This paper argues that although financial consolidation creates some dangers because it is leading to larger institutions who might expose the US financial system to increased systemic risk, these dangers can be handled by vigilant supervision and a government safety net with an appropriate amount of constructive ambiguity. Financial consolidation also opens up opportunities to dramatically reduce the scope of deposit insurance and limit it to narrow bank accounts, thus substantially reducing the moral hazard created by the government safety net. Reducing the scope of deposit insurance, however, does not eliminate the need for a government safety net, and thus there is still a strong need for adequate prudential supervision of the financial system. Moving to a world in which we have larger, nationwide, diversified financial institutions and in which deposit insurance plays a very limited role, should improve the efficiency of the financial system. However, it is no panacea: the job of financial regulators and supervisors will continue to be highly challenging in the future.

This paper exploits the 1990 change in capital adequacy regulations to construct more powerful tests of capital and earnings management effects on bank loan loss provisions. We find strong support for the hypothesis that loan loss provisions are used for capital management. We do not find evidence of earnings management via loan loss provisions. We also document the reasons for the conflicting results on these effects observed in prior studies. Additionally, we find that loan loss provisions are negatively related to both future earnings changes and contemporaneous stock returns contrary to the signaling results documented in prior work.

We use a rational expectations model to examine how public disclosure requirements affect listing decisions by rent-seeking corporate insiders, and allocation decisions by liquidity traders seeking to minimize trading costs. We find that exchanges competing for trading volume engage in a ‘race for the top’ whereunder disclosure requirements increase and trading costs fall. This result is robust to diversification incentives of risk-averse liquidity traders, institutional impediments that restrict the flow of liquidity, and listing costs. Under certain conditions, unrestricted liquidity flows to low disclosure exchanges. The consequences of cross-listing also are modeled.

Abstract Lee (1988) finds that LIFO firms have higher earnings‐price (EP) ratios than non‐LIFO firms despite the income‐reducing effects of LIFO, a result contrary to economic intuition that Lee describes as a “puzzle.” This paper attempts to resolve this puzzle by introducing refined measures of variables that are related to both EP ratios and inventory costing method choices. The improved proxies are analysts' expectations of future growth rather than realized growth, beta computed using a procedure designed to reduce measurement error rather than the usual OLS beta, and leverage as a supplemental risk measure. Further, we control for expected earnings changes, since transitory earnings shocks that are not expected to persist in future earnings affect the numerator of the EP ratio. After controlling for these factors, we find that EP ratios for LIFO firms are actually lower than those of non‐LIFO firms, a result consistent with economic intuition and the result expected by Lee.

Joel S. Demski, Hans Frimor, Performance Measure Garbling Under Renegotiation in Multi-Period Agencies, Journal of Accounting Research, Vol. 37, Studies on Credible Financial Reporting (1999), pp. 187-214

Valuation, Taxation, Dividends, Residual income model

This study examines how political and economic factors affect the offer price, share allocation, and other terms governments choose when they privatize state-owned enterprises via a public share offering. Using a 59 country sample of 630 share issue privatizations (SIPs) with total proceeds of over $446 billion during the period 1977–1997, we find that governments consistently underprice SIP offers, tilt their share allocation patterns to favour domestic investors, impose control restrictions on privatized firms, and typically use fixed-price offers rather than book building or competitive tender offers, all to further political and economic policy objectives.

We compare the investment–cash flow sensitivity of Korean chaebols (conglomerates) and non-chaebol firms. We show that investment–cash flow sensitivity is low and insignificant for chaebol firms but is high and significant for non-chaebol firms. On the other hand, a chaebol firm's investment is significantly related to the growth opportunities but that of a non-chaebol firm is not. A chaebol firm's investment is significantly affected by the cash flow of other firms within the same chaebol even though they are independent legal entities. With these findings, we argue that there is an internal capital market in a chaebol and the internal capital market reduces the financing constraints of the chaebol. However, the operation of the internal capital market does not improve the efficiency of allocation of scarce funds in the Korean economy since we find that chaebols invest more than non-chaebol firms despite their relatively poor growth opportunities.

Private information, Moral Hazard, Contracting, Risk