Until 1974, firms could capitalize or expense all or part of their research and development (R&D) costs. Managerial choice between these two alternatives is hypothesized to be affected by the existence of debt covenants which employ accounting numbers relating to leverage, interest coverage, and ability to pay dividends. In addition, the use of public versus private debt is hypothesized to affect the accounting choice due to differential renegotiation costs. Lastly, a political cost hypothesis is tested. This study uses a multivariate statistical technique, the generalized jackknife. The results suggest that firms which capitalized R&D costs were more highly levered, used more public debt, were closer to dividend restrictions, and were smaller than firms which expensed R&D costs.

Several studies indicate the presence of large abnormal returns accruing to shareholders of merged firms in the period immediately before the merger. For example, Mandelker [18] reports that stockholders of acquired firms earn abnormal returns of approximately 14 percent in the seven months preceding merger. Franks, Broyles, and Hecht [15] find abnormal returns of 26 percent for British firms during the four months prior to merger; Elgers and Clark [11] report 43 percent abnormal returns accruing over two years before merger to shareholders of acquired firms.

Firm size has been used as a proxy for the firm's political costs and hence managers' proclivity to choose income reducing accounting procedures. This study provides additional evidence on this topic by examining the association between firm size and effective corporate tax rates. The latter are one component of a firm's political costs. The roughly fifty largest U.S. exchange-listed firms, in particular oil and gas companies and manufacturing firms, have significantly higher worldwide tax rates than other firms. These higher tax rates are observed primarily after the implementation of the U.S. 1969 Tax Reform Act and after the OPEC countries raised their tax rates on U.S. oil producers. The findings, which are insensitive to alternative sources of data, alternative measures of firm size, and alternative measures of effective tax rates, are consistent with the use in previous studies of firm size as a proxy for the firm's political costs.

The traditional analysis of the relative pricing of tax-exempt and taxable debt is a habitat theory of the term structure of interest rates. In the traditional analysis the preferences of investors for particular maturities of debt lead to unique pricing relations at every point on the yield curve which are indicative of investor marginal tax brackets. Recent work by Fama (1977) suggests that banks are potential arbitrageurs across tax-exempt and taxable bond markets which force a particular equilibrium on the pricing of short-term bonds. Miller (1977) suggests that the choice of debt or equity financing by firms in the aggregate forces a similar equilibrium on the pricing of all tax-exempt and taxable bonds. This paper exploits the institution of Regulation Q and its effects on the banking system to bring evidence to bear on the predictions of these three models.

[Differing opinions about the specification of econometric relationships often lead to a situation in which there are competing non-nested models. This paper is concerned with the problem of testing such models. It is first assumed that tests are based upon instrumental variable estimates (so that the models can be alternative versions of an equation in a system). The tests so derived are then specialized to the case in which ordinary least squares is an appropriate estimator.]

William W. Alberts, Gailen L. Hite, The Modigliani-Miller Leverage Equation Considered in a Product Market Context, The Journal of Financial and Quantitative Analysis, Vol. 18, No. 4 (Dec., 1983), pp. 425-437

PLENTIFUL reasons exist for seeking information on the determinants of child health. While the potential improvement in children's health provides sufficient justification in itself, research in human capital investment has demonstrated the further important influence of health, particularly child health, on cognitive development, schooling, hours of work, and wages.' Poor child health is likely to detract from human capital accumulation during childhood years, and is frequently associated with poor adult health, both of which impair an individual's adult market performance. Further, child health status is a primary determinant of the demand for medical care for children, leading those economists estimating medical services demand to focus attention increasingly on the determinants of child health.2 The existing research in child health determination has highlighted some important family influences, but the results have been limited. The object of this study is to use sibling and adoption data to explore the effects of family background on child health. The results are compared to those of the usual multivariate regression analysis. Sibling and adoption data analysis involves many difficulties, but is potentially valuable for indicating which areas need further exploration if a more adequate understanding of child health is to be achieved. Sibling data were used in economics as early as 1932. The early studies, and more recent studies in the human capital literature, utilize sibling and twin data to partially control family effects on adult earnings, enabling the pure economic returns to education to be estimated.3 The focus of this study is on the identification of the variance in the child health measure which can be attributed to family influences, rather than on the magnitude of a particular regression coefficient. The use of adoption data may then yield insight into the relative importance of various components of the family effect. In section II, an economic model of the household production of child health is presented and the data set described. An error components model of child health using the natural siblings data is estimated in section III, and this estimate is compared to a multivariate regression. Section IV presents an examination of whether genetics is an important influence in child health determination and is followed by concluding comments in section V.

Beach, Charles M., and James G. MacKinnon, Maximum Likelihood Procedure for Regression with Autocorrelated Errors, Econometrica 46 (1978), 51-58. Box, G. E. P., and D. R. Cox, An Analysis of Transformations, Journal of the Royal Statistical Society 26, Series B (1964), 211-243. Hall, Bronwyn H., and Robert E. Hall, Time-Series Processor Version 3.5 User's Manual, mimeographed, Stanford, California, 1980. Savin, N. E., and K. J. White, Estimation and Testing for Functional Form and Autocorrelation: A Simultaneous Approach, Journal of Econometrics 8 (1978), 1-12. Spitzer, John J., Primer on Box-Cox Estimation, this REVIEW 64 (May 1982), 307-313. Zarembka, Paul, Transformation of Variables in Econometrics, in Paul Zarembka (ed.), Frontiers in Econ?ometric.s (New York: Academic Press, 1974).

We examine security price reactions around the announcements of 123 voluntary spin-offs by 116 firms between 1963 and 1981 involving a pro-rata distribution of the common stock of a subsidiary to the stockholders of the parent firm. The median spin-off in the sample is 6.6% of the original equity value and is associated with an abnormal return of 7.0% from 50 days prior to the announcement through completion of the spin-off. No evidence is found to indicate the gains to stockholders represent wealth transfers from senior securityholders. Over the entire event period we find positive gains for firms engaging in spin-offs to facilitate mergers or to separate diverse operating units but negative returns to firms responding to legal and/or regulatory difficulties. In the two-day interval surrounding the first press announcement we find positive average excess returns for all groups.