CROSS‐BORDER M&A INFLOWS AND QUALITY OF COUNTRY GOVERNANCE: DEVELOPING VERSUS DEVELOPED COUNTRIES

This paper provides an empirical explanation to the observed disparity in cross‐border merger and acquisition inflows to developing and developed countries over the past two decades. We show two main results. First, the disparity can be attributed to the difference in the quality of institutions between the two groups of countries. Second, the gain from reforming institutions in developing countries is smaller than that in developed countries. These findings suggest that, with the current speed of institutional reforms in some developing countries, the disparity in cross‐border merger and acquisition inflows is likely to persist.     

Tax Advice and Reporting under Uncertainty: Theory and Experimental Evidence*

Abstract. This study extends the Beck, Davis, and Jung (1992) experimental study by incorporating opportunities for taxpayer subjects to purchase advice before making their tax reporting decisions. Tax advice has two roles in the model and experiment. First, tax advice allows taxpayers to reduce their uncertainty about the amount of taxes owed. This permits us to study the demand for tax advice in conjunction with its effect on tax reporting decisions. Second, the decision to purchase tax advice from an expert provides a means of signaling that may alter tax agency audit policies. The resulting audit policies, in turn, can affect taxpayers' decisions to purchase tax advice. These interdependencies are incorporated in a game-theoretic model and several predictions are tested experimentally. Consistent with theory, subjects sorted themselves into three groups based upon their private information. Another prediction supported by the experiment is that the demand for tax advice increased with the magnitude of an uncertain tax deduction (amount-at-risk). We also found, as expected, that the effects of tax advice on pre-audit tax revenues depend upon the amount-at-risk. When the amount-at-risk was high, subjects in settings with tax advice reported lower average incomes and paid lower taxes than did those subjects in settings without the opportunity to purchase tax advice. The opposite was true for the low amount-at-risk condition, supporting our prediction that tax advice and amount-at-risk would have an interactive effect on tax reporting. Analysis was also performed on post-audit tax collections. Contrary to theory, post-audit tax payments were found to increase when subjects had an opportunity to purchase tax advice. This result apparently was caused by a tendency to over-purchase tax advice and, in some cases, to report a low income regardless of the advice received. Résumé. Les auteurs développent l'étude expérimentale de Beck, Davis et Jung (1992) en y incorporant la possibilité pour les sujets contribuables de solliciter des conseils avant de prendre leurs décisions relatives à l'information qu'ils fourniront aux fins fiscales. Les conseils fiscaux jouent deux rôles dans le modèle et l'expérience. Premièrement, ils permettent aux contribuables de réduire leur incertitude relative au montant des impôts auxquels ils sont assujettis. Les auteurs peuvent ainsi étudier la demande de conseils fiscaux en conjonction avec leurs conséquences sur les décisions relatives à l'information à fournir aux fins fiscales. Deuxièmement, la décision de solliciter les conseils fiscaux d'un expert est un signal pouvant influer sur les politiques de vérification des représentants du fisc. À leur tour, ces politiques peuvent influer sur les décisions des contribuables de solliciter des conseils fiscaux. Ces interdépendances ont été intégrées à un modèle de jeu théorique et les auteurs ont vérifié plusieurs prédictions par expérimentation. Conformément à la théorie, les sujets se sont répartis en trois groupes, en fonction de l'information privilégiée dont ils disposaient. L'expérimentation a confirmé une autre prédiction: la demande de conseils fiscaux augmente avec l'importance de la somme dont la déductibilité est incertaine (montant à risque). Les auteurs constatent également, comme ils s'y attendaient, que les effets des conseils fiscaux sur les recettes fiscales antérieures à la vérification dépendent du montant à risque. Lorsque le montant à risque est élevé, les sujets pouvant solliciter des conseils fiscaux font état de revenus moyens inférieurs et paient moins d'impôt que les sujets n'ayant pas la possibilité de solliciter des conseils fiscaux. L'inverse est vrai lorsque le montant à risque est faible, ce qui confirme la prédiction selon laquelle les conseils fiscaux et le montant à risque ont un effet interactif sur l'information fournie aux fins fiscales. Les auteurs analysent également les impôts perçus postérieurement à la vérification. Contrairement à la théorie, ils constatent que les paiements fiscaux postérieurs à la vérification augmentent lorsque les sujets ont eu la possibilité de solliciter des conseils fiscaux. Ce résultat semble être attribuable à une tendance à solliciter des conseils fiscaux avec excès et, dans certains cas, à faire état d'un faible revenu, malgré les conseils reçus.     

