Daily returns are used to examine how mutual funds actively alter the risk of their portfolios in response to past performance. Compared to monthly data, daily returns produce much more efficient estimates of fund volatility, which give vastly different inferences about the behavior of fund managers. In particular, monthly results consistent with under-performers increasing their risk relative to better performing funds disappear with daily data. The differences in the monthly and daily results arise from biases in the monthly volatility estimates attributable to daily return autocorrelation.

This paper analyzes institutional investors' demand for stock characteristics and the implications of this demand for stock prices and returns. We find that "large" institutional investors nearly doubled their share of the stock market from 1980 to 1996. Overall, this compositional shift tends to increase demand for the stock of large companies and decrease demand for the stock of small companies. The compositional shift can, by itself, account for a nearly 50 percent increase in the price oflarge-company stock relative to small-company stock and can explain part of the disappearance of the historical small-company stock premium.

In this article we ask: what kind of information and how much of it should firms voluntarily disclose? Three types of disclosures are considered. One is information that complements the information available only to informed investors (to-be-processed complementary information). The second is information that is orthogonal to that which any investor can acquire and thus complements the information available to all investors (preprocessed complementary information). And the third is information that substitutes for the information of the informed investors in that it reveals to all what was previously known only by the informed (substitute information). Our main results are as follows. First, in equilibrium, all types of firms voluntarily disclose all three types of information. Second, in contrast to the existing literature, complementary information disclosure by firms strengthens investors' private incentives to acquire information. Substitute information disclosure weakens private information acquisition incentives. Third, while complementary information disclosure has an ambiguous effect on financial innovation incentives, substitute information disclosure weakens those incentives.

New York Stock Exchange specialists disseminate information to market participants by displaying price schedules consisting of bid prices, ask prices, bid depths, and ask depths. We examine how specialists update these price schedules in a simultaneous equations model. We find that changes in the best prices and depths on the limit order book have a significant impact on the posted price schedule, while the effects of transactions and order activity are secondary. Furthermore, we show that specialists revise prices and depths differently, but find no evidence that they revise the price schedule in response to changes in inventory.

Despite extensive research on the determinants of external audit fees, there is little empirical evidence on the effect of internal audit contribution on the external audit fee. Using a cross‐sectional regression model based on prior audit fee research, this study provides evidence that internal audit contribution is a significant determinant of the external audit fee. Further, a second model that provides evidence on the determinants of internal audit contribution is developed and tested. This second model indicates that internal audit contribution is influenced by internal audit quality and, conditional on the level of inherent risk, the availability of internal audit and the extent of coordination between internal and external auditors. These results are based on a unique data‐set comprised of publicly available data matched with survey responses from internal and external auditors affiliated with 70 non‐financial services Fortune 1000 firms. The sample includes all of the former “Big 6” international accounting firms and clients from twenty‐nine different industries.

In 1993 and 1994, FreeportMcMoRan Copper and Gold issued two series of gold-denominated depositary shares to finance the expansion of its mining capacity in Indonesia. The pricing of these securities reflected their enhanced credit quality, which arose from the positive correlation between the value of the firm and the value of the securities. This feature of the securities effectively bundles a gold hedge with financing. A bundled hedge avoids wealth transfers to senior bondholders, since junior bondholders can effectively net their bond-related claims on the firm against their hedge-related liability to the firm. Such securities cannot be replicated by conventional hedging strategies, and they also mitigate the asset substitution problem.

This paper develops and tests procedures for ranking the performance of security analysts based on the timeliness of their earnings forecasts, the abnormal trading volume associated with these forecasts, and forecast accuracy. Our framework provides an objective assessment of analyst quality that differs from the standard approach, which uses survey evidence to rate analysts. We find that lead analysts identified by our measure of forecast timeliness have a greater impact on stock prices than follower analysts. Further, we find that performance rankings based on forecast timeliness are more informative than rankings based on abnormal trading volume and forecast accuracy. We also present evidence that analyst's forecast revisions are correlated with recent stock price performance, suggesting that security analysts use publicly available information to revise their earnings forecasts.

This paper examines how capital tax competition affects jurisdiction formation. We describe a non-cooperative locational model of public goods provision choices, where the levels of taxation and the local public good varieties provided within jurisdictions are selected by majority voting, and where equilibrium jurisdictions consist of consumers with similar tastes. We show that interjurisdictional tax competition results in an enlargement of jurisdictional boundaries, and, even in the absence of intrajurisdictional transfers, can raise welfare for all members of a jurisdiction.

This paper provides an analysis of aggregate behavioural outcomes when individual utility exhibits social interaction effects. We study generalized logistic models of individual choice which incorporate terms reflecting the desire of individuals to conform to the behaviour of others in an environment of noncooperative decisionmaking. Laws of large numbers are generated in such environments. Multiplicity of equilibria in these models, which are equivalent to the existence of multiple self-consistent means for average choice behaviour, will exist when the social interactions exceed a particular threshold. Local stability of these multiple equilibria is also studied. The properties of the noncooperative economy are contrasted with the properties of an economy in which a social planner determines the set of individual choices. Finally, a likelihood function based on the theoretical model is given and conditions for the econometric identifiability of the model are established.

When bidders anticipate an opportunity for resale trade, the value of winning an auction is determined in part by the option values of buying and selling in the secondary market. One implication is that a bidder's willingness to pay at an auction increases with the expected level of competition between resale buyers. Empirical evidence from auctions of timber contracts supports this prediction and rejects standard models that ignore resale. The estimated effect is smaller after policy changes expected to diminish the prevalence of resale. Additional evidence supports the predicted presence of a common value element introduced by the resale opportunity. (JEL D44, D82, C52, L73)