The high volume return premium: Cross-country evidence

We examine the high volume return premium across 41 different countries and find it to be a phenomenon found in both developed and emerging markets. The premium is not caused by systematic differences in risk or liquidity. Using Merton's (1987) investor recognition hypothesis as a guide, we find the magnitude of the premium is generally associated with country and firm characteristics hypothesized to affect returns subsequent to a change in a stock's visibility. We also characterize the time-series properties of the premium and consider economic trading strategies.     

Price Stability and the Case for Flexible Exchange Rates

We revisit Friedman’s case for flexible exchange rates in a small open economy with several distortions and rigidities and a variety of domestic and external shocks. We find that, for external shocks, the flexible exchange rate regime outperforms the fixed regime independent of the source of domestic nominal rigidities provided that the monetary authorities pursue a policy of strict inflation targeting. For domestic supply shocks, a joint policy of a flexible exchange rate and strict inflation targeting fares well when the main source of nominal rigidities is in the domestic goods markets, but not if rigidities arise in the labor markets.     

Do firms understate stock option-based compensation expense disclosed under SFAS 123?

Focusing on the four key option pricing model inputs—expected option life, expected stock price volatility, expected dividend yield, and the risk-free interest rate for the expected life of the option—this study finds that firms understate option value estimates and, thus, stock-based compensation expense disclosed under SFAS 123. As predicted based on incentives and opportunities for management to understate SFAS 123 expense, the understatement of option value estimates is increasing in proxies for the magnitude of the expense, is greater for firms with weaker corporate governance, and, to a lesser extent, is increasing in the excessiveness of executive pay. The findings are strongest for the expected option life and expected stock price volatility input assumptions, consistent with firms’ greater latitude in determining these inputs. We find weaker evidence of understatement associated with the expected dividend yield assumption, and none for the interest rate assumption, consistent with these inputs being less amenable to discretion. Taken together, our findings raise some concern that the exercise of management discretion adversely affects the overall reliability of SFAS 123 expense.

Healthcare resource utilization by patients with treatment-refractory myasthenia gravis in England

Aims: To examine healthcare resource utilization associated with refractory myasthenia gravis (MG) in England.

Materials and methods: This was a retrospective cohort study of linked data from the Clinical Practice Research Datalink and the Hospital Episode Statistics database collected between 1997 and 2016. Included patients were ≥18?years of age at the index MG diagnosis. Patients with refractory MG were identified using an algorithm based on treatments received. Healthcare resource utilization since the index date was compared between refractory and non-refractory cohorts.

Results: The study included 1149 patients with MG, of whom 66 (5.7%) were refractory. Sex and age at diagnosis did not significantly differ between the refractory and non-refractory cohorts. Rates of healthcare resource utilization per person-year were significantly higher (p?p?Limitations: The algorithm for identifying refractory patients did not include clinical criteria. Also, treatments administered in hospitals or by specialists were not available in the databases.

Conclusions: Patients in England with refractory MG more often visit healthcare providers, are hospitalized and visit an emergency room than patients with non-refractory MG.     

The initiation of audit committee interlocks and the contagion of accounting policy choices: evidence from special items

Review of Accounting Studies - We document that the initiation of audit committee interlocks is associated with contagion in reported special items. We argue that this is, in part, attributable to...     

THE IMPACT OF BODY WEIGHT ON OCCUPATIONAL MOBILITY AND CAREER DEVELOPMENT

This article examines the relationship between individuals' weight and employment decisions over the life cycle. I estimate a dynamic stochastic model of individuals' annual choices of occupation, hours worked, and schooling. Evidence suggests that heavier individuals face higher switching costs when transitioning into white‐collar occupations, earn lower returns to experience in white‐collar occupations, and earn lower wages in socially intensive jobs. I simulate a hypothetical antidiscrimination policy treating obese workers as a protected class. Although such a policy would reduce gaps in occupational attainment, it would have little effect on the observed divergence in wages between obese and nonobese workers.     

Executive stock-based compensation and firms’ cash payout: the role of shareholders’ tax-related payout preferences

We hypothesize that the structure of executive stock-based compensation helps to align managers’ payout choices with shareholders’ tax-related payout preferences. Specifically, stock options, which are not dividend-protected, can deter self-interested executives from using dividends as a form of payout. In contrast, restricted stock, which is dividend-protected, is more likely to induce the use of dividends. Relatedly, shareholders’ preferences for dividends, which are taxed as ordinary income, can depend on the income tax consequences of dividends relative to those of long-term capital gains. To test our hypothesis, we investigate whether the exogenous changes in shareholders’ tax-related payout preferences following the 2003 dividend tax rate reduction result in predictable shifts in executive stock-based compensation and in managers’ payout choices. Consistent with our prediction, we find a positive relation between the increased use of dividends in firms’ payouts and the increased (decreased) use of restricted stock (stock options) in executive compensation, particularly for firms with a greater percentage ownership by individual investors and with lower costs associated with modifying the structure of their compensation plans. Our investigation of the role of shareholders’ tax-related payout preferences in the design of executive stock-based compensation extends the prior literature that has largely focused on the role of incentive contracts in inducing managerial effort, risk taking, and retention.     

Statement of the Financial Economists Roundtable: Bank Capital as a Substitute for Prudential Regulation

The Financial CHOICE Act recently passed by the House proposes to create an “off‐ramp” that would allow banks to escape burdensome prudential regulation if the ratio of their equity capital to their total assets is 10% or more. The Financial Economists Roundtable supports this idea as a means of reducing regulatory costs, but believes some additional safeguards are needed. A capital ratio of 10% may not be high enough to discourage banks from excessive risk taking. A solution is to have two capital requirements for banks choosing the off‐ramp: one absolute (as proposed in the act) and one risk‐based. The FER believes that many banks will prefer this regime to the current burdensome prudential regulation, especially if regulators simplify the setting of risk weights and make them more rule‐based. Regulators setting minimum capital requirements should consider not only a bank’s stand‐alone risk, but also the systemic risk posed by banks, as well as the tendency of accounting measures of income and assets to overstate the economic value of banks’ equity capital. The Financial Choice Act would also eliminate useful elements of ongoing supervision and regulation, not all of which can be addressed by higher capital alone. Furthermore, to facilitate regulatory learning about risks, off‐ramped banks should continue to report the data that regulators use for stress tests, even if they are no longer subjected to the discipline of stress tests. Finally, the act is viewed as too permissive in its treatment of off‐ramped banks that get into trouble. To prevent gaming of regulation, FERC recommends that off‐ramped banks that subsequently fall below the minimum requirements should be required to raise new capital immediately.