[An auditor's reputation lends credibility to the earnings report that he audits. An unresolved issue is whether auditor size is correlated with auditor quality, where a high-quality auditor is defined as one who brings about more credible earnings reports. According to basic intuition and a modified Holthausen-Verrecchia (1988) model, investors' response to an earnings surprise will depend on the perceived credibility of the earnings report. In this study, we examine whether the earnings response coefficient (ERC) differs between Big Eight (B8) and non-Big Eight (NB8) audited firms. This provides a test of the joint hypotheses that auditor size is a proxy for auditor credibility and of the modified H-V model. Consistent with the joint hypotheses, we find that the ERCs of Big Eight clients are statistically significantly higher than for non-Big Eight clients. The result obtains in both a matched sample of firms paired according to industry membership, and a switch sample of firms grouped according to shifts from and to B8 and NB8 auditors. Furthermore, the result is robust with respect to the inclusion of other explanatory factors for ERC that have been suggested by previous studies: growth and persistence, risk, firm size, and predisclosure information environment.]

Edward T. Gullason, Bharat R. Kolluri, Michael J. Panik, Social Security and Household Wealth Accumulation: Refined Microeconometric Evidence, The Review of Economics and Statistics, Vol. 75, No. 3 (Aug., 1993), pp. 548-551

This paper considers the revealed preference implications of a fairly general optimization hypothesis under any finite number of constraints. It extends Afriat's seminal nonparametric analysis. The usefulness of the results are illustrated in two examples.

Neoclassical transitional dynamics are a central element of standard macroeconomic theory. Quantitative experiments with the fixed-savings-rate models of the 1960's showed lengthy transitions, thus potentially rationalizing sustained differences in growth rates across countries. We investigate quantitative transitional dynamics in various neoclassical models with intertemporally optimizing households. Lengthy transitions occur only with very low intertemporal substitution. Generally, when one tries to explain sustained economic growth with transitional dynamics, there are extremely counterfactual implications. These result from the fact that implied marginal products are extraordinarily high in the early stages of development.

We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. All information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter into a contract in which he would have an incentive to default in some state. In general there is only partial insurance: variations in consumption may be imperfectly correlated across agents; interest rates may be lower than they would be without constraints; and equilibria may be Pareto ranked.

This paper examines debt restructurings by financially distressed firms. We develop a model which predicts that, in public debt exchange offers, firms with unfavorable private information will offer equity claims to convince bondholders that the firm's prospects are poor. In contrast, offering equity to well-informed private lenders conveys favorable private information to outsiders. Consistent with our analysis, we find positive average abnormal returns around restructurings that offer equity to private lenders and senior debt to public debtholders, and we find significant negative average abnormal returns when private lenders are offered senior debt and public lenders are offered equity.

The Box-Cox transformation is used to compare alternative functional forms of market value equations. Based on evidence from a panel of 480 publicly-traded U.S. manufacturing companies and two additional data sets used previously in the literature, the semilog form of a Tobin’s q equation is found to be strongly preferred to the commonly estimated linear form. We provide illustrations in which inferences can be affected by the choice of functional form. The authors thank Zvi Griliches, Hendrik Houthakker, and two anonymous referees for helpful discussion and suggestions, and Jerry Stevens for providing access to one of the data sets examined in Section III. Remaining errors are ours. A longer working paper version is available on request. 1

We investigate the channels through which partisan influence from a Presidential administration could affect monetary policy-making. Influence could be a result of direct Presidential pressure exerted on members of the Federal Open Market Committee (FOMC), or it could be a result of partisan considerations in Presidential appointments to the Board of Governors. To investigate these two channels of influence, we devise and apply a method for estimating parameters of monetary policy reaction functions that can vary across individual members of the FOMC. Our results suggest that the appointments process is the primary mechanism by which partisan differences in monetary policies arise.