The objective of this paper is to carry out tests of the general hypothesis, most recently urged by Scherer [14, pp. 100–102] and Weston and Brigham [17, p. 689], that the cost-of-equity capital of small industrial corporations is greater than that of large industrial corporations. The paper denotes this cost as ke and defines it as the expected rate of return on the stock of a company when the current price of the stock is in equilibrium. A common designation of ke of course is the equity capitalization rate. It will be noted that this definition of the cost-of-equity capital abstracts from the flotation costs that are usually incurred when companies sell new stock. Archer and Faerber [2] have already shown that these costs are inversely related to the size of companies.

In this paper, I provide some evidence concerning the relationship between financial information and a firm's entry into a capital market. The main assumption underlying this study is that corporations will be motivated to upgrade their financial disclosure in order to obtain scarce money capital as cheaply as possible.' To assess the relationship between disclosure and capital market entry, I selected the entry of an enterprise-investor into an international new issues market. My reason for this choice was simply that a firm would be expected to make its security issues relatively appealing during entry in order to attract support from an audience which possesses alternative outlets for their savings.2 The demand for information would appear to be even stronger in an international setting where investors are often unacquainted with the relative merits of foreign borrowers.3 The effect of

The paper compares the power of two tests for serial correlation in regression models with lagged dependent variables, recently suggested by Durbin, with that of the likelihood ratio test by means of two sets of Monte-Carlo experiments-one in which the exogenous series is taken to be the quarterly GNP series for the USA and the other in which the exogenous series is generated by a known autoregression.

Abstract We have interpreted accounting theory as providing a complete and transitive ranking of accounting alternatives at the individual level. It was then proven that no set of standards (applied to the accounting alternatives per se) exists that will always rank accounting alternatives in relation to consistent individual preferences and beliefs. The major import of the result is to raise a number of questions. We know that standards do not always work. When, then, do they work? Under what types of conditions will various types of standards work; when they fail, how badly do they fail? We know that criteria systems, as in information theory, ASOBAT, or cost-allocation guides cannot be relied upon to provide the desired result in every situation. This does not, however, necessarily imply that they never provide the desired result. Hence, a major question in accounting theory must be conditions under which standards do work.

The empirical results on dependency rates and savings rates reported by Nathaniel Leff (1969) cannot be correct. For several cross-country samples, Leff estimates pairs of equations of the form (1) ^1 = 00-1- aiXi + CiXi-f (2) ^2 = 60 + bixi + biXi-f 63*3-|- biXi-f- d where yi = ln S/Y = ln domestic savings ratio yi = In S/N = In per capita savings xi = ln Y/N = In per capita income a:2 = | = growth rate of per capita income X3 = ln Di = ln percentage of population aged 14 or less Xi = ln Di = ln percentage of population aged 65 or more, and a and b are least-squares regression co-efl&cients, and e \\ and e ^ are least-squares resid-uals. As noted by Leff, S/N^iS/Y)iY/N). Consequently, yi = yi-\\-Xi. Least-squares re-gression being what it is, a proper com-putation of (2) should produce = flo + (1 + ai)xi, + 0.2*2 +(3) That is, regressing y ^ on the x should give the same coefficients and the same residuals as occur when y ^ is regressed on the *, except for the coefficient of Xi, which should in-crease by exactly 1. Furthermore, if regression coefficients are guaranteed to be equal, their standard errors, and hence their ^-ratios, must be equal. If regression coefficients are guar-* Professor of economics, University of Wisconsin, Madison. anteed to differ by unity, their standard errors must be equal, and hence their t-ratios must be related by bx/si, = (ajAa.)((l-f ai)/ai) But the results Leff reports do not satisfy these arithmetic requirements. For example, consider the upper panel of his Table 1, p. 891, which refers to a sample of 47 under-developed countries. In the present notation we find:

CONTROVERSIES involving inflation, particularly inflation in developing countries, have usually focused on Latin America.1 One major point which emerges from these controversies is the distinction between a fully anticipated, fully adjusted inflation and an inflation which proceeds with such irregularity that economic agents are able neither to anticipate nor to adjust completely. To the extent that individuals can anticipate and adjust to inflation, a higher rate of inflation will cause the income velocity of money to rise, as attempts are made to exchange money for hedges against inflation.' The influence of inflation on monetary velocity is less clear, however, under the conditions of imperfect anticipation and adjustment which prevail in Latin America. Not only are the rates of inflation in most Latin American countries high, but they also tend to be highly variable. In addition, most Latin American countries have less than perfect markets for hedging against inflation, and these are further restricted by the regulations often imposed on interest rates, prices and international trade in the wake of inflationary conditions.' The present paper examines the impact of inflation on the income velocity of money for sixteen Latin American countries over the period 1950-1969. Such an examination not only indicates the sensitivity of demand for real cash balances to changes in the price level, but also reflects the extent to which economic agents under conditions prevailing in Latin America can anticipate inflation and adjust by hedging. Aside from Cagan's well-known work on hyperinflation (Friedman, 1956, pp. 25117), most empirical studies of the demand for money in individual countries conclude that inflation does not have a significant impact on velocity.4 These studies generally argue that the small changes in the price level usually observed cannot be adequately anticipated or are not large enough to cover the costs of adjustment. A recent article by Melitz and Correa (1970) on international differences in income velocity, like most studies of individual countries (but contrary to theoretical expectations), also concludes that inflation does not influence velocity. This article, like the present study, uses international comparisons, but the findings differ substantially. Melitz and Correa find that the coefficient for the impact of inflation on velocity does not have the expected sign and therefore omit the inflation variable from further consideration. They argue that price changes are important only in cases of hyperinflation and that adjusting to mild inflation is too costly and difficult to be worthwhile. Having excluded inflation as an explanatory variable, Melitz and Received for publication May 24, 1972. Revision accepted for publication January 30, 1973. * The authors wish to thank Michael C. Lovell for many helpful comments and suggestions, Francisco Chaves for assistance with data collection and computational work, and the Wesleyan Computer Center for generous use of its facilities. ' Best known is the monetarist-structuralist controversy over the causes of inflation and the impact of inflation on economic development. See, for example, Baer and Kerstenetzky (1964), Johnson (1967, pp. 281-291) and Baer (1967). 2-Johnson (1967, pp. 104-142) identifies the tax on real cash balances as the essence of the quantity theory approach to inflation, and it is the efforts to escape this tax which cause monetary velocity to rise with inflation. 'In discussions of inflation and economic growth, more costs and benefits of inflation are attributed to structural imperfections rather than to the tax on real cash balances. Structuralists emphasize the benefits of inflation in circumventing market imperfections, while monetarists focus on the costs of inflation in conjunction with inappropriate government regulations. See Johnson (1967, pp. 281-291) and Baer (1967). 4 However, some studies in a collection edited by Meiselman (1970) provide limited support for a positive influence of inflation on velocity in several less-developed countries. Deaver (Meiselman, 1970, pp. 7-67), finds the rate of inflation to be a significant variable in explaining velocity changes in Chile during the period 1932-1955, while Campbell (Meiselman, 1970, pp. 339-386) finds a positive correlation between velocity and changes in the rate of inflation in a comparative study of South Korea and Brazil. In a cross-country study Perlman (Meiselman, 1970, pp. 297337) finds nominal interest rates or inflation rates (as proxies for the opportunity cost of holding money) to be significant in explaining international differences in liquid asset portfolios.