We analyze the choice between fixed-price offerings and auctions in IPOs and privatizations. We model a firm going public by selling equity in the IPO market. Firm insiders have private information about intrinsic firm value, but outsiders can produce information about this value before bidding for shares. Inducing information production is beneficial for higher intrinsic value firms, because this information, reflected in secondary market prices, yields higher equity prices. We show that auctions and fixed-price offerings have different properties for inducing information production, solve for the equilibrium IPO mechanisms for firms with different characteristics, and explain the “IPO auction” puzzle. Received July 3, 2012; Editorial decision July 14, 2018 by Editor Paolo Fulghieri

This paper analyzes a new explanation of the “ripple effect” of minimum wages based on how minimum wages affect hedonic compensation. Minimum wage hikes lower compensating differentials at low-skill undesirable jobs because they raise wages at the most desirable low-skill job, the minimum wage job. This change in hedonic compensation may cause some individuals to optimally leave low-wage undesirable jobs and seek more desirable employment. If labor supply falls at low-wage undesirable jobs, employers would raise wages, consistent with the ripple effect. Empirically, I provide evidence that hedonic-based labor supply substitution is taking place and contributing to the ripple effect.

Higher accruals are associated with lower subsequent earnings. We show this phenomenon can be explained by the way sales, profits, and working capital respond to changes in a firm's product markets. Empirically, high accruals predict high subsequent sales growth but a long-lasting drop in both profits and profitability. Accruals also predict an increase in future competition, suggesting that accruals are correlated with abnormally high—and, in equilibrium, transitory—true profitability that attracts new entrants to the industry. Overall, the predictive power of accruals is better explained by product-market effects than by measurement error in accruals or diminishing returns from investment.

Moody's adjusts a firm's reported leverage across several dimensions to determine credit ratings. I find that changes to this adjustment methodology affect firm capital structure and investment decisions. In particular, in 2006, Moody's made several changes to its adjustment methodologies, which are arguably exogenous to changes in firm fundamentals. I show these changes significantly affect adjustments for firms in this year. I then show that these changes to adjustments in 2006 affect capital structure and investment decisions in 2007, especially for those firms with greatest exposure to the methodology changes. These results show that rating agencies have the power to affect corporate decisions.

Since the early 2000s, macroprudential policy has increasingly become part of the regulatory and supervisory framework. Likewise, the housing market has been at the center of the debate on systemic financial risk prevention. Among macroprudential tools, the purpose of the loan-to-value (LTV) ratio is to constrain mortgage loan creation. This paper is unique in that it analyzes the effectiveness of LTV on mortgage lending moderation using a large sample of more than 4000 banks from 46 countries. The analysis suggests mortgage loans have been successfully curbed in countries with a LTV policy. Size and non-performing loans are the two key characteristics to the effectiveness of LTV. When nonlinearities are considered, the average effect of LTV can be very large; however, it becomes much less effective with large banks and banks with bad loans. Our results suggest the inclusion of other macroprudential tools may have complementary effects to LTV, and for large size banks in particular.

Using a data set covering one quarter of the U.S. general-purpose credit card market, we document that 29% of accounts regularly make payments at or near the minimum payment. To explain the prevalence of low payment amounts, we exploit changes in issuers’ minimum payment formulas to quantify the explanatory power of two potential theories: liquidity constraints and anchoring. At least 22% of near-minimum payers (and 9% of all accounts) respond to the formula changes in a manner consistent with anchoring as opposed to liquidity constraints alone. Our results show that anchoring to a salient contractual term has a significant impact on household repayment decisions.

Children whose parents were self-employed before China’s socialist transformation were more likely to become self-employed after the economic reform, even though they had no direct exposure to their parents’ businesses. The effect is statistically significant only for sons. The lack of direct exposure to family businesses impedes the transfer of business human capital and motivates us to explore personality traits as the underlying mechanisms. We find that children with self-employed parents are also more likely to invest in risky assets and to consume cigarettes. This suggests that children of self-employed parents inherit personality traits that induce risky behaviors.

This study tests whether firms seek to mitigate the adverse effects of Financial Reporting Complexity (FRC) by investing in accounting expertise. We develop a measure of FRC based on the complexity of accounting standards that govern annual disclosures. We find that FRC is positively related to the accounting expertise on a firm’s board of directors and audit committee. We also find that accounting expertise mitigates the relation between FRC and negative reporting outcomes. Collectively, this study increases our understanding of the actions firms take to mitigate the negative consequences of FRC, and the role of accounting expertise in this setting.

This study reports an experiment conducted to examine auditors' materiality judgments for nonfinancial performance information (NFPI) in the context of Integrated Reporting; a setting where auditors do not have well-established guidelines or benchmarks. We examine two fundamental factors underlying Integrated Reporting that are predicted to influence auditors' NFPI materiality judgments, namely, the level of strategic relevance associated with the NFPI being assessed, and the provision of a strategy map (a visual representation of linkages between the firm's strategic objectives) to auditors. Our study provides evidence that while auditors judge misstated NFPI of low strategic relevance to be less material than misstated NFPI with high strategic relevance, they only make this distinction when a strategy map is present. As integrating a client's strategy in the process of evaluating materiality is important, our result suggests that the presence of a strategy map potentially improves the efficient allocation of assurance resources. The importance of understanding how qualitative factors affect materiality judgments in nonfinancial assurance engagements is reflected in the fact that accounting firms view such assurance as mainstream. Our findings not only have implications for standard setters developing further guidance for determining audit materiality under Integrated Reporting, but also more generally for auditors who are providing assurance services for NFPI.