The paper analyzes the use of reported accounting earnings and price as a basis for compensating a manager when he trades on private information, and share price is set rationally based on privately held information, publicly available and contractible information, and publicly available but noncontractible information. In addition, we analyze the comparative statics of the compensation on reported earnings and price with respect to changes in the economy.

This paper presents the results of 32 experimental markets designed to test hypotheses based on Wagenhofer's (1990) disclosure model. The model predicts the existence of multiple disclosure equilibria in cases where a manager balances the effects that disclosures can have on two sets of external agents: investors and an opponent. The experimental results support the partial-disclosure equilibrium over the full-disclosure option. Additionally, a lower level of disclosure was observed in those markets in which the discloser repeatedly interacted with information receivers. Lower disclosure reduces the level of proprietary costs which is beneficial to the information sender.

The paper ranks Departments of Economics in the U.S., based on publications in a set of eight "Blue Ribbon" journals during the period 1987-91. We adjust for variation in character and page size across the journals, allow for differences in journal quality and deal with changes in department composition over the period by assigning affiliation at the time of assessment rather than at the date of publication. Alternative journal set specifications are examined to test the sensitivity of the composition of the top 25 departments.

We analyze how analysts' forecasts relate to investor beliefs and describe the implications of these relations for price and volume reactions to earnings surprises. We show that dispersion among forecasts does not fully capture investor uncertainty. We also show how the relations between market reactions and forecast properties differ under the alternative assumptions of exogenous and endogenous private information acquisition. Finally, the analysis suggests refined tests for volume reactions at the time of an announcement. Our results indicate that the model is useful for understanding and interpreting empirical work and developing empirical tests of market reactions to announcements.

The paper presents a dynamic contracting model of myopic firm behaviour caused by the fear of early project termination by outside investors. Although the parties can conclude longterm contracts, asymmetric information between investors and firms can make it impossible to implement profitable long-term projects. The paper characterizes the structure of optimal, renegotiation-proof contracts for unmonitored and monitored finance. Monitoring by investors, although itself subject to distorting incentive constraints, is shown to be able to overcome the short-term bias of investment and thus to lengthen the firms' planning horizon.

We study a credit model where, because of adverse selection, unprofitable projects may nevertheless be financed. Indeed they may continue to be financed even when shown to be low-quality if sunk costs have already been incurred. We show that credit decentralization offers a way for creditors to commit not to refinance such projects, thereby discouraging entrepreneurs from undertaking them initially. Thus, decentralization provides financial discipline. Nevertheless, we argue that it puts too high a premium on short-term returns. The model seems pertinent to two issues: “soft budget constraint” problems in centralized economies, and differences between “Anglo-Saxon” and “German-Japanese” financing practices.

A new asymptotic theory of regression is introduced for possibly nonstationary time series. The regressors are assumed to be generated by a linear process with martingale difference innovations. The conditional variances of these martingale differences are specified as autoregressive stochastic volatility processes with autoregressive roots that are local to unity. The author finds conditions under which the least squares estimates are consistent and asymptotically normal. A simple adaptive estimator is proposed which achieves the same asymptotic distribution as the generalized least squares estimator without requiring parameter assumptions for the stochastic volatility process. Copyright 1995 by The Econometric Society.

We introduce a new model for time-varying conditional variances as the most general quadratic version possible within the ARCH class. Hence, it encompasses all the existing restricted quadratic variance functions. Its properties are very similar to those of GARCH models, but avoids some of their criticisms. In univariate applications to daily U.S. and monthly U.K. stock market returns, QARCH adequately represents volatility and risk premia. QARCH is easy to incorporate in multivariate models to capture dynamic asymmetries that GARCH rules out. Such asymmetries are found in an empirical application of a conditional factor model to 26 U.K. sectorial stock returns.