[This paper proposes a representative agent habit-formation model where preferences are defined for both luxury goods and basic goods. The model matches the equity risk premium, risk-free rate, and volatilities. From the intratemporal first-order condition, one can substitute out basic good consumption and the habit level, yielding a stochastic discount factor driven by two observable risk factors: luxury good consumption and the relative price of the two goods. I estimate these processes and find them to be heteroskedastic, implying time variation in the conditional volatility of the stochastic discount factor. These dynamics occur both at the business cycle frequency and at a lower, "generational" frequency. The findings reveal that the time variation in aggregate stock market and Treasury bond risk premiums are consistent with the predictions of the model.]

[This paper shows that persistent mispricing is consistent with a market that includes ambiguity-averse investors. In particular, ambiguity-averse investors may prefer to trade based on aggregate signals that reduce ambiguity at the cost of a loss in information. Equilibrium prices may therefore fail to impound publicly available information. While this creates profit opportunities for ambiguity-neutral investors, ambiguity-averse investors perceive that the benefit of ambiguity reduction outweighs the cost of trading against investors who have superior information. The model can explain both underreaction, such as that evident in postearnings announcement drifts and momentum, and overreaction to accounting accruals.]

We test the signaling and wealth transfer hypotheses around the announcement of share repurchases using a recent and larger sample of data than previously examined while employing a methodology designed to enhance the power of our tests. Disentangling the wealth transfer and signaling hypotheses is difficult; they are not mutually exclusive and can have opposite effects for bondholders. Wealth transfers decrease bondholder wealth while positive signals increase it; the combined result obscures tests of each hypothesis. By focusing on sub-samples where signaling is more and less likely to be present we increase our ability to isolate the separate effects. In addition to traditional tests of wealth effects, we feature information inherent in the correlation of wealth changes to equity and debt. Our results are generally consistent with the positive signaling effect of stock repurchases, but also provide some support for wealth transfer. Our work also emphasizes the importance of trying to disentangle the various hypotheses. In the subset of option funding repurchases, where signaling effects are less likely, the positive correlation of wealth changes between stockholders and bondholders is completely eliminated. Bond ratings are much more likely to be upgraded in samples without executive options which is precisely where the signaling effects are expected to be concentrated. Firms with weaker shareholder rights experience greater bondholder wealth losses at the announcement of stock repurchases.

Subsequent to Feltham and Ohlson 1995 and Ohlson 1995, the accounting literature has published a large numbers of papers on accounting data and value.1 A review of this literature reveals that many themes and insights recur across the papers. With the advantage of hindsight, the repetitions seem inefficient. A student who takes a stab at familiarizing herself with subject matter naturally tends to view such a state of affairs as less than ideal. Questions like “What is it that I really need to understand?” or “Taken in its totality, what ideas and results make the literature tick?” arise. This paper addresses the essence of such questions. It states the central results as eight simple formal propositions. Because all the propositions are freestanding, they can, at least in principle, be internalized independently of each other. But the sequencing is in fact relevant because it introduces step-by-step increasingly sophisticated concepts. The concepts build upon each other; the propositions’ analytical simplicity should, therefore, not be taken as a sign that they are conceptually simplistic. Much discussion follows the propositions to spell out their broader significance. And the paper approaches this task always maintaining the texture of accounting: the central variables are earnings, book values, and dividends. The paper does not digress on proofs and finer analytical points. These aspects are of little interest, which is another way of saying that the paper focuses squarely on analytical constructs/representations and how these fit together. Nor does this paper elaborate on the extent to which the literature has already dealt with the results or insights. There is no question that most, if not all, results have had some kind of presence and thus lack novelty. That said, such cataloguing and related discussion would have been long and tedious without facilitating a better understanding of the insights I wish to convey. Aside from trying to systemize the literature, and thereby making it more accessible to the average reader, the paper also has a more ambitious objective. It goes to the heart of subject matter: the exposition should give the reader the sense that all pieces and insights interrelate logically and conceptually. In other words, the task at hand is to go beyond a listing of useful results (though this should hopefully be the case, too), and instead give a sense of how the various pieces coalesce into a whole. The development of such a coherent mental map allows the reader to think of the broad literature in an integrated fashion, rather than as consisting of loosely connected, or even competing, models that primarily differ in their empirical

This paper describes the findings of a study aimed at providing an international replication of a US-based study by Gibbs et al. [Gibbs, M., Merchant, K., Van der Stede, W., & Vargus, M. (2004). Determinants and effects of subjectivity in incentives. The Accounting Review, 79(2), 409-436; Gibbs, M., Merchant, K., Van der Stede, W., & Vargus, M. (2006). The structure of incentive contracts: Evidence from auto dealerships. Working Paper, University of Chicago, University of Southern California, London School of Economics and University of Texas-Dallas] focused on the incentive compensation practices of firms in the automobile retailing industry. The purpose was to determine the extent to which these practices and their effects were similar across countries. Theory provides conflicting predictions as to whether international practices should reflect a situational "best fit" or "global best practices." We collected a dataset comparable to that of Gibbs et al. from Dutch automobile retailers. The findings reveal dramatic differences in practices across the two countries. As compared to the US firms, the Dutch firms are much less likely to provide their managers with incentive compensation in any form. Where Dutch firms do offer incentive compensation, the payouts are smaller and their bonus awards are less likely to be based on profit measures of performance. But where the Dutch firms use incentive compensation, their performance/reward functions are more complex. Moreover, unlike in the US firms, in the Dutch firms the effects of the use of incentive compensation on net profit and pay satisfaction are negative.

This paper evaluates investment strategies that exploit the deviations from theoretical price parity in a sample of 12 dual-listed companies (DLCs) in the period 1980–2002. We show that simple trading rules produce abnormal returns of up to almost 10% per annum adjusted for systematic risk, transaction costs, and margin requirements. However, arbitrageurs face uncertainty about the horizon at which prices will converge and deviations from parity are very volatile. As a result, DLC arbitrage is characterized by substantial idiosyncratic return volatility and a high incidence of large negative returns, which are likely to impede arbitrage.

We examine the effect of earnings surprises on changes in information asymmetry. We hypothesize and find that asymmetry is lower (higher) in the quarter following positive (negative) earnings surprises compared to firms that meet the consensus analyst earnings forecast. The relations between earnings surprises and information asymmetry are stronger when the surprises are more likely to capture investors’ attention. Examining the source of these changes, we show that decreased information search activities is the most important factor for asymmetry declining after positive surprises; for negative surprises, decreased uninformed trading plays a dominant role increasing asymmetry.

[We investigate the relation between a country's first-time enforcement of insider trading laws and stock price informativeness using data from 48 countries over 1980-2003. Enforcement of insider trading laws improves price informativeness, as measured by firm-specific stock return variation, but this increase is concentrated in developed markets. In emerging market countries, price informativeness changes insignificantly after the enforcement, as the important contribution of insiders in impounding information into stock prices largely disappears. The enforcement does not achieve the goal of improving price informativeness in countries with poor legal institutions. It does turn some private information into public information, thereby reducing the cost of equity in emerging markets.]