Price-Quality Correlations for Packaged Food Products

Prior investigations have indicated that relationships between price and product quality are considerably weaker for non-durables than for durables. Among non-durables, packaged food products frequently have exhibited the poorest correspondence between price and quality. This study, utilizing data from Consumers Union, analyzes the relationships between price and a measure of product quality for 679 brands in forty packaged food product classes over a fifteen year period. The study generally confirms earlier preliminary conclusions that the correlation between quality and price for packaged food products is near zero. In addition, the findings indicate that convenience foods, particularly frozen foods, display the poorest correspondence between price and product quality with more than 43 percent of all frozen food product classes exhibiting negative relationships between price and product quality. Some possible explanations for these findings and their implications for public policy are advanced.     

ORGANIZATIONAL STRUCTURE AND THE DIVERSIFICATION DISCOUNT: EVIDENCE FROM COMMERCIAL BANKING*

We provide evidence on organizational structure and performance at bank holding companies (BHC's). First, we show that a BHC's member banks benefit from access to internal capital markets. Second, we ask if these benefits are best realized within loosely structured, decentralized organizations or more consolidated, centralized firms. We find that BHC's with many subsidiaries are less profitable and have lower q ratios than similar BHC's with fewer subsidiaries. However, because we study multi‐unit firms in a single industry, our results suggest that the diversification discount reported in the corporate finance literature reflects not only industry diversification, but also organizational structure.     

Venturing beyond the IPO: Financing of Newly Public Firms by Venture Capitalists

Contrary to conventional wisdom, we document that approximately 15% of venture capitalist (VC)-backed firms raise additional capital from VCs in the five years after going public. We propose two explanations for why firms revert to VC financing post-IPO (initial public offering). First, we hypothesize that VC participation in post-IPO financing represents an efficient solution to informational problems that would otherwise constrain firms’ abilities to exploit value-increasing investments. Analyses of firm and VC characteristics, together with the finding that these investments are value-increasing for both VCs and the underlying companies, support this hypothesis. We find no support for the alternative that agency conflicts motivate these investments.     

A Market Efficiency Study of Used Car Reliability and Prices

This study explores the relationship between price and reliability in the used car market. Some of the measurement concerns, expressed by others in price-quality studies of new products, are absent because of the choice of the secondary data sources from which the relationships were derived. The finding that depreciation is independent of reliability performance raises a number of public policy issues regarding the information efficiency of the used car market.     

The Impact of Media Attention on the Use of Alternative Earnings Measures

The practice of reporting earnings measures that deviate from generally accepted accounting principles (non‐GAAP measures) has received negative attention in the media. In a period of increased regulatory concern for these reporting practices, we explore whether there has been a shift away from the use of non‐GAAP metrics. This study focuses on the Dutch situation, where regulators responded conservatively (‘light’) to the accounting scandals. This contrasts with the U.S., where regulators intervened with a radical (‘heavy’) reform of regulation. We analyse a sample of earnings press releases published in the period 2000–05 from companies listed at Euronext Amsterdam. Our findings indicate that Dutch companies report non‐GAAP measures frequently and prominently. However, companies' reporting behaviour changes after a peak in negative media attention for non‐GAAP reporting. The magnitude of the adjustments to GAAP earnings becomes smaller and companies seem to have different reasons to report non‐GAAP measures. The effect of the media attention is stronger when companies have been criticized for their non‐GAAP reporting in the press. Investors seem to have become more hesitant towards the use of non‐GAAP measures for their decision‐making after negative media attention. Together, these findings suggest that the negative media attention for non‐GAAP measures has influenced the decisions of investors and managers.     

The Effect of SOX Section 404: Costs,Earnings Quality,and Stock Prices

This paper exploits a natural quasi‐experiment to isolate the effects that were uniquely due to the Sarbanes–Oxley Act (SOX): U.S. firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million could delay the auditor's attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. On net, SOX compliance reduced the market value of small firms.     

Community-Wide Discount Programs for Older Persons: A Review and Evaluation

An evaluation of a community-wide discount program for elderly people in Richmond, Virginia is reported. The costs and benefits to both the elderly card holders and participating merchants were examined. While some elderly shoppers reported significant savings, many realized little benefit from the program. Most merchants did not vigorously promote the program, and experienced little impact on sales and profits. Implications for program management are explored.     

Initial Evidence on the Role of Accounting Earnings in the Bond Market

We document that: (1) the incidence of bond trade increases during the days surrounding earnings announcements, (2) there is a bond‐price reaction to the announcement of earnings, and (3) there is a positive association between annual bond returns and both annual changes in earnings and annual analysts' forecast errors. All of these effects are larger when earnings convey bad news or when the underlying bond is more risky. Taken together, our results suggest that the nonlinear payoff structure of bond securities affects the role of accounting earnings in the bond market.