N‐FIRM OLIGOPOLY WITH GENERAL ISO‐ELASTIC DEMAND

In this note oligopoly with iso‐elastic demand is analysed. Unlike previous studies we consider general iso‐elastic demand rather than the case of unit elasticity. An n‐firm Nash‐Cournot equilibrium for the case of heterogeneous constant marginal costs is derived. The main result is a closed‐form solution that shows the dependency of the equilibrium on the elasticity of demand and the share of industry costs. The result has applications to a wide range of areas in oligopoly theory by allowing comparisons across markets with different elasticities of demand.     

Properties of Census Dual System Population Size Estimators

We study parametric and non‐parametric approaches for assessing the accuracy and coverage of a population census based on dual system surveys. The two parametric approaches being considered are post‐stratification and logistic regression, which have been or will be implemented for the US Census dual system surveys. We show that the parametric model‐based approaches are generally biased unless the model is correctly specified. We then study a local post‐stratification approach based on a non‐parametric kernel estimate of the Census enumeration functions. We illustrate that the non‐parametric approach avoids the risk of model mis‐specification and is consistent under relatively weak conditions. The performances of these estimators are evaluated numerically via simulation studies and an empirical analysis based on the 2000 US Census post‐enumeration survey data.     

Using clustering ensemble to identify banking business models

The business models of banks are often seen as the result of a variety of simultaneously determined managerial choices, such as those regarding the types of activities, funding sources, level of diversification, and size. Moreover, owing to the fuzziness of data and the possibility that some banks may combine features of different business models, the use of hard clustering methods has often led to poorly identified business models. In this paper we propose a framework to deal with these challenges based on an ensemble of three unsupervised clustering methods to identify banking business models: fuzzy c‐means (which allows us to handle fuzzy clustering), self‐organizing maps (which yield intuitive visual representations of the clusters), and partitioning around medoids (which circumvents the presence of data outliers). We set up our analysis in the context of the European banking sector, which has seen its regulators increasingly focused on examining the business models of supervised entities in the aftermath of the twin financial crises. In our empirical application, we find evidence of four distinct banking business models and further distinguish between banks with a clearly defined business model (core banks) and others (non‐core banks), as well as banks with a stable business model over time (persistent banks) and others (non‐persistent banks). Our proposed framework performs well under several robustness checks related with the sample, clustering methods, and variables used.     

The impact of privatization on efficiency and profitability

Over the past three decades, China has undergone tremendous economic and social change as a consequence of the transition from a centrally planned to a market economy. This paper examines a key feature of this transition – the privatization of the state‐owned enterprises (SOEs) – through both a theoretical model and empirical analysis. Using newly collected primary data from a variety of sources, we study how privatization of listed SOEs affects employment, wages, profits and other aspects of economic performance at the firm level. Our major finding is that privatization results in substantial downsizing of employment, increased labour productivity and rising profitability.     

A NOTE ON PRICING OF PRODUCT QUALITY FOR STATUS CONCERNS

The paper analyses the optimal pricing of the product quality scheme when concerns for relative standing exist among consumers. We demonstrate that if the proportion of high‐value consumers is over (respectively, under) 1/2 of the total consumers, a firm has an incentive to select a large (respectively, small) quality gap among products. Therefore, there exists a cut‐off level for status concerns, which eliminates quality differences, and the firm assigns the same quality to all the consumers. These results indicate that consumers’ qualities will reflect distortions at the top and bottom. Accordingly, the firm's profit depends on which consumer category is larger.     

TIME‐CONSISTENT AND MARKET‐CONSISTENT EVALUATIONS

We consider evaluation methods for payoffs with an inherent financial risk as encountered for instance for portfolios held by pension funds and insurance companies. Pricing such payoffs in a way consistent to market prices typically involves combining actuarial techniques with methods from mathematical finance. We propose to extend standard actuarial principles by a new market‐consistent evaluation procedure which we call “two‐step market evaluation.” This procedure preserves the structure of standard evaluation techniques and has many other appealing properties. We give a complete axiomatic characterization for two‐step market evaluations. We show further that in a dynamic setting with continuous stock prices every evaluation which is time‐consistent and market‐consistent is a two‐step market evaluation. We also give characterization results and examples in terms of g‐expectations in a Brownian‐Poisson setting.     

Tax avoidance and ex ante cost of capital

This study examines the association between tax avoidance and ex ante cost of equity capital. Based on prior research, we develop two proxies for investors’ expectations of tax avoidance and explore whether deviations from those expectations result in higher ex ante cost of equity capital. We find that the ex ante cost of equity capital increases with tax avoidance that is either below or above investor expectations and that the increase is larger for tax avoidance that exceeds investors’ expectations. We then examine whether firms that alter their future tax avoidance exhibit a lowering of their ex ante cost of equity capital and find that tax avoidance decreases (increases) from the prior year for firms that were above (below) investors’ expectations in the prior year. These results are consistent with the trade‐off suggested by the Scholes and Wolfson framework and reinforce the notion that balancing tax benefits and non‐tax costs is an important feature of firms’ tax planning.     

The Unintended Consequences of the Frequency of PCAOB Inspection

After more than 50 years of self‐regulation of the US auditing profession, the Sarbanes‐Oxley Act of 2002 (SOX) created the Public Company Accounting Oversight Board (PCAOB) as a quasi‐governmental entity with statutory authority to inspect accounting firms that audit public clients. The frequency of this inspection is annual or triennial, based upon the number of public clients the firm audits. We examine the effects of these two levels of inspection frequency on financial reporting quality and audit fees for clients of small and midsize public accounting firms. Our findings provide evidence of significantly higher audit quality and audit fees for clients of annually inspected firms relative to clients of triennially inspected firms. These findings are robust to auditor‐client alignment analyses, propensity score matching, time‐series analyses, examination of firms that have changed from triennial to annual inspection, and particular examination of firms with inspection deficiencies. Overall, our study suggests that the two‐tier frequency system of PCAOB inspection may have also resulted in two‐tier audit quality and audit fee systems for small and midsize public accounting firms, with more frequent inspection leading to more rigorous and informed auditor decisions. We discuss the implications of our results for the Board and the profession at large.     

A saddlepoint approximation to the distribution of the sum of independent non‐identically uniform random variables

Calculating the probability of the corresponding significance point is important for finite sample sizes. However, it is difficult to evaluate this probability when the sample sizes are moderate to large. Under these circumstances, consideration of a more accurate approximation for the distribution function is extremely important. Herein, we performed a saddlepoint approximation in the upper tails for the distribution of the sum of independent non‐identically uniform random variables under finite sample sizes. Saddlepoint approximation results were compared with those for a normal approximation. Additionally, the order of errors of the saddlepoint approximation was derived. © 2014 The Authors. Statistica Neerlandica © 2014 VVS.