The relationship between saving and finance: theory and evidence from E.U. countries

This paper investigates the relationship between saving and investment in an effort to shed light on the issue of mobility of capital and whether or not this is prevented by the presence of any barriers. The data of our analysis are annual and come from 14 E.U. countries during the 1960–1994 period. The econometric analysis shows that for the E.U. countries, saving and the provision of credit are two cointegrated variables, which means that for each E.U. country (Belgium was the only exception) the amount of money saved is closely related to the amount of money that is ultimately invested. This result lends support to the view that in E.U. countries the degree of capital mobility plays a minor role in investment, which is primarily influenced by the conditions affecting the domestic provision of savings. In addition, the econometric analysis shows that the causal linkage is in most countries from savings to investment.     

Alternative Methods for Solving Heterogeneous Firm Models

I implement and compare five solution methods for a benchmark heterogeneous firms model with lumpy capital adjustment and aggregate uncertainty. The Krusell–Smith algorithm performs best within a group of methods using projection in the aggregate states. Another technique, Parameterization plus Perturbation, is much faster and performs best within a group of methods using perturbation in aggregates. However, projection and perturbation have nonoverlapping strengths and weaknesses. I highlight the resulting trade‐offs with several model extensions. I recommend that researchers apply projection methods to cases with large shocks or nonlinear dynamics, while cases with explicitly distributional channels at work favor perturbation.     

CFO Narcissism and Financial Reporting Quality

We investigate the effect of CFO narcissism, as measured by signature size, on financial reporting quality. Experimentally, we validate that narcissism predicts misreporting behavior, and that signature size predicts misreporting through its association with narcissism. Empirically, we examine notarized CFO signatures and find CFO narcissism is associated with more earnings management, less timely loss recognition, weaker internal control quality, and a higher probability of restatements. The results are consistent for within‐firm comparisons focusing on CFO changes and are robust to controlling for CFO overconfidence and CEO narcissism. The results highlight the importance of CFO characteristics in the domain of financial reporting decisions.     

EVIDENCE ON THE ROLE OF FIRM CAPABILITIES IN VERTICAL INTEGRATION DECISIONS

The capabilities approach to the firm postulates that firms vertically integrate activities for which they possess capabilities that are superior to potential suppliers'. The comparative contracting approach, in contrast, emphasizes high asset specificity as leading to vertical integration. This paper compares the two sets of explanations on make-or-buy decisions made by a large firm. It finds that in some cases asset specificity alone is determinant, but in others capabilities and combinations of considerations are explanatory. Analysis of the data also provides insights about the mechanisms through which capabilities operate. In particular, the similarity of the knowledge bases associated with various activities, and the time required to acquire knowledge, appear as important indicators of the importance of capabilities to vertical integration decisions.     

DEMOGRAPHIC DEMAND SYSTEMS WITH APPLICATION TO EQUIVALENCE SCALES ESTIMATION AND INEQUALITY ANALYSIS: THE AUSTRALIAN EVIDENCE

This paper proposes and applies an alternative demographic procedure for extending a demand system to allow for the effect of household size and composition changes, along with price changes, on expenditure allocation. The demographic procedure is applied to two recent demand functional forms to obtain their estimable demographic extensions. The estimation on pooled time series of Australian Household Expenditure Surveys yields sensible and robust estimates of the equivalence scale, and of its variation with relative prices. Further evidence on the usefulness of this procedure is provided by using it to evaluate the nature and magnitude of the inequality bias of relative price changes in Australia over a period from the late 1980s to the early part of the new millennium.     

Time Variation in the Inflation Passthrough of Energy Prices

From Bayesian estimates of a vector autoregression that allows for both coefficient drift and stochastic volatility, we obtain the following three results. First, beginning in approximately 1975, the responsiveness of core inflation to changes in energy prices in the United States fell rapidly and remains muted. Second, this decline in the passthrough of energy inflation to core prices has been sustained through a recent period of markedly higher volatility of shocks to energy inflation. Finally, reduced energy inflation passthrough has persisted in the face of monetary policy that became less responsive to energy inflation starting around 1985.     

Urban population in late medieval England: the evidence of the lay subsidies

Was there a growth in the proportion of the population living in England's towns in the later middle ages? Uncertainty about national population trends and about the taxation multipliers needed to arrive at population totals has made it difficult to answer this question. A direct comparison of the proportion of taxpayers that was urban in 1377 and 1524 suggests that the urban share of population was static or may even have declined in this period. However, such decline provides no simple index of urban prosperity or decay: a decline in urbanization could be the product of rural buoyancy rather than of urban recession.     

Financial Knowledge among Educated Women: Room for Improvement

We examined financial knowledge among educated women with at least a bachelor's degree by analyzing the results from a 2009 survey representing a well‐defined sample (N = 4,344) of alumnae from a highly selective liberal arts college for women. This study found modest levels of financial knowledge with wide variation. Specifically, in the sample of alumnae, respondents in an older cohort, with higher household income, and those who obtained an MBA degree exhibit higher levels of financial knowledge. These results highlighted the need for effective financial education for many college‐educated women.     

What Constitutes Evidence of Discrimination in Lending?

We analyze a simple model of bank lending in order to ascertain what can be inferred from relative denial and default rates about lending discrimination. We show that if minority applicants are of lower average creditworthiness than majority applicants, then, contrary to a popular argument, a uniform, nondiscriminatory credit policy cannot simultaneously produce (i) higher denial rates for minority applicants, and (ii) equal default rates for minority and majority applicants. Moreover, we show that equality of denial or default rates always implies discrimination. In particular, equal denial (default) rates imply discrimination against majority (minority) applicants.     

The Real Effects of FAS 166/167 on Banks’ Mortgage Approval and Sale Decisions

We examine the real effects of FAS 166 and FAS 167 on banks’ loan‐level mortgage approval and sale decisions. Effective in 2010, these standards tightened the accounting for securitizations and consolidation of securitization entities, respectively, causing banks to recognize an estimated $811 billion of securitized assets on balance sheet. We find that banks that recognize more securitized assets exhibit larger decreases in mortgage approval rates and larger increases in mortgage sale rates. These effects significantly exceed those of banks’ off–balance sheet securitized assets, consistent with our results being driven by the consolidation of securitization entities rather than by securitization per se. We conduct tests that help rule out the financial crisis as an alternative explanation for our results. Further analyses suggest that mechanisms underlying the results include consolidating banks’ reduced regulatory capital adequacy, increased market discipline, and consequent desire not to recognize high‐risk mortgages on balance sheet.