THE BENEFITS OF STRATEGIC HOMOGENEITY AND STRATEGIC HETEROGENEITY: THEORETICAL AND EMPIRICAL EVIDENCE RESOLVING PAST DIFFERENCES

Past research on the relationship between strategic variety and industry profitability has argued for either high homogeneity or high heterogeneity. In this paper, we review the literature on strategic variety and use it to develop hypotheses suggesting that the relationship between strategic variety and average industry profits is curvilinear. Based on our analysis of 61 industries, we find empirical support for our hypotheses, suggesting that very high levels of heterogeneity or homogeneity are more likely associated with industry profitability, while the industries in our sample displaying moderate levels of strategic variety are most likely to suffer from widespread financial losses.     

International Stock Return Comovements

We examine international stock return comovements using country‐industry and country‐style portfolios as the base portfolios. We first establish that parsimonious risk‐based factor models capture the data covariance structure better than the popular Heston–Rouwenhorst (1994) model. We then establish the following stylized facts regarding stock return comovements. First, there is no evidence for an upward trend in return correlations, except for the European stock markets. Second, the increasing importance of industry factors relative to country factors was a short‐lived phenomenon. Third, large growth stocks are more correlated across countries than are small value stocks, and the difference has increased over time.     

On the Predictability of Stock Returns: An Asset-Allocation Perspective

Sample evidence about the predictability of monthly stock returns is considered from the perspective of a risk-averse Bayesian investor who must allocate funds between stocks and cash. The investor uses the sample evidence to update prior beliefs about the parameters in a regression of stock returns on a set of predictive variables. The regression relation can seem weak when described by usual statistical measures, but the current values of the predictive variables can exert a substantial influence on the investor's portfolio decision, even when the investor's prior beliefs are weighted against predictability.     

Resource Allocation Decisions in Audit Engagements*

Abstract. We examine the empirical relationship between auditors' resource allocations and selected engagement characteristics. Our measure of resources is hours of grades of labor (partner, manager, etc.) “charged” to audit activities (planning, internal control evaluation, etc.). Engagement characteristics examined are client size, industry affiliation, client complexity, risk, auditor provision of management advisory services to the auditee, and degree of control reliance. The data were obtained from publicly available sources and a survey developed and administered by an international public accounting firm. We find the cross-sectional variation in the labor charged to various audit activities can be explained by engagement characteristics found to be important in prior studies on audit fees, total labor inputs, and the mix of labor inputs. Measures of client size, industry, complexity, risk, and services provided are associated with changes in the allocation of labor among audit activities. We find no substitution of internal control review/testing for substantive testing on reliance audits. Task assignments vary by rank. Measures of client size, complexity, risk, and services provided are associated with activity-specific changes in the labor mix.     

FISCAL REFORM IN SWEDEN: WHAT GENERATIONAL ACCOUNTING TELLS US

Generational accounts answer the simple question of how much future generations will have to pay in net taxes as compared to today's generations. This paper briefly reviews the concept of generational accounting and provides estimates for Sweden, where public finances deteriorated significantly after 1990. The results suggest that the measures adopted since 1994 should improve dramatically the relative position of future generations, who may nevertheless be expected to face large net tax bills.     

Learning by Observing: Information Spillovers in the Execution and Valuation of Commercial Bank M&As

We offer a new explanation for why academic studies typically fail to find value creation in bank mergers. Our conjectures are predicated on the idea that, until recently, large bank acquisitions were a new phenomenon, with no best practices history to inform bank managers or market investors. We hypothesize that merging banks, and investors pricing bank mergers, learn by observing information that spills over from previous bank mergers. We find evidence consistent with these conjectures for 216 M&As of large, publicly traded U.S. commercial banks between 1987 and 1999. Our findings are consistent with semistrong stock market efficiency.     

Accounting Information, Disclosure, and the Cost of Capital

In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the Capital Asset Pricing Model and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures affect the firm's assessed covariances with other firms' cash flows, which is nondiversifiable. The indirect effect occurs because higher quality disclosures affect a firm's real decisions, which likely changes the firm's ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market. We show that this effect can go in either direction, but also derive conditions under which an increase in information quality leads to an unambiguous decline in the cost of capital.     

An Empirical Analysis of the Role of the Medium of Exchange in Mergers

In empirical studies of differences between firms which are acquired and those which are not, researchers typically divide firms into two groups-acquired and nonacquired. In this paper, we argue that cash takeovers may be sufficiently different from noncash acquisitionst hat failure to distinguish between them may lead to inappropriateg eneralizations. We provide evidence from the mid 1970s that three categories of firms can be distinguished:n onacquireda, cquiredi n a cash takeover, and acquired in an exchange of securities.