Tax professionals provide valuable services to clients by reducing uncertainty about how clients should report transactions on their tax returns. To reduce uncertainty, tax professionals research applicable authorities (e.g., judicial precedents) and provide assessments to clients of the level of authoritative support for client-favorable positions. Tax professionals have strong incentives to make accurate assessments of the strength of client-preferred positions so that clients will understand the level of risk associated with the reporting position. Further, tax professionals must make accurate assessments of authoritative support in order to maintain compliance with tax professional standards and Federal income tax regulations. Incentives notwithstanding, psychological research on confirmation bias suggests that tax professionals' client advocacy role may inhibit professionals' ability to search objectively for relevant tax authority which, in turn, might inhibit their ability to accurately assess authoritative support. We report the results of two studies that examine causes and effects of confirmation bias in tax information search. In study 1, we find that subjects' information searches emphasized cases with conclusions consistent with the client's desired outcome (i.e., positive cases) over cases inconsistent with the client's desired outcome (i.e., negative cases), despite the fact that positive cases were no more similar to the client's facts. Additional analyses indicate that the extent of this confirmation bias was positively related to their assessments of the likelihood that a neutral court would resolve the issue in the client's favor and this in turn increased the strength with which they recommended the client's preferred tax position. Results of study 2 indicate that confirmation bias induced by client preferences can be strong enough to not only result in inaccurate assessments of authoritative support for the client-favored position, which is problematic in and of itself, but also to lead tax professionals to make overly aggressive recommendations.

We examine whether an increase in focus is an explanation for the stock market gains associated with spinoffs. For a sample of 155 spinoffs between the years 1975 and 1991, we find that the announcement period as well the long-run abnormal returns for the focus-increasing spinoffs are significantly larger than the corresponding abnormal returns for the non-focus-increasing spinoffs. The results for the change in operating performance are consistent with those for the stock market performance. Cross-sectionally, the stock market performance as well as the operating performance are positively associated with change in focus. An analysis of the non-focus-increasing spinoffs shows that the firms are likely to undertake these spinoffs to separate underperforming subsidiaries from the parents.

[Portfolio turnpike theorems show that if preferences at large wealth levels are similar to power utility, then the investment strategy converges to the power utility strategy as the horizon increases. We state and prove two simple and general portfolio turnpike theorems. Unlike existing literature, our main result does not assume independence of returns and depends only on discounting of future cash flows. We also provide a critique of portfolio turnpike results, based on the observations that (1) the time required for convergence is often too large to be relevant, and (2) there is no convergence for consumption withdrawal problems.]

Trading relations in Vietnam's emerging private sector are shaped by two market frictions: the difficulty of locating trading partners and the absence of legal enforcement of contracts. Examining relational contracting, we find that a firm trusts its customer enough to offer credit when the customer finds it hard to locate an alternative supplier. A longer duration of trading relationship is associated with larger credit, as is prior information gathering. Customers identified through business networks receive more credit. These network effects are enduring, suggesting that networks are used to sanction defaulting customers.

This paper compares the performance of privatized and state firms in the transition economies of Central Europe, while controlling for various forms of selection bias. It argues that privatization has different effects depending on the types of owners to whom it gives control. In particular, privatization to outsider, but not insider, owners has significant performance effects. Where privatization is effective, the effect on revenue performance is very pronounced, but there is no comparable effect on cost reduction. Overlooking the strong revenue effect of privatization to outsider owners leads to a substantial overstatement of potential employment losses from postprivatization restructuring.

This paper uses an intermediation model to study the efficiency and welfare implications of both banks' minimum required capital–asset ratio and the regulation that limits, and in some countries forbids, banks' investments in the equity of nonfinancial firms. There are two sources of moral hazard in the model: one between the bank and the provider of deposit insurance, and the other between the bank and an entrepreneur who demands funds to finance an investment project. Among other things, the paper shows that capital regulation improves the bank's stability and can also be Pareto-improving. Equity regulation is never Pareto-improving and does not increase the bank's stability.

We propose new tests to examine whether stock index futures affect stock market volatility. These tests decompose spot portfolio volatility into the cross-sectional dispersion and the average volatility of returns on the portfolio's constituent securities. Our tests show that for Nikkei stocks spot portfolio volatility increased and cross-sectional dispersion decreased compared with average volatility when Nikkei futures began trading on the Osaka Securities Exchange, but not on the Singapore International Monetary Exchange. For non-Nikkei stocks, no shift occurred when futures trading began on either exchange. These findings are consistent with the hypotheses that futures trading increases spot portfolio volatility but that there is no volatility “spillover” to stocks against which futures are not traded. However, the increase in volatility attributable to futures trading is small compared with volatility shifts induced by changes in broad economic factors.

Output per worker varies enormously across countries. Why? On an accounting basis our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker—we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language.

We estimate the relative influence of trade versus technology on wages in a “large-country” setting, where technological change affects product prices. Trade is measured by the foreign outsourcing of intermediate inputs, while technological change is measured by expenditures on high-technology capital such as computers. The estimation procedure we develop, which modifies the conventional “price regression,” is able to distinguish whether product price changes are due to factor-biased versus sector-biased technology shifts. In our base specification we find that computers explain about 35 percent of the increase in the relative wage of nonproduction workers, while outsourcing explains 15 percent; both of these effects are higher in other specifications.