Small firm mutual funds: Additional evidence on the small firm effect

Returns generated with small firm mutual fund data are used to examine the extent to which identification of a small firm effect is due to the difficulty in measuring the direct and indirect transaction costs involved in investing in the common shares of small capitalization stocks. Little if any evidence of the excess risk-adjusted returns is obtained for either of the period 1978–1983, when the small firm effect was observed, or the period 1984–1989, when it was not. The small firm effect may therefore be attributed to (1) higher direct transaction costs including bid-ask spread and broker fees and (2) higher indirect transaction costs including portfolio management expenses and market impact costs.The authors thank an anonymous referee for helpful comments on an earlier version of this paper, and Brett Salazar for valuable assistance in data collection. Errors remain our own.     

Lower Bound Restrictions on Intensities in Data Envelopment Analysis

We propose an extension to the basic DEA models that guarantees that if an intensity is positive then it must be at least as large as a pre-defined lower bound. This requirement adds an integer programming constraint known within Operations Research as a Fixed-Charge (FC) type of constraint. Accordingly, we term the new model DEA_FC. The proposed model lies between the DEA models that allow units to be scaled arbitrarily low, and the Free Disposal Hull model that allows no scaling. We analyze 18 datasets from the literature to demonstrate that sufficiently low intensities—those for which the scaled Decision-Making Unit (DMU) has inputs and outputs that lie below the minimum values observed—are pervasive, and that the new model ensures fairer comparisons without sacrificing the required discriminating power. We explain why the low-intensity phenomenon exists. In sharp contrast to standard DEA models we demonstrate via examples that an inefficient DMU may play a pivotal role in determining the technology. We also propose a goal programming model that determines how deviations from the lower bounds affect efficiency, which we term the trade-off between the deviation gap and the efficiency gap.     

Total Freedom: Toward a Dialectical Libertarianism by Chris Matthew Sciabarra

The Review of Austrian Economics -     

Time,congestion, and public goods

This paper considers intermediate and final public goods as stocks from which consumers obtain a flow of services by expending scarce time. The services so obtained depend on the time other individuals spend utilizing these same goods. Optimality conditions are derived for both stock levels and flow usage where tolls are required to cover costs. The elasticities in the resulting formulae are endogenous in the sense that only certain values are permissible. In the intermediate good case, at the optimum, the public good will always be locally optimally supplied and locally underutilized to a degree which depends on the congestion parameter.     

The effects of precedents and client position on auditors' financial accounting policy judgment

This paper investigates whether precedents (content, perceived similarity, and source) and the client's preferred accounting policy affects audit partner and manager financial accounting policy judgments. The research employs a combination of an experiment with an analysis of archival data. The experimental results show clear support for precedent content and perceived precedent similarity affecting auditor judgment. The archival data analysis suggests that precedent source and client position may indirectly affect auditor judgment through the precedent generation process. Implications of these findings are discussed.     

Feedback loops, fair value accounting and correlated investments

This paper presents and tests a model of the price dynamics that arise when investors fail to recognize the redundancy of unrealized gains and losses (“UGLs”) that are correlated with the firm’s past returns. Consistent with the predictions of our model, our experiment shows that a firm’s prices and earnings become highly volatile when correlated investment is large and correlated UGLs are made salient by comprehensive income reporting. The results suggest that including correlated UGLs in performance numbers could induce violations of weak-form efficiency that exacerbate volatility in share prices and earnings.