Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information

We examine whether information in footnotes might lack reliability because auditors permit more misstatement in disclosed, as opposed to recognized, amounts. In both the stock‐compensation and lease settings, audit partners require greater correction of misstatements in recognized amounts than in the equivalent disclosed amounts. Debriefing questions indicate that the partners make these decisions knowingly, even though they expect greater client resistance to correcting recognized amounts, because they view recognized amounts as more material. Partners also spend more time on correction decisions for recognized information. While prior literature suggests that amounts are often relegated to footnotes because they are less reliable, our results suggest that the actual choice to disclose versus recognize can also reduce information reliability. These results have implications for the interpretation of prior research on the reliability of recognized and disclosed numbers, for financial‐accounting standard setters who may want to consider the reliability effects of their recognition versus disclosure decisions, and for auditing standard setters who may wish to clarify auditors' responsibilities for preventing misstatements in disclosed amounts.     

ALCOHOL ADVERTISING IN MAGAZINES: DO BEER,WINE, AND SPIRITS ADS TARGET YOUTH?

In 2003, the alcohol beverage industry spent more than $1.6 billion on advertising, including $394 million on ads in magazines. Critics allege that these activities target adolescents. This article examines count data for alcohol ads placed in 28 magazines in 2001–03. Specifying a demand function for advertising space, regressions are estimated that are conditioned on magazine characteristics and readership demographics, including the percent of youth in the audience. The explanatory variables include real prices of advertisements and audience size. Results indicate significant effects for price, audience size, and adult demographics, but fail to support claims that advertisers target youth. ( JEL L82, L66, M37)     

Shadow Banks and Macroeconomic Instability

We develop a macroeconomic model in which commercial banks can offload risky loans to a “shadow” banking sector, and financial intermediaries trade in securitized assets. The model can account both for the business cycle comovement between output, traditional bank, and shadow bank credit, and for the behavior of macroeconomic variables in a liquidity crisis centered on shadow banks. We find that following a liquidity shock, stabilization policy aimed solely at the market in securitized assets is relatively ineffective.     

LINKAGES BETWEEN EXCHANGE RATE POLICY AND MACROECONOMIC PERFORMANCE

Using a sample of 104 countries, we study macroeconomic performance from 1973 to 2007. We examine GDP growth, inflation rate, growth volatility and inflation volatility, and their response to a ‘words versus deeds’ measure of exchange‐rate policy, which is obtained by interacting a country's de jure and its de facto policy. For non‐industrialized countries, the highest growth rates and the lowest inflation volatility are associated with countries that pursue fear of floating policy, whereas countries that pursue a matched float policy (de jure and de facto floating) have the highest inflation rates but the lowest GDP volatility.