WHAT'S IN A NAME? A CAUTIONARY TALE OF PROFITABILITY ANOMALIES AND LIMITS TO ARBITRAGE

The recent literature investigating profitability anomalies defines profitability in various ways (i.e., gross, operating, and cash based). We show that limits to arbitrage are associated with returns of gross and cash-based operating profitability anomalies, suggesting mispricing. In contrast, returns from the operating profitability strategy have no relation with barriers to arbitrage and exhibit no evidence of mispricing. Additionally, we show that the differential effects of limited arbitrage-related mispricing of gross and cash-based operating profitability anomalies are attributable to their respective correlations with selling, general, and administrative (SG&A) expense and accruals anomalies. We find that SG&A return predictability, like that of accruals, is related to limits to arbitrage. These findings suggest that investors and researchers should proceed with caution when searching for return predictability by redefining profitability measures.     

Bills of exchange, interest bans, and impersonal exchange in Islam and Christianity

A vast economic history literature suggests that medieval institutions supporting contract enforcement were necessary for impersonal exchange to emerge. Yet this literature cannot account for the bill of exchange, an important financial instrument that had positive legal standing in both the medieval Islamic and Christian worlds but remained relegated to personal networks only in the former. This paper suggests that a seemingly innocuous difference - the involvement of currency exchange in European but not Middle Eastern bills, a difference resulting from the secular legalization of interest in Europe - encouraged divergent endogenous processes resulting in these distinct institutional arrangements.     

The U.S. immigration debate: what’s all the shouting for?

Potential GDP growth has slowed by 1.3% a year. The main culprit is labor force decline. It follows logically that a more welcoming immigration policy would be responsive to our demographic challenges and thereby complementary to macroeconomic growth. Ironically, anger at immigration has grown in inverse proportion to actual immigration flows. There is little evidence that immigrants have negative impacts on the wages of native-born workers, and increased immigration would likely have a net positive fiscal impact. Based on these economic considerations, the U.S. immigration debate seems driven by much more heat than light.     

Executive Network Centrality and Stock Liquidity

We examine the relationship between stock market liquidity and the network centrality of firm executives. We find that firms whose executive officers are more central in the network of executives have narrower bid‐ask spreads. We use an exogenous network centrality shock of executive turnover and report that liquidity improves after firms hire executives with greater centrality. We present evidence that improved liquidity is attributable to efficient information flows around executives in more advantageous network positions.     

A neoclassical model of interregional economic growth

Interregional economic growth is characterized by free trade, capital movements and labour migration. An interregional equilibrium and a steady state are likely to exist, and if a disturbance occurs, there might be a tendency back to equilibrium. Output and income grow at the same rate in all regions, although the regions differ in technology, propensity to save and natural growth of labour; these factors also determine the speed of expansion. Yet if the natural growth of labour is too fast (too slow), then capital and labour tend to a single region.     

Idiosyncratic Volatility and Firm‐Specific News: Beyond Limited Arbitrage

We examine the relation between idiosyncratic volatility and returns around news announcements. Mispricing is most likely to occur during news announcements. If idiosyncratic volatility generates a limit to arbitrage, then the negative relation between returns and news volatility should be stronger than the relation to nonnews volatility. Instead, we find nonnews volatility has a robust negative relation to returns and lacks key features expected if volatility were a reflection of limits to arbitrage. Pricing of nonnews volatility is related to lottery‐like features of a stock's return. Our results suggest that volatility has a price effect beyond a limit to arbitrage.     

Does pedigree matter? Earnings quality of U.S. listed domestic firms via reverse mergers

This paper examines earnings quality of U.S. domestic firms that access capital markets via a reverse merger transaction (RM firms) compared to those via the more traditional initial public offering (IPO firms) during the period from 1997 to 2011. In order to mitigate confounding effects of legal regime, law enforcement, and culture, we require both the acquiring and target firms to be incorporated and headquartered in the U.S. to be included in our sample. We also use the Heckman (1976) procedure to control for self-selection bias. To capture earnings quality, we use a battery of measures established in prior literature, including discretionary accruals, discretionary revenues, real activities earnings management, and accrual estimation errors. Our measures have both convergent and discriminant validity and therefore appear to capture earnings quality fairly well. We find consistent evidence that U.S. domestic RM firms have lower earnings quality compared with U.S. IPO firms. Our evidence suggests that investors and other stakeholders should take into account the fact and consequences of the method that firms use to access capital markets in their investment decision making process.