E BEGAN to conceptualize average total cost functions during the early decades of the twentieth century. But a century before, a German music publishing firm calculated and used in its internal decision making output-dependent average cost estimates for two methods of printing sheet music. This note describes that early experience and juxtaposes against it the relatively late emergence of the ATC curve in the formal literature of economics.

From the perspective of the Walrasian general equilibrium model, entrepreneurial and opportunistic behavior seems foreign. Can the model be refashioned so that it can accommodate such behavior? Many would say no, but we argue the contrary. Indeed, we present a reformulation of the model that serves as a gateway to, rather than a detour from, such contemporary issues as innovation and incentives. The trick is to reexamine what perfect competition means. Starting with an historical summary of general equilibrium, we sketch an image of the perfect competitor as an active market opportunist, seeking out profit potentials wherever he can.

Much of capital market research in accounting over the past 20 years has assumed that the price adjustment process to information is instantaneous and/or trivial. This assumption has had an enormous influence on the way we select research topics, design empirical tests, and interpret research findings. In this discussion, I argue that price discovery is a complex process, deserving of more attention. I highlight significant problems associated with a naı̈ve view of market efficiency, and advocate a more general model involving noise traders. Finally, I discuss the implications of recent evidence against market efficiency for future research.

In this paper I assess the degree of similarity in the cross-sectional pricing of Internet and non-Internet stocks during the tumultuous year of 2000. Despite large differences in their economic fundamentals, I find that the equity market values of Internet firms with immaterial web traffic, firms that are randomly selected, and firms that went public at the same time as Internet firms are similarly related to analysts' forecasts of earnings in 2001 and the long-term rate of growth in earnings. This is not the case for firms with intensive web traffic. I also find that at the peak of Internet prices in March 2000 the market rewarded losses of web-traffic-intensive firms but did not reward profits, while after the peak the market reversed its view, rewarding profits but not losses. Beyond earnings, web traffic is significantly positively priced both at and after the Internet peak. However, I find no evidence that two proxies for supply and demand forces – the degree of public float and short interest – are value-relevant for Internet firms. Overall, I argue that there are enough similarities in the cross-sectional pricing of Internet and non-Internet firms to make it unlikely that the pricing of Internet stocks during 2000 was entirely irrational. Moreover, any irrationality in the prices of Internet stocks cannot be linked to public float and short interest. JEL classifications: G12, G14, M41.

Financial reporting and disclosure are potentially important means for management to communicate firm performance and governance to outside investors. We provide a framework for analyzing managers’ reporting and disclosure decisions in a capital markets setting, and identify key research questions. We then review current empirical research on disclosure regulation, information intermediaries, and the determinants and economic consequences of corporate disclosure. Our survey concludes that current research has generated a number of useful insights. We identify many fundamental questions that remain unanswered, and changes in the economic environment that raise new questions for research.

This paper reviews and proposes additional research concerning the role of publicly reported financial accounting information in the governance processes of corporations. We first discuss research on the use of financial accounting in managerial incentive plans and explore future research directions. We then propose that governance research be extended to explore more comprehensively the use of financial accounting information in additional corporate control mechanisms, and suggest opportunities for expanding such research. We also propose cross-country research to investigate more directly the effects of financial accounting information on economic performance through its role in governance and more generally.

Many firms issue hybrid securities, such as convertible debt, instead of standard securities like straight debt or common equity. Theoretical arguments suggest that convertible debt minimizes costs for firms facing high debt- and equity-related external financing costs. Theory also suggests that an appropriately designed convertible security provides efficient investment incentives. We show, however, that firms on average perform poorly following the issuance of convertible debt. The empirical evidence suggests that the efficient investment decisions predicted by theory are not in fact achieved by the actual design and issuance of convertible debt securities. An alternative interpretation of convertible debt offers is that investors ration the participation of some issuers in the seasoned equity market.