Industry,corporate, and segment effects and business performance: a non‐parametric approach

The literature investigating the degree to which firm performance is associated with industry or corporate factors has recently been subject to criticism on the grounds of both methodological shortcomings and incomplete interpretation of results. Our research goes beyond these critiques to raise more basic issues concerning the assumptions underlying variance decomposition, the methodology dominating the antecedent literature. Performance data and categorizations from a sample consistent with those employed in the recent literature are analyzed via a new non‐parametric methodology. Results here indicate that corporate factors were over an order of magnitude better predictors of business unit profit position than were industry factors—which were found not to have been significant predictors. Further, underlying performance relationships were seen to have shifted over time. A key implication of these results for researchers is that they provide additional evidence that managers can have a strategic influence on business performance. Copyright © 2003 John Wiley & Sons, Ltd.     

Portfolio Selection with Quadratic Utility Revisited

Considering a simple portfolio selection problem by agents with quadratic utility, an apparently counterintuitive outcome results. When such a choice is over two assets that can be ordered in terms of riskiness, an agent that is more risk averse may optimally invest a larger portion of wealth in the riskier asset. It is shown that such an outcome is not counterintuitive, since for the portfolios from which agents optimally choose, a larger proportion of investment in the riskier asset leads to a less risky portfolio.     

Competitive harm and geographic area disclosure under SFAS 131

Prior research documents considerable diversity in the amount of detail provided by companies in complying with the foreign country disclosure requirements of SFAS 131. We posit that the potential competitive harm associated with country specific disclosures provides an incentive for management to avoid making these disclosures. Specifically, we hypothesize that firms with higher potential competitive harm costs will provide less detailed geographic area disclosures. Our results show that, as expected, firms exposed to greater competitive harm costs provide less detailed country specific revenue disclosures. This study helps to explain the diversity in practice with respect to the level of detail provided by companies in their geographic area disclosures under SFAS 131. In addition, it adds to the literature examining the impact of potential competitive harm on disclosures made by U.S. firms, by extending the line of research to geographic area disclosures.     

Interpretation of uncertainty expressions: a cross-national study

This study investigates the effect of language-culture and linguistic translation on the interpretation of verbal uncertainty expressions found in International Accounting Standards. Data are collected from US Certified Public Accountants and German-speaking Wirtschaftsprüfer (chartered or certified accountants) to test three hypotheses. One group of German speakers evaluated uncertainty terms expressed in German and another group in English. The results indicate significant differences in interpretation across the three groups. Some differences are attributed to a language-culture effect and others to a translation effect, with the language-culture effect being more pervasive. These results raise the question of whether International Accounting Standards can be applied consistently across language-cultures.     

The Effect of Market Structure on the Incentives to Quote Aggressively: An Empirical Study of Nasdaq Market Makers

We use data on Nasdaq stocks to study arguments that preferencing reduces incentives to quote competitively. We examine a market maker's volume as a function of various measures of quoting aggressiveness. We find that more aggressive quoting does indeed result in more business. We also examine the relation between volume and quote aggressiveness as a function of the competitiveness. We find that in less (more) competitive markets, increased quote aggressiveness has a smaller (larger) impact on market share. We argue that preferencing arrangements could be more harmful to public investors in markets where competition is weak.     

An Experimental Investigation of Hard and Soft Price Ceilings in Emissions Permit Markets

Tradable emissions permits have been implemented to control pollution levels in various markets and represent a major component of legislative efforts to control greenhouse gas emissions. Because permits are supplied for a fixed level of pollution, allowing the market for permits to determine the price, price control mechanisms may be needed to protect firms from price spikes caused by fluctuations in the demand for permits. We test permit markets in an experimental laboratory setting to determine the effectiveness of several price control mechanisms, with special attention on the soft price ceiling. We focus on a static setting similar to some of the earliest experimental work focused on price ceilings. Results indicate that both permit supply adjustments and price ceilings (hard ceilings) effectively limit elevated prices in this setting. By contrast, reserve auctions to implement soft ceilings do not consistently control prices, especially when a minimum reserve permit price is applied. Furthermore, the grandfathering of permits allows permit sellers to realize significant welfare gains at the expense of buyers under a soft ceiling policy. Our results thus highlight several advantages of hard ceilings for controlling short term price increases.     

Debt and Development

This paper examines incentive and valuation effects of debt financing on land investment. When land is debt financed, the landowner holds both a development option on the land and a default option on the debt. Because development typically devalues the default option, investment may be delayed past the point at which efficient investment would otherwise proceed. The incentive to underinvest is shown to be more pronounced as debt level increases, i.e., as the debt becomes riskier. This agency problem provides an explanation as to why land is generally difficult to debt finance and may also explain why debt levels are relatively low for “land-intensive” real estate firms. Novel comparative statics show that debt value may increase for a given increase in asset volatility as well as for a given increase in interest rate. Renegotiation and restrictive contract provisions are considered as mechanisms to promote efficient investment policy in the presence of debt financing.     

Implementing Electricity Restructuring

Electricity is one of the last U.S.industries in which competition is replacingregulation. We briefly review the technologyfor producing and delivering power, the historyof electricity policy, and recent state andinternational experience. We then outline themajor questions facing policymakers as theydecide whether, when, and how to implementrestructuring. We conclude with some thoughtson the California electricity crisis and otherpolitical controversies. Although theCalifornia experience has come to define whatit means for electricity markets to fail, mostof the problems it raised are among those weknow how to solve or prevent. The stillunresolved make-or-break issue remains whetherthe cooperation necessary to maintainreliability is compatible with the degree ofcompetition necessary to bring about greaterefficiency and lower prices.