This paper explains that value relevance research assesses how well accounting amounts reflect information used by equity investors, and provides insights into questions of interest to standard setters. A primary focus of financial statements is equity investment. Other uses of financial statement information, such as contracting, do not diminish the importance of value relevance research. Value relevance questions can be addressed using extant valuation models. Value relevance studies address econometric issues that otherwise could limit inferences, and can accommodate and be used to study the implications of accounting conservatism.

The fiscal theory says that the price level is determined by the ratio of nominal debt to the present value of real primary surpluses. I analyze long-term debt and optimal policy in the fiscal theory. I find that the maturity structure of the debt matters. For example, it determines whether news of future deficits implies current inflation or future inflation. When long-term debt is present, the government can trade current inflation for future inflation by debt operations; this tradeoff is not present if the government rolls over short-term debt. The maturity structure of outstanding debt acts as a ‘‘budget constraint’’ determining which periods’ price levels the government can affect by debt variation alone. In addition, debt policythe expected pattern of future state-contingent debt sales, repurchases and redemptionsmatters crucially for the effects of a debt operation. I solve for optimal debt policies to minimize the variance of inflation. I find cases in which long-term debt helps to stabilize inflation. I also find that the optimal policy produces time series that are similar to U.S. surplus and debt time series. To understand the data, I must assume that debt policy offsets the inflationary impact of cyclical surplus shocks, rather than causing price level disturbances by policy-induced shocks. Shifting the objective from price level variance to inflation variance, the optimal policy produces much less volatile inflation at the cost of a unit root in the price level; this is consistent with the stabilization of U.S. inflation after the gold standard was abandoned.

This paper revisits the uncovered interest parity relation. It supplements existing work in two ways: It focuses on long instead of short-term interest rates, and, related to that, employs exchange rate expectations derived from purchasing power parity (PPP) instead of actual outcomes. Among the major floating currencies over the period 1975–1997, the paper cannot support the notion of further increases in UIP-validation beyond that associated with the wave of financial market liberalization and deregulation in the early 1980s.

This paper extends prior studies that attempt to explain the existence of unique securities, particularly Engel, Erickson, and Maydew [1999], by investigating why firms issue non‐voting, non‐convertible preferred stock (PS) instead of other securities. We find that the choice of PS is influenced by tax and regulatory changes imposed by the Tax Reform Act of 1986 (TRA86) and the 1989 Basle Banking Accord as well as various firm specific incentives. We find that industrials issue PS to preserve tax attributes by avoiding an ownership change and to maximize foreign tax credit utilization. In addition, we find that the regulatory requirements of the Basle Accord influence the choice by banks to issue PS. Finally, we show that although firms could have issued alternative securities that would have allowed them to achieve the same tax or regulatory goals, firm specific factors limit their ability to do so. For example, firms can also avoid triggering an ownership change by issuing straight debt, however, financial distress considerations may constrain their ability to issue additional debt. Therefore, we demonstrate that the final choice of PS is influenced by a combination of tax, regulatory, and firm specific incentives.

This study investigates the extent of information-motivated trading conditional on trade size in the options and stock markets. We find envidence that the options market is the primary venue for information trading only for small investors, whereas large ivestors do not necessarily trade options rather than stocks when they are informed. With different trading mechanisms in the stock and options markets, this finding implies that investors, when facing different impediments to information-related trading, select different vehicles to exploit their information. We also show that the adverse selection component of the bid-ask spread decreases with option delta, implying that options with greater finanical leverage attract more informed investors. Overall, our results reinforce the notion that the options market is a venue for information-motivated trading.

Although it is clear that the volatility of asset returns is serially correlated, there is no general agreement as to the most appropriate parametric model for characterizing this temporal dependence. In this paper, we propose a simple way of modeling financial market volatility using high-frequency data. The method avoids using a tight parametric model by instead simply fitting a long autoregression to log-squared, squared, or absolute high-frequency returns. This can either be estimated by the usual time domain method, or alternatively the autoregressive coefficients can be backed out from the smoothed periodogram estimate of the spectrum of log-squared, squared, or absolute returns. We show how this approach can be used to construct volatility forecasts, which compare favorably with some leading alternatives in an out-of-sample forecasting exercise.

A wide range of empirical applications rely on linear approximations to dynamic Euler equations. Among the most notable of these is the large and growing literature on precautionary saving that examines how consumption growth and saving behavior are affected by uncertainty and prudence. Linear approximations to Euler equations imply a linear relationship between expected consumption growth and uncertainty in consumption growth, with a slope coefficient that is a function of the coefficient of relative prudence. This literature has produced puzzling results: estimates of the coefficient of relative prudence (and the coefficient of relative risk aversion) from linear regressions of consumption growth on uncertainty in consumption growth imply estimates of prudence and risk aversion that are unrealistically low. Using numerical solutions to a fairly standard intertemporal optimization problem, our results show that the actual relationship between expected consumption growth and uncertainty in consumption growth differs substantially from the relationship implied by a linear approximation. We also present Monte Carlo evidence that shows that the instrumental-variables methods that are commonly used to estimate the parameters correct some, but not all, of the approximation bias.

This paper examines the evolution of productivity in U.S. manufacturing plants from 1963 to 1992. We define a vintage effect as the change in productivity of recent cohorts of new plants relative to earlier cohorts of new plants, and a survival effect as the change in productivity of a particular cohort of surviving plants as it ages. Both factors contribute to industry productivity growth, but play offsetting roles in determining a cohort's relative position in the productivity distribution. Recent cohorts enter with higher productivity than earlier entrants did, whereas surviving cohorts show productivity increases as they age. These two effects roughly offset each other, however, so there is a rough convergence in productivity across cohorts in 1992 and 1987.

This article characterizes optimal dynamic consumption and portfolio decisions in the presence of capital gains taxes and short-sale restrictions. The optimal decisions are a function of the investor’s age, initial portfolio holdings, and tax basis. Our results capture the trade-off between the diversification benefits and tax costs of trading over an investor’s lifetime. The incentive to rediversify the portfolio is inversely related to the size of the embedded gain and investor’s age. Contrary to standard financial advice, the optimal equity holding increases well into an investor’s lifetime in our model due to the forgiveness of capital gains taxes at death.

This paper is an exploration of the ability of game theory to explain real-world corporate maneuvering. We explore this issue by investigating bond tender offers accompanied by a threat to call nontendered bonds, so called “Simultaneous Tender and Call” (STAC) offers. We argue that STACs engender a transparent game played by bondholders and shareholders. We model this game and use this model to predict the outcome of STACs. Finally, we investigate the issue of whether this theoretical model explains the outcomes of four actual STAC issues made by James River, May Department Stores, and Houston Lighting & Power Company. Our clinical analysis provides support for the explanatory power of our model. Calibrating the predictions of the model with data from these STACs, we demonstrate a correspondence between theory and actual corporate behavior. As predicted by our model, subgame perfection, or threat credibility, and preplay coordination are central to explaining the outcomes of the STACs.