We show that the noninformation component of trading costs is priced in the cross-section of stock returns using intraday data for NYSE/AMEX stocks. More importantly, we show that the noninformation component is much larger and more strongly related to stock returns than is the adverse-selection component, indicating that the noninformation component plays a more important role in asset pricing than does the adverse-section component. We conduct a variety of robustness tests and show that our main results hold for different estimation methods, measures of the adverse-selection cost, subsample periods, and control variables. We offer plausible explanations for these results.

The efficacy of the Financial Stability Board's proposed requirement for minimum “total loss absorbing capacity” (TLAC) at global systemically important banks (G-SIBs) is assessed using a stylized model of a bank holding company and an equilibrium asset pricing model to value financial claims. I identify a number of G-SIB strategies that satisfy minimum TLAC requirements but fail to reduce implicit safety net subsidies that accrue to G-SIB shareholders or increase the resources available to recapitalize a failing G-SIB subsidiary. To meet the FSB's stated goals, TLAC requirements must impose minimum TLAC at all subsidiaries and restrict how TLAC funds can be invested. An equivalent, but much simpler solution is to significantly increase regulatory capital requirements on systemically important bank subsidiaries.

Robert H. Nelson has been a member of the economics staff of the Office of Policy Analysis of the U.S. Department of the Interior since 1975. He thanks Christopher Leman for his particular helpfulness over many years in identifying literature on American government and for comments and criticisms from the viewpoint of a political scientist on several drafts of this article. In addition, Donald Bieniewicz, Robert Crandall, Robert Davis, Herbert Fullerton, Jon Goldstein, Joan Hartmann, Ted Heintz, Evan Kwerel, Larry Lane, Ross Marcou, John Schefter, Eugene Steuerle, Richard Stroup, Richard Wahl, and Jeffrey Wasserman-all past or presentfirst-hand observers of the policy-making process-read earlier drafts and made helpful comments.

We treat rising inequality as an equilibrium outcome in which human capital investment fails to keep pace with rising demand for skills. Investment affects skill supply and prices on three margins: the type of human capital in which to invest, how much to acquire, and the intensity of use. The latter two represent the intensive margins of human capital acquisition and utilization. These choices are substitutes for the creation of new skilled workers, yet they are complementary with each other, magnifying inequality. When skill-biased technical change drives economic growth, greater inequality reduces growth.

Firms have increasingly adopted open work environments. Although openness is thought to have benefits, it could also expose firms to an unanticipated cost. An open (closed) internal reporting environment makes it more (less) likely that managers will observe a colleague's communications with senior executives. This increase in what one manager knows about another manager's communication to senior executives could facilitate employee collusion to extract resources from the firm. To test whether internal reporting openness results in more collusion, we conduct an experiment in which two managers each make separate reports to the firm about cost information they know in common but that remains unknown by the firm. Because both managers face the same truth‐inducing contract, conventional economic theory predicts that they will not collude to misreport costs regardless of reporting openness. However, using behavioral theory involving trust and reciprocity, we predict and find that managers honor their nonbinding collusive agreements and successfully collude more often in an open versus closed internal reporting environment, leading to lower firm welfare in the open environment. These results suggest that firms should consider how the cost of collusion compares to the benefits of openness.

We propose a new method of testing asset pricing models that relies on quantities rather than just prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the risk model that is closest to the model that investors use in making their capital allocation decisions. Using our method, we assess the performance of the most commonly used asset pricing models in the literature.

This study examines the role of the external audit in management's decision about the amount of GAAP financial statement information to disclose in the annual earnings announcement. The earnings announcement is a key disclosure provided by public companies. Yet, there is no requirement that earnings announcements contain audited GAAP numbers; in fact, recent trends indicate that a majority of companies release earnings before the completion of year-end audit fieldwork. I predict and find that companies that wait until the audit is more complete at the earnings announcement date and receive higher quality audits provide more detailed balance sheet, cash flow statement, and overall GAAP disclosures. I also provide evidence that complete audits and higher quality audits impact the information content of the earnings announcement. The combined results indicate that audit completeness and quality help facilitate more detailed earnings announcement disclosures and have implications for the equity market. Data Availability: Data are publicly available from sources identified in the text.

We propose a dynamic framework to study the value of medical innovation in the context of infectious disease. We apply our framework to evaluate an HIV treatment breakthrough known as HAART. The model captures how, in lowering both the expected cost and likelihood of HIV infection, HAART reduced the implicit price of risky sex. Forward-looking agents responded by optimally shifting their behaviour. The model also imposes equilibrium constraints, explicitly capturing how optimal shifts in behaviour affect equilibrium choices by changing both infection probabilities and the ease of finding partners willing to engage in risky sex. Using the estimated model, we conduct counterfactual simulations to compute the value of HAART from the perspective of uninfected agents. This includes the option value of the innovation along with value accruing from changes in sex behaviour in response to HAART introduction. We also calculate the added value of a fully functional vaccine from the perspective of both infected and uninfected agents, where infected agents benefit from a vaccine due to resulting shifts in market equilibrium.

Arthur Goldberger's comment is a tempest in a teacup. This is readily verified from the data presented in Table 1. This table reproduces from my original paper the coefficients for paired equations estimated with three different samples in which In S/N and ln SI Y were the dependent variables. As the data of Table 1 indicate, in 7 of the 12 cases, the coefficients are identical through the second decimal place. Furthermore, all the discrepancies are quantitatively very small. In 9 cases, the paired parameter estimates are within 1 percent of each other. In the remaining cases, the differences are of the magnitude of .0825, .0012, and .0011. These are well within the margins of accuracy within which anyone views data generated from the national income accounts of the less developed countries. In light of these considerations, it is difficult to understand the tone of Goldberger's comment. The reason for the slight discrepancies is straightforward. My observations for S/N and S/Y were computed separately from data supplied by the Statistical Office of the Agency for International Development. With the rounding introduced by the series for N and Y, it is not surprising that the series for S/N is not identically equal to the series which would be obtained by forming S/N from the product of Y/N and S/Y. Similar slight discrepancies have also been reported in other econometric work in which equations for S/N and S/Y have been estimated with separately computed data series.' In any case, nowhere in my paper did I even refer to the precise numerical parameter estimates obtained in my equations. The main conclusions of the paper were that the dependency variables were quantitatively an important determinant of international savings rates, and, further, that introduction of these variables greatly reduced the importance of percapita income, on which some previous discussions had focused. Neither of these conclusions is affected by Goldberger's comment.