We examine whether short sellers identify firms that have significant changes in default likelihoods and credit rating downgrades. In the month before a rating downgrade, equity short interest is 40% higher than one year prior. Short sellers predict changes in default probabilities that lead to downgrades by focusing on firms with inaccurate or biased ratings. This strategy is profitable for short sellers primarily since downgrades are associated with significantly negative equity returns. Short sellers also facilitate price discovery by reducing abnormal stock returns following downgrades and by leading bond yield spreads.

Securities class actions typically involve some misrepresentation by a firm that overstates its true value. In securities class actions econometric models are used to assess damages to shareholders. However, studies on measuring damages for debt-holders are limited. Using structural models and leveraging the relationship between equity and firm value, we use observable equity information to determine firm and debt values and hence the effect of misrepresentation on corporate debt values. We find that the misrepresentation impact on debt value depends on the debt's credit risk. Generally, the debt for higher-leverage firms is more sensitive to the misrepresentation impact than for lower-leverage firms and junior debt is more affected by fraud than senior debt. Our proposed methodology allows for debt damages assessments consistent with standard methods for assessing equity damages. Our findings have important consequences for damages assessment and the allocation of settlement awards in securities class actions. In some jurisdictions damages awarded are net of any hedge or risk-limitation transaction. Since corporate securities such as bonds and stocks are often held in portfolios for hedging purposes, measuring the effect of misrepresentation on all of the firm's issuances is essential to accurately computed damages awards. Additionally our approach provides a consistent methodology for computing damages for securities that do not trade on public markets. A case study of a recent securities class action illustrates our methodology.

A five-factor model directed at capturing the size, value, profitability, and investment patterns in average stock returns performs better than the three-factor model of Fama and French (FF, 1993). The five-factor model׳s main problem is its failure to capture the low average returns on small stocks whose returns behave like those of firms that invest a lot despite low profitability. The model׳s performance is not sensitive to the way its factors are defined. With the addition of profitability and investment factors, the value factor of the FF three-factor model becomes redundant for describing average returns in the sample we examine.

Variables with strong marginal explanatory power in cross-section asset pricing regressions typically show less power to produce increments to average portfolio returns, for two reasons. (1) Adding an explanatory variable can attenuate the slopes in a regression. (2) Adding a variable with marginal explanatory power always attenuates the values of other explanatory variables in the extremes of a regression’s fitted values. Without a restriction on portfolio weights, the maximum Sharpe ratios in the GRS statistic of Gibbons, Ross, and Shanken (1989) provide little information about an incremental variable’s impact on the portfolio opportunity set.

The above article has been retracted at the request of authors Robert Libby and Hun‐Tong Tan, in agreement with the Editor‐in‐Chief, Patricia C. O'Brien, the copyright holder, the Canadian Academic Accounting Association (CAAA), and Wiley Periodicals, Inc. Bentley University conducted an investigation confirming that Dr. J. E. Hunton, while a faculty member at Bentley University and without the knowledge of his co‐authors, engaged in research misconduct, specifically data fabrication. Dr. Hunton provided the data used in the above study, and did not respond to a request for comment. Based on Bentley's initial report and further investigation into details specific to this paper, we conclude that the validity of the data cannot be confirmed. To correct the academic literature and maintain standards of academic integrity, we therefore retract the paper. The article was published online in Contemporary Accounting Research on 13 May 2010, in Wiley Online ( wileyonlinelibrary.com ). Reference Tan , H.‐T. , R. Libby , and J. E. Hunton . 2010 . . Contemporary Accounting Research 27 (): 187 – 208 . doi: 10.1111/j.1911‐3846.2010.01006.x

We introduce ex post participation constraints in the standard sequential screening model. This captures the presence of consumer withdrawal rights as, for instance, mandated by European Union regulation of “distance sales contracts”. With such additional constraints, the optimal contract is static and, unlike with only ex ante participation constraints, does not elicit the agent's information sequentially. This holds whenever differences in ex ante and ex post outside options are below a positive upper bound. Welfare effects of mandatory withdrawal rights are ambiguous. Since it is insufficient in our setting to consider only local incentive constraints, we develop a novel technique to identify the relevant global constraints.

By the 1970s, quid pro quo policy, which requires multinational firms to transfer technology in return for market access, had become a common practice in many developing countries. While many countries have subsequently liberalized quid pro quo requirements, China continues to follow the policy. In this article, we incorporate quid pro quo policy into a multicountry dynamic general equilibrium model, using microevidence from Chinese patents to motivate key assumptions about the terms of the technology transfer deals and macroevidence on China's inward foreign direct investment (FDI) to estimate key model parameters. We then use the model to quantify the impact of China's quid pro quo policy and show that it has had a significant impact on global innovation and welfare.

This article studies belief heterogeneity in a benchmark competitive asset market: a market for Arrow–Debreu securities. We show that differences in agents' beliefs lead to a systematic pricing pattern, the favourite–longshot bias (FLB): securities with a low-pay-out probability are overpriced, whereas securities with high probability pay-out are underpriced. We apply demand estimation techniques to betting market data, and find that the observed FLB is explained by a two-type population consisting of canonical traders, who hold virtually correct beliefs and are the majority type in the population (70%); and noise traders exhibiting significant belief dispersion. Furthermore, exploiting variation in public information across markets in our data set, we show that our belief heterogeneity model empirically outperforms existing preference-based explanations of the FLB.

We study the impact of skilled immigrants on the employment structures of US firms using matched employer-employee data. Unlike most previous work, we use the firm as the lens of analysis to account for greater heterogeneity and the fact that many skilled immigrant admissions are driven by firms themselves (e.g., the H-1B visa). OLS and IV specifications show rising overall employment of skilled workers with increased skilled immigrant employment by the firm. Employment expansion is greater for young natives than for their older counterparts. The departure rates for older workers relative to younger workers appear highest for those in STEM occupations.