Evidence on the motivation for management forecasts of corporate earnings

A multivariate model of the process by which managers decide to release public forecasts of their firms' earnings is developed, based on factors that are hypothesized to affect the demand for and the willingness to supply such forecasts. We test the model on data from a comprehensive sample of earnings forecasts, and find support for our hypotheses about the likely joint influence of those factors. Larger firm size, greater leverage, higher and more stable earnings rates and less rapid growth rates are found to be associated with an increased propensity for management to provide earnings forecasts for their firms.     

Learning, Asset-Pricing Tests, and Market Efficiency

This paper studies the asset-pricing implications of parameter uncertainty. We show that, when investors must learn about expected cash flows, empirical tests can find patterns in the data that differ from those perceived by rational investors. Returns might appear predictable to an econometrician, or appear to deviate from the Capital Asset Pricing Model, but investors can neither perceive nor exploit this predictability. Returns may also appear excessively volatile even though prices react efficiently to cash-flow news. We conclude that parameter uncertainty can be important for characterizing and testing market efficiency.     

Public utility valuation and risk under incentive regulation

The objective of providing inducements for public utilities to seek to improve the efficiency of their operations has been a longstanding regulatory concern. Among the evolving strategies for furthering that objective is a shift toward what has come to be referred to as incentive regulation. We examine here how this departure from past regulatory practice will affect the market value and market risk of the utility firm, and the specific manner in which an incentive mechanism can be implemented in order to achieve a desired valuation outcome. A particular focus is the establishment of boundaries on allowed rates of return under incentive regulation which are consistent with that desired outcome. The likely impact on utility ratepayers is considered.     

INFLATION,SECURITY VALUES,AND RISK PREMIA

The impact of stochastic inflation on the cross-sectional structure of nominal securities yields is examined. The analysis indicates that equilibrium required returns on debt and equity securities are affected differently by inflation and that the “Fisher Effect” is more likely to hold for equity returns than for debt yields. Implications for empirical investigations of portfolio performance and the real interest rate are explored.     

AN ARBITRAGE PRICING APPROACH TO EVALUATING MUTUAL FUND PERFORMANCE

A test procedure, derived from arbitrage pricing theory, that permits the measurement of the security selection performance of professional portfolio managers is developed and applied to a sample of mutual funds over the period of the 1970's. The evidence indicates that more than one factor was present in the market during that interval as a systematic influence on the profile of securities returns. Consistent with prior studies, the evidence also suggests that mutual fund portfolios did not outperform a passive buy-and-hold investment strategy. A comparative analysis of the same data, using performance measures based on the single-factor market model, produces similar but less powerful results, both in the aggregate and at the individual fund level.     

Inflation,currency exchange rates,and the international securities markets

A time-state-preference model of an efficient and complete international financial market is employed to investigate the conditions under which the international Fisher Effect will hold, and the forward currency exchange rate will be an unbiased estimate of the future spot rate. The presence of stochastic inflation within countries in the fiat-currency prices of real goods will destroy both relationships, even in the absence of any institutional imperfections or trading barriers. Similarly, expected inflation rate differentials across countries will not coincide with spot-versus-forward currency exchange rate differentials.     

TAX-TIMING OPTIONS,LEVERAGE, AND THE CHOICE OF CORPORATE FORM

The tax-timing options associated with opportunities to trade corporate securities are examined. The availability of such options to both the firm and its securityholders is shown to create incentives for, and thereby to add to the possible explanation of, three empirically observed financial phenomena: (1) the existence of complex corporate capital structures; (2) the presence of debt in those capital structures; and (3) corporate spin-offs as vehicles to increase the total market value of a firm's assets. A set of symmetrical arguments also offers a reason to expect at least one negative effect on shareholder wealth from mergers of publicly traded companies.     

The Complementarity between Tax Avoidance and Manager Diversion: Evidence from Tax Haven Firms

We investigate whether tax avoidance and manager diversion are complementary when the costs of diversion are low by comparing dividend payouts, performance, and overinvestments of tax haven firms versus other multinational firms based in countries with weak and strong investor protections. Desai and Dharmapala (2006, 2009a, b) and Desai et al. (2007) set forth a theory of tax avoidance within an agency framework (the D&D theory) based on the assumption that tax avoidance and manager diversion are complementary when the corporate governance system is “ineffective” (i.e., the manager's expected costs of diversion are low). Tax haven firms are corporate groups whose parent firms are incorporated in tax haven countries that are not the countries where the groups’ headquarters or primary operations are located (i.e., their “base” countries). We argue that tax haven incorporation potentially lowers the costs of diversion for managers of firms based in countries with weak investor protections. Using a sample from 28 base countries, we provide evidence that manager diversion and tax avoidance are complementary for tax haven firms based in countries with weak investor protections but not for tax haven firms based in countries with strong investor protections. Our results are consistent with the complementarity assumption underlying the D&D model and provide additional insights into the potential impact of the decentralization of the global firm.     

Security-holder cash flows and the valuation of corporate investment projects

The difference between adjusted present value and cost-of-capital discounting procedures for evaluating corporate real-asset investment projects is re-examined. The two approaches are shown to contain different implicit assumptions about the distribution of project cash flows to security-holders. The consequences thereof for the proper valuation of individual projects in the context of a multiproject investment plan are considered.