Unlike previous studies on the demand for local public education, this paper applies a minimum likelihood technique, developed for a kinked budget constraint, to the case of Wisconsin school districts and carries out simulations. The results indicate that (1) the bias in estimation under standard econometric techniques is substantial, (2) the so-called flypaper effect indeed exists, and (3) the impacts of grants on expenditures and wealth neutrality are different from those obtained by previous studies. Copyright 1990 by MIT Press.

Consistent with the notion that dividends are very sticky, Daniel, Denis, and Naveen ( ) report evidence that firms manage earnings upward when pre‐managed earnings are expected to fall short of dividend payments. However, we find that this evidence is not robust when controlling for firms' tendency to manage earnings upward to avoid reporting earnings declines; only firms with high leverage exhibit a statistically weak tendency to manage earnings to close deficits of pre‐managed earnings relative to dividends. We further report that the decision to cut dividends depends on whether reported earnings fall short of past dividends, but not on earnings management that eliminates a shortfall in pre‐managed earnings relative to dividend payments. Overall, our evidence suggests that firms that face dividend constraints are more likely to cut dividends than to manage earnings to avoid dividend cuts.

We test whether limited cost pass-through encourages durable goods producers to build financial flexibility. We find that firms with more durable output have larger cash balances and marginal value of cash, lower propensity to pay dividends, and less financial leverage. The link between durable goods and financial flexibility is equally strong in low and zero leverage firms and is reduced in more concentrated industries and when the firm has captive financing activity. Consistent with high demand elasticity driving limited cost pass-through, we find that a large increase in input costs decreases markups and financial slack of durable goods firms in comparison to nondurable goods and services firms.

We construct a measure of the pairwise relatedness of firms’ human capital to examine whether human capital relatedness is a key factor in mergers and acquisitions. We find that mergers are more likely and merger returns and postmerger performance are higher when firms have related human capital. These relations are stronger or only present in acquisitions where the merging firms do not operate in the same industries or product markets. Reductions in employment and wages following mergers with high human capital relatedness suggest that the merged firm has greater ability to layoff low quality and/or duplicate employees and reduce labor costs. We further show in a falsification test that human capital relatedness has no effect on acquiring firm returns in asset sales when little or no labor is transferred, which helps validate our measure of human capital relatedness.

We construct a measure ( fLMA ) of the extent to which neighboring firms hire similar types of workers, based on the similarity between the labor profile of a firm and that of its locality. We show that a firm’s innovation is positively related to fLMA. The enhanced labor mobility induced by higher fLMA is an important channel for this positive relation. This relation is stronger when firms have increased outside job opportunities for employees, increased knowledge spillovers via coworkership, and more employee stock options. Innovation is higher when intellectual property ownership is with employers, not employees. This effect increases in fLMA.