Regulation Fair Disclosure and Earnings Information: Market, Analyst, and Corporate Responses

With the adoption of Regulation Fair Disclosure (Reg FD), market behavior around earnings releases displays no significant change in return volatility (after controlling for decimalization of stock trading) but significant increases in trading volume due to difference in opinion. Analyst forecast dispersion increases, and increases in other measures of disagreement and difference of opinion suggest greater difficulty in forming forecasts beyond the current quarter. Corporations increase the quantity of voluntary disclosures, but only for current quarter earnings. Thus, Reg FD seems to increase the quantity of information available to the public while imposing greater demands on investment professionals.     

Voting Rights and Market Reaction to Dual Class Common Stock Issues

This paper examines the return of the original class of common stock around the announcement of the creation of a second class of stock. As in previous studies, this one finds a generally ambiguous market reaction on the first public announcement. However, this paper offers new evidence that both the voting rights and the compensation for loss of voting rights are important determinants of the market's reaction. Specifically, it demonstrates that a second class stock issue that contains no compensation for the lost voting rights results in negative returns. When the original stockholders are compensated for lost voting rights, they experience positive abnormal returns.     

Assessing the impact of AIDS on the growth path of the Malawian economy

More than 1% of people of sub-Saharan Africa aged 15-49 years are infected with HIV, with over half likely to develop AIDS in the next decade. As rates of HIV infection continue to climb, there will be staggering financial consequences to bear in the years ahead in terms of high medical treatment costs and crippled macroeconomies. The authors employ a modified Solow growth model to simulate the impact of the AIDS epidemic on output capacity and other key macroeconomic aggregates in Malawi. They compare a counterfactual no-AIDS scenario to medium and extreme AIDS projections and find that average real GDP growth over the 1985-2010 period will be 0.2-0.3 percentage points lower in the medium case and 1.2-1.5% lower in the extreme case relative to the no-AIDS case. The size of the economy by 2010 will therefore be reduced from a real GDP of 5.03 billion (constant 1985) Kwacha without AIDS to 4.81-4.77 and 3.80-3.46 billion Kwacha in the medium and extreme scenarios, respectively.     

The Impact of Ethical Ideologies,Moral Intensity,and Social Context on Sales-Based Ethical Reasoning

Previous research indicates that ethical ideologies, issue-contingencies, and social context can impact ethical reasoning in different business situations. However, the manner in which these constructs work together to shape different steps of the ethical decision-making process is not always clear. The purpose of this study was to address these issues by exploring the influence of idealism and relativism, perceived moral intensity in a decision-making situation, and social context on the recognition of an ethical issue and ethical intention. Utilizing a sales-based scenario and multiple ethics measures included on a self-report questionnaire, data were collected from a regional sample of business students, most of whom had modest work experience. The results indicated that perceived moral intensity was associated with increased ethical issue recognition and ethical intention. Idealism was also associated with increased ethical issue recognition, and relativism was associated with decreased ethical intention. Social consensus was positively related to ethical issue recognition and intention, while competitive context was inversely related to ethical intention. Finally, ethical issue recognition was associated with increased ethical intention. Idealism, moral intensity, social consensus, and work experience worked together as predictors of ethical issue recognition, whereas recognition of an ethical issue, relativism, moral intensity, social consensus, and competitive context worked together to predict ethical intention.     

Corporate Risk Management under Information Asymmetry

This paper examines the financial and operational hedging activities of US pharmaceutical and biotech firms that are subject to a high level of information asymmetry stemming from R&D investments during 2001–2006. We find evidence in support of the information asymmetry hypothesis à la Froot, Scharfstein and Stein (1993) that hedging helps mitigate the under‐investment problem. Specifically, we find that the use of financial derivatives is associated with greater firm value and that the value enhancement is larger for firms subject to greater information asymmetry and better growth opportunities. There is a synergy between financial hedging and operational hedging where the latter is used to counter product development risk. The results are robust with respect to alternative performance measures, industry‐specific growth measures, and the endogeneity problem. Our work is differentiated from existing studies that examined commodity‐based industries without addressing information asymmetry.     

Bank Capital and the Credit Crunch: The Roles of Risk-Weighted and Unweighted Capital Regulations

We investigated whether in recent years banks have increased their holdings of securities at the expense of their holdings of business loans in response to shortfalls of their capital relative to risk-weighted capital standards and relative to a capital standard that made no explicit allowance for credit risk. We estimated that bank credit fell by about $4.50 for each $1 that a bank's capital fell short of the unweighted capital standard. Banks that had less capital than required by the risk-weighted standard appear to have shifted away from assets with low risk weights (securities and single-family mortgages) and to have shifted toward assets with higher risk weights (commercial real estate and commercial and industrial loans). When we included both shortfall variables in a regression, shortfalls relative to the unweighted capital standard significantly affected bank credit, while shortfalls of capital relative to the risk-weighted standard did not. We found no significant effects of capital shortfalls at other, local-competitor banks on bank portfolios. Delinquencies in a given category of a bank's loans generally had significantly negative effects on that bank's holdings of loans in that category. In contrast, banks tended to increase holdings of loans in categories in which local-competitor banks were experiencing higher delinquency rates.