Bradshaw, Richardson, and Sloan (BRS) find a negative relation between their comprehensive measure of corporate financing activities and future stock returns and future profitability. Noticing that accounting accruals are increases in net operating assets on a company's balance sheet, we question whether it is possible to distinguish between the ‘external financing anomaly’ documented by BRS and the ‘accrual anomaly’ first documented by Sloan [1996. Do stock prices fully reflect information in accruals and cash flows about future earnings? The Accounting Review 71, 289–315]. We show that once controlling for total accruals, the relation between external financing activities and future stock returns is attenuated and not statistically significant. These findings are consistent with Richardson and Sloan [2003. External financing, capital investment and future stock returns. Working Paper, University of Pennsylvania and University of Michigan].

We develop a comprehensive and parsimonious measure of corporate financing activities and document a negative relation between this measure and both future stock returns and future profitability. The economic and statistical significance of our results is stronger than in previous research focusing on individual categories of corporate financing activities. To discriminate between risk versus misvaluation as explanations for this relation, we analyze the association between our measure of external financing and sell-side analysts’ forecasts. Consistent with the misvaluation explanation, our measure of external financing is positively related to overoptimism in analysts’ forecasts.

While it is crucial to understand the impact of regulatory changes on market risk, the literature does not show how risk responds to expected regulatory changes that are specifically designed to change risk. Our paper fills this gap by providing a detailed study of one such case. Using both a sample of privatized U.K. companies, and U.K. and U.S. control portfolios, between 1993 and 2000, we show (both for the single-factor market model and the three-factor Fama-French model) that the observed changes in market risk are significant and consistent with theory.

Empirically, disincentive effects on work of generous welfare state arrangements tend to appear with a substantial time lag. One explanation is that norms concerning work and benefit dependency delay such effects. We model altruistic parents' economic incentives for instilling such work norms in their children. Anticipated economic support from parents may reduce work effort, and parental altruism makes threats to withdraw such support noncredible. Instilling norms mitigates this problem. However, generous social insurance arrangements tend to weaken parents' incentives to instill such norms in their children. We find empirical support for this prediction.

This article evaluates the impact of capital controls and their liberalization on the activities of US multinational firms. These firms attempt to circumvent capital controls by reducing reported local profitability and increasing the frequency of dividend repatriations. As a result, the reported profit impact of local capital controls is comparable with the effect of 27% higher corporate tax rates, and affiliates located in countries imposing capital controls are 9.8% more likely than other affiliates to remit dividends to parent companies. Multinational affiliates located in countries with capital controls face 5.25% higher interest rates on local borrowing than do affiliates of the same parent borrowing locally in countries without capital controls. Capital control liberalizations are associated with significant increases in multinational activity—property, plant, and equipment grow at 6.9% faster annual rates following liberalizations. The combination of the costliness of avoidance and higher interest rates discourages investment in countries with capital controls, and this effect is reversed upon liberalization of controls. (JEL F21, F23, F36, F42, G15, G32, G34)

Housing, Credit Constraints, and Macro Stability: The Secondary Mortgage Market and Reduced Cyclicality of Residential Investment by Joe Peek and James A. Wilcox. Published in volume 96, issue 2, pages 135-140 of American Economic Review, May 2006

The 1964 Securities Acts Amendments extended the mandatory disclosure requirements that had applied to listed firms since 1934 to large firms traded Over-the-Counter (OTC). We find several pieces of evidence indicating that investors valued these disclosure requirements, two of which are particularly striking. First, a firm-level event study reveals that the OTC firms most affected by the 1964 Amendments had abnormal excess returns of about 3.5 percent in the weeks immediately surrounding the announcement thai they had begun to comply with the new requirements. Second, we estimate that the most affected OTC firms had abnormal excess returns ranging between 11.5 and 22.1 percent in the period between when the legislation was initially proposed and when it went into force. These returns are adjusted for the standard four factors and are relative to NYSE/AMEX firms, matched on size and book-to-market equity, that were unaffected by the legislation. While we cannot determine how much of shareholders' gains were a transfer from insiders of these same companies, our results suggest that mandatory disclosure causes managers to focus more narrowly on maximizing shareholder value.

We analyse a model of equilibrium directed search in a large labour market. Each worker, observing the wages posted at all vacancies, makes a fixed, finite number of applications, a. We allow for the possibility of ex post competition should more than one vacancy want to hire the same worker. For each a, there is a unique symmetric equilibrium in which all vacancies post the same wage. When a =1, the common posted wage lies between the competitive and monopsony levels, and equilibrium is efficient. When a > 1, all vacancies post the monopsony wage. Some workers fail to find a job, some find a job at the monopsony wage, and some - those for whom there is competition - get the competitive wage. Equilibrium is inefficient when a > 1; in particular, there is excessive vacancy creation. © 2006 The Review of Economic Studies Limited.

In this article, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings serve as a coordinating mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a “focal point” for firms and their investors, and explore the vital, but previously overlooked implicit contractual relationship between a credit rating agency (CRA) and a firm through its credit watch procedures. Credit ratings can help fix the desired equilibrium and as such play an economically meaningful role. Our model provides several empirical predictions and insights regarding the expected price impact of rating changes.

This paper explores to what extent secondary policy issues are influenced by electoral incentives. We develop a two-dimensional political agency model, in which a politician decides on both a frontline policy issue and a secondary policy issue. The model predicts when the incumbent should manipulate the secondary policy to attract voters. We test our model by using panel data on environmental policy choices in the U. S. states. In contrast to the popular view that secondary policies are largely determined by lobbying, we find that there are strong effects of electoral incentives.