An index of diversification suitable for manufacturing plants and firms is defined as a function of product number, distribution, and dissimilarity. A novel feature of the index is its continuous treatment of product heterogeneity. Using "Census of Manufactures" data files, the index is constructed for each establishment and each enterprise surveyed in the 1963-1982 censuses. Results are reported at the 2-digit SIC level. While quantifying the upward trend in enterprise diversification, the index reveals an ubiquitous and persistent decline in establishment diversification. Over time, enterprises are shifting toward a more diverse portfolio of increasingly homogeneous plants. Technical economies of scope appear to play little role in explaining the measured increase in enterprise diversification. Copyright 1991 by MIT Press.

Observed human capital explains less than half of wage variation. In BLS Industry Wage Surveys, establishment-based wage differentials (controlling for occupation) account for 20–70 percent of intra-industry wage variation. This corresponds to a standard deviation in wages of 14 percent of the mean, almost as large as interindustry wage variation. Investigation suggests that establishment wage differentials are not random variations or returns to usual measures of human capital.

Rational Choice--the published record of a conference on economics and psychology--frames the issues as a contest between economic theory and the falsifying evidence from psychology. According to a third perspective, that of experimental economics, most standard theory provides a correct first approximation in predicting motivated behavior in laboratory experimental markets, but the theory is incomplete, particularly in articulating convergence processes in time and in ignoring decision cost. This view has roots in the work of Herbert Simon and Sidney Siegel, but it is not plainly represented in contemporary research in economic pyschology.

[With time-varying adverse selection in the market for new equity issues, firms will prefer to issue equity when the market is most informed about the quality of the firm. This implies that equity issues tend to follow credible information releases. In addition, if the asymmetry in information increases over time between information releases, the price drop at the announcement of an equity issue should increase in the time since the last information release. Using earnings releases as a proxy for informative events, we find evidence supporting these propositions.]

It seems inconsistent to model boundedly rational action choice by assuming that the agent chooses the optimal decision procedure. This criticism is not avoided by assuming that he chooses the optimal procedure to choose a procedure to . . . to choose an action. The author shows that, properly interpreted, this regress, continued transfinitely, generates a model representing the agent's perception of all his options, including every way to refine his perceptions. In this model, the agent surely must choose the perceived best option. Hence, it is not inconsistent to model limited rationality by assuming that the agent uses the "optimal" decision procedure. Copyright 1991 by The Econometric Society.

This paper models debt renegotiation as a bargaining game between debtholders and shareholder-oriented management, in which management credibly threatens to run down firm assets to force concessions from the creditors. Creditors anticipate this opportunistic behavior by management, creating an upper bound on debt capacity that is less than the value of the firm. If an advantage to debt is introduced, such as favorable tax treatment, an interior optimal capital structure obtains even in the absence of realized bankruptcy costs. Our model also explains variations in debt-equity ratios and the use of certain puzzling debt covenants.

[Stratified sampling for inventories, as discussed in the literature, usually employs the recorded book value as the stratification variable (Neter and Loebbecke 1975; Roshwalb et al. 1987). Stratification by book value along with an appropriate estimator provides a cost effective and precise estimate of the total inventory cost. Other stratification variables, such as volume of activity, provide information not provided by the book value about the variability of the errors in inventories, but little is known about the effectiveness of designs based on them. Greater improvement in efficiency may be possible by simultaneously including book value and volume into one sample design. In this paper, the effectiveness of volume is investigated as a stratification variable. A bivariate stratification method based on a model-based sampling framework is developed which effectively folds both book value and volume into one collective and simple stratification scheme. Using a bivariate sample design is not without any cost, because it requires that both the book and the volume values for an item to be positive. However, another extension of the model is proposed to include all items with zero book value or zero volume into a single stratified design. To examine the effectiveness, sample designs based on book value alone, volume alone, and the bivariate method are constructed for three inventory populations. Since the errors are known for every item in these inventories, the exact efficiency of a sample design can be determined. By designing a sample to achieve a specified precision with known reliability, the resulting sample size is a measure of efficiency. The design for a population with the smallest sample size is the most efficient and cost effective. To test whether the sampling methodologies actually achieve their precision and reliability targets, the audit sampling process is repeated in a simulation. Random samples are repeatedly selected from the inventories using the alternative sample designs, estimates for the inventory total are calculated using each set of sample data, and the accuracy of the estimates are recorded. Designs based on the bivariate stratification method required up to 62.5 percent fewer items to achieve the same level of precision and reliability than designs based on book value alone or volume alone. The simulation results show that these bivariate stratified designs attain the same targer level of precision and reliability as designs based on book value alone or volume alone. In some cases, the bivariate designs improve the actual confidence interval coverage more than designs based on book value alone.]

[Accounting Principles Board (APB) Statement No. 20 (1971) defines financial statement errors as items resulting "from mathematical mistakes, mistakes in the application of accounting principles, or the oversight or misuse of facts that existed at the time the financial statements were prepared" (APB 20, par. 13). This definition encompasses both intentional and unintentional misrepresentation by management. Errors affecting previously reported earnings are revealed as prior period adjustments as specified in Statement of Financial Accounting Standards No. 16 (1977). If the erroneous year's financial statements are presented, retroactive restatement is required (in accordance with APB 9 1966). Footnote disclosure of the nature of the error and its effect on earnings, earnings before extraordinary items, and earnings per share is also required. Although financial statement disclosures generally provide no indication that prior errors were intentional, they may be motivated by the same types of economic incentives influencing managers' choices of accounting methods or management of accruals. In this study, we examine the incidence of accounting errors revealed by prior period adjustments for 41 firms in comparison with a control group of another 41 firms. This comparison is used to highlight circumstances that are likely to motivate managers to use errors as an income management tool. While corrections of prior year earnings are rare for both over- and understatement errors, the latter are relatively less frequent. Our investigation revealed 41 overstatement firms but only three understatement firms, which is consistent with an income-increasing motivation. Because of the very small number of understatements, the analysis is limited to overstatement errors. We find that the earnings overstatements are negatively correlated with the growth in earnings. Analysis also indicates that earnings overstatements are more likely when firms have diffuse ownership, lower growth in earnings, and fewer income-increasing GAAP alternatives available. Overstatements are less likely among firms that have audit committees. These results are generally consistent with the view that overstatement errors are the result of managers responding to economic incentives.]