Knowledge that Transforms

This paper discusses appropriate methodology for measuring the effect of an event on the value of a firm's equity. Th e key points are (1) cumulative abnormal returns do not measure the effect of an event on firm value if there are dividends during the event window; (2) it is generally appropriate to use pre-event parameters of the return-generating process even if the event alters the parameters during the event window, and (3) controlling for fact ors other than the return on the market portfolio improves the power of the estimation. The formula for the effect of an event on the value of a firm when there are dividends during the event window is developed a nd applied to a study of the effect of the Bhopal disaster on the value of Union Carbide. Copyright 1992 by MIT Press.

We analyze taxpayer choices of return preparation services. We distinguish between two types of nonpaid preparers, six types of paid third parties, and self-preparation. Among other things, we find significant differences in the factors which explain the demand for paid third parties who are and are not able to represent clients before the IRS. Among these factors are increases in IRS audit rates and the frequency of IRS penalties.

Two commonly used sources of aggregate expenditure data are personal consumption expenditures in the National Income an d Product Accounts and the Consumer Expenditure Surveys administered by the Bureau of Labor Statistics. The author adjusts b oth data sources to incorporate the service flows from owner-occupied housing and other consumer durables. A comparison of the two estimat es of aggregate expenditure reveals that the differences between the tw o data sets have been growing over time. By 1989 the level of aggregat e expenditure in the national accounts exceeds that reported in the Consumer Expenditure Surveys by $1224 billions. Less than half of th is difference can be attributed to definitional differences in the two data sources. Copyright 1992 by MIT Press.

Brent, Richard P., Algorithm 488: A Gaussian Pseudo-Random Number Generator, Communications of the ACM 17 (Dec. 1974), 1704-1706. Durbin, James, and Geoffrey S. Watson, Testing for Serial Correlation in Least Squares Regression I, II, III, Biometrika 37 (1950), 409-428; 38 (1951), 159-178; 58 (1971), 1-42. Godfrey, Lester G., Misspecification Tests in Econometrics (Cambridge: Cambridge University Press, 1988). Imhof, J. P., Computing the Distribution of Quadratic Forms in Normal Variables, Biometrika 48 (1961), 419-426. Judge, George G., R. Carter Hill, William Griffiths, Helmut Lutkepohl, and Tsoung-Chao Lee, Introduction to the Theory and Practice of Econometrics (New York: Wiley, first edition, 1982; second edition, 1988). White, Kenneth J., S. Donna Wong, Diana Whistler, and Shirley Haun, SHAZAM User's Reference Manual, Version 6.2 (New York: McGraw-Hill, 1990).

Nasser Daneshvary, Henry W. Herzog, Jr., Richard A. Hofler, Alan M. Schlottmann, Job Search and Immigrant Assimilation: An Earnings Frontier Approach, The Review of Economics and Statistics, Vol. 74, No. 3 (Aug., 1992), pp. 482-492

Subal C. Kumbhakar, Arunava Bhattacharyya, Price Distortions and Resource-Use Efficiency in Indian Agriculture: A Restricted Profit Function Approach, The Review of Economics and Statistics, Vol. 74, No. 2 (May, 1992), pp. 231-239

Federally insured student loans constitute an area that is almost completely unexplored by researchers despite intense scrutiny that federally insured loans are receiving after the savings and loan collapse. Based on a probit model of default for two thousand guaranteed student loans, the authors find that individual characteristics (including parents' income, presence of two parents at home, student's graduation, and student's race) have a significant impact on default rates, while institutional characteristics (four year vs. two year college, private vs. public, school size, and individual school dummies) have little significant effect. The results imply that proposals to penalize colleges with high default rates are premature. Copyright 1992 by MIT Press.

This paper is the first study investigating wage-risk relationships for both fatal and nonfatal work-related accidents on the basis of a large occupational data bank. Risk variables cover the whole array of potential configurations found in the literature, while based on the compensated accidents over a four-year period for the province of Quebec. The authors first estimate the model using the standard techniques developed by previous researchers and then submit their initial results to additional tests that, in the past, had disturbing effects. It becomes apparent, however, that in all but one case the results remain positive and significant. Copyright 1992 by MIT Press.

For a seventeen-year panel covering 308 U.S. manufacturing corporations, we analyze firms' R&D spending reactions to changes in high-technology imports. On average, companies reduced their R&D/sales ratios in the short run as imports rose. Individual company reactions were heterogeneous, especially for multinational firms. Short-run reactions were more aggressive (i.e., tending toward R&D/sales ratio increases), the more concentrated the markets were in which the companies operated, the larger the company was, and the more diversified the firm's sales mix was. Reactions were less aggressive when special trade barriers had been erected or patent protection was strong in the impacted industries. Companies with a top executive officer educated in science or engineering were more likely to increase R&D/sales ratios in response to an import shock, all else equal. Over the full 17-year sample period, reactions may have shifted toward greater average aggressiveness.

It sometimes happens that the unobservable state vector of a linear dynamic model expressed in the state space is subject to known restrictions. Incorporation of this information into the Kalman filter procedure will increase the efficiency of estimation. It is shown that a simple augmentation of the measurement equation constrains the estimated state vector to obey the restrictions. The method applies whether the restrictions are time-invariant, time-varying, linear, or nonlinear. Copyright 1992 by MIT Press.