We examine investor communication issues using the experience of CUC International. CUC had difficulty convincing investors that its marketing outlays were profitable investments, leading to stock misvaluation over an extended period. To resolve this problem, CUC adopted an accounting change and then underwent a leveraged recapitalization. Subsequently, it accelerated recap debt repayments and initiated a stock repurchase. CUC's experience suggests that accounting reports are not always effective in investor communication. While financial signals are more effective, their impact is not as immediate as predicted by prior research. The CUC case suggests that investor communications is a rich area for future research.

We analyze optimal mechanisms in environments where sellers are privately informed about quality. A methodology is provided for deriving conditions that are necessary and sufficient to determine when two simple trading environments maximize either social or private surplus. The commonly used auction mechanism is frequently inefficient in procurement environments. Often, the optimal mechanism is simply to order potential suppliers and to tender take-it-or-leave-it offers to each sequentially. We completely characterize the environments in which either mechanism is optimal. In doing so, we develop a general methodology that determines when and if a given trading institution is optimal.

Banking, Regulatory capital, Financial reporting, Tax incentives

Paul A. Copley, Jennifer J. Gaver, Kenneth M. Gaver, Simultaneous Estimation of the Supply and Demand of Differentiated Audits: Evidence from the Municipal Audit Market, Journal of Accounting Research, Vol. 33, No. 1 (Spring, 1995), pp. 137-155

This article explores the information effect of financial risk management. Financial hedging improves the informativeness of corporate earnings as a signal of management ability and project quality by eliminating extraneous noise. Managerial and shareholder incentives regarding information transmission may differ, however, leading to conflicts regarding an optimal hedging policy. We show that these incentives depend on the accounting information made available by the firm. Under some circumstances, if hedge transactions are not disclosed (i.e., firms report only aggregate earnings), managers hedge to achieve greater risk reduction than they would if full disclosure were required. In these cases, it is optimal for shareholders to request only aggregate accounting reports.