We present a model in which setting up and running a regulatory institution takes a fixed cost. As a consequence, the supply of regulation is limited by the extent of the market. We test three implications of this model. First, jurisdictions with larger populations affected by a given regulation are more likely to have it. Second, jurisdictions with lower incremental fixed costs of introducing and administering new regulations should regulate more. This implies that regulation spreads from higher to lower population jurisdictions, and that jurisdictions that build up transferable regulatory capabilities should regulate more intensely. Consistent with the model, we find that higher population U. S. states have more pages of legislation and adopt particular laws earlier in their history than do smaller states. We also find that the regulation of entry, the regulation of labor, and the military draft are more extensive in countries with larger populations, as well as in civil law countries, where we argue that the incremental fixed costs are lower.

In this study, I examine the association between the credibility of the financial reporting system and the quality of governance mechanisms. I use a sample of 87 firms identified by the SEC as fraudulently manipulating their financial statements. Consistent with prior research, results indicate that fraud firms have poor governance relative to a control sample in the year prior to fraud detection. Specifically, fraud firms have fewer numbers and percentages of outside board members, fewer audit committee meetings, fewer financial experts on the audit committee, a smaller percentage of Big 4 auditing firms, and a higher percentage of CEOs who are also chairmen of the board of directors. However, the results indicate that fraud firms take actions to improve their governance, and three years after fraud detection these firms have governance characteristics similar to the control firms in terms of the numbers and percentages of outside members on the board, but exceed the control firms in the number of audit committee meetings. I also investigate whether the improved governance influences informed capital market participants. The results indicate that analyst following and institutional holdings do not increase in fraud firms, suggesting that credibility was still a problem for these firms. However, the results also indicate that firms that take actions to improve governance have superior stock price performance, even after controlling for earnings performance. This suggests that investors appear to value governance improvements.

Over the last decade, the Brazilian banking industry has undergone major and deep transformations with several privatizations of state-owned banks, mergers and acquisitions, closing down of troubled banks, entry by foreign banks, etc. The purpose of this paper is to evaluate the impacts of these changes in banking total factor productivity. We first obtain measures of bank-level productivity by employing the techniques due to Levinsohn and Petrin [Levinsohn, J., Petrin, A., 2003. Estimating production functions using inputs to control for unobservables. Review of Economic Studies 70, 317–342]. We then relate such measures to a set of bank characteristics. Our main results indicate that state-owned banks are less productive than their private peers, and that privatization has increased productivity.

Modigliani and Cohn hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has implications for the pricing of risky stocks relative to safe stocks. Simultaneously examining the pricing of Treasury bills, safe stocks, and risky stocks allows us to distinguish money illusion from any change in the attitudes of investors toward risk. Our empirical results support the hypothesis that the stock market suffers from money illusion.

Prices of interest rate derivative securities depend crucially on the mean reversion parameters of the underlying diffusions. These parameters are subject to estimation bias when standard methods are used. The estimation bias can be substantial even in very large samples and much more serious than the discretization bias, and it translates into a bias in pricing bond options and other derivative securities that is important in practical work. This article proposes a very general and computationally inexpensive method of bias reduction that is based on Quenouille's (1956; Biometrika, 43, 353–360) jackknife. We show how the method can be applied directly to the options price itself as well as the coefficients in the models. We investigate its performance in a Monte Carlo study. Empirical applications to U.S. dollar swap rates highlight the differences between bond and option prices implied by the jackknife procedure and those implied by the standard approach. These differences are large and suggest that bias reduction in pricing options is important in practical applications.

Fellowship Stipend Support and the Supply of Science and Engineering Students: NSF Graduate Research Fellowships by Richard B. Freeman. Published in volume 95, issue 2, pages 61-65 of American Economic Review, May 2005

We investigate how the market for corporate control (external governance) and shareholder activism (internal governance) interact. A portfolio that buys firms with the highest level of takeover vulnerability and shorts firms with the lowest level of takeover vulnerability generates an annualized abnormal return of 10% to 15% only when public pension fund (blockholder) ownership is high as well. A similar portfolio created to capture the importance of internal governance generates annualized abnormal returns of 8%, though only in the presence of “high” vulnerability to takeovers. The complementarity effect exists for firms with lower industry‐adjusted leverage and is stronger for smaller firms.

We find that analyst forecasts of earnings per share occur in nickel intervals at a much greater frequency than do actual earnings per share. Analysts who round their earnings per share forecasts to nickel intervals exhibit characteristics of analysts who are less informed, exert less effort, and have fewer resources. Rounded forecasts are less accurate and the negative relation between rounding and forecast accuracy increases as the rounding interval increases from nickel to dime, quarter, half-dollar, and dollar. An examination of announcement period returns reveals that market expectations more closely align with consensus forecasts including rounded forecasts and then correct toward the more accurate consensus forecasts excluding rounded forecasts. Finally, exclusion of rounded forecasts decreases forecast dispersion.

This paper demonstrates that mall store contracts are written to internalize externalities through both an efficient allocation and pricing of space, and an efficient allocation of incentives across stores. Certain stores generate externalities by drawing customers to other stores, whereas many stores primarily benefit from external mall traffic. Therefore, to varying degrees, the success of each store depends upon the presence and effort of other stores, and the effort of the developer to attract customers to the mall. Using a unique data set of mall tenant contracts, we show that rental contracts are written to (i) efficiently price the net externality of each store and (ii) align the incentives to induce optimal effort by the developer and each mall store according to the externality of each store's effort.