An active market for corporate control has prompted corporate managers to lobby for measures that protect their positions. It has been argued that corporate managements have worked to entrench themselves at the expense of outside shareholders and have pressured institutional investors (including banks) to vote on corporate matters in a manner supportive of managements' proposals. One source of potential pressure arises when bank fiduciaries manage employee savings plans, pension funds, and engage in other fee generating corporate trust activities for firms whose shares they vote. In addition, banks often extend commercial credit to firms whose shares the trust division votes. Finally, director interlock between banks and corporations is likely to bias voting behavior. Fiduciary loyalty may be compromised by bankers' concern that failure to support management can threaten business relationships. The objective of this study is to investigate the effects of conflicting relationships on the voting behavior of banks as fiduciaries. The empirical results indicate that where director interlock and income-related relationships exist, banks tend to vote in favor of management antitakeover proposals; however, where these business relationships do not exist banks tend to vote against such proposals.

We present a new methodology for studying the problem of intra-firm bargaining, based on the notion that contracts cannot commit the firm and its agents to wages and employment. We develop and analyse a general non-cooperative multilateral bargaining framework between the firm and its employees and consider outcomes which are immune to renegotiations by any party. Equilibrium firm profits are characterizable as both a weighted average of a neo-classical (non-bargaining) firm's profits and a generalization of Shapley value for a corresponding cooperative game. Furthermore, the resulting payoffs induce economically significant distortions in the firm's input and organizational-design decisions.

We use unique data to analyze employer tax compliance with Unemployment Insurance (UI) provisions. The data indicate that employers may have underreported $728 million of UI taxes nationally in 1987 alone. To formally examine this noncompliance, a theoretical model of payroll tax evasion is developed showing that increasing payroll tax rates, among other things, likely increases noncompliance by risk-neutral firms. This prediction is empirically verified. The finding that UI tax evasion is systematically related to various firm characteristics suggests that UI audits may be effectively targeted by statistical profiles derived from our model, thereby improving compliance.

Ronald A. Davidson, Willie E. Gist, Empirical Evidence on the Functional Relation between Audit Planning and Total Audit Effort, Journal of Accounting Research, Vol. 34, No. 1 (Spring, 1996), pp. 111-124

We find that the determinants of the cross-section of expected stock returns are stable in their identity and influence from period to period and from country to country. Out-of-sample predictions of expected return are strongly and consistently accurate. Two findings distinguish this paper from others in the contemporary literature: First, stocks with higher expected and realized rates of return are unambiguously lower in risk than stocks with lower returns. Second, the important determinants of expected stock returns are strikingly common to the major equity markets of the world. Overall, the results seem to reveal a major failure in the Efficient Markets Hypothesis.

[Financially intermediated and stock market consumption-investment allocations, with and without governmental interventions, are compared in a welfare sense in overlapping generation economies with (and without) shocks to agents' intertemporal preferences. We first show that, in economies with preference shocks, governmental interventions subject to the same informational requirements as those imposed on financial intermediaries, lead to stock market allocations that are not inferior to those attained under financial intermediation. Second, we argue that the necessary interventions are qualitatively no different from those required to implement stationary optimal allocations in OLG models without shocks to agents' intertemporal consumption preferences.]

To what extent can agents' learning and incomplete information about the "true" underlying model generating stock returns explain findings of excess volatility and predictability of returns in the stock market? In this paper we analyse two models of recursive learning in the stock market when dividends follow a (trend-)stationary autoregressive process. The asymptotic convergence properties of the models are characterized and we decompose the variation in stock prices into rational expectations and recursive learning components with different rates of convergence. A present-value learning rule is found to generate substantial excess volatility in stock prices even in very large samples, and also seems capable of explaining the positive correlation between stock returns and the lagged dividend yield. Self-referential learning, where agents' learning affect the law of motion of the process they are estimating, is shown to generate some additional volatility in stock prices, though of a magnitude much smaller than present value learning

Investment is characterized by costly reversibility when a firm can purchase capital at a given price and sell capital at a lower price. We solve for the optimal investment of a firm that faces costly reversibility under uncertainty and we extend the Jorgensonian concept of the user cost of capital to this case. We define and calculate cU and cL as the user costs of capital associated with the purchase and sale of capital, respectively. Optimality requires the firm to purchase and sell capital as needed to keep the marginal revenue product of capital in the closed interval [cL, cU). This prescription encompasses the case of irreversible investment as well as the standard neoclassical case of costlessly reversible investment.