Investor Sentiment and Corporate Disclosure

This paper investigates how firms react strategically to investor sentiment via their disclosure policies in an attempt to influence the sentiment‐induced biases in expectations. Proxying for sentiment using the Michigan Consumer Confidence Index, we show that during low‐sentiment periods, managers increase forecasts to “walk up” current estimates of future earnings over long horizons. In contrast, during periods of high sentiment, managers reduce their long‐horizon forecasting activity. Further, while there is an association between sentiment and the biases in analysts' estimates of future earnings, management disclosures vary with sentiment even after controlling for analyst pessimism, indicating that managers attempt to communicate with investors at large, and not just analysts. Our study provides evidence that firms' long‐horizon disclosure choices reflect managers' desire to maintain optimistic earnings valuations.     

PUBLIC INVESTMENT,TAXATION AND TRANSFER OF TECHNOLOGY

A low‐wage developing economy (South) is interested in accessing and attracting superior technology from a high‐wage developed economy (North) with firms having heterogeneous quality of technology. To improve upon the initial market equilibrium, which shows that relatively inefficient technologies will move to the South, the host government invests in infrastructure financed through taxing the foreign firms. We discuss the problem of existence of such a tax‐transfer mechanism within a balanced budget framework. We argue that such a policy can increase tax revenue as well as instigate the transfer of better quality technology. It turns out that this policy is more likely to be successful when the production concerns high‐value, high‐price products in low‐wage economies. Our results improve upon the conventional strategy of a tax break.     

Managerial Ownership and Accounting Conservatism

In this paper we examine the effect of managerial ownership on financial reporting conservatism. Separation of ownership and control gives rise to agency problems between managers and shareholders. Financial reporting conservatism is one potential mechanism to address these agency problems. We hypothesize that, as managerial ownership declines, the severity of agency problem increases, increasing the demand for conservatism. Consistent with our hypothesis, we find that conservatism as measured by the asymmetric timeliness of earnings declines with managerial ownership. The negative association between managerial ownership and asymmetric timeliness of earnings is robust to various controls, in particular, for the investment opportunity set. We thus provide evidence of a demand for conservatism from the firm's shareholders.     

FISCAL FEDERALISM, STATE LOBBYING AND DISCRETIONARY FINANCE: EVIDENCE FROM INDIA

In the quasi-federal democratic polity that India has, lobbying for central funds by the states is often done in a subliminal fashion. Hence, it becomes difficult to get an account of how much lobbying has been done to a particular end. Our paper attempts at constructing certain political proxy variables to quantify the extent of such lobbying in India. We quantify lobbying through the ministerial representation in the council of ministers. We also use several time and state dummies to account for the constituent states' political alignment with the center as well as the coalition and the reform period breaks in the Indian system. Taking panel data that cover 29 years and 14 major states we show that our constructed variables do explain disparity in central fiscal disbursements under the non-formulaic "discretionary" head in a robust way. Our findings remain true even after we take into account the impact of endogeneity of net state income on the transfers. Additionally, our exercise brings to the fore the fact that the coalition governments and economic reform measures impact upon state lobbying at the center in a significant manner.     

SEEKING RENT IN THE INFORMAL SECTOR

Rent seeking within the vast informal segment of the developing world is a relatively under‐explored topic in the interface of labor market policies and public economics. Moreover, how rent seeking and corruption within the informal segment gets affected by economic reforms targeted for the formal sector is rarely discussed in the literature. This paper fills the gap. We identify conditions under which economic reform in the formal segment will increase the rate of corruption or rent seeking in the informal sector and raise the pay‐off for those involved in rent‐seeking activities. When the formal sector contracts due to reforms, rent seeking in the informal sector may increase and lower the level of welfare unconditionally. Economic reforms may increase corruption instead of reducing it, unlike standard conjectures.     

INTERNATIONAL AND INTRA‐NATIONAL TRADE: A CONTINUUM APPROACH*

We build up a Ricardian trade model with multiple regions within a nation and examine how international trade determines interregional patterns of production and specialization. We show that the degree of interregional concentration of economic activities moves in different directions in two trading nations. The role of “absolute advantage” becomes crucial in dictating the course of income disparity across regions. We discuss cases with varying degrees of labour mobility and reconfirm the result on post‐trade interregional concentration and dispersion. Later we explore the impact of “scale factor” in this model and show how principle of comparative advantage and economies of scale interact to determine the pattern of specialization and volume of trade.     

FOREIGN INVESTMENT AND THE ROLE OF JOINT VENTURES

Foreign investment in developing countries and in economies in transition may be discouraged by fluctuations in the value of local currencies, particularly when risk sharing markets, such as currency future markets are missing. International joint ventures can be regarded as an institution for risk sharing. We demonstrate that a properly designed joint venture between the foreign firm and a local partner makes foreign investment more likely. Furthermore, foreign investment may be increased by a joint venture.     

POVERTY,ELITE HETEROGENEITY,AND THE ALLOCATION OF PUBLIC SPENDING: PANEL EVIDENCE FROM THE INDIAN STATES

In this paper, we explore how in India, the world's largest democracy, the presence of different elite groups—the dominant landed and capitalist elite, and the minority elite (who are the elected representatives of the marginalized women and low caste population)—could affect the nature and extent of public spending on various accounts, especially education. We argue that the productive cooperation between the capitalist elite and workers may induce capitalists to favor spending on education, while the landed elite tend to oppose investment in basic education because they are fearful of dilution of their political dominance by the educated poor. While the minority elite may tend to favor redistributive spending, including that on education, their effectiveness could be limited by their under‐representation in the government. Results from the Indian states for the period 1960–2002 provide support for these hypotheses.     

The Role of Gatekeepers in Capital Markets

Gatekeepers in financial markets have the power to provide the institutional stability, fortitude, and direction necessary for the development and the smooth functioning of capital markets. At the same time, they are often motivated by their own private incentives. This along with the tradeoffs they face, and the at‐times unintended consequences of the regulations they propose and enforce, can undermine their effectiveness. A thorough understanding of gatekeepers and their roles can thus illuminate academics, the financial community, and regulators on how such gatekeepers can be the most effective and generate the greatest benefits for capital markets. Since gatekeeping roles and the literature they have inspired encompass a wide array of institutions and agencies, our overview concentrates on those that the conference papers appearing in this volume focus on. We conclude that collectively, the papers contribute to significant progress, and point out some crucial areas that call for further investigation and offer opportunities for future research.