This paper examines some implications of the observation that the same Lagrange multiplier test is sometimes appropriate for quite different alternative hypotheses. A characterization of the class of such alternatives is developed which suggests a simple approach to testing for misspecification, and the consequences for finite sample power properties are examined by Monte Carlo experiments.

IN March of 1972, the Canadian federal government and the Ontario provincial government jointly announced that a second international airport for Toronto would be built near the town of Pickering, Ontario. Considerable controversy followed this decision in spite of the great number of governmental studies on which the decision had presumably been based. Among other criticisms it was alleged that while the government's research effort had been extensive, it had not necessarily been balanced, and the case for simply expanding the existing international airport at Toronto might have been understated. The problem faced by the Canadian government in this instance illustrates a frequent problem in the evaluation of public policy alternatives: how to provide balance in the development of information so that both the pro and con positions can be said to be adequately represented. Airport location studies provide particularly good illustrations of the problem of balance because it is impossible for the data and arguments ever to be considered complete. No matter what the expenditure of time and money, there is always room for further research. Even after the million-pound Rosskill cost-benefit study regarding the third London airport, Mishan (1970) and Flowerdew (1972) describe how differences of opinion continued to persist among economists on the commission itself. Similarly, for the Pickering Airport question, no amount of study could be expected to be definitive. In such cases the problem of how to assure that resources and talent are not overconcentrated on one side or the other is a problem of importance. The response of the Canadian government to the Pickering controversy was to appoint a three-man review board, headed by a federal judge, to serve as an Airport Inquiry Commission. The commission was assigned full responsibility for reviewing existing airport studies, holding new hearings, and presenting new summaries and recommendations regarding whether or not the new airport should be built. The procedure chosen in this instance illustrates a common approach to organizing information for decisions. A group such as an executive or legislative committee wishes to receive both balanced information and recommendations regarding some proposal, but allows the same people who are asked to make the recommendations to also summarize the information. When the group making the recommendations also summarizes the information, however, the balance in this information is subject to question. The information may be seen in part as a rationale for the recommendations, and both the information and recommendations may be considered too dependent upon the personal views of a small group. Consequently there have been suggestions for more formal information procedures for certain executive and legislative decisions. More formal information procedures, for example, have been proposed for government technology assessment. As one example, Uman (1975) outlines procedures for using science advisory panels as checks on internal government technology assessments. Other technology assessment procedures are surveyed in articles by Jones (1973) and Coates (1974). An even more formal approach to securing balance in information is the Science Court proposed by Kantrowitz and discussed in reports such as that by the Task Force of the Presidential Advisory Group in Anticipated Advances in Science and Technology (1976). The Science Court and many of the other formal procedures for balance, howReceived for publication March 20, 1978. Revision accepted for publication August 8, 1980. * York University. This study was supported by the University of TorontoYork University Joint Program in Transportation and Canada Council Grant No. 770121. The author would like to thank R. F. Boruch, H. 0. Hartley, B. L. Raktoe, and also the participants at the 1978 National Bureau of Economic Research-National Science Foundation Conference on Decision Rules and Uncertainty at Carnegie-Mellon University. The author is particularly indebted to the economists who formed the research teams for the experiment, John Evans with advisor George Hilton, and Sanford Borins with advisor Glen Jenkins. Finally the author would like to acknowledge useful suggestions from the referees.

T HE international monetary events of the 1970s-the collapse of Bretton Woods, the introduction of generalized floating exchange rates, the appearance of significant inflation differentials among the major industrialized nations (e.g., Goldstein and Young, 1979), and the recent threat of rate wars -have renewed interest among international economists in the role real rates of return play in determining the international pattern of capital flows (Mudd, 1979) and exchange rates (Frankel, 1979). In this paper I investigate the empirical relationship between long-term portfolio capital flows and the real rate of interest for three European countries and the United States. The flows are disaggregated according to asset and liability categories and are measured on a quarterly basis; I examine only long-term portfolio flows into and out of the private sectors of the United Kingdom, West Germany, Italy, and the United States. The methodology represents an extension and mathematical redefinition of the stockadjustment approach to capital flow modeling developed by Branson (1968) and applied by Miller and Whitman (1970) to analyze long-term foreign portfolio investment. Real rates of interest are explicitly calculated through the computation of (weakly) rational expected inflation variables (Kreicher, 1979), which are then composed with long-term nominal rates in a manner consistent with a long-run, relative Purchasing-Power Parity theory of exchange rate expectations. The results reported here support the stockadjustment approach and provide fairly convincing evidence in support of the hypothesis that international investment decisions are sensitive and responsive to inflationary and exchange rate expectations and real interest rates.

