Regulating bidder participation in auctions

Regulating bidder participation in auctions can potentially increase efficiency compared to standard auction formats with free entry. We show that the relative performance of two such mechanisms, a standard first‐price auction with free entry and an entry rights auction, depends nonmonotonically on the precision of information that bidders have about their costs prior to deciding whether to participate in a mechanism. As an empirical application, we estimate parameters from first‐price auctions with free entry for bridge‐building contracts in Oklahoma and Texas and predict that an entry rights auction increases efficiency and reduces procurement costs significantly.     

Has momentum lost its momentum?

We evaluate the robustness of momentum returns in the US stock market over the period 1965–2012. We find that momentum profits have become insignificant since the late 1990s. Investigations of momentum profits in high and low volatility months address the concerns about unprecedented levels of market volatility in this period rendering momentum strategy unprofitable. Momentum profits remain insignificant in tests designed to control for seasonality, up or down market conditions, firm size and liquidity. Past returns, can no longer explain the cross-sectional variation in stock returns, even following up markets. Investigation of post holding period returns of momentum portfolios and risk adjusted buy and hold returns of stocks in momentum suggests that investors possibly recognize that momentum strategy is profitable and trade in ways that arbitrage away such profits. These findings are partially consistent with Schwert (Handbook of the economics of finance. Elsevier, Amsterdam, 2003) that documents two primary reasons for the disappearance of an anomaly in the behavior of asset prices, first, sample selection bias, and second, uncovering of anomaly by investors who trade in the assets to arbitrage it away. In further analyses we find evidence that suggest two other possible explanations for the declining momentum profits, besides uncovering of the anomaly by investors, that involve decline in the risk premium on a macroeconomic factor, growth rate in industrial production in particular and relative improvement in market efficiency.     

Is CEO certification of earnings numbers value-relevant?

On June 27, 2002, the Securities and Exchange Commission of the United States ordered the CEOs and CFOs of 688 large firms to certify the earnings numbers of their companies by 5:30PM EST, Aug 14, 2002. This paper uses this natural experiment to find that certification was not only a non-event for the certifiers around their certification date, but it was also a non-event for the non-certifiers around Aug 15, 2002. Further tests make us conclude that CEO certification of earnings numbers is not value-relevant.     

Pro forma disclosure and investor sophistication: External validation of experimental evidence using archival data

Insights on how ordinary, less-sophisticated investors interpret and process management-issued pro forma earnings numbers are useful to regulators because of concerns that pro forma disclosures are misleading to ordinary investors. Two recent experimental studies [Frederickson, J. R., & Miller, J. S. (2004). The effects of pro forma earnings disclosures on analysts’ and nonprofessional investors’ equity valuation judgments. The Accounting Review, 79(3), 667–686; Elliott, W. B. (2006). Are investors influenced by pro forma emphasis and reconciliations in earnings announcements? The Accounting Review, 81(1), 113–133] find that the existence of a pro forma number in the earnings press release as well as the relative placement of the pro forma and GAAP earnings figures within the press release affect the judgments of less-sophisticated investors but not those of more-sophisticated investors. Experimental and archival methodologies complement one another and results that persist in both settings are likely to be robust to both internal and external validity concerns. Therefore, we complement experimental evidence using trade-size-based proxies constructed from intraday transactions data to distinguish the trading activities of less-sophisticated investors from more-sophisticated investors. Our results suggest that less-sophisticated investors rely significantly more on quarterly earnings press releases that include a pro forma number than on those that do not, while more-sophisticated investors exhibit the opposite behavior. This result is consistent with Frederickson and Miller’s experimental evidence. Further, consistent with Elliott’s results, we find that less-sophisticated investors rely more on the pro forma figure when it is placed before the GAAP earnings number in the press release, while more-sophisticated investors’ trading behavior is unaffected by the relative placement of the two earnings metrics. We conclude that the existence of a pro forma number as well as its strategic placement in the press release generally affect the judgments of less-sophisticated (but not more-sophisticated) investors and these inferences are robust because they persist in both experimental and archival settings.     

