We use a simulation model for a pharmaceutical R&D program to examine the tradeoff between objectivity and relevance of accounting information under various methods of R&D reporting. A simple capitalization rule, similar to the successful‐efforts method of capitalizing oil and gas exploration costs, provides a stronger relation between accounting information and economic values than immediate expensing of R&D outlays or capitalizing the full cost of outlays. The superior relevance of this “successful‐efforts” method persists even when earnings management is widespread.

ABSTRACT This paper asks how well different organizational structures perform in terms of generating information about investment projects and allocating capital to these projects. A decentralized approach‐with small, single‐manager firms‐is most likely to be attractive when information about projects is “soft” and cannot be credibly transmitted. In contrast, large hierarchies perform better when information can be costlessly “hardened” and passed along inside the firm. The model can be used to think about the consequences of consolidation in the banking industry, particularly the documented tendency for mergers to lead to declines in small‐business lending.

Most mutual funds adopt investment styles that cluster around a broad market benchmark. Few funds take extreme positions away from the index, but those who do are more likely to favor growth stocks and past winners. The bias toward glamour and the tendency of poorly performing value funds to shift styles may reflect agency and behavioral considerations. After adjusting for style, there is evidence that growth managers on average outperform value managers. Though a fund's factor loadings and its portfolio characteristics generally yield similar conclusions about its style, an approach using portfolio characteristics predicts fund returns better.

This study presents a general approach for selecting comparable firms in market‐based research and equity valuation. Guided by valuation theory, we develop a “warranted multiple” for each firm, and identify peer firms as those having the closest warranted multiple. We test this approach by examining the efficacy of the selected comparable firms in predicting future (one‐ to three‐year‐ahead) enterprise‐value‐to‐sales and price‐to‐book ratios. Our tests encompass the general universe of stocks as well as a sub‐population of so‐called “new economy” stocks. We conclude that comparable firms selected in this manner offer sharp improvements over comparable firms selected on the basis of other techniques.

This study uses simultaneous equations models and single-equation models to test for simultaneity bias in mortgage refinance data compiled by a regional bank. The purpose of the study is to assess the claim that single-equation models of the lending decision produce biased and inconsistent parameter estimates of endogenous mortgage terms. Bank-specific data are analyzed to avoid bias resulting from uncontrolled policy, training, or underwriting differences across banks. Importantly, the data contain all variables the regional bank identified as important factors in explaining its loan disposition results. After controlling for applicants' debt, income, credit history, and requested loan term, I find that the race coefficient in single-equation models is biased upward, while the loan-to-value ratio coefficient is biased downward, although both biases are insignificant. Overall, the results suggest that simultaneous equations models are preferable to single-equation models in tests for discrimination, and can be used to determine the extent of race coefficient and loan-to-value ratio coefficient bias in single-equation models.

This paper develops an extension of the classical multinomial logit model which approximates a class of models obtained when there is uncontrolled taste variation across agents and choices in addition to the stochastic noise inherent in the logit model. Unlike semiparametric and parametric alternatives, the extended logit model is easy to estimate even when there are many potential choices. Unlike parametric alternatives, it does not require the specification of a distribution of varying tastes. The extended logit model can give a quick indication of the impact of taste variation on estimates and it generates estimates of the covariances of the taste shifters. It can be used as an exploratory device en route to the construction of a model incorporating a particular form of random taste variation and it can be used to determine whether such effort is required at all. When the amount of taste variation is not excessive the approximate model can be adequate itself. The model nests the conventional logit model which leads to a misspecification diagnostic. A method for estimating the model using conventional logit model software is proposed, asymptotic properties of estimators are derived and an application is presented.

We investigate the effect of an increase in the individual (shareholder-level) income tax rate on share values. We regress cumulative daily abnormal stock returns surrounding the passage of the Revenue Reconciliation Act of 1993 on firm dividend yield, tax status of the investor as represented by level of institutional ownership, the interaction of these two variables, and control variables. Consistent with our expectations, we find that (1) the higher the firm's dividend yield, the more negative the firm's stock price reaction to the increase in the individual income tax rate (i.e., the dividend tax rate) enacted in the Revenue Reconciliation Act of 1993, and (2) institutional holdings mitigate this negative reaction. Our results suggest that both the dividend policy of the firm and the tax status of the marginal investor influence the extent to which dividend taxes are reflected in share values. Our evidence is consistent with the traditional view that firm dividend policy influences the extent to which tax rate changes affect share values.

Dynamic Inconsistencies: Counterfactual Implications of a Class of Rational-Expectations Models by Arturo Estrella and Jeffrey C. Fuhrer. Published in volume 92, issue 4, pages 1013-1028 of American Economic Review, September 2002

Many emerging market countries have suffered financial crises. One view blames soft pegs for these crises. Adherents of this view suggest that countries move to corner solutions—hard pegs or floating exchange rates. We analyze the behavior of exchange rates, reserves, and interest rates to assess whether there is evidence that country practice is moving toward corner solutions. We focus on whether countries that claim they are floating are indeed doing so. We find that countries that say they allow their exchange rate to float mostly do not—there seems to be an epidemic case of “fear of floating.”