The purpose of this paper is to examine an auditor's decision to investigate for fraud, when a manager with exogenous incentives to misreport chooses the quality of internal controls. I extend the strategic auditing literature by allowing the manager both a choice with respect to fraud and a second choice that affects the error rate in the audit population. Consistent with the practitioner literature, I assume managers can commit fraud by overriding internal controls, and that audits conducted in accordance with Generally Accepted Auditing Standards (GAAS) do not always distinguish between errors and fraud. The study is motivated by the increasing importance of internal controls in auditors' fraud risk assessments. In 1997, the Auditing Standards Board issued Statement on Auditing Standards (SAS) No. 82: Consideration of Fraud in a Financial Statement Audit. This standard requires auditors to assess the risk of fraud on every audit and encourages auditors to consider both the internal control system and management's attitude toward controls, when making this assessment.1

Since the start of economic reforms in 1978, China has experienced the largest increase in income inequality of all countries for which comparable data are available. According to the World Bank (1997), China’s Gini coefficient increased from 28.2 in 1981 to 38.8 in 1995 based on official survey data. Another study that used internationally standard definitions for incomes estimated China’s Gini ratio at 38.2 in 1988 and 45.2 in 1995, a level that already surpassed many developing economies in Asia (Azizur Khan and Carl Riskin, 1998). Are these income inequality changes the consequence of institutional reforms that replaced egalitarian rewards with work incentives, employment contracts, and labor mobility? This paper uses household survey data collected by China’s State Statistical Bureau (SSB) to investigate the sources and causes of this rising inequality. By analyzing Gini ratios and generalized entropy measures, I decompose the overall inequality into three sectoral components: ( i ) inequality within rural areas, ( ii ) inequality within urban areas, and (iii ) sectoral disparity. The data indicate that increases in rural – urban income differentials have been the driving factor behind the rising overall inequality in China. I argue that urbanbiased policies and institutions, including labor mobility restrictions, welfare systems, and financial policies of inflation subsidies and investment credits to the urban sector, are responsible for the long-term rural–urban divide and the recent increases in disparity.

We use a previously unexploited data base, specifically debt offerings by AT&T and its subsidiaries in the period 1970–1974, to examine the relative costliness of competitive and negotiated offerings. A sample based on the experience of a single issuer allows us to minimize the influence of agency considerations and differential riskiness of the issuers. We find no systematic ex post cost difference, and we also find that negotiation was chosen during comparatively unsettled times.

Nonlinear modeling has become popular in applied macroeconomics. Successful attempts include Beaudry and Koop's CDR (current depth of the recession) model of real GNP, and various STAR (smooth transition autoregression) models of industrial production. However, these models have not been directly compared. We compare CDR and STAR models of U.S. real GNP and industrial production. We find (i) within sample, the CDR model fits slightly better than the STAR model; (ii) out of sample, the CDR model forecasts better than the STAR model; and (iii) the CDR model generates very different dynamics than the STAR model.

This paper provides a new explanation of why inflation is sluggish in response to aggregate demand shocks and why aggregate output changes as result of such shocks. We argue that these phenomena are related to between inputs and outputs in the process, production lags for short. The broad intuition is that activities in a modern economy are interconnected through complex input-output relations, with within individual firms, and that it takes considerable time for cost and price changes to penetrate the entire input-output system. Our analysis provides a rationale for a prolonged inverse relation between inflation and unemployment. The paper suggests that the interaction of inflation persistence and unemployment persistence may offer a possible explanation of high and prolonged European unemployment. (This abstract was borrowed from another version of this item.)

Auditing, Analytical review judgement, Hypothesis set size, Time efficiency

The purpose of this study is to investigate inter-temporal and cross-sectional depth patterns in an electronic, order-driven environment. Although many exchanges operate in this environment, little is known about the liquidity dynamics induced by such trading mechanisms. The findings, based on over six million observations, reveal an inverted U-shaped pattern that mirrors the commonly reported U-shaped spread pattern. An important implication is that earlier spread results understate the strength of inter-temporal liquidity variations. Cross-sectional analysis, based on adverse selection-sorted portfolios, demonstrates that corporate depth is negatively related to information asymmetry. The adverse selection impact on liquidity and cost of capital is stronger than previously believed since information costs are realized through both spreads and depths.

We document that ownership by officers and directors of publicly traded firms is on average higher today than earlier in the century. Managerial ownership has risen from 13 percent for the universe of exchange‐listed corporations in 1935, the earliest year for which such data exist, to 21 percent in 1995. We examine in detail the robustness of the increase and explore hypotheses to explain it. Higher managerial ownership has not substituted for alternative corporate governance mechanisms. Lower volatility and greater hedging opportunities associated with the development of financial markets appear to be important factors explaining the increase in managerial ownership.

We document that ownership by officers and directors of publicly traded firms is on average higher today than earlier in the century. Managerial ownership has risen from 13 percent for the universe of exchange‐listed corporations in 1935, the earliest year for which such data exist, to 21 percent in 1995. We examine in detail the robustness of the increase and explore hypotheses to explain it. Higher managerial ownership has not substituted for alternative corporate governance mechanisms. Lower volatility and greater hedging opportunities associated with the development of financial markets appear to be important factors explaining the increase in managerial ownership.