Group Profit,Market Share and Efficiency: Evidence from Australian Manufacturing

This paper explains the intra-industry variations of profit in Australian manufacturing. Considering three groups of firms, viz leading, secondary and follower groups, a profit model is developed for each group. Indicators of ``strategic behavior' and ``efficiency' are considered along with other control variables. Both equilibrium and dynamic versions of the model are tested using unpublished data at the enterprise level between 1977/78 and 1992/93. The findings support the importance of both strategic behavior and efficiency in determining group profits.     

Environmental standards as strategic outcomes: A simple model

This paper analyses the strategic nature of choice of environmental standards considering both local and global pollution under alternative regimes of international trade. It also compares and contrasts the strategic equilibrium environmental standards and levels of pollution, local and global, with the world optimum levels. It shows that, in case of open economies, environmental standards can be either strategic substitutes or strategic complements. On the contrary, in case of closed economies, environmental standards are always strategic substitutes. It also shows that the strategic equilibrium environmental standards in case of open economies are higher than the world optimum in certain situations. Whereas, in absence of international trade, countries set, in equilibrium, lower environmental standards than the world optimum.     

Deviant generations, Ricardian equivalence, and growth cycles

Two equilibrium possibilities are known to obtain in a standard overlapping-generations model with dynastic preferences: either the altruistic bequest motive is operative for every generation (in which case, Ricardian equivalence obtains) or it is not, for any generation. Dynamic equilibria, where the bequest motive is occasionally operative, cannot emerge. This paper studies bequest-giving behavior and out-of-steady-state bequest and growth dynamics in a Ak model with intra- and inter-generational consumption externalities. These externalities, by their very presence, do not destroy Ricardian equivalence. They may, however, give rise to deviant generations—generations that do not leave a bequest having received an inheritance, and vice versa—and that seals the fate for Ricardian equivalence. Consumption externalities may also generate interesting indeterminacies and endogenous growth cycles that did not exist otherwise.     

Business Growth,Size and Age: Evidence from the Business Longitudinal Survey (BLS) Data in Australia

Despite the important role small and medium‐sized enterprises (SMEs) play in the Australian economy, little is known from empirical literature on the formation, growth and frequent dissolution of these businesses. Considering the dynamics of business behaviour, this article analyses the performance, business formation (or dissolution) and variability of growth. Using only available Business Longitudinal Survey (BLS) data from the Australian Bureau of Statistics (ABS), manufacturing businesses are considered for the analysis. Firm growth, the variability of firm growth and the probability that a firm will fail (or survive) depend on firm age. Incorporating the age for Australian businesses, we are able to explain the importance of maturity in analysing growth and survival process of SMEs.     

Industrial concentration and competition in Malaysian manufacturing

Industrial concentration is the most widely studied area among various elements of market structure in the industrial organization literature. This paper is a first attempt to analyse the determinants of changes in industry concentration over time in the case of Malaysia. Using a partial adjustment model, a cross-sectional analysis is carried out against a sample of manufacturing industries between 1986 and 1996. Domestic factors in influencing competition e.g. capital intensity, advertising intensity and market size are found to be significant in most cases to explain the level of concentration. Considering variable rate of adjustment of concentration, an increase in labour productivity of large firms and high entry rates are found to be significant for faster adjustment towards equilibrium level. Compared with other developed countries, the annual rate of structural adjustment is found to be slow in the case of Malaysian manufacturing.     

Evaluating Permanent Disability Ratings Using Empirical Data on Earnings Losses

Workers' compensation systems are typically designed to assign higher permanent disability benefits to workers with more severe disabilities. However, little or no scientific work exists to guide the design of ratings systems to properly account for the amount of earnings power lost due to disability. In this article, we examine the effectiveness of disability ratings using matched administrative data on ratings and earnings for a large, representative sample of permanent disability claimants in California. We find that while workers with higher ratings do experience larger earnings losses on average, there are large and persistent differences in average earnings losses for similarly rated impairments in different parts of the body. We then explore how adjusting permanent disability ratings to reflect cross-impairment differences in earnings losses can affect the equity of permanent disability benefits. Adjusting disability ratings to account for typical earnings losses reduces cross-impairment differences substantially. The adjusted ratings result in a more equitable distribution of disability benefits across workers with different impairments.