Abstract In setting prices for physician services, Medicare solicits input from a committee that evaluates proposals from industry. The committee itself comprises members from industry; we investigate whether this arrangement leads to regulatory capture with prices biased toward industry interests. We find that increasing a measure of affiliation between the committee and proposers by one standard deviation increases prices by 10%. We then evaluate whether employing a biased committee as an intermediary may nonetheless be desirable, if greater affiliation allows the committee to extract information needed for regulation. We find industry proposers more affiliated with the committee produce less hard evidence in their proposals. However, on soft information, we find evidence of a trade-off: private insurers set prices that more closely track Medicare prices generated under higher affiliation.

When Bayesian risk-averse investors are uncertain about their assets’ cash flows’ exposure to systematic risk, stock prices react to news more in downturns than in upturns, implying higher volatility in downturns and negatively skewed returns. In good times, less desirable assets with low average cash flows and high market risk perform similar to more desirable assets with high average cash flows and low market risk, rendering them difficult to distinguish. However, their performance diverges in downturns, enabling better inference. Consistent with these predictions, stocks’ reaction to earnings news is up to 70% stronger in downturns than in upturns. Received July 7, 2014; editorial decision March 20, 2018 by Editor Laura Starks. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

ABSTRACT The elimination of goodwill amortization in 2001 brought about significant change in how companies are required to account for goodwill. This change in accounting also brought with it new challenges for auditors, namely evaluating the reasonableness of management's assumptions related to goodwill valuation. In addition to introducing technical challenges, this task is particularly difficult given the misalignment in incentives it creates between managers who likely prefer to avoid recording an impairment and auditors who seek to minimize the bias in management's impairment testing. This study focuses on the consequences of the misaligned incentives that auditors face under the current goodwill assessment process. We find that the decision to record a goodwill impairment is associated with an increase in the probability of auditor dismissal. Consistent with the presence of significant friction with clients, our results also indicate that the likelihood of auditor dismissals is negatively related to the favorability of the impairment decision. Furthermore, we find that companies impairing goodwill prior to dismissing auditors subsequently employ auditors that are, on average, more favorable to clients in their impairment decisions.

Abstract We build on the intuitive (static) modeling framework of Rosen (1974) and specify a simple, forward-looking model of location choice. We use this model, along with a series of graphs, to describe the potential biases associated with the static model and relate these biases to the time series of the amenity of interest. We then derive an adjustment factor that allows the potentially biased static estimates to be converted into forwardlooking estimates. Finally, we illustrate these concepts with two empirical applications: the marginal willingness to pay to avoid violent crime and the marginal willingness to pay to avoid air pollution.

Abstract We examine how bank capital and borrower bargaining power affect loan spreads. Consistent with previous studies, higher bank capital has a negative impact on loan rates, but borrower cash flow has a significant effect on this impact: compared with high-capital banks, low-capital banks charge more for borrowers with low cash flow, but offer greater marginal discounts as these borrowers’ cash flow rises. These effects are largely focused on more bank-dependent borrowers. We find some evidence that low-capital banks charge a higher premium for bank-dependent borrowers’ systematic risk, but not for their total equity risk or default risk. Received January 27, 2015; editorial decision July 7, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

In a transformation model , where the errors are i.i.d. and independent of the explanatory variables , the parameters can be estimated by a pseudo‐maximum likelihood (PML) method, that is, by using a misspecified distribution of the errors, but the PML estimator of is in general not consistent. We explain in this paper how to nest the initial model in an identified augmented model with more parameters in order to derive consistent PML estimators of appropriate functions of parameter . The usefulness of the consistency result is illustrated by examples of systems of nonlinear equations, conditionally heteroscedastic models, stochastic volatility, or models with spatial interactions.

Our model shows that when regulation is based on credit ratings, banks with low charter value maximize shareholder value by minimizing capital and selecting identically rated loans and bonds with the highest systematic risk. This regulatory arbitrage is possible if the credit spreads on same-rated loans and bonds are greater when their systematic risk (debt beta) is higher. We empirically confirm this relationship between credit spreads, ratings, and debt betas. We also show that banks with lower capital select syndicated loans with higher debt betas and credit spreads. Banks with lower charter value choose overall assets with higher systematic risk. Received July 27, 2016; editorial decision May 29, 2018 by Editor Itay Goldstein.

We assess the link between corporate social responsibility (CSR) and government ownership using a unique sample of privatized firms (PFs) from 41 countries over the 2002 to 2014 period. We find that PFs have, on average, better CSR intensity than other publicly listed firms. Further tests show a nonlinear relation between residual state ownership and CSR intensity that depends on the trade-off between political objectives of the government and profit maximization objectives of private owners. In addition, country-level institutions affect the state ownership–CSR intensity relation, and PFs benefit from higher valuation and lower equity financing costs through improved CSR.

ABSTRACT While substantial revisions to auditor reporting requirements are being implemented internationally, the impact of these reforms on financial reporting quality is unknown. We exploit the United Kingdom's recent auditor reporting changes and find that the United Kingdom's new reporting regime is associated with an improvement in financial reporting quality as proxied by significant decreases in absolute abnormal accruals and the propensity to just meet or beat analyst forecasts, and a significant increase in earnings response coefficients. As for audit costs, we do not find a significant change in audit fees or audit delay surrounding the implementation of the new reporting regime. Taken together, the results of this study suggest that new auditor reporting requirements are associated with a significant improvement in financial reporting quality without detecting a significant increase in audit costs.

Separate literatures study violations of uncovered interest parity (UIP) using regression-based and portfolio-based methods. We propose a decomposition of these violations into a cross-currency, a between-time-and-currency, and a cross-time component that allows us to analytically relate regression-based and portfolio-based facts and to estimate the joint restrictions they put on models of currency returns. Subject to standard assumptions on investors’ information sets, we find that the forward premium puzzle (FPP) and the “dollar trade” anomaly are intimately linked: both are driven almost exclusively by the cross-time component. By contrast, the “carry trade” anomaly is driven largely by cross-sectional violations of UIP. The simplest model that the data do not reject features a cross-sectional asymmetry that makes some currencies pay permanently higher expected returns than others, and larger time series variation in expected returns on the U.S. dollar than on other currencies. Importantly, conventional estimates of the FPP are not directly informative about expected returns because they do not correct for uncertainty about future mean interest rates. Once we correct for this uncertainty, we never reject the null that investors expect high-interest-rate currencies to depreciate, not appreciate.