Asset Sales, Investment Opportunities, and the Use of Proceeds

This study examines the allocation of cash proceeds following 400 subsidiary sales between 1990 and 1998. Retention probabilities are increasing in the divesting firm's contemporaneous growth opportunities and expected investment. Retaining firms, however, also systematically overinvest relative to an industry benchmark. Shareholder returns to retention decisions are positively correlated with growth opportunities and benchmarked investment, but negatively correlated with benchmarked investment for firms with poor growth opportunities. Shareholder returns to debt distributions are increasing in industry‐benchmarked leverage. Overall, the results of this study cohere with the hypothesized trade‐off between the investment efficiencies associated with retained proceeds and the agency costs of managerial discretion and debt.     

Deep Habits in the New Keynesian Phillips Curve

We derive and estimate a New Keynesian Phillips Curve (NKPC) in a model with deep habits. Habits are deep in that they apply to individual consumption goods instead of aggregate consumption. This alters the NKPC in a fundamental manner since it introduces consumption growth and future demand terms into the NKPC equation. We construct the driving process in the deep habits NKPC by using the model's optimality conditions to impute time series for unobservable variables. The resulting series is considerably more volatile than unit labor cost. Generalized methods of moments estimation shows an improved fit and a much lower degree of indexation compared to the standard NKPC.     

Why Do EPS Forecast Error and Dispersion Not Vary with Scale? Implications for Analyst and Managerial Behavior

We document a counter‐intuitive finding regarding analyst forecasts of quarterly earnings per share (EPS): magnitudes of deviations from benchmarks—individual forecasts versus consensus (dispersion) and consensus versus actual (forecast error)—do not vary with scale. Seasonally differenced EPS, or time‐series forecast error, also exhibits substantial lack of variation with scale, but only for firms followed by analysts. This lack of variation with scale is not observed for analyst and time‐series forecasts for (a) EPS for some countries, (b) sales and cash flows for all countries, and (c) stock splits. We propose and investigate different explanations for these puzzling regularities that have important implications for practice and research. We believe the cause is managerial smoothing of EPS designed to reduce across‐firm variation in EPS volatility.     

Standard setting and security returns: A time series analysis of FAS No. 8 events*

Abstract. This study examines the information content of seven FAS No. 8 related key events on the security returns of firms affected by the accounting rule. The Box and Tiao intervention analysis was used, which combines the univariate ARIMA(p,d,q) (auto-regressive integrated moving average) modeling with a statistical impact assessment. Results indicate that security returns of firms investigated have generally exhibited patterns of small positive blips (abrupt onsets, temporary durations, and rapid decays) around the time of the appointment of the task force as well as at the date of issuance of the exposure draft. Résumé. Cette étude examine le contenu informationnel de sept événements importants entourant le FAS no 8 sur les rendements des titres d'entreprises affectées par la règle de comptabilité. L'analyse d'intervention Box-Tiao fut utilisée, méthode où la modélisation ARMNI (p.d.q) à une variable aléatoire est combinée à une évaluation de l'impact statistique. Les résultats indiquent que les rendements des titres émis par les firmes étudiées ont présenté des structures de petites oscillations positives (croissance brutale, durée temporaire et déclin rapide) autour des moments de nomination du groupe d'étude et de publication de l'exposé sondage.     

Investment Bank Reputation,Information Production,and Financial Intermediation

We model reputation acquisition by investment banks in the equity market. Entrepreneurs sell shares in an asymmetrically informed equity market, either directly, or using an investment bank. Investment banks, who interact repeatedly with the equity market, evaluate entrepreneurs' projects and report to investors, in return for a fee. Setting strict evaluation standards (unobservable to investors) is costly for investment banks, inducing moral hazard. Investment banks' credibility therefore depends on their equity-marketing history. Investment banks' evaluation standards, their reputations, underwriter compensation, the market value of equity sold, and entrepreneurs' choice between underwritten and nonunderwritten equity issues emerge endogenously.