Separating microstructure noise from volatility

There are two variance components embedded in the returns constructed using high frequency asset prices: the time-varying variance of the unobservable efficient returns that would prevail in a frictionless economy and the variance of the equally unobservable microstructure noise. Using sample moments of high frequency return data recorded at different frequencies, we provide a simple and robust technique to identify both variance components.     

Love or Money? The Effects of Owner Motivation in the California Wine Industry

Models that assume only consumer tastes determine the characteristics of supply are restrictive; producers can gain utility from aspects of production and pay for deviating from demand by accepting lower financial returns. We model and measure motivations of California winery owners, and analyze their effects on quality and price. We find utility–maximizers are more likely to produce high quality and set higher quality–adjusted prices. Profit–oriented owners are less likely to produce high quality wines. These results suggest that the presence of hobbyists who enjoy producing high quality may lower financial returns in the segment and discourage profit–maximizers from locating there.     

Managing multiple dimensions of manufacturing performance — an exploratory study

Drawing on qualitative data collected during semi-structured interviews with 36 profit centre managers in manufacturing firms in Victoria, Australia, this study seeks to explore the mechanisms used to manage multiple manufacturing performance dimensions arising from the pursuit of profit centre strategy. Where measures capture potentially conflicting influences on the manufacturing cost function, strategy implementation is facilitated by loosening control reactions to cost variances and through explicit attempts to integrate multiple measures. However, a joint emphasis on performance dimensions relating to manufacturing efficiency and customer responsiveness emerges as problematic. In contrast, a joint emphasis on quality and efficiency is relatively easily managed. It is suggested that in the context of responsiveness strategies, the difficulty of designing complete measures inhibits the effectiveness of performance measurement systems as a facilitator of strategy implementation.     

Risk Arbitrage in Takeovers

This article studies the role of risk arbitrageurs in takeoversand the source of their advantage. We show how the presenceof arbitrageurs affects the value of the target shares, sincearbitrageurs are more likely to tender. Therefore an arbitrageurhas the informational advantage of knowing he bought shares.In equilibrium, the number of arbitrageurs buying shares andthe price they pay are determined endogenously. We also presentseveral empirical implications, including the relationship amongtrading volume, takeover premium, liquidity of the shares, andthe number of risk arbitrageurs investing in one particulardeal.     

Managerial Ownership, Information Content of Earnings, and Discretionary Accruals in a Non–US Setting

This study employs Danish data to examine the empirical relationship between the proportion of managerial ownership and two characteristics of accounting earnings: the information content of earnings and the magnitude of discretionary accruals. In previous research concerning American firms, Warfield et al. (1995) document a positive relationship between managerial ownership and the information content of earnings, and a negative relationship between managerial ownership and discretionary accruals. We question the generality of the Warfield et al. result, as the ownership structure found in most other countries, including Denmark, deviates from the US ownership configuration. In fact, Danish data indicate that the information content of earnings is inversely related to managerial ownership.     

Are the Best Small Companies the Best Investments?

Previous research finds that large companies previously judged to be excellent growth companies have subsequently been poor investments. We examine small companies selected by Business Week on the basis of multiple criteria used in annual articles featuring highly rated growth companies. We study the investment performance over the three years before eleven annual Business Week publications and the three years after publication. We find positive excess returns in the pre‐publication period, but negative excess returns in the post‐publication period. This reversal in investment performance appears to be due to a mean‐reversion tendency in operating performance, in which the earnings and the past rates of return on capital of such companies subsequently decrease significantly.     

Accounting for Option–based Compensation: The Economic Cost Approach

The intrinsic value approach amortizes over the life of the option, the difference between the stock price on the date of the grant and the exercise price of the option. The fair market value approach amortizes over the life of the option, the market value of stock options on the date of the grant. These approaches do not reflect the changes in the option–based compensation cost after the grant date. This paper proposes an economic cost approach that not only adjusts for the changes in the value of the options during its life but also records the issuance of the stock at fair market value on the exercise date.     

The colors of investors’ money: The role of institutional investors around the world

We study the role of institutional investors around the world using a comprehensive data set of equity holdings from 27 countries. We find that all institutional investors have a strong preference for the stock of large firms and firms with good governance, while foreign institutions tend to overweight firms that are cross-listed in the U.S. and members of the Morgan Stanley Capital International World Index. Firms with higher ownership by foreign and independent institutions have higher firm valuations, better operating performance, and lower capital expenditures. Our results indicate that foreign and independent institutions, with potentially fewer business ties to firms, are involved in monitoring corporations worldwide.     

Technological innovation and real investment booms and busts

We investigate why new, high-risk technologies can attract excessive and often unprofitable investment. We develop an equilibrium model in which rational, risk-averse agents overinvest in a risky technology, possibly to the point that its expected return is negative. Overinvestment results from relative wealth concerns which arise endogenously from the imperfect tradability of future endowments. Competition over future consumption leads to an indirect utility for wealth with “keeping up with the Joneses” properties that can induce herding. Because overinvestment increases with the risk of the technology, our model can explain why new, risky technological innovations may promote investment bubbles.