How should bankers respond to challenges about whether to separate stock analysis from the other financial functions of financial services companies, or whether to maintain relationships with socially discredited customers? We wrote a book recently, Ties That Bind (Donaldson and Dunfee, 1999), out of our conviction that answering many of these questions requires a new approach to business ethics, one that exposes the implicit understandings or “contracts” that bind industries, companies, and economic systems into communities. In this article we unpack the fundamental elements of our approach called Integrative Social Contracts Theory (ISCT) and demonstrate how the theory can be applied to a particular question currently asked in the financial services industry, namely, “How should accounting firms and banking institutions deal with the increasing criticism alleging that new forms of conflict of interest impair the objectivity of auditors and security analysts.”

This article provides a comprehensive study of survivorship issues using the mutual fund data of Carhart (1997). We demonstrate theoretically that when survival depends on multiperiod performance, the survivorship bias in average performance typically increases with the sample length. This is empirically relevant because evidence suggests a multiyear survival rule for U.S. mutual funds. In the data we find the annual bias increases from 0.07% for 1-year samples to 1% for samples longer than 15 years. We find that survivor conditioning weakens evidence of performance persistence. Finally, we explain how survivor conditioning affects the relation between performance and fund characteristics.

Ronald W. Masulis, Lakshmanan Shivakumar, Does Market Structure Affect the Immediacy of Stock Price Responses to News?, The Journal of Financial and Quantitative Analysis, Vol. 37, No. 4 (Dec., 2002), pp. 617-648

The proliferation of economics courses offered partly or completely online (Arnold Katz and William E. Becker, 1999) raises important questions about the effects of the new technologies on student learning. Do students enrolled in online courses learn more or less than students taught face-to-face? Can we identify any student characteristics, such as gender, race, ACT scores, or grade averages, that are associated with better outcomes in one technology or another? How would the online (or face-to-face) students fare if they had taken the course using the alternative technology? This paper addresses these questions using student data from our Principles of Microeconomics courses at Michigan State University.

We develop a √n-consistent and asymptotically normal estimator of the parameters (regression coefficients and threshold points) of a semiparametric ordered response model under the assumption of independence of errors and regressors. The independence assumption implies shift restrictions allowing identification of threshold points up to location and scale. The estimator is useful in various applications, particularly in new product demand forecasting from survey data subject to systematic misreporting. We apply the estimator to assess exaggeration bias in survey data on demand for a new telecommunications service.

During the 1980's, theories were developed to explain the striking correlation between real exchange rates and foreign direct investment (FDI). However, this relationship broke down for Japanese FDI in the 1990's, as the real exchange rate appreciated while FDI plummeted. We propose the relative access to credit hypothesis and show that unequal access to credit by Japanese firms contributes to the explanation of declining Japanese FDI. Using bank-level and firm-level data sets, we find that financial difficulties at banks were economically and statistically important in reducing the number of FDI projects by Japanese firms into the United States.

This paper explores the relation between capital and risk in the life insurance industry in the period after the adoption of life risk-based capital (RBC) regulation. To examine this issue, we use a simultaneous-equation partial-adjustment model. Three equations express the interrelations among capital and two measures of risk: product risk and asset risk. The asset-risk measure used in this paper reflects credit or solvency risk as in RBC. Product risk assessment for life insurance products is rationalized by transaction-cost economics – contractual uncertainty. A significant finding is that for life insurers the relation between capital and asset risk is positive. This agrees with prior studies for the property/casualty insurance industry and some banking studies. But the relation between capital and product risk is negative. This is consistent with the hypothesized impact of guarantee funds in other studies. The contrast between the positive relation of capital to asset risk and the negative relation of capital to product risk underscores the importance of distinguishing these two components of risk.

We suggest that economics can complement traditional ethics discussions with the respect to at least three basic points. First, economics provides a theory of how individuals make choices; including choices that have potential ethical dimensions. Second business ethics and the internal structure of the organization are inextricably linked they establish important incentives for those individuals who compose the firm. Third, a company's reputation for ethical behavior is part of its brand-name capital. As such, it is reflected in the value of its securities.

Use It or Lose It: Teaching Literacy in the Economics Principles Course by W. Lee Hansen, Michael K. Salemi and John J. Siegfried. Published in volume 92, issue 2, pages 463-472 of American Economic Review, May 2002

This article provides a comprehensive study of survivorship issues using the mutual fund data of Carhart (1997). We demonstrate theoretically that when survival depends on multiperiod performance, the survivorship bias in average performance typically increases with the sample length. This is empirically relevant because evidence suggests a multiyear survival rule for U.S. mutual funds. In the data we find the annual bias increases from 0.07% for 1-year samples to 1% for samples longer than 15 years. We find that survivor conditioning weakens evidence of performance persistence. Finally, we explain how survivor conditioning affects the relation between performance and fund characteristics.