William H. Beaver, Stephen G. Ryan, Biases and Lags in Book Value and Their Effects on the Ability of the Book-to-Market Ratio to Predict Book Return on Equity, Journal of Accounting Research, Vol. 38, No. 1 (Spring, 2000), pp. 127-148

Banking, Disclosures, Bank loan portfolio compositions, Market reaction

We discuss the identification and estimation of discrete games of complete information. Following Bresnahan and Reiss (1990, 1991), a discrete game is a generalization of a standard discrete choice model where utility depends on the actions of other players. Using recent algorithms to compute all of the Nash equilibria to a game, we propose simulation-based estimators for static, discrete games. We demonstrate that the model is identified under weak functional form assumptions using exclusion restrictions and an identification at infinity approach. Monte Carlo evidence demonstrates that the estimator can perform well in moderately sized samples. As an application, we study entry decisions by construction contractors to bid on highway projects in California. We find that an equilibrium is more likely to be observed if it maximizes joint profits, has a higher Nash product, uses mixed strategies, and is not Pareto dominated by another equilibrium.

Firms measure fair values using Level 2 or 3 inputs when items do not trade in liquid markets, limiting market discipline over the measurements. We provide evidence that firms holding higher proportions of financial instruments measured at Level 2 and 3 fair values report more conditionally conservative comprehensive income attributable to fair value measurements, consistent with firms trying to mitigate investors' discounting of the measurements. We further predict and find that this conditional conservatism (1) increases with governance mechanisms that increase the strength and persistence of firms' incentives to report conservatively and (2) decreases with firms’ earnings management incentives.

Beaver, Lambert and Morse (1980) employ a regression of percentage change in prices on percentage change in earnings in which data are grouped by the dependent variable. Reverse regression offers a more intuitive and direct way to assess the information content of security prices, the objective of Beaver et al. While grouping is asymptotically equivalent, reverse regression is a more efficient way of examining the incremental explanatory power of lagged values of percentage change in price with respect to accounting earnings.

We use a randomized experiment and a structural model to test whether monitoring and financial incentives can reduce teacher absence and increase learning in India. In treatment schools, teachers' attendance was monitored daily using cameras, and their salaries were made a nonlinear function of attendance. Teacher absenteeism in the treatment group fell by 21 percentage points relative to the control group, and the children's test scores increased by 0.17 standard deviations. We estimate a structural dynamic labor supply model and find that teachers respond strongly to financial incentives. Our model is used to compute cost-minimizing compensation policies. (JEL I21, J31, J45, O15)

Financial reporting, Disclosures, Banking, Loan loss allowance