Appendix: inconsistency in the Naive and Nadiri models, 330.

T HE Index of Consumer Sentiment is one of the oldest and most respected measures of consumer psychology. The contribution of the Index to the prediction of aggregate consumer durable spending was first examined by Mueller and Katona (1953, 1957). The Index has been used in several econometric models of the U.S. economy (Friend and Taubman, 1964; Duesenberry et al., 1965; Evans, Klein and Schink, 1967). However, the contribution of the Index is only marginally significant in most of these studies, if account is taken of stocks of durables and relative prices. Friend and Adams (1964) have noted that several cyclical variables the average work week in manufacturing, stock market prices, and the unemployment rate -appear to be close substitutes for the Index in automobile demand equations, yielding approximately-equal coefficients of determination when specified with similar lag structures. More recently, Burch and Stekler (1969) compared forecasts of consumer durable expenditure based on income and attitudes with those generated by naive strategies. The use of a serial correlation correction of the error term proved necessary to generate forecasts superior to an assumption of no change in durable sales. Even so, the best fitting equation they estimated was unable to forecast turning points. Thus, the recent evidence suggests to many econometricians that attempting to use expectational variables in large scale econometric models is more trouble than it's worth.1 This is especially true since more convenient variables, such as the unemployment rate, or the average work week in manufacturing, appear to substitute so well. Saul Hymans expressed this sentiment accurately:

R. Burr Porter, Roger C. Pfaffenberger, Efficient Algorithms for Conducting Stochastic Dominance Tests on Large Numbers of Portfolios: Reply, The Journal of Financial and Quantitative Analysis, Vol. 10, No. 1 (Mar., 1975), pp. 181-185

The comment by Linke and Kim correctly observes that the assumption regarding the maintenance of constant proportional use of capital sources is not appropriate for our argument and should be deleted. As our analysis did not make use of this assumption, the two conclusions hold.1. The weighted average cost of capital calculated with the usual weights (original capital structure proportions) is not in general equal to the discount rate which equates the current value of the firm to the present value of future cash flows.2. The above conclusion holds for any weights which can be constructed from the cash flows.

Linear programming models of specialized financial decision problems such as working capital management [21], short-term financing [22], or capital bug-geting [24] are deficient in that they may lead to decisions which are suboptimal with respect to the firm as a whole. Each model attacks a single decision problem and neglects its interaction with the other activities of the firm. On the other hand, a model which reflects these interdependences and interactions by including the various financing, investment, and operating decisions in a single model tends to become excessively large and inefficient to use. What is needed is a model that incorporates the efficiencies inherent in smaller, more specialized models which can be utilized on a decentralized basis and which can simultaneously lead to decisions that are optimal for the firm as a whole.

Several recently reported studies have considered whether changes in accounting methods by firms whose securities are publicaly traded have led to any discernible response in the form of shifts in share prices. (I) These studies have been framed in differing terms, and have looked at share price movements under a variety of conditions. But a common finding has been that changes in accounting methods do not appear to have had much of an effect on stock market prices. This paper presents some evidence of changes in accounting method which lead to shifts in stock prices. It describes an examination of movements in share prices of a sample of relatively large Australian public companies which announced upward asset revaluations during the period 1960-70. This examination revealed that announcements of asset revaluations were associated with substantial upward movements in stock prices, and that these shifts in stock prices were generally sustained in the post-announcement months. Furthermore, the stock market appears to digest this new information quickly into stock prices as the adjustment was almost complete at the close of the announcement month. Further analysis suggested that the observed movements in stock prices could not be attributed entirely to such additional information signals as earnings and dividend changes. Nor were the results explained by induced changes in volatility which could conceivably result from the release of revaluation information. Given that the revaluations reflected changes in the worth of assets which had predominantly taken place but had not been recorded during prior accounting periods, then the findings are consistent with claims that the failure of accounting to systematically provide contemporary information about the affairs of firms can deprive the stock market of valuable information and lead to the inequitable treatment of individual investors.

Journal Article Macro-Policy Goals in the Postwar Period: Comment Get access Raford Boddy, Raford Boddy The American University Search for other works by this author on: Oxford Academic Google Scholar James R. Crotty James R. Crotty University of Massachusetts at Amherst Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 89, Issue 4, November 1975, Pages 673–676, https://doi.org/10.2307/1884704 Published: 01 November 1975