Bakshi and Chen (1996b) suggest that the spirit of capitalism affects stock prices by increasing society's aversion to risk. In this article, I show that the way in which the spirit of capitalism impinges upon asset prices depends on the interaction of impatience, willingness to substitute over time, and ordinal preferences between consumption and status, in addition to risk aversion. I develop a general model that charts the channels through which the spirit of capitalism affects asset prices. An increase in the capitalist spirit may increase or decrease risk aversion, and may actually decrease the prices of risky assets.

This paper proposes an alternative to the asymptotic principal components procedure of Connor and Korajczyk (J. Financial Econom. 15 (1986) 373) that is robust to time series heteroskedasticity in the factor model residuals. The new method is simple to use and requires no assumptions stronger than those made by Connor and Korajczyk. It is demonstrated through simulations and analysis of actual stock market data that allowing heteroskedasticity sometimes improves the quality of the extracted factors quite dramatically. Over the period from 1989 to 1993, for example, a single factor extracted using the Connor and Korajczyk method explains only 8.2% of the variation of the CRSP value-weighted index, while the factor extracted allowing heteroskedasticity explains 57.3%. Accounting for heteroskedasticity is also important for tests of the APT, with p-values sometimes depending strongly on the factor extraction method used.

This paper studies the consequences of opening asset markets more often for the properties of asset prices and social welfare. For all reasonable parameter values, increasing trading hours lowers average asset prices, increases unconditional asset price volatility at a given point in time, and decreases unconditional asset price volatility when averaged over the period of time that includes the additional hours that markets are open. Unconditional social welfare is increased by opening markets more often, although the welfare gains are small – well below 1% of lifetime consumption. In contrast, because expanding hours of trading affects agents' information sets, the welfare effect of more trading hours conditional on information available to agents can be large and the effect can be negative.

Stanley Engerman has been a presence in the Department of Economics at the University of Rochester for over 37 years. He was an early and eminent participant in the Cliometric Revolution that swept throughout the economichistory profession in the 1960’s and 1970’s. We doubt that anyone could have anticipated the “gathering storm” that greeted the publication of Time on the Cross, co-authored with Robert Fogel in 1974. Since that time Stan has become the world’s leading authority on slavery in the Americas and the Caribbean, as well as an important contributor to a set of issues ranging from the 19th century American iron industry to the economics of British imperialism. His own human capital, as extensive as we know it to be, is complemented by capital of the physical variety: an enormous library of research material spilling over into bookshelves and floors in several offices in Rochester and attracting a yearly stream of itinerant scholars anxious to pick his books as well as his brains. In this short note, we intend to honor Stan by applying the tools of international trade theory to illustrate several episodes in the development of industries, both in the United States and in world markets. A colleague of Stan’s at Rochester, Lionel McKenzie, once commented that, in 19th century Britain, Lancashire would have been unlikely to produce cotton cloth if the cotton had to be grown in England (McKenzie, 1954). This remark expresses in utter brevity the importance to production and trading patterns of the domain of tradability of raw materials or intermediate products. For example, it is difficult to envisage the patterns of production (and trade) in modern-day Japan should it be denied access to world supplies of oil, coal, and iron ore, local production of each of these items being negligible. Transport costs as well as man-made impediments to trade are mainly responsible for variations in the degree of access countries possess to the inputs available in the markets of other countries. Simple competitive generalequilibrium models of production, of the type intensively utilized in the theory of international trade, can usefully be harnessed to shed light on several episodes in 19th century American economic history in which the nature of trading possibilities for raw materials heavily influenced the extent to which local American production of final commodities could withstand the pressures in world markets without the aid of protective devices. The simplest model setting in which to investigate the importance of trade in raw materials is a Ricardian model, augmented by the necessity of using a produced input in addition to labor in at least one commodity. Denote the pair of final commodities by X and Y, where in order to produce Y a certain quantity of intermediate good, Z, is required. The competitive profit conditions for the two final commodities are shown in equation (1):

This paper reviews and proposes additional research concerning the role of publicly reported financial accounting information in the governance processes of corporations. We first discuss research on the use of financial accounting in managerial incentive plans and explore future research directions. We then propose that governance research be extended to explore more comprehensively the use of financial accounting information in additional corporate control mechanisms, and suggest opportunities for expanding such research. We also propose cross-country research to investigate more directly the effects of financial accounting information on economic performance through its role in governance and more generally.

Bakshi and Chen (1996) suggest that the spirit of capitalism affects stock prices by increasing society's aversion to risk. In this article, I show that the way in which the spirit of capitalism impinges upon asset prices depends on the interaction of impatience, willingness to substitute over time, and ordinal preferences between consumption and status, in addition to risk aversion. I develop a general model that charts the channels through which the spirit of capitalism affects asset prices. An increase in the capitalist spirit may increase or decrease risk aversion, and may actually decrease the prices of risky assets. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

This paper analyses changes in capitalization and control of dual class firms before and after IPO. The results indicate that the combination of a large controlling shareholder with family interests, rather than concentrated ownership per se, leads to dual class capitalization. During the first 15 years post-IPO, voting leverage continuously increases as the dual class firms issue more restricted than superior voting shares. However, control changes are equally frequent for dual and single class firms suggesting that dual class capitalization is not used to unduly entrench management. We document disputes between restricted and superior voting shareholders to illustrate the potential corporate governance problems which are associated with dual class capitalization. As a result of these disputes, investor interest in dual class equity has decreased and there is a recent trend toward reclassification back into single class equity.

In this paper, we propose that affective reactions are integral to accounting decision contexts like capital budgeting, and that researchers must jointly consider affect and cognition to better understand accounting decision makers' behavior. We argue that interpersonal relationships are characteristic of many capital‐budgeting contexts, and that these relationships can lead to emotional affective reactions. For example, reactions such as frustration and anger may result if a manager is treated unfairly by another individual involved in a capital project. Drawing on relevant work in neurobiology and psychology, we then predict that these affective reactions can influence managers' capital‐budgeting decisions. We report on four experimental scenarios that demonstrate the impact of affective reactions on capital‐budgeting decisions. Consistent with our predictions, the results indicate that managers consider both financial data and affective reactions when evaluating the utility of an investment alternative. Our results suggest that researchers should consider both affect and cognition to more fully understand decision making in accounting contexts.

In June 1997, the New York Stock Exchange lowered its minimum price increment on most stocks from eighths to sixteenths. We use a sample of institutional trades to directly measure the effect of this tick size reduction on execution costs. Though quoted and effective spreads decline, realized execution costs for these institutions increase after the change to sixteenths. Costs increase most for orders that aggressively demand liquidity, including large orders, orders placed by momentum traders, and orders not worked by the trading desk. These findings emphasize that spreads are not a sufficient statistic for market quality. Smaller tick sizes may actually reduce market liquidity.