P AUL COOTNER stimulated significant research on the subject of speculative markets in both commodities and equities. His papers (1960, 1964, 1967) were original and provocative. One paper began with the statement: subject matter of this paper is bound to be considered heresy. I can say that without equivocation, because whatever views anyone expresses on this subject are sure to conflict with someone else's deeply held beliefs (1964, p. 231). Most of the papers concerned with the operation of futures markets in commodities test the 'efficiency of the market by examining the stochastic nature of futures prices (which Samuelson refers to as the Idiot of Chance).' In particular, it is asked whether the price of a futures contract is a martingale. Cootner's contention, which runs counter to the tide of academic writings, is that speculative prices are not random walks but are constrained by economically determined barriers (1964, ch. 11). The present paper is in the spirit of Cootner's thinking about the economic and welfare implications of speculative markets. My main conclusions are as follows. (1) The optimality of resource allocation (defined as the sum of consumer and producer surplus) depends upon the accuracy of the forward price, at the time production decisions are made, as a forecast of the subsequent spot price when consumption occurs. The existence or nonexistence of the martingale property of futures prices between these two dates is irrelevant for welfare purposes. (2) Social loss is a multiple of the square of the forecast error between the forward price and the subsequent spot price. Expected social loss is irreducible when the forward price is equal to the mathematical expectation of the subsequent spot price. (3) The longer the period between the production decisions and the subsequent consumption decisions, the greater the bias between the forward price and subsequent spot price. (4) It has been claimed that in an efficient market, the spot price at time t should just depend upon the price at t 1 and not upon earlier prices. It is proved that this situation is neither a necessary nor a sufficient condition for rational expectations. (5) Therefore, there is a tenuous connection between the stochastic nature of speculative price and measures of economic welfare; but there is a direct connection between the forecast errors and economic welfare.

Abstract ABSTRACT: This paper examines the likelihood that U.S.-based multinational enterprises (MNEs) will alter their corporate structure in response to changes in U.S. tax policies towards income derived from direct foreign investments. If the deferral privilege is eliminated, it is probable that a number of corporations having foreign subsidiaries will decontrol part or all of their subsidiaries that retain the controlled foreign corporation (CFC) classification in order to avoid the additional U.S. tax burden. The most likely means for decontrolling these subsidiaries is by either selling additional common stock that has not been previously issued or by making a tax-free distribution of the CFC stock under Section 355. For the "average" subsidiary, decontrol will increase the net dividends to shareholders by approximately 20 to 25 percent. Decontrolling is more likely for subsidiaries that are incorporated and/or operating in low tax rate jurisdictions and which reinvest half or more of their earnings. For these decontrolled subsidiaries, the increased dividends available to the shareholders can be nearly six times as large as are the dividends when CFC status is retained following the repeal of the deferral privilege.

Observation error, Observation Bias, Accounting research

Recent studies have implied that the capital market has become more efficient with respect to the announcements of stock splits and corporate earnings. This study calculated residual returns associated with these announcements and then tested, by time period (early and late years), for a between period difference. The results suggest that for certain earnings and split announcements the market is no more efficient than it has been in the past.

The sequential nature of activities like research, development, or exploration requires optimal funding criteria to take account of the fact that subsequent funding decisions will be made throughout the future. Thus, there is a continual possibility of reviewing a project's status, based on the latest information. After setting up a model to capture this feature, optimal funding criteria are investigated. In an important special case, an explicit formula is derived. As well as throwing light upon the nature of development activities, the analysis is also relevant to the general theory of information gathering processes.