The dynamics of price elasticity of demand in the presence of reference price effects

The authors derive an expression for the price elasticity of demand in the presence of reference price effects that includes a component resulting from the presence of gains and losses in consumer evaluations. The effect of reference price is most noticeable immediately after a price change, before consumers have had time to adjust their reference price. As a result, immediate-term price elasticity is higher than long-term elasticity, which describes the response of demand long after a price change, when reference price effects are negligible. Furthermore, because of the differential effect of gains and losses, immediate-term price elasticity for price increases and price decreases is not equal. The authors provide a quantitative definition for the terms immediate term and long term, using the average interpurchase time and the discrete “memory” parameter. Practical consequences of the distinction between immediate- and long-term elasticities for the estimation and use of elasticity values are discussed. Gadi Fibich (fibich@math.tau.ac.il) is an associate professor in the Department of Applied Mathematics at Tel Aviv University. This research grew out of his interest in applications of mathematical modeling to economics and management science. He is currently working on auction theory. Arieh Gavious (ariehg@bgumail.bgu.ac.il) is a senior lecturer in the Department of Industrial Engineering at Ben Gurion University, Israel. His interest is in application of game theory to economics and management science problems. His current interest is in auction theory. Oded Lowengart (odedl@bgumail.bgu.ac.il) is a senior lecturer in the Department of Business Administration at Ben Gurion University, Israel. His research interests are in the areas of modeling pricing effects on consumer behavior at both aggregate and disaggregate levels, product positioning, and market share forecasting and diagnostics.     

Do private firm valuations contain incremental information content over routine analyst valuations?

In this study, we seek to investigate whether private expert valuations commissioned for specific transactions outside the exchange contain incremental information content over public analyst valuations published routinely by investment houses. First, we find that public valuations are based to a larger extent on financial statements and market quotes, whereas private valuations tend to be based on other, non-public information. Second, we show that investors’ response to both public and private valuations is cautious in the short-run as well as in the long-run. Third, we provide evidence that despite the fact that private valuations have the advantage of time, human resources, and better access to non-public information, they do not provide different results than those obtained from public valuations. We conclude that while private valuations may be captured as more accurate and reliable, their superiority over public valuations is questionable at best.     

Dividends from unrealized earnings and default risk

Review of Accounting Studies - Using hand-collected data on Israeli firms’ unrealized earnings and debt restructurings following adoption of the International Financial Reporting Standards...     

Contracting, signaling, and moral hazard: a model of entrepreneurs, ‘angels,’ and venture capitalists

Investment by wealthy individuals, known as ‘angels,’ in startup firms is quite significant and has taken off in the last few years. Angels invest in the company at an earlier stage than venture capitalists (VCs) do. This paper examines the relationship between an entrepreneur, an angel, and a VC from the seed investment made by the angel to the exit stage. The study characterizes the equilibrium contracts among the players and provides insights into the related institutional arrangements. Next, the study examines the signaling aspects of the game. The paper also analyzes the moral hazard problems of the entrepreneur and the VC. It shows that the outcome in a startup firm is not efficient because of the free-rider phenomenon.     

Stock market bubble effects on mergers and acquisitions

We investigate if and how mergers and acquisitions are affected by trends in the capital market, and particularly by a stock market bubble. Our main findings indicate that while the prevalence of M&A increased during the technology bubble, the pricing of M&A did not change. Moreover, the bursting of the bubble seems to have led to further cautiousness by investors, which extended throughout the years subsequent to the bursting of the bubble, even when prices on the exchange had rebounded. While we do not find robust evidence for changes in price multiples outside the exchange in concomitance with the changes on the exchange, we document changes in the information used by investors to value their targets. It seems that investors experienced a learning process in terms of the type of variables preferred, appearing to be more cautious since the bubble burst. This learning process investors undergo in concomitance to processes in the market seems to result in their being less affected by periodical or cyclical sentiments of euphoria and depression in the capital market.     

The positive externalities of IFRS R&D capitalization: enhanced voluntary disclosure

Studies comparing IFRS with U.S. GAAP generally focus on differences in the attributes and consequences of the recognized financial items. We, in contrast, focus on voluntary disclosure resulting from arguably the most significant difference between IFRS and GAAP: the capitalization of development costs—the “D” of R&D—required by IFRS but prohibited by GAAP. Using a sample of Israeli high-technology and science-based firms, some using IFRS and others U.S. GAAP, we document a significant externality of IFRS development cost capitalization in the form of extensive voluntary disclosure of forward?looking information on product pipeline development and its expected consequences. We show that this disclosure is value-relevant over and above the mandated financial information, including the capitalized R&D asset. We also show that the capitalized development costs (an asset) is highly significant in relation to stock prices, and enhances the relevance of the voluntary disclosures.     

Price–quality relationship in the presence of asymmetric dynamic reference quality effects

The purpose of this study is to examine the relationship between price and reference quality and their combined effect on profits. An analytical modeling approach aimed at solving the optimal solution for the profit maximization problem under these conditions is developed, enabling the exact path of the optimal price and quality over time to be depicted. Based on separating the effects of price and reference quality on demand, this analysis also provides insight into the contribution of these two effects to the steady-state solution through elasticities. Our results show that a monotonic inverse relationship exists between price and quality, such that a steady-state level is obtained where the quality?Cprice ratio is lower when reference quality effects exist than when such effects do not exist. In other words, consumers obtain higher quality for a higher price but with a lower price per unit of quality. Overall, accounting for reference quality effects will increase a firm??s profits.     

Information and Common Knowledge in Collective Action

The paper suggests a theoretical game framework to explain collective action dynamics by learning processes. When a certain fact becomes common knowledge due to a certain event, people accumulate knowledge about the state of the world and act accordingly. We concentrate on a conceptual example of the bandwagon dynamic showing the insights which this approach adds to existing studies. We analyze two other conceptual examples showing that the accumulation of information does not always bring people to know the truth about the state of the world. On the other hand, it may make them aware of their ignorance. Several practical implications follow.     

Earnings Management in Chapter 11 Bankruptcy

We study the impact of earnings management prior to bankruptcy filing on the passage of firms through Chapter 11. Using data on public US firms, we construct three measures of earnings management: a real activities manipulation measure (abnormal operating cash flows) and two accounting manipulation measures (discretionary accruals and abnormal working capital accruals). We find that, controlling for the impact of factors known to influence earnings management and firm survival in bankruptcy, earnings management prior to bankruptcy significantly reduces the likelihood of Chapter 11 plan confirmation and emergence from Chapter 11. The results are driven primarily by extreme values of earnings management, characterized by one or two standard deviations above or below the mean. The findings are consistent with creditors reacting positively to unduly conservative earnings reports and negatively to overly optimistic earnings reports. We also find that the presence of a Big 4 auditor is associated with a higher incidence of confirmation and switching to a Big 4 auditor before filing increases the incidence of emergence.     

Continuous Time Models of Collective Action and Political Change

This paper presents continuous time models for an analysis of dynamic systems using them to examine the complex dynamics of collective action and political change. The study concentrates on the mutual dependence and behavior of two variables over time: the number of citizens participating in collective action, and the amount of resources mobilized by the government to combat such collective action. The models presented highlight the key components that determine outcomes, and allow for planning, of particular dynamics of collective action and political change. Specifically, the proposed models analyze the impact of collective action on the transition toward democracy as well as possible dynamics of revolution.