Knowledge that Transforms

We provide evidence on the preliminary effects of mandatory adoption of International Financial Reporting Standards ( IFRS ) on accounting quality for a relatively broad set of firms from 20 countries that adopted IFRS in 2005 relative to a benchmark group of firms from countries that did not adopt IFRS matched on the strength of legal enforcement, industry, size, book‐to‐market, and accounting performance. Relative to these benchmark firms, we find that IFRS firms exhibit significant increases in income smoothing and aggressive reporting of accruals, and a significant decrease in timeliness of loss recognition; however we do not find significant differences across IFRS and benchmark firms in meeting or beating earnings targets. Our findings contrast with findings in earlier studies which suggest that IFRS adoption leads to increased accounting quality. Our findings primarily hold for firms in strong enforcement countries, which suggests that enforcement mechanisms in these countries were not able to counter the initial effects of greater flexibility in IFRS relative to domestic GAAP .

There is little research on how accounting information quality affects a firm’s external financing choices. In this paper, we use the occurrence of accounting restatements as a proxy for the reduced credibility of accounting information and investigate how restatements affect a firm’s external financing choices. We find that for firms that obtain external financing after restatements, they rely more on debt financing, especially private debt financing, and less on equity financing. The increase in debt financing is more pronounced for firms with more severe information problems and less pronounced for firms with prompt CEO or CFO turnover and auditor dismissal. Our evidence indicates that accounting information quality affects capital providers’ resource allocation and that debt holders help alleviate information problems after accounting restatements.

We use novel data to study genetic testing among individuals at risk for Huntington disease (HD), a hereditary disease with limited life expectancy. Although genetic testing is perfectly predictive and carries little economic cost, presymptomatic testing is rare. Testing rates increase with increases in ex ante risk of having HD. Untested individuals express optimistic beliefs about their health and make decisions (e.g., retirement) as if they do not have HD, even though individuals with confirmed HD behave differently. We suggest that these facts can be reconciled by an optimal expectations model (Brunnermeier and Parker 2005).

We characterize the unique equilibrium of a competitive continuous time game between a resource-constrained informed player and a sequence of rivals who partially observe his action intensity. Our game adds noisy monitoring and impatient players to Aumann and Maschler (1966), and also subsumes insider trading models. The intensity bound induces a novel strategic bias and serial mean reversion by uninformed players. We compute the duration of the informed player's informational edge. The uninformed player's value of information is concave if the intensity bound is large enough. Costly obfuscation by the informed player optimally rises in the public deception.

We study the scale and selectivity of foreign-born PhD students in science and engineering. We focus on students from China, India, Korea, and Taiwan, which together account for most roughly one-third of science and engineering PhD students in the United States. The selectivity of these students is high, as measured by their fathers' relative education levels. In China and India, fathers of students who receive US PhDs in these fields are roughly 15 times more likely to have a BA degree than their contemporaries are to have tertiary education. Over time, selectivity falls for China but the trend for other countries is ambiguous.

This paper empirically assesses the incidence and efficiency of Round I of the federal urban Empowerment Zone (EZ) program using confidential microdata from the Decennial Census and the Longitudinal Business Database. Using rejected and future applicants to the EZ program as controls, we find that EZ designation substantially increased employment in zone neighborhoods and generated wage increases for local workers without corresponding increases in population or the local cost of living. The results suggest the efficiency costs of first Round EZs were relatively modest.

This paper explores the causes and consequences of regional taste differences. I introduce habit formation into a standard general equilibrium model. Household tastes evolve over time to favor foods consumed as a child. Thus, locally abundant foods are preferred in every region, as they were relatively inexpensive in prior generations. These patterns alter the correspondence between price changes and nutrition. For example, neglecting this relationship between tastes and agro-climatic endowments overstates the short-run nutritional gains from agricultural trade liberalization, since preferred foods rise in price in every region. I examine the model's predictions using household survey data from many regions of India.

Drastic changes in central bank operations and monetary institutions in recent years have made previously standard approaches to explaining the determination of the price level obsolete. Recent expansions of central bank balance sheets and of the levels of richcountry sovereign debt, as well as the evolving political economy of the European Monetary Union, have made it clear that fiscal policy and monetary policy are intertwined. Our thinking and teaching about inflation, monetary policy, and fiscal policy should be based on models that recognize fiscal-monetary policy interactions.

Randomization is commonplace in everyday resource allocation. We generalize the theory of randomized assignment to accommodate multi-unit allocations and various real-world constraints, such as group-specific quotas (“controlled choice”) in school choice and house allocation, and scheduling and curriculum constraints in course allocation. We develop new mechanisms that are ex ante efficient and fair in these environments, and that incorporate certain non-additive substitutable preferences. We also develop a “utility guarantee” technique that limits ex post unfairness in random allocations, supplementing the ex ante fairness promoted by randomization. This can be applied to multi-unit assignment problems and certain two-sided matching problems.

The purpose of this note is to analyze properties of the risk lovers' utility function beyond the positive sign of its second order derivative. We show that—contrarily to a priori beliefs—risk lovers are prudent and are willing to accumulate precautionary savings.