Reporting Discretion and Private Information Communication through Earnings

We model a two-period pure exchange economy where a risk averse manager, who has private information regarding future earnings, is required to issue an earnings report to investors at the end of each period. While the manager is prohibited from directly disclosing her private information, she is allowed to bias reported earnings in the first period, subject to GAAP rules that require that a specified proportion of the bias be reversed subsequently. We show there is a minimum threshold of reversal, such that, when the proportion of required reversal is above this threshold, the manager smooths income and communicates her private information through reported earnings. Consequently, the market attaches greater weight to reported earnings than under a regime that allows no discretion. When the required reversal is below the minimum threshold, the manager increases reported earnings without limit and the equilibrium degenerates. When the manager is not endowed with any private information, the market unravels the "true" earnings and price is unaffected by earnings management. Our results underscore the importance of both allowing and restricting reporting discretion through formal mechanisms.     

Service Competitiveness – An Anglo-US Study

This article reports on the latest in a series of international comparisons of management practices and performance outcomes of industries in various countries. Here, it is the service industries in the UK and the US which come under the microscope. Among the companies surveyed, there were more world-class performers in the US than the UK, but also more low performers. The concluding part of the article is diagnostic – the authors also suggest measures which could improve performance.     

The divide-and-conquer and employer/ employee models of discrimination: Neoclassical competition as a familial defect

This article is an examination of the similarities between Michael Reich’s divide-and-conquer model of discrimination and the Becker-Arrow taste model of discrimination. It shows that Reich’s model of discrimination is analytically identical to Arrow’s employer discrimination model when employer utility is a function of total profits and the racial employment ratio. It also shows that the Becker-Arrow distinction between employer and employee discrimination is invalid. Finally, the author argues that neoclassical competition is the major defect of both models. After discussing the implications of these results the article points to new directions in the literature on the economics of discrimination.     

Buyout candidates and their investment banking relationships: An empirical analysis of returns adjoining buyout offers

Previous studies document a significant positive price reaction at the proposal of a buyout offer. In this study the author examines the influence of investment banking relationships on target firms associated with buyout offers. The results support the hypothesis that knowledge of an impending buyout manifests itself before a buyout’s public announcement. The evidence supports the hypothesis that investment bankers use different strategies before a buyout.     

Pricing Options on an Asset with Bernoulli Jump-Diffusion Returns

The price movements of certain assets can be modeled by stochastic processes that combine continuous diffusion with discrete jumps. This paper compares values of options on assets with no jumps, jumps of fixed size, and jumps drawn from a lognormal distribution. It is shown that not only the magnitude but also the direction of the mispricing of the Black-Scholes model relative to jump models can vary with the distribution family of the jump component. This paper also discusses a methodology for the numerical valuation, via a backward induction algorithm, of American options on a jump-diffusion asset whose early exercise may be profitable. These cannot, in general, be accurately priced using analytic models. The procedure has the further advantage of being easily adaptable to nonanalytic, empirical distributions of period returns and to nonstationarity in the underlying diffusion process.     

Current Issues in the Analysis of Commercial Real Estate

This paper identifies and discusses a number of current issues regarding our understanding of commercial real estate markets. These issues include: 1) accurate estimation of the quantity and location of our nation's commercial space; 2) an understanding of the linkage between the space and capital markets for commercial real estate; 3) identification of the macroeconomic factors that affect the rate of return on commercial property and whether local market factors also affect the rate of return; 4) problems associated with measuring the return characteristics of equity investments in commercial property (including measures of the diversification benefits and inflation-hedging abilities of this asset class); 5) a better understanding of rental markets, including good measures of changes in effective rents over time; and 6) examination of the rationale for ownership of commercial space by corporate users. This paper reviews recent research related to these questions and suggests future research that should prove to be fruitful.     

Profit maximization: The ethical mandate of business

The authors propose a model for business ethics which arises directly from business practice. This model is based on a behavioral definition of the economic theory of profit maximization and situates business ethics within opportunity costs. Within that context, they argue that good business and good ethics are synonymous, that ethics is at the heart and center of business, that profits and ethics are intrinsically related.Marist Father Pat Primeaux is a Professor of Theology at Saint John's University, (New York). John Stieber is a Professor of Finance and Economics at Southern Methodist University's Edwin L. Cox School of Business (Dallas). They have collaborated on several articles on the behavioral dimension of economic efficiency. They have also designed and taught courses in business ethics at both the graduate and undergraduate level.