AN ECONOMETRIC ANALYSIS OF EQUITY COSTS AND RISK PREMIUMS IN THE ELECTRIC UTILITY INDUSTRY: 1971–1985

This paper develops a varying parameter econometric model that estimates the cost of equity of individual utility firms from 1971 to 1985. The equity costs estimated in this framework can be analyzed in terms of their statistical precision. The paper also examines, theoretically and empirically, the relationship between the econometric estimates of the equity risk premiums and the risk-free interest rates. The data do not support the hypothesis that risk premiums are independent of interest rates. Also, the relationship appears to vary over time. These results invalidate the risk premium approach in which equity costs are estimated by adding a constant, historical average risk premium to the prevailing interest rates.     

The revival of shelf-registered corporate equity offerings

We report that traditional seasoned equity offerings (SEOs) are no longer firms' preferred choice for raising seasoned public equity. Traditional offerings have recently been surpassed by shelf-registered offerings in terms of both annual frequency and total capital raised. This represents a dramatic shift from the 1980s, during which the overwhelming majority of firms favored traditional over shelf-registered offerings. We find that the growth in shelf use is related to firms increasingly valuing and using the option feature of shelf registration to defer offerings. Moreover, the evidence indicates that the way firms now use shelf offerings resolves the shelf under-certification problem and results in no larger market penalties and significantly lower underwriter fees relative to non-shelf offerings. Finally, firms often use universal shelf filings and choose between debt and equity offerings based on the prevailing relative market conditions.     

Machiavellianism in public accountants: some additional Canadian evidence

The current study surveys practising Canadian public accountants in Canada in both Big 4 and non-Big 4 firms to determine their orientation with respect to Machiavellianism, defined as 'attending to one's interests much more than to others'. Results indicate that while there are no significant differences in Machiavellianism between public accountants in the upper-level positions (managers and partners), partners are significantly less Machiavellian than seniors. These results are consistent with previous studies on Canadian public accountants.     

Analysts' Forecasts: Low-Balling,Market Efficiency,and Insider Trading

The phenomenon of low-balling reported in the financial press involves downward biased projections of earnings by managers or analysts, thereby artificially lowering market expectations and creating a positive earnings surprise when actual earnings are announced. This study reports that the stock market does respond to such surprises relative to analysts' reported forecasts. Further, the proportion of insider buy-transactions in the period prior to the earnings forecast is significantly higher for the sample with high positive earnings surprise than for the control sample with zero forecast errors. The study cannot distinguish whether managers or analysts are the source of the low-balling and therefore makes no statement on the legality of such insider trades.     

Generalized tax incidence results using the Harberger model with three factors

The Harberger (1962) model of corporate tax incidence, utilising a two-sector, two-factor, general equilibrium framework and Mieszkowski's (1967) extension yielded several interesting results on equivalences among general taxes as well as differential incidence of partial taxes. This paper reports on the generality of these theorems in the presence of a third factor. Not surprisingly, many results will be dependent upon the relative magnitudes of partial factor elasticities of substitution and sectoral factor ratios. Emphasis is given to an intuitive explanation of these dependencies.     

El debate sobre la flexibilidad laboral en la India. Argumentos en contra de los acuerdos voluntarios

Un punto candente del debate sobre flexibilización laboral en la India es la obligación de que las empresas de 100 asalariados o más obtengan permiso del Gobierno para los despidos. Quienes abogan por revocar dicha ley (o elevar sustancialmente el umbral de trabajadores) se basan en Basu, Fields y Debgupta (2009), cuya argumentación teórica a favor del despido y la contratación libres sobre la base de acuerdos voluntarios se cuestiona aquí: la recomendación política general de estos autores no se sostiene lógicamente ni siquiera en el marco de su propio modelo, por lo que esta alternativa de flexibilización sigue sin fundamento.     

CAPITAL ADEQUACY AND THE VALUATION OF LARGE COMMERCIAL BANKING ORGANIZATIONS

Bankers argue that regulatory agencies require excessive capital adequacy. As a consequence, banks cannot achieve optimal capital structure. This study investigates the capital adequacy issue for bank holding companies over the 1974—1983 period, one of the most turbulent periods in recent banking history. During this time, capital is never excessive from the stockholders' viewpoint, and financial markets, on average, perceive capital levels as inadequate. Assuming the public wants no lower capital levels than shareholders, recent regulatory action to require higher capital ratios is a Pareto superior decision.     

Exchange Rate Exposure of Exporting and Importing Firms

Although economic theory and conventional wisdom suggest that U.S. multinationals and export-oriented firms are adversely affected by a strengthening dollar and benefit from a depreciating dollar, the research to date provides little evidence of any relationship between FX changes and the stock prices of such firms. The authors propose a "dual-effect" hypothesis that distinguishes between (1) the direct competitive effect of currency induced changes on the effective price to consumers of the firm's products and (2) an indirect effect stemming from the generally positive correlations between currency levels and the strength of the domestic economy. Thus, for example, while a strong dollar hurts exports, it also tends to be associated with a strong domestic market and higher domestic sales. For this reason, the net effect on exporters of a stronger dollar could be close to zero. On the other hand, a weak dollar tends to have a "doubly" negative effect on importers because of higher import prices and the associated weakness of the local economy. For this reason, importers—in contrast to exporters—are likely to have significant exposures to currency fluctuations.
Consistent with these arguments, the authors' econometric analysis reveals a significantly positive currency exposure for importers and insignificant exposure for exporters, based on correlations between stock returns and currency changes. But when the benchmark is non-exporting domestic firms instead of a marketwide index (which contains exporters), a stronger currency is associated with a significantly negative effect on exporters.     

REGULATORY ENVIRONMENT AND MARKET RESPONSE TO PUBLIC UTILITY RATE DECISIONS

This paper examines the stock market's response to the public utility rate-case decisions, or settlements, in the context of the regulatory environment. Davidson (1984) finds that the market responds only to “surprise” settlements that are extreme. No adjustment is made, however, for the regulatory environment of the utility requesting a rate increase. The hypothesis of this paper is that a “surprise” is a function of the regulatory environment in which the decision is made. The results of the residual study support the hypotheses that after adjusting for regulatory environment, there is no significant market response to average settlements and above and below average settlements influence the market positively and negatively, respectively.