Emerging markets are characterized by volatile, but substantial returns that can easily exceed 75% per annum. Balancing these lofty returns are liquidity costs that, using the bid–ask spread as a basis, range from 1% for the Taiwanese market to over 47% for the Russian market. However, the paucity of bid–ask spread information across countries and time requires the use of liquidity estimates in emerging markets even though little is known about the efficacy of these estimates in measuring bid–ask spread costs. Using firm-level quoted bid–ask spreads as a basis, I find that price-based liquidity measures of Lesmond et al. [Review of Financial Studies 12 (1999) 1113] and Roll [Journal of Finance 39 (1984) 1127] perform better at representing cross-country liquidity effects than do volume based liquidity measures. Within-country liquidity is best measured with the liquidity estimates of either Lesmond, Ogden, and Trzcinka or, to a lesser extent, Amihud (2002). Examining the impact of legal origin and political institutions on liquidity levels shows that countries with weak political and legal institutions have significantly higher liquidity costs than do countries with strong political and legal systems, even to the exclusion of legal origin or insider trading enforcement. Higher incremental political risk is associated with a 10 basis point increase in transaction costs, using the Lesmond, Ogden, and Trzcinka estimate, or a 1.9% increase in price impact costs, using the Amihud estimate.

Previous research provides evidence that, for the clients of a large audit firm, audit clients with higher perceived business risk bear the expected costs of this risk with higher audit fees. We extend the literature, which focuses on the relation between litigation risk and audit fees, by examining alleged client misconduct that is not illegal but possibly increases business risk. In particular, we examine the relation between audit fees and business risk for audit clients doing business in developing countries where bribery of top government officials has been an accepted business practice. We hypothesize that bribery‐paying clients are riskier because of both client business risk and audit business risk. Using data collected from Securities and Exchange Commission filings and audit fee data in the 1970s, before the passage of the Foreign Corrupt Practices Act, we provide evidence that audit fees were higher for clients that disclosed paying bribes. This evidence is consistent with an audit market where auditors assess business risk at the client level, then pass their expected costs to the client in the form of higher audit fees.

Schrand and Walther's (2000) archival evidence suggests that managers strategically disclose prior-period benchmarks in current earnings announcements, which, in turn, influences investors' judgments. Using a controlled experimental setting, I present evidence confirming that a transparent description of a transitory prior-period gain or loss affects how investors apply prior-period earnings when evaluating currentperiod earnings. I also provide evidence that this effect is likely to be unintentional on the part of investors, resulting from limitations in their memory for the prior-period event. Overall, the experimental results suggest that a quantitative description of the transitory prior-period gain or loss in a current earnings announcement helps investors to evaluate company performance. The results also highlight the need for consistency in reporting non-GAAP financial performance measures.

Editors exhort authors to circulate and present their working papers to colleagues before submitting them to journals (Zimmerman 1989; Green et al. 2002). Authors heeding such advice are said to increase the likelihood of getting their work published and making their research, once published, more influential (Zimmerman 1989). While evidence regarding these matters is of keen importance to authors, editors, and administrators, no research exists showing that circulating and presenting manuscripts increases their probability of being accepted in accounting journals or, when published, their influence on stimulating other research. I present such evidence by perusing acknowledgments in premier accounting journals. I examine the relation between circulating and presenting manuscripts and the probability of acceptance by relating acknowledgments of 305 papers submitted to The Accounting Review during June 2002–May 2003 to the editor's reject versus revise and resubmit decision. I examine the relation between circulating and presenting manuscripts and an article's influence by relating the acknowledgments in 256 articles published in The Accounting Review, Journal of Accounting Research, and Journal of Accounting and Economics to citations to these articles. My two analyses of acknowledgments to institutions, conferences, and individuals yield similar results. I find that papers presented at more workshops are more likely to be invited back to The Accounting Review, and that papers published in The Accounting Review, Journal of Accounting and Economics, or Journal of Accounting Research generate more citations if they were presented previously at more workshops.

Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting By MARTIN D . D . EVANS AND RICHARD K . LYONS* This paper compares the true, ex ante fore- casting performance of a micro-based model against both a standard macro model and a random walk. In contrast to existing literature, which is focused on longer-horizon forecasting, we examine forecasting over horizons from one day to one month (the one-month horizon being where micro and macro analysis begin to over- lap). Over our three-year forecasting sample, we find that the micro-based model consistently outperforms both the random walk and the macro model. Micro-based forecasts account for almost 16 percent of the sample variance in monthly spot rate changes. These results pro- vide a level of empirical validation as yet unat- tained by other models. The forecasting experiment proposed by Richard Meese and Kenneth Rogoff (1983) re- mains a benchmark against which exchange- rate models are judged. Their result that structural macro models cannot outperform a naive random walk has proved robust over the decades. Yet, the Meese-Rogoff paper was never about forecasting in the true sense (i.e., using tirrie-f information to forecast exchange rates at t + 1). B y using concurrent, realized values of the forcing variables, their regressions were more about concurrent explanation than about ex ante forecasting. Their only forecast- ing element is in their reliance on ex ante data to estimate equation parameters, which appro- priately penalized models whose estimated pa- rameters were unstable. tion for the random-walk nature of exchange rates is that there exists some unobserved fun- damental that itself follows a random walk (un- observed being important because fundamentals proposed in most macro models do not follow random walks). They offer a different explana- tion, one rooted in the asset approach to ex- change rates and the present-value relation that follows from it. Specifically, they show that i f fundamentals are 1(1), but not necessarily ran- dom walks, then as the discount factor in the present-value relation approaches 1, the ex- change rate will follow a process arbitrarily close to a random walk. Intuitively, given that an 1(1) process can be split into random-walk and stationary components, a discount factor near 1 means that most all of the weight is placed on fundamentals far into the future, ex- pectations of which are dominated by the random- walk component. Charles Engel and Kenneth West (2004, 2005) provide a valuable perspective on the forecastability of exchange rates. One explana- This paper takes the analysis of Engel and West as an important reorientation of thinking and brings it to the natural next step. Specifi- cally, if there is little room for forecasting based on stationary components of fundamentals, then one needs to focus on where all the action is, namely, exchange-rate dynamics that come from expectational surprises. Though the sur- prise part is, by definition, orthogonal to public information, our micro-based model shows that there should exist types of nonpublic infor- mation that are useful for forecasting this part, and where to look for these types of informa- tion. We then locate data on these types of nonpublic information and test whether they have true, ex ante forecasting power. We should * Evans: Department of Economics, Georgetown Uni- versity, Washington, DC 20057, and NBER; Lyons: Haas School of Business, University of California, Berkeley, C A 94720-1900, and NBER. We are grateful to Ken West for his comments and to the National Science Foundation for financial support. We refrain from using the word news because it has too strong an association with macro information that is public, which, even in the most careful of event studies, explains less than 5 percent of exchange-rate variation in total (see Torben Andersen et al., 2003).

This paper examines the policy issues associated with resolving the possible failure of Fannie Mae or Freddie Mac (housing enterprises). It compares and contrasts these issues with those raised in the context of large bank failures and also identifies important differences in the extant supervisory authorities. Based on these discussions, a number of policy suggestions are offered to minimize the cost of resolution and protect taxpayers from loss should a large bank or housing enterprise fail.

We show analytically that in a rational expectations present‐value model, an asset price manifests near–random walk behavior if fundamentals are I(1) and the factor for discounting future fundamentals is near one. We argue that this result helps explain the well‐known puzzle that fundamental variables such as relative money supplies, outputs, inflation, and interest rates provide little help in predicting changes in floating exchange rates. As well, we show that the data do exhibit a related link suggested by standard models—that the exchange rate helps predict these fundamentals. The implication is that exchange rates and fundamentals are linked in a way that is broadly consistent with asset‐pricing models of the exchange rate.

This study adds to the empirical evidence that privatization improves the performance of divested firms and offers preliminary evidence as to why these performance improvements occur. Using a sample of 129 share-issue privatizations from 23 developed (OECD) countries, we first document significant increases in profitability, efficiency, output, and capital expenditure following privatization. Our data indicate that ownership (both private and foreign), degree of economic freedom, and level of capital market development significantly affect post-privatization performance. A comparison to the findings of Boubakri et al. (2005) [Boubakri, N., Cosset, J., Guedmani, O., 2005. Liberalization, corporate governance, and the performance of newly privatized firms. Journal of Corporate Finance (this issue)] suggests that several determinants of post-privatization performance improvements differ between developed and developing countries.

This paper documents that insiders are both contrarians and possessors of superior information. We find that insider trades are positively related to the firm's future earnings performance (proxy for superior cash flow information), positively related to the firm's book-to-market ratio and inversely related to recent returns (proxies for trading against misvaluation). Each relation has incremental explanatory power, yet information about future cash flow changes explains a smaller portion of insider purchases than do proxies for security misvaluation. The relation between insider trades and future earnings performance is amplified (attenuated) as the benefits (costs) to trading on financial performance information increase.