We show that if true returns are independently distributed and a manager fully reports gains but delays reporting losses, then reported returns will feature conditional serial correlation. We use conditional serial correlation as a measure of conditional return smoothing. We estimate conditional serial correlation in a large sample of hedge funds. We find that the probability of observing conditional serial correlation is related to the volatility and magnitude of investor cash flows, consistent with conditional return smoothing in response to the risk of capital flight. We also present evidence that conditional serial correlation is a leading indicator of fraud.

What is good for a country may not be good for its big businesses, at least recently. More turnover in top businesses correlates with faster per capita gross domestic product, productivity, and capital growth; supporting Schumpeter's [1942. Capitalism, Socialism and Democracy, third ed., Harper & Bros., New York, NY] theory of “creative destruction”—innovative firms blooming as stagnant ones wither. These correlations are greater in more developed economies, supporting Aghion and Howitt's [1992. A model of growth through creative destruction. Econometrica 60, 323–351] thesis that creative destruction matters more to economies nearer the technological frontier. More big business turnover also correlates with smaller government, common law, less bank-dependence, stronger shareholder rights, and greater openness.

The adoption of business risk audit (BRA) approaches during the 1990s by several leading audit firms has been the subject of considerable scrutiny and commentary. Under BRA, the auditor responds to the increasing complexity of auditee financial reports by acquiring a deep and comprehensive understanding of the auditee's industry, strategy, business models, and processes—tasks best accomplished by higher‐ranked labor—and by employing this understanding to make audit labor allocations. Using proprietary data for 165 audits conducted in 2002, we investigate three propositions about audit labor use under BRA. First, relative to pre‐BRA benchmarks for the same auditor, we expect BRA audits to use a greater proportion of higher‐ranked labor. Second, we expect engagements with high assessed auditor business risk (ABR), a summary risk assessment that reflects the BRA auditor's rich understanding of the auditee, to be allocated more labor and more higher‐ranked labor than pre‐BRA benchmarks. Third, at all ranks of labor, we expect a positive association between assessed ABR and levels of labor use. We find empirical evidence consistent with these propositions. We also find that total labor use in our sample is only modestly lower than pre‐BRA norms. Analysis of fee data from these engagements suggests that audit fees in 2002 are substantially less than would be expected under pre‐BRA benchmarks. After controlling for audit labor use, both total fees and fees per hour increase with assessed ABR for first‐year auditees but not for continuing auditees. Overall, our results provide evidence on the impact of the BRA audit regime and speak to the likely impact of BRA on audit effectiveness and efficiency.

In theory, growing wage inequality within gender should cause women to invest more in their market productivity and should differentially pull able women into the workforce. Our paper uses Heckman's two-step estimator and identification at infinity on repeated Current Population Survey cross sections to calculate relative wage series for women since 1970 that hold constant the composition of skills. We find that selection into the female full-time full-year workforce shifted from negative in the 1970s to positive in the 1990s, and that the majority of the apparent narrowing of the gender wage gap reflects changes in female workforce composition. We find the same types of composition changes by measuring husbands' wages and National Longitudinal Survey IQ data as proxies for unobserved skills. Our findings help to explain why growing wage equality between genders coincided with growing inequality within gender.

Using a unique insurance dataset for a sample of Chinese publicly listed companies for the period 1997 through 2003, this study tests the simultaneous linkages between debt capacity, cost of debt, and corporate property insurance. Our results suggest that, on the one hand, a higher cost of debt appears to motivate the use of more property insurance, but high leverage alone does not lead to the purchase of more property insurance. The latter finding might reflect the unique institutional setting of China, for example, where there is a low chanceof legally enforced company liquidation. Also, there is evidence that leverage can interact with tangible assets intensity and exert a positive conjoint effect on the corporate purchase ofproperty insurance. On the other hand, we find evidence that supports that property insurance helps expand insuring firms' debt capacity and helps lower their borrowing costs. However, themoderate evidence on the cost reduction effect suggests that lowering the borrowing cost is likely to be a concern secondary to facilitating corporate borrowing and thereby expanding debt capacity in corporate property insurance decisions in China. Overall, we conclude that debt capacity, cost of debt, and corporate insurance appear to be simultaneously related.

A bank determines whether potential borrowers are creditworthy, that is, whether they meet the bank's credit or lending standards. In making this determination, each bank is in competition with other banks, but without knowing the competitor banks' credit standards. The resulting unique form of competition leads to endogenous credit cycles, periodic "credit crunches". Empirical tests of this repeated bank lending game are constructed based on parameterizing public information about relative bank performance that is at the root of banks' beliefs about rival banks' lending standards. The relative performance of rival banks has predictive power for subsequent lending in the credit card market, where we can identify the main competitors. At the macroeconomic level, the relative bank performance of commercial and industrial loans is an autonomous source of macroeconomic fluctuations. In an asset pricing context, the relative bank performance is a priced risk factor for both banks and non-financial firms. The factor coefficients for non-financial firms are decreasing with size, consistent with smaller firms being more bank dependent.

Do parents have preferences over the gender of their children, and if so, does this have negative consequences for daughters versus sons? In this paper, we show that child gender affects the marital status, family structure, and fertility of a significant number of American families. Overall, a first-born daughter is significantly less likely to be living with her father compared to a first-born son. Three factors are important in explaining this gap. First, women with first-born daughters are less likely to marry. Strikingly, we also find evidence that the gender of a child in utero affects shotgun marriages. Among women who have taken an ultrasound test during pregnancy, mothers who have a girl are less likely to be married at delivery than those who have a boy. Second, parents who have first-born girls are significantly more likely to be divorced. Third, after a divorce, fathers are much more likely to obtain custody of sons compared to daughters. These three factors have serious negative income and educational consequences for affected children. What explains these findings? In the last part of the paper, we turn to the relationship between child gender and fertility to help sort out parental gender bias from competing explanations for our findings. We show that the number of children is significantly higher in families with a first-born girl. Our estimates indicate that first-born daughters caused approximately 5500 more births per year, for a total of 220,000 more births over the past 40 years. Taken individually, each piece of empirical evidence is not sufficient to establish the existence of parental gender bias. But taken together, the weight of the evidence supports the notion that parents in the U.S. favour boys over girls.

This paper investigates the valuation effects of corporate international diversification by examining cross-border mergers and acquisitions of US acquirers over the period 1990–2000. We find that, on average, acquisitions of “fairly valued” foreign business units do not lead to value discounts. In contrast, unrelated cross-border acquisitions result in a significant diversification discount of about 24% after accounting for the valuation of foreign targets. Furthermore, significant wealth gains accrue to foreign target shareholders regardless of the type of acquisition. Overall, our results suggest that international diversification does not destroy value while industrial diversification leads to discounts even after controlling for the pre-acquisition value of the target.