Consumer‐surplus‐enhancing collusion and trade

That collusion among sellers hurts buyers is a central tenet in economics. We provide an oligopoly model in which collusion can raise consumer surplus. A differentiated‐product duopoly operates in two geographically separated markets. Each market is home to a single firm, but can import, at a cost, from the foreign firm. Under some circumstances, a perfect cartel, relative to duopolistic competition, raises the price of the imported good and lowers the price of the home good. This raises welfare for most consumers and increases aggregate consumer surplus. A similar possibility result applies to autarky. Our analysis applies beyond the spatial setting.     

Accounting disclosure and firms' financial attributes: Evidence from the UK stock market

This paper focuses on the disclosure of accounting information in the financial statements of UK firms. The primary objective of the study is to analyse the financial characteristics of firms that provide extensive disclosures, and assess the financial impact of their motives, such as for example the need to raise equity finance. The study examines the financial attributes of firms that disclose information about key accounting issues including risk exposure, changes in accounting policies, use of international financial reporting standards and hedging practices. Firms are inclined to disclose accounting information in order to assure the market participants that their accounting policies are consistent with the accounting regulation and meet the information needs of their stakeholders. The study shows that in order to raise finance in the capital and debt markets, firms tend to provide extensive accounting disclosures. Firms that provide informative accounting disclosures appear to display higher size, growth and leverage measures. The findings also show that the disclosure of sensitive accounting information has not adversely affected firms' profitability. In fact, firms that provide detailed accounting disclosures tend to exhibit higher profitability. The implementation of international financial reporting standards enhances the quality and the comparability of financial statements; hence it promotes consistency and reliability in financial reporting and facilitates companies in raising capital internationally.     

The impact of corporate social responsibility on investment recommendations: Analysts' perceptions and shifting institutional logics

We explore the impact of corporate social responsibility (CSR) ratings on sell‐side analysts' assessments of firms' future financial performance. We suggest that when analysts perceive CSR as an agency cost they produce pessimistic recommendations for firms with high CSR ratings. Moreover, we theorize that, over time, the emergence of a stakeholder focus shifts the analysts' perceptions of CSR. Using a large sample of publicly traded U.S. firms over 15 years, we confirm that, in the early 1990s, analysts issue more pessimistic recommendations for firms with high CSR ratings. However, analysts progressively assess these firms more optimistically over time. Furthermore, we find that analysts of highest status are the first to shift the relation between CSR ratings and investment recommendation optimism. Copyright © 2014 John Wiley & Sons, Ltd.     

Locating decision rights: Evidence from the mutual fund industry

Mutual fund advisors make portfolio decisions for their funds on a daily basis. We examine the location of these portfolio decision rights on two dimensions. First, we consider the geographic location of the decision rights. Second, we consider whether the decision rights remain with an advisor or are allocated to an independent sub-advisor. We argue that the allocation of portfolio decision rights involves a tradeoff between the opportunity cost of not matching decision rights with specific knowledge, and the agency costs associated with moving the decision rights to the specific knowledge. The patterns in the location of decision rights are consistent with the tradeoff being a meaningful determinant of the allocation of decision rights in the mutual fund industry. We also find that funds that are predicted to be sub-advised and are sub-advised outperform those that are predicted to be sub-advised but are not.     

Should more local governments purchase a bond rating?

We investigate whether issuers that choose to forgo a bond rating suffer an interest cost penalty greater than the cost of the rating. We use estimated ratings provided by Moody’s Investor Service to proxy for what the rating would have been if it had been purchased. We find that the primary factors associated with an issuer’s decision to purchase a rating are the rating expected by the issuer and the extent to which an issue is marketed locally. After controlling for self-selection bias, we find that the issuers that forgo a rating do not suffer an interest cost penalty.

Investment Timing for Dynamic Business Expansion

We investigate the timing of business expansion. With an indefinite sequence of growth opportunities that have constant returns to scale, current investment neither displaces nor impairs future returns. In a dynamic setting with expansion restricted to a fraction of firm size, the endogenously determined cost of capital uniformly exceeds the value maximizing return threshold for expansion. Taking this into account, a manager accelerates investment to facilitate larger and more valuable future investments when earnings stochastically improve. This result is the opposite of deferral that the investment literature recommends due to irreversibility. This means that the managerial application of the cost of capital as an expansion hurdle rate is improperly conservative.     

Timing the investment grade securities market: Evidence from high quality bond funds

We examine the ability of bond fund managers to shift assets between bonds and cash and across bonds of different maturities in order to capture the changes in their relative returns. As measured by estimated changes in portfolio allocations, we find strong evidence of perverse market timing ability between cash and investment grade securities, and our results indicate additional perverse timing across the bond maturity spectrum. Results are robust to an alternative performance metric. We present evidence that the survival of the majority of these funds despite their negative performance may reflect the value investors place on the portfolio diversification benefits of holding these funds.     

Stock splits in a neutral transaction cost environment: Evidence from the Athens Stock Exchange

This paper investigates the value consequences of stock splits in a market where institutional characteristics minimize the effects of price realignment and signaling. We find that despite these market conditions, stock splits by Greek firms produce positive price reaction around the announcement day. Further, split factors are directly related to pre-split price levels and deviations from average market prices. Splitting firms also realize earnings improvement which is not reversed after the stock split. Consistent with these findings, market reaction is inversely related to the post-split target price and the size of firm. We interpret this as evidence in support, respectively, of the self-selection and “attention-gathering” hypotheses. As reported in other international studies, there is no evidence of liquidity improvement.