Can the Truth Hurt? How Honest and Persuasive Advertising Can Unintentionally Lead to Increased Consumer Skepticism

In some situations, unsought, honest, but persuasive advertising claims may be difficult for many consumers to believe. To resist the hidden tactics and persuasive efforts of advertisers, defensively motivated consumers may challenge claims even if they have no rational reason for doing so. That is, consumer skepticism may evolve as a defensive coping and reactance response to pervasive advertising attempts.     

Trends and Cycles in GDP

The recent experience in the UK of substantial growth in GDP following the recession of the early 1980s has led to renewed interest in the measurement and explanation of business cycles. Development of economic as well as econometric theory has improved our ability both to measure the cycle more accurately and to offer a better explanation of its behaviour. In this Briefing Paper we present an analysis of these two developments.     

Incremental Information Content of the Change in the Percent of Production Added to Inventory*

Abstract. Manufacturing firms can manipulate income by producing in excess of the quantity needed to meet current period demand, thereby allocating part of current period fixed manufacturing overhead costs from cost of goods sold to inventory. Because it is subject to manipulation, the component of earnings due to producing in excess of sales may be of lower quality than the remaining component of earnings. We investigate this possibility using a regression of security returns on unexpected income and an estimate of the change in percent of production added to inventory (CPAI). An analytical model indicates that CPAI determines the “earnings surprise” subject to manipulation by overproducing. Assuming the market recognizes this, the coefficient on CPAI should be negative because this low quality component must be deducted from the total “good news” conveyed by the change in reported earnings. Alternatively, CPAI may convey good or bad news to the market that is unrelated to the manipulation of current period earnings. Firms may increase the percent of production added to inventory in anticipation of high levels of future sales. In this case, the estimated coefficient on CPAI should be positive. Or, if the increase in the percent of production added to inventory reflects anticipation of a strike or an unexpected downturn in current sales, the estimated coefficient should be negative. Cross-sectional tests using a large sample of manufacturing firms indicate a significant positive relation between security returns and CPAI. This finding is consistent with market participants viewing CPAI as a leading indicator of firm performance. Although the results are most supportive of CPAI conveying good news, there is some evidence that CPAI is used by managers to smooth earnings and, for firms classified as smoothing earnings, there is weak evidence that the component of earnings related to CPAI is viewed by market participants to be of lower quality.     

Accounting-Based Stock Price Anomalies: Separating Market Inefficiencies from Risk*

Abstract. We examine six accounting-based stock price anomalies using two sets of tests to determine the extent to which the anomalies (1) represent market mispricing or (2) reflect premia for unidentified risks. Market mispricing is indicated if the anomalous returns are concentrated around subsequent earnings announcements in patterns suggesting that the earnings information causes traders to re-examine their prior (incorrect) beliefs. Mispricing is also indicated if anomalous returns on zero-investment portfolios are positive, period after period. Our results indicate that an anomaly based on earnings momentum probably reflects market mispricing, but that two value-glamour anomalies (based on the book-market ratio and the earnings-price ratio), and two anomalies based on computerized fundamental analyses (from Ou and Penman 1989 and Holthausen and Larcker 1992) are more likely to reflect risk premia than indicated by prior research. Evidence on a sixth anomaly, based on price momentum, is mixed.     

VALUING EFFECTS OF CLIMATE CHANGE AND FISHERY ENHANCEMENT ON CHINOOK SALMON

This paper represents a continuing multidisciplinary analysis of species preservation and global change. It explores the economic cost of a potential regional warming's effect on the spring chinook salmon (Oncorhynchus tshcawytscha). Climate change and planned habitat improvements impact the production and economic value of spring chinook salmon in the Yakima River tributary of the Columbia River in eastern Washington. A chinook salmon's total economic value includes the summation of the existence, commercial, recreational, and capital values. The analysis here applies currently available data on these four components of value to estimated changes in chinook salmon population resulting from regional warming. Results show that the estimated change in economic value per fish associated with reducing one fish run is significant .     

THE EMPIRICAL FAILURE OF THE LIFE CYCLE MODEL WITH PERFECT CAPITAL MARKETS

The paper calibrates a life cycle model which incorporates standardassumptions, similar to those in Modighani's (1986) ‘strippeddown’ version, including perfect capital markets. Theresulting model generates strongly counter-factual predictions,planned wealth is negative for all or most of life, followinga W-shaped rather than a hump-shaped profile. (Equivalently,the debt profile is M-shaped.) The paper argues that introducingcapital market imperfections can resolve many of the problems,though some issues remain, and further research is warranted ‘The hypothesis of utility maximisation (and perfect markets)has, all by itself, one very powerful implication—theresources that a representative consumer allocates to consumptionat any age, t, will depend only on his life resources (the presentvalue of labour income plus bequests received, if any) whencombined with the self-evident proposition that the representativeconsumer will choose to consume at a reasonably stable rate,close to his anticipated average life consumption the size ofsaving over short periods of time, like a year, will be swayedby the extent to which current income departs from average liferesources the main parameter that controls the wealth-incomeratio and the saving rate for given growth is the prevailinglength of retirement’ (Modigliani, 1986, pp 299 and 301)     

Slack and Cyclically Sensitive Inflation

We investigate the flattening Phillips relation by making two departures from standard specifications. First, we measure slack using real activity variables that are bandpass filtered or year-over-year changes in activity (these are similar), instead of gaps. Second, we study the components of inflation instead of the standard aggregates. We find that some inflation components have strong and stable correlations with the cyclical component of real activity; these components tend to be relatively well-measured and domestically determined. Other components, typically prices that are poorly measured or internationally determined, have weak and/or unstable correlations with cyclical activity. We construct a new inflation index, cyclically sensitive inflation, that weights the components by their joint cyclical covariation with real activity. The index has strong and stable correlations with cyclical activity and provides a real-time measure of cyclical movements in inflation.