Conflicting Family Values in Mutual Fund Families

We analyze the investment behavior of affiliated funds of mutual funds (AFoMFs), which are mutual funds that can only invest in other funds in the family, and are offered by most large families. Though never mentioned in any prospectus, we discover that AFoMFs provide an insurance pool against temporary liquidity shocks to other funds in the family. We show that, though the family benefits because funds can avoid fire sales, the cost of this insurance is borne by the investors in the AFoMFs. The paper thus uncovers some of the hidden complexities of fiduciary responsibility in mutual fund families.     

Financial Reporting Quality and Wage Differentials: Evidence from Worker-Level Data

We examine whether financial reporting quality affects worker wages using employer-employee matched data in the United States. We find that low financial reporting quality is associated with a compensating wage differential—that is, a risk premium—using three distinct approaches while controlling for worker characteristics by (1) regressing wages on firm-year–level and firm-level reporting quality, (2) documenting wage changes when workers switch firms, and (3) estimating a structural approach that separates reporting quality from performance-related volatility. We find evidence consistent with two channels: performance pay and turnover risk, where workers bear risks from noise in performance measurement and unemployment, respectively. To mitigate endogeneity concerns, we show that—after the accounting scandals in 2002 and after the announcements of an internal control weakness (ICW)—former Arthur Andersen clients and ICW firms pay wage premiums to employees, with magnitudes between 0.9% and 2.8% of annual wages.     

Car prices and the degree of buyer sophistication

This study deals with price variations among car dealers. The major emphasis is on differences in prices quoted to prospective buyers based on their degree of sophistication. The value of bargaining in the price negotiation process is addressed. Prices are also compared based on dealer sales volume and dealer location.     

Do Jobseekers Value Diversity Information? Evidence from a Field Experiment and Human Capital Disclosures

We examine how information about the diversity of a potential employer's workforce affects individuals’ job-seeking behavior. We embed a field experiment in job recommendation emails from a leading career advice agency in the United States. The experimental treatment involves highlighting a diversity metric to jobseekers. Our results indicate that disclosing diversity scores in job postings leads jobseekers to click on firms with higher diversity scores, with such effects varying across jobseeker demographics. A follow-up survey provides evidence on potential explanations for why jobseekers value diversity information. We then examine how jobseekers’ preferences for diversity relate to disclosure choices under the U.S. SEC Human Capital Disclosure requirement. We find that firms in industries characterized by higher jobseeker responsiveness to diversity information tend to voluntarily disclose diversity metrics in their 10-Ks under these new disclosure requirements.     

A Liquidity-Based Resolution of the Uncovered Interest Parity Puzzle

A new monetary theory is set out to resolve the “uncovered interest parity (UIP)” puzzle. It explores the possibility that liquidity properties of money and nominal bonds can account for the puzzle. A key concept in our model is that nominal bonds carry liquidity premia. We show that the UIP can fail to hold under the economic environment where collateral pledgeability and/or liquidity of nominal bonds and/or collateralized credit-based transactions are relatively bigger. Our liquidity-based theory can help understanding many empirical observations that risk-based explanations find difficult to reconcile with.     

Consumer Decision-Making Styles: Comparison Between United States and Korean Young Consumers

The purpose is to identify decision-making styles of young consumers in Korea and to find if these styles are similar to those of U.S. young consumers. An instrument, based on previous research in the United States, was administered to 310 college students in Korea. Data are factor analyzed and alpha coefficients are computed for scale reliability. Findings indicate the generality of some consumer decision-making styles. Similarities and differences between cultures are discussed, and implications are provided.