Abstract. The study examines how the risk of exhausting corporate tax liabilities before deducting interest expense affects corporate leverage. It differs from prior studies in three ways: (1) it uses data compiled by the Internal Revenue Service (IRS) from corporate tax returns rather than accounting data; (2) it measures risk of tax exhaustion more accurately; and (3) it adopts a first‐difference time‐series approach, so that firms act as their own control between adjacent years. These methodological innovations reduce biases caused by measurement error and omitted variables that were present in prior research. The results suggest that, all else being equal, high risk of tax exhaustion reduces firms' use of leverage. As well, the study provides the first evidence that personal taxes significantly affect corporate leverage. The effects on leverage decisions of other variables are also tested and the results are consistent with predictions from prior theoretical work.

Simultaneity between prisoner populations and crime rates makes it difficult to isolate the causal effect of changes in prison populations on crime. To break that simultaneity, this paper uses prison overcrowding litigation in a state as an instrument for changes in the prison population. The resulting elasticities are two to three times greater than those of previous studies. A one-prisoner reduction is associated with an increase of fifteen Index I crimes per year. While calculations of the costs of crime are inherently uncertain, it appears that the social benefits associated with crime reduction equal or exceed the social costs of incarceration for the marginal prisoner.

This paper examines the value relevance of fair value data disclosed under SFAS 107 by banks for 1992 and 1993. Collectively, the evidence suggests differences between fair and book values of financial instruments are associated with market-to-book ratios. However, fair value disclosures for financial instruments other than securities are value-relevant only in limited settings. In addition, only in 1992 are fair value variables associated with market-to-book ratios after incorporating existing historical cost information. Further analysis suggests the weaker 1993 results are not necessarily due to increased measurement error in fair value numbers.

This paper examines the strategic role of high levels of debt and bankruptcy threats in deterring entry into monopolistic markets. In the context of an infinite horizon entry game, we show that if a potential entrant has access to debt financing with limited liability, the unique sub-game perfect equilibrium involves the entrant successfully issuing a high level of debt, entering the market and being met with cooperation. If, in addition to the entrant, the incumbent also has access to debt with limited liability, it will be highly levered and will completely pre-empt any entry in equilibrium. Finally, if the incumbent faces a variety of potential entrants with differing abilities to capture market shares, its optimal capital structure will help pre-empt the entry of the tougher entrants, while allowing the weaker ones to share the market. The results of extreme leverage are also shown to hold in an alternative formulation analyzed by Kreps and Wilson (1982) and Milgrom and Roberts (1982), and thus are robust to model specifications. The empirical implications and possible application to high leverage industries are briefly discussed.

This paper examines how interaction between endogenous human capital accumulation and technological change affects relative wages and economic growth. Private incentives to invest in human capital finance the employment of skilled labour in the education sector, while non-rival technology is a by-product of the education process. The absorption of new technologies into production is skill intensive, creates skill-biased labour demand, and increases the relative wage of skilled to unskilled labour. In contrast to recent models of endogenous growth, higher rates of technological change and growth may be accompanied by a higher relative wage but lower relative supply of skilled labour. Thus the model provides a theoretical foundation for the empirically observed relation between technological change and relative demand, supply and wages of skilled labour.

As traders learn about the true distribution of some asset's dividends, a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred. Small differences in prior beliefs lead to large speculative premiums during the learning process. This phenomenon helps explain a paradox concerning the pricing of initial public offerings. The result casts light on the significance of the common prior assumption in economic models.

This paper develops and estimates a cost model for U.S. hospitals, analyzing the cost of excess bed capacity. A new estimate is worth making for at least two reasons. Recent changes in the economic environment of hospitals have caused their utilization rates to fall sharply, making previous estimates inaccurate. Second, we employ econometric techniques not previously applied to this problem, with estimation based on all short-term community hospitals from 1979-89. Our results, based on conservative estimates of the average optimal occupancy rate, indicate an annual cost of excess bed capacity of $17.2 billion in 1989, $24.1 billion in 1991, and over $25 billion in 1993. Copyright 1996 by MIT Press.

We develop a dynamic model of learning about worker ability in a competitive labor market. The model produces three testable implications regarding wage dynamics: (1) although the role of schooling in the labor market's inference process declines as performance observations accumulate, the estimated effect of schooling on the level of wages is independent of labor-market experience; (2) timeinvariant variables correlated with ability but unobserved by employers ( such as certain test scores) are increasingly correlated with wages as experience increases; and (3) wage residuals are a martingale. We present evidence from the NLSY that is broadly consistent with the model's predictions.

Abstract Identifies widespread noncompliance with Securities and Exchange Commission (SEC) regulations requiring prompt disclosure of auditor changes. Institutional setting; Effect of changes in regulatory regimes; Competency factors; Disclosure costs and incentives.