Knowledge that Transforms

Stock market Disciplining, Rational expectations model, Managerial decision making

This paper provides a framework and some empirical evidence to evaluate the seriousness of problems in inference that arise in stockreturn-based studies when the data are cross-sectionally dependent. The study is motivated on the grounds that statistical procedures designed to address such problems are often infeasible, and even when they can be implemented they sometimes introduce other more serious difficulties. Thus, researchers have frequently adopted an approach that ignores the cross-sectional dependence (e.g., ordinary least squares [OLS]). The objective of this paper is to help identify the contexts in which ignoring the dependence would lead to serious misstatement of significance levels. Cross-sectional dependence in stock returns data is likely to exist when at least some of the returns are sampled from common time periods. This would be the case in all studies of the reaction of stock prices to a

Robert Jennings, Unsystematic Security Price Movements, Management Earnings Forecasts, and Revisions in Consensus Analyst Earnings Forecasts, Journal of Accounting Research, Vol. 25, No. 1 (Spring, 1987), pp. 90-110

Auditing, Auditor size, Audit fees, Audit partnerships

The model presented here extends previous corporate failure prediction models (e.g., Beaver [1966], Altman [1968], Altman, Haldeman, and Narayanan [1977], Ohlson [1980], Zavgren [1985], etc.) in two ways: (1) instead of the conventional failing/nonfailing dichotomy, five financial states are used to approximate the continuum of corporate financial health; and (2) instead of classifying a firm into a certain financial state, the new model will estimate the probabilities that a firm will enter each of the five financial states. The ranked probability scoring rule is then used to evaluate the quality of such probabilistic predictions. The first extension enables the prediction of prefailure distress in addition to ultimate failure. The second extension conforms with more recent advances in prediction methodologies (see, e.g., Epstein [1969] and Murphy and Winkler [1970]). Together, the two extensions provide a better approximation to the continuum of alternative financial judgment and actions in reality. Sections 2 and 3 explain the structure of the model and the data; section 4 explains the statistical methodology (multivariate logit analysis) and presents the constructed models. These models are evaluated in section 5.

John H. Evans III, James M. Patton, Signaling and Monitoring in Public-Sector Accounting, Journal of Accounting Research, Vol. 25, Studies on Stewardship Uses of Accounting Information (1987), pp. 130-158

Forecasting, Structural modelling, Prediction performance, Disaggregate data

An effectivity function describes the blocking power of coalitions on subsets of alternatives. Given a preference profile, if any coalition blocks an alternative whenever it can, using its own power, make all of its members better off, only alternatives in the core can be reached. In this paper we study the incentives of the coalitions to use this power truthfully, i.e. to not manipulate. Some well known cores, among them the core of an exchange economy, are manipulable. We give sufficient conditions on an effectivity function that assure its core is nonmanipulable.

Sequential equilibria comprise consistent beliefs and a sequentially ra tional strategy profile. Consistent beliefs are limits of Bayes ratio nal beliefs for sequences of strategies that approach the equilibrium strategy. Beliefs are structurally consistent if they are rationaliz ed by some single conjecture concerning opponents' strategies. Consis tent beliefs are not necessarily structurally consistent, notwithstan ding a claim by Kreps and Robert Wilson (1982). Moreover, the spirit of structural consistency conflicts with that of sequential rationali ty. One avoids these difficulties by weakening structural consistency to allow convex combinations of opponents' strategies, but this intr oduces correlation into the strategies that justify out-of-equilibriu m beliefs. Copyright 1987 by The Econometric Society.

A structural consumption model incorporating endogenous liquidity constraints is fit to a cross section of 798 U.S. families. Liquidity constrained families are estimated to constitute 19.4 percent of the population sampled, a group that accounts for 16.7 percent of consumption in the population sampled. In-sample simulations of the model suggest that a temporary tax has three to four times more impact on aggregate consumption than it would if liquidity constraints were not in effect. Copyright 1987 by The Econometric Society.