Current cost, Price indexes, PPE, PPI accuracy

James A. Brickley, Interpreting Common Stock Returns around Proxy Statement Disclosures and Annual Shareholder Meetings, The Journal of Financial and Quantitative Analysis, Vol. 21, No. 3 (Sep., 1986), pp. 343-349

Portfolios of stocks issued by small firms are well known to earn rates of return in excess of those commensurate with their market sensitivities. One common explanation for this phenomenon is that small firm stocks are riskier than large firm stocks because less information is available about the former than about the latter. A necessary condition for such an explanation to be valid is that the information effect not be eliminated by combining the individual stocks into portfolios. This paper uses jump-diffusion return models to gauge the impact of information by firm size. The results show that portfolios of small firm stocks are no more prone to information surprises than are portfolios of large firm stocks. However, portfolios of small firm stocks are found to react more severely than portfolios of large firm stocks when surprises do occur.

This paper explores the effects of mergers on the investment incentives of the levered firm and on levered firm value. Under a fairly broad set of assumptions, it is shown that most firm combinations “improve” investment incentives, bringing about a reduction in the agency costs of underinvestment associated with risky debt. The effect of the merger on debt and equity claim values is also explored. If not properly anticipated, the merger may create a wealth transfer from equity holders to bondholders. Such a wealth transfer includes, but is not limited to, the “coinsurance effect.”

Decentralized wage setting in search equilibrium models is inefficient because the meeting firm and worker ignore the dependence of job-matching probabilities on the number of firms and workers engaged in search. This paper investigates whether risk-neutral monopolistic unions will have an incentive to internalize this externality. I find that the externality will be internalized only if the union's policy is chosen by unemployed persons. If employed persons influence union policy, both the union wage and unemployment will be too high. A tax on the union wage combined with an employment subsidy to firms can correct this inefficiency.

Auditing, Sampling, Substantive test, Dollar-Unit sampling