Reexamines the impact of merger accounting method by using a sample of tax-free mergers drawn from a different time period and using more refined cumulative average residual methodology. Nonmerger-related capital asset pricing model; Postmerger indirect cash-flow impacts.

[In this study I reexamine the impact of merger accounting method by using a sample of tax-free mergers drawn from a different time period and using more refined cumulative average residual (CAR) methodology. As in the Hong et al. study, the purchase method sample exhibits significant positive CARs over the entire period, which appear to originate in the interval preceding the announcement. The pooling method sample does not generate any significant residuals or CARs. To identify variables for which merger accounting method may be proxying, covariance analysis is used to determine that variables omitted from the capital asset pricing model (CAPM) do not influence the abnormal returns. Furthermore, probit analysis is used to investigate potential indirect cash-flow effects such as managerial income manipulation. A positive relationship between leverage and income-reducing policies is observed. This suggests that firms with high financial risk (leverage) may prefer purchase accounting to reduce reported earnings and regulators' attention. Tax characteristics of the acquired firms (net operating loss and investment tax credit carryforwards) are also examined as they can result in indirect cash-flow effects, such as reduced postmerger corporate income taxes. The limited data available indicate that tax factors have little impact on the CARs. Finally, a variable representing the relative bargaining strengths of the merging firms is tested for association with accounting method used. A statistically significant relationship is observed, and two implications follow from this result: (1) acquiring firms in a strong bargaining position are more likely to use the purchase method, and (2) as the bargaining strength of the acquiring firm decreases, the consideration given to the target firm increases while the magnitude of the CARs decreases. The contributions of the study are as follows. First, the abnormal returns to tax-free purchase method mergers, first observed by Hong et al., are found to persist and appear to originate during the preannouncement period. Second, other CAPM-omitted variables do not appear to influence these results. Finally, two tests of the association between potential indirect cash-flow effects and the CARs are significant and provide a partial explanation for the observed abnormal returns.]

If an increase in the rate at which a criminal commits crimes lowers the expected time until detection, the income from crime (net of expected fines) must be discounted at a rate that varies with the crime rate. This paper models the criminal's choice of the optimal crime rate under such conditions. It is shown that, irrespective of the criminal's attitude toward risk, an increase in the probability of detection is more likely to deter crime than a comparable increase in penalties. Other implications of the model for the optimal enforcement of laws are also explored.

If an increase in the rate at which a criminal commits crimes lowers the expected time until detection, the income from crime (net of expected fines) must be discounted at a rate that varies with the crime rate. This paper models the criminal's choice of the optimal crime rate under such conditions. It is shown that, irrespective of the criminal's attitude toward risk, an increase in the probability of detection is more likely to deter crime than a comparable increase in penalties. Other implications of the model for the optimal enforcement of laws are also explored.

[For years the SEC had required companies that experienced increases in their equity in subsidiaries due to a subsidiary stock issuance to enter that increase (or "gain") in Paid-In Capital. In 1983, the SEC changed its views on this issue in Staff Accounting Bulletin No. 51 [SEC, 1983]. Following the conclusions of an AICPA Issues Paper on the subject, the Commission decided to offer companies the option of reporting such gains from subsidiary stock issuances either in capital or in income in consolidated financial statements. This treatment was later extended to stock issuances of nonconsolidated equity investees, and companies began reporting these gains in income. This paper critically examines the view taken in the Issues Paper and reflected in SAB 51, that gains on subsidiary stock issuances are similar in substance to gains realized when the parent sells part of its investment in the subsidiary. It also reports on the treatment of these transactions in practice-and the window-dressing potential-by companies reporting them. We conclude that while a subsidiary stock issuance is similar in many respects to a parent's sale of its subsidiary's stock, there are important differences. Moreover, the proper accounting may depend on the theory of consolidation adopted. Public reporting of these transactions is often inadequate, particularly with respect to tax effects (an unsettled area in which standard-setting may be needed) and footnote disclosure.]

For years the SEC had required companies that experienced increases in their equity in subsidiaries due to a subsidiary stock issuance to enter that increase (or ‘gain’) in Paid-in Capital. In 1983, the SEC changed its views on this issue in Staff Accounting Bulletin No. 51 [SEC, 1983]. Following the conclusions of an AICPA Issues Paper on the subject, the Commission decided to offer companies the option of reporting such gains from subsidiary stock issuances either in capital or in income in consolidated financial statements. This treatment was later extended to stock issuances of nonconsolidated equity investees, and companies began reporting these gains in income. This paper critically examines the view taken in the Issues Paper and reflected in SAB 51, that gains on subsidiary stock issuances are similar in substance to gains realized when the parent sells part of its investment in the subsidiary It also reports on the treatment of these transactions in practice—and the window—dressing potential-by companies reporting them. We conclude that while a subsidiary stock issuance is similar in many respects to a parent's sale of its subsidiary's stock, there are important differences. Moreover, the proper accounting may depend on the theory of consolidation adopted. Public reporting of these transactions is often inadequate, particularly with respect to tax effects (an unsettled area in which standard-setting may be needed) and footnote disclosure.

The efficiency of governments may be influenced by institutional factors and by the intensity of monitoring by citizens. This paper develops a theory of optimal monitoring and then uses frontier estimation techniques to construct measures of efficiency f or police departments in 141 cities. Using these efficiency measures, i t is possible to test the extent to which efficiency is influenced by the presence of a professional city manager and by characteristics of th e citizens. Copyright 1993 by MIT Press.