This paper provides empirical evidence on the economic value of services provided by independent auditors by analyzing whether auditor association leads to reduced interest rates on revolving credit agreements. Using multivariate regressions, we analyze the relation between interest rates on revolving bank loans to small, private firms and the degree of auditor association with the financial statements provided to the lender,

Drawing upon recent contributions in the statistical literature, we present new results on the convergence of recursive, stochastic algorithms which can be applied to economic models with learning and which generalize previous results. The formal results provide probability bounds for convergence which can be used to describe the local stability under learning of rational expectations equilibria in stochastic models. Economic examples include local stability in a multivariate linear model with multiple equilibria and global convergence in a model with a unique equilibrium.

Abstract Reviews the book "International Accounting and Finance Handbook," 2nd ed., edited by Frederick D.S. Choi.

Abstract Reviews the book "Intrafirm Trade and Global Transfer Pricing Regulation," by Roger Y.W. Tang.

This paper surveys the empirical and theoretical literature on the mechanisms of corporate governance. We focus on the internal mechanisms of corporate governance (e.g., corporate board of directors) and their role in ameliorating various classes of agency problems arising from conflicts of interests between managers and equityholders, equityholders and creditors, and capital contributors and other stakeholders to the corporate firm. We also examine the substitution effect between internal mechanisms of corporate governance and external mechanisms, particularly markets for corporate control. Directions for future research are provided.

Many workers receive pay based on subjectively assessed performance, yet the shirking model of efficiency wages excludes it. This paper incorporates such pay, with the following results. Performance pay is more efficient than efficiency wages when the costs of having a job vacant are low and qualified workers in short supply. More capital-intensive industries pay more than less capital-intensive industries, as observed in studies of interindustry wages differentials. Sustaining an efficient outcome requires a social convention similar to the notion of a fair wage. The model also makes predictions about the relationship between turnover, wages, growth, and unemployment.

Implicit in the prices of traded financial assets are Arrow–Debreu prices or, with continuous states, the state-price density (SPD). We construct a nonparametric estimator for the SPD implicit in option prices and we derive its asymptotic sampling theory. This estimator provides an arbitrage-free method of pricing new, complex, or illiquid securities while capturing those features of the data that are most relevant from an asset-pricing perspective, for example, negative skewness and excess kurtosis for asset returns, and volatility “smiles” for option prices. We perform Monte Carlo experiments and extract the SPD from actual S&P 500 option prices.

This study proposes a managerial discretion hypothesis of equity carve-outs in which managers value control over assets and are reluctant to carve out subsidiaries. Thus, managers undertake carve-outs only when the firm is capital constrained. Consistent with this hypothesis, firms that carve out subsidiaries exhibit poor operating performance and high leverage prior to carve-outs. Also consistent with this hypothesis, in carve-outs wherein funds raised are used to pay down debt, the average excess stock return of + 6.63 percent is significantly greater than the average excess stock return of −0.01 percent for carve-outs wherein funds are retained for investment purposes.

We construct a rational expectations model in which the economy switches stochastically between periods of low and high growth. When agents expect growth to be slow, the returns on investment are low and little investment takes place. But if agents expect fast growth, investment is high, returns are high, and growth is rapid. This expectational indeterminacy is induced by monopolistic competition and complementarity between different types of capital goods. Neither externalities nor increasing returns to scale are required. The equilibrium with growth cycles is stable under the dynamics implied by a simple learning rule.