselves after long periods of time, and (3) no single option pricing model currently developed seems likely to explain this reversal.     

From T-Bills to Common Stocks: Investigating the Generality of Intra-Week Return Seasonality

The authors investigate the extent to which intra-week seasonality still exists and whether its pattern is uniform across three stock indices and Treasury bonds with seven different maturities. They find that intra-week seasonality continues to be significant and that its pattern is not uniform, either between the stock indices and the Treasury bonds or even among the bonds alone. A pattern shared by stocks and bonds is that Monday returns become increasingly negative with maturity. These findings suggest that neither institutional nor general-equilibriumex planations by themselves can explain the pattern of intra-week seasonality in securities markets.     

Testing the CAPM with Time-Varying Risks and Returns

This paper draws on Engle's autoregressive conditionally heteroskedastic modeling strategy to formulate a conditional CAPM with time-varying risk and expected returns. The model is estimated by generalized method of moments. A CAPM that allows mean excess returns to shift in January survives generalized method of moments specification tests for a number of omitted variables. However, a residual dividend yield component is found to remain in the excess returns of smaller firms. We find significant monthly and quarterly components in the risk premia and beta estimates.