AN OBTRUSIVE REMARK ON CAPITAL AND COMPARATIVE STATICS

We present a simple comparative statics analysis of steady‐state equilibria in overlapping generations economies with capital accumulation. We regard comparative statics as paradoxical whenever an exogenous increase in saving propensity induces a decrease (an increase) in consumption at the steady state when interest rate is positive (negative). It is shown that there is an exact relation between paradoxical comparative statics and a perverse intersection of properly identified curves of demand for and supply of capital in value. The demand curve for capital in value coincides with that of neo‐Ricardian analysis. We relate our conclusions to some old and recent issues in capital theory.     

Testing the Political Replacement Effect: A Panel Data Analysis*

This article tests for the existence of the political replacement effect, as suggested by Acemoglu and Robinson: [American Political Science Review, Vol. 100, pp. 115–131]. They argue that the implementation of market‐oriented reform is crucially driven by the political calculus of incumbent governments: they implement economic policy change if such a choice is not expected to reduce their chances to retain power. This implies a non‐monotonic relationship between the level of political competition and the extent of economic reform. We test this hypothesis using data for 102 countries over the period 1980 to 2005. Our results strongly support the theory.     

Political uncertainty and risk premia

We develop a general equilibrium model of government policy choice in which stock prices respond to political news. The model implies that political uncertainty commands a risk premium whose magnitude is larger in weaker economic conditions. Political uncertainty reduces the value of the implicit put protection that the government provides to the market. It also makes stocks more volatile and more correlated, especially when the economy is weak. We find empirical evidence consistent with these predictions.     

Productivity or Discrimination? Beauty and the Exams*

Do good looks make people more productive? An impact of looks on earnings has been found in the empirical literature: plain people earn less than average‐looking people who in turn earn less than good‐looking people. However, an important question remains unanswered: is the impact of beauty due to pure discrimination or productivity? We provide evidence against the hypothesis of Becker‐type discrimination stemming from tastes and in favour of productivity‐related discrimination.     

Earnings Quality Measures and Excess Returns

This paper examines how commonly used earnings quality measures fulfill a key objective of financial reporting, i.e., improving decision usefulness for investors. We propose a stock‐price‐based measure for assessing the quality of earnings quality measures. We predict that firms with higher earnings quality will be less mispriced than other firms. Mispricing is measured by the difference of the mean absolute excess returns of portfolios formed on high and low values of a measure. We examine persistence, predictability, two measures of smoothness, abnormal accruals, accruals quality, earnings response coefficient and value relevance. For a large sample of US non‐financial firms over the period 1988–2007, we show that all measures except for smoothness are negatively associated with absolute excess returns, suggesting that smoothness is generally a favorable attribute of earnings. Accruals measures generate the largest spread in absolute excess returns, followed by smoothness and market‐based measures. These results lend support to the widespread use of accruals measures as overall measures of earnings quality in the literature.     

Low-Income Countries and an SDR-based International Monetary System

The global financial crisis, the weakening role of the dollar and the increasing international importance of China are calling for a reform of the international monetary system in the direction of greater multilateralism. To this end, we advance a proposal based on a greater role of the Special Drawing Rights (SDRs) and focus on the potential benefits that these could bring to Low-Income Countries (LICs). SDRs would be created exogenously - with a disproportionate allocation to LICs -, but also endogenously, through a substitution account and an overdraft facility. Finally, the paper discusses the superiority of this proposal in the context of the current foreign assistance framework.     

Asset correlations and bank capital adequacy

This paper addresses the estimation of confidence sets for asset correlations used in credit risk portfolio models. Research on the estimation of asset correlations using endogenous probabilities of default estimations has focused on the impact of concentration risk factors, such as firm size and industry. The empirical evidence from Italian small- and medium-size companies show that the assumptions underlying the Basel Committee regulatory capital risk weight function are not substantiated. The regulatory impact is that the capital adequacy is significantly compromised, driving an adverse selection, which favors the worst companies, and transferring the procyclical effects from firms to banks.     

Did fiscal institutions affect Wagner’s law in Italy during 1951–2009 period? An empirical analysis

In this article, we test Wagner’s assumption of the one-sided directional flow moving from economic growth to public spending in Italy for the 1951–2009 period. We pay particular attention to the impact of certain regime shifts related to changes in Italian budget regulations and procedures and the relevance of fiscal institutions to the fiscal performance equation, i.e. the public spending–national income nexus. The Error Correction Model is estimated to measure short-run dynamic effects and the long-run equilibrium between the two time series. The empirical evidence suggests that Wagner’s law is supported. In regard to policy implications, we find that public spending reacted less to positive changes in economic growth when the strengthening of the Ministry of Finance occurred in 1997 (Ciampi’s reform). Some sensitivity analyses confirm our empirical evidence.     

Selection in asset markets: the good, the bad, and the unknown

In this paper, we use a series of simple examples to illustrate how wealth-driven selection works in a market for Arrow securities. Our analysis delivers both a good and a bad message. The good message is that, when traders invest constant fractions of their wealth in each asset and have equal consumption rates, markets are informationally efficient: the best informed agent is rewarded and asset prices eventually reflect this information. However, and this is the bad message, when asset demands are not constant fractions of wealth but dependent upon prices, markets might behave sub-optimally. In this case, asymptotic prices depend on preferences and beliefs of the whole ecology of traders and do not, in general, reflect the best available information. We show that the key difference between the two cases lies in the local, i.e. price dependent, versus global nature of wealth-driven selection.     

Strategy,Valuation, and Forecast Accuracy: Evidence from Italian Strategic Plan Disclosures

Using a sample of 264 strategic plan presentations by Milan Stock Exchange firms during 2001–2012, we present evidence of both a security price reaction and an increase in the accuracy of analysts’ earnings forecasts pursuant to plan disclosure. In the cross-section, the information content of the plan disclosures and the accuracy increase are incrementally associated with the extent of forward-looking narrative disclosures in the plan, after controlling for other disclosures within and outside the plan presentation and the fact that the firm has self-selected into the sample. Both quantitative and qualitative narrative disclosures are informative to investors and analysts. The results are driven by narrative disclosures about company strategy and action plans rather than about the business environment in which the company operates. Our study informs the current debate on the use of voluntary comprehensive, integrated, long-run-oriented strategic plan disclosure as a potential complement for disclosures such as quarterly earnings forecasts that have been described as an example of ‘short-termism’.