Uskali Maki read three books by McCloskey on the "rhetoric of economics" with sympathy. But he wants McCloskey to choose between a coherence and a correspondence theory of truth. McCloskey notes in reply that modern epistemology - by contrast with the analytic philosophy circa 1955 that many philosophers of economics espouse - rejects the choice. Modern epistemology would say that economic scientists argue in many legitimate ways, governed by ethics. In brief, as Maki agrees, economics has a rhetoric. Rhetoric is a better guide than 1955-style analytic philosophy.

This paper considers an alternative asymptotic framework to standard sequential asymptotics for nonlinear models with deterministically trending variables. The asymptotic distributions of generalized method of moments estimators and corresponding test statistics are derived using this framework. The asymptotic distributions are shown to be the same with deterministically trending variables as with non-trending variables. That is, the distributions are normal and chi-squared respectively. The asymptotic covariance matrices of the estimators, however, are found to depend on the form of the trends. These findings provide a justification for the use of standard asymptotic approximations in nonlinear models even when the variables have deterministic trends.

This paper examines the behavior of institutional traders. We use unique data on the equity transactions of 21 institutions of differing investment styles which provide a detailed account of the anatomy of the trading process. The data include information on the number of days needed to fill an order and types of order placement strategies employed. We analyze the motivations for trade, the determinants of trade duration, and the choice of order type. The analysis provides some support for the predictions made by theoretical models, but suggests that these models fail to capture important dimensions of trading behavior.

This paper develops a framework for a general equilibrium analysis of asset markets when the number of assets is infinite. Such markets have been studied in the context of asset pricing theories. Our main results concern the existence of an equilibrium. We show that an equilibrium exists if there is a price system under which no investor has an arbitrage opportunity. A similar result has been previously known to hold in finite asset markets. Our extension to infinite assets involves a concept of an arbitrage opportunity which is different from the one used in finite markets. An arbitrage opportunity in finite asset markets is a portfolio that guarantees non-negative payoff in every event, positive payoff in some event, and has zero price. For the case of infinite asset markets, we introduce a concept of sequential arbitrage opportunity which is a sequence of portfolios which increases an investor's utility indefinitely and has zero price in the limit. We show that a sequential arbitrage opportunity and an arbitrage portfolio are equivalent concepts in finite markets but not in their infinite counterpart.

We estimate continuous-time event-history models of the acquisition of conglomerate vs. non-conglomerate and predatory vs. friendly acquisitions among the 1962 Fortune 500 between January, 1963, and December, 1968. Our analysis of predatory acquisitions reveals that there were strong disciplinary motivations for these acquisitions in the 1960s. Q ratios were, by a large margin, the most important determinant of predatory acquisition likelihood. Surprisingly, however, corporate boards appear to have provided little alternative to predatory acquisition as a monitoring mechanism during this period. Friendly acquisitions, on the other hand, were concentrated among firms with low price-earnings ratios and high return on equity, suggestive of the earnings manipulation story often associated with conglomerate acquisitions. Our analysis of conglomerate acquisitions reveals that there were strong disciplinary motivations for conglomerate acquisitions during this period. Conglomerate targets had low Q ratios and were as likely as non-conglomerate targets to be acquired in a predatory fashion. We find no evidence that conglomerate acquisitions were motivated by a desire to improve earnings-per-share numbers, as some have maintained. In addition, regardless of type or tenor, we find managerial ownership, firm size, and industrial organization motivations for acquisition are consistently important determinants of acquisition likelihood.

Previous work on hypothesis generation demonstrates that auditors tend to generate frequently occurring financial statement errors as their initial hypotheses to explain unexpected fluctuations. However, such work does not examine how the initially generated hypothesis affects subsequent performance at identifying an actual error. We hypothesized that the initially generated hypothesis would interfere with an auditor's ability to subsequently switch to a different hypothesis. Thus, if the initial hypothesis were incorrect, auditors would find it difficult to switch hypotheses in order to identify an actual error. Moreover, initially generating a frequent error would exacerbate this difficulty. Auditor‐subjects were asked to generate an initial error hypothesis after seeing a pattern of fluctuations in which sales and accounts receivable were overstated. After they generated their initial hypothesis, half of the subjects were provided with additional information that was consistent with a very frequent error (sales cutoff) and the other half were provided with information consistent with an infrequent error (sales recorded twice). As expected, we found that initially generating the very frequent error (i.e., sales cutoff) versus some other less frequent error affected auditors' subsequent performance at identifying actual errors. Specifically, auditors who generated the very frequent error as their initial hypothesis performed best when it was the actual error, but performed worst when the infrequent error was the actual error. In contrast, auditors who generated a less frequent error as their initial hypothesis performed moderately well (i.e., between best and worst) both when the actual error was frequent and when it was infrequent. The implications of these results for audit efficiency and effectiveness are discussed.