This paper comprehensively reviews the Accounting for Income Taxes (AFIT) literature. We begin by identifying four distinctive aspects of AFIT and briefly covering the rules surrounding AFIT. We then review the existing studies in detail and offer suggestions for future research. We emphasize the research questions that have been addressed (most of which relate to whether the tax accounts are used to manage earnings and whether the tax accounts are priced by equity market participants). We also highlight areas that have not received much research attention and that warrant future analysis.

I bridge the current pricing kernel framework with the early partial-moment pricing models of the beta framework, thereby reconciling and clarifying these bodies of literature. I argue for the inclusion of powers of min and max functions within a generalized kernel, and form a generalized beta model. Polynomial kernels and the kernel underpinning the partial-moment analogue of the Sharpe-Lintner CAPM are nested. I derive the partial-moment analogue to the Black CAPM, thus completing a theoretical parallelism, and compare the kernel-implied and canonical risk-neutral probabilities. A new model involving both lower and upper partial-moments, accommodating various kernel shapes present in the literature, is developed in the context of preference regularity conditions.

[This article studies the central role of the credit market. We show that the credit market facilitates optimal risk sharing by allowing less risk-averse investors to take on levered positions and consume more risk. The equilibrium amount behaves procyclically when aggregate consumption is low but countercyclically when it is high. The varying size of the credit market modifies the amount of risk sharing, which in turn influences asset prices such as expected stock returns, stock return volatility, and the term structure of interest rates. Our article provides a frictionless benchmark for the role and the behavior of the credit market.]

[We investigate the effects of bank control over borrower firms whether by representation on boards of directors or by the holding of shares through bank asset management divisions. Using a large sample of syndicated loans, we find that banks are more likely to act as lead arrangers in loans when they exert some control over the borrower firm. Bank-firm governance links are associated with higher loan spreads during the 2003—2006 credit boom but lower spreads during the 2007—2008 financial crisis. Additionally, these links mitigate credit rationing effects during the crisis. The results are robust to several methods to correct for the endogeneity of the bank-firm governance link. Our evidence, consistent with intertemporal smoothing of loan rates, suggests that there are costs and benefits from banks' involvement in firm governance.]

Abstract. The Ricardian model predicts that countries should produce and export relatively more in industries in which they are relatively more productive. Though one of the most celebrated insights in the theory of international trade, this prediction has received little attention in the empirical literature since the mid-1960s. The main reason behind this lack of popularity is the absence of clear theoretical foundations to guide the empirical analysis. Building on the seminal work of Eaton and Kortum (2002), we offer such foundations and use them to quantify the importance of Ricardian comparative advantage. In the process, we also provide a theoretically-consistent alternative to Balassa’s (1965) well-known index of ‘revealed comparative advantage.’

The game-theoretic literature on collusion has been hard pressed to explain why a cartel should engage in price wars, without resorting to either impatience, symmetry restrictions, inability to communicate, or failure to optimize. This paper introduces a new explanation that relies on none of these assumptions: if the cartel's member firms have private information about their costs, price wars can be optimal in the face of complexity. Specifically, equilibria that are robust to pay-off irrelevant disruptions of the information environment generically cannot attain or approximate efficiency. An optimal robust equilibrium must allocate market shares inefficiently and may call for price wars under certain conditions. For a two-firm cartel, cost interdependence is a sufficient condition for price wars to arise in an optimal robust equilibrium. That optimal equilibria are inefficient generically applies not only to collusion games but also to the entire separable pay-off environment—a class that includes most typical economic models.

We use earnings forecasts from a cross-sectional model to proxy for cash flow expectations and estimate the implied cost of capital (ICC) for a large sample of firms over 1968¿2008. The earnings forecasts generated by the cross-sectional model are superior to analysts' forecasts in terms of coverage, forecast bias, and earnings response coefficient. Moreover, the model-based ICC is a more reliable proxy for expected returns than the ICC based on analysts' forecasts. We present evidence on the cross-sectional relation between firm-level characteristics and ex ante expected returns using the model-based ICC.

We provide evidence of a significant relation between diversification and performance in the hedge fund industry. Measuring diversification across four distinct dimensions, we find a significant positive relation between hedge fund performance and diversification across sectors and asset classes. We show that on a risk adjusted basis, hedge funds that diversify across sectors and asset classes outperform other funds by an average of 1.1% per year. However, diversification across styles and geographies exhibits a significant negative association with hedge fund returns. Funds that diversify across styles and geographies underperform other funds by an average of 1% per year. For fund of hedge funds, we find a significant positive relation between performance and diversification across sectors. However, diversifying across asset classes and geographies is found to exhibit a negative relation with fund performance. Finally, we find that the motive to engage in diversification is consistent with managerial incentive structure in the hedge fund industry.

We examine how two attributes of preventive and detective controls affect employee performance and employee motivation. Specifically, we examine how the extent to which controls (1) restrict employees’ autonomy, and (2) provide more or less timely feedback impacts employees’ performance and intrinsic motivation. These characteristics are the defining differences between preventive and detective controls in that preventive controls restrict employee autonomy relative to detective controls and preventive controls always provide immediate feedback; whereas, detective controls can provide either immediate feedback or delayed feedback. We conduct an experiment to examine how and why these two types of formal controls impact employees’ performance in an incomplete contract setting in which one dimension of the employees’ task is compensated and one dimension is controlled. The results show that detective controls with more timely feedback improve employees’ performance toward the control objective, without affecting their intrinsic motivation. In contrast, the restriction of autonomy associated with preventive controls, has no additional effect on employees’ performance toward the control objective over detective controls with timely feedback but significantly reduces employees’ motivation. Neither control characteristic has a significant effect on employees’ performance on the compensated dimension of the task, suggesting that monetary incentives continue to provide an effective motivation. Our results reveal the importance of designing and implementing controls that provide timely feedback but do not restrict autonomy.

Using a sample of restatement firms and a meet-or-beat model to classify firms as making discretionary accounting choices for opportunistic meet-or-beat (OP-MB) reasons, we show that originally reported earnings and accrual components are less predictive of future cash flows relative to the restated numbers. We find the opposite is true for firms classified as making discretionary accounting choices for non-OP-MB reasons. We consider a number of competing explanations for these latter results. Our findings are most consistent with the informational hypothesis, weakly consistent with conservative-motivated efficient contracting hypotheses, but inconsistent with opportunistic contracting and misapplication/errors of GAAP explanations.