In the formative stages of their businesses, entrepreneurs have to provide incentives for employees to protect, rather than steal, the source of organizational rents. We study how the entrepreneur's response to this problem determines the organization's internal structure, growth, and its eventual size. Large, steep hierarchies will predominate in physical-capital-intensive industries, and will have seniority-based promotion policies. By contrast, flat hierarchies will prevail in human-capital-intensive industries and will have up-or-out promotion systems. Furthermore, flat hierarchies will have more distinctive technologies or cultures than steep hierarchies. The model points to some essential differences between organized hierarchies and markets.

This paper investigates the uneven mean reverting pattern of monthly return indexes of the NYSE, AMEX and NASDAQ, using asymmetric non-linear smooth-transition (ANST) GARCH models. It also evaluates the extent to which time-varying volatility in the index returns support the stock market overreaction hypothesis. The models illuminate patterns of asymmetric mean reversion and risk decimation. Between 1926:01 and l997:12, not only did negative returns reverse to positive returns quicker than positive returns reverted to negative ones, but negative returns, in fact, reduced risk premiums from predictable high volatility. The findings support the market overreaction hypotheses. The asymmetry is due to the mispricing behavior on the part of investors who overreact to certain market news. The findings also corroborate arguments for the “contrarian” portfolio strategy.

We estimate models of workers compensation claim duration for a sample of Canadian workers with serious low-back injuries. The models extend recent duration research by allowing worker characteristics to affect duration dependence through the nonlocation parameters of the duration distribution. We compare results for modified Weibull models and piecewise-constant hazard rate models of duration dependence. The results show that workers' responses to elapsed claim duration vary significantly with their characteristics and with economic incentives to return to work. Further, allowing for heterogeneity in duration dependence effects can dramatically change the coefficient estimates of the variables that determine the location parameter of the duration distribution.

This paper provides the first estimates of overall CPI bias prior to the 1970s and new estimates of bias since the 1970s. It finds that annual CPI bias was −0.1 percent between 1888 and 1919 and rose to 0.7 percent between 1919 and 1935. Annual CPI bias was 0.4 percent in the 1960s and then rose to 2.7 percent between 1972 and 1982 before falling to 0.6 percent between 1982 and 1994. The findings imply that we have underestimated growth rates in true income in the 1920s and 1930s and in the 1970s.

Ž. We extend Kreps’ 1979 analysis of preference for flexibility, reinterpreted by Kreps Ž. 1992 as a model of unforeseen contingencies. We enrich the choice set, consequently obtaining uniqueness results that were not possible in Kreps’ model. We consider several representations and allow the agent to prefer commitment in some contingencies. In the representations, the agent acts as if she had coherent beliefs about a set of possible future Ž. ex post preferences, each of which is an expected-utility preference. We show that this set of ex post preferences, called the subjectie state space, is essentially unique given the restriction that all ex post preferences are expected-utility preferences and is minimal even without this restriction. Because the subjective state space is identified, the way ex post utilities are aggregated into an ex ante ranking is also essentially unique. Hence when a representation that is additive across states exists, the additivity is meaningful in the sense that all representations are intrinsically additive. Uniqueness enables us to show that the size of the subjective state space provides a measure of the agent’s uncertainty about future contingencies and that the way the states are aggregated indicates whether these contingencies lead to a desire for flexibility or commitment.

Are firms that engage in trade more vulnerable to exchange rate risk? In this paper we examine the relationship between exchange rate movements, firm value and trade. Our empirical work tests whether exchange rate exposure can be explained by variables that proxy for the level of international activity, firm size, industry affiliation and country affiliation. The results suggest that while a significant fraction of firms in these countries is exposed to exchange rate movements, there is little evidence of a systematic link between exposure and trade. Indeed, what little evidence there is of a link suggests that firms that engage in greater trade exhibit lower degrees of exposure. This may reflect the fact that those firms most engaged in trade are also the most aware of exchange rate risk, and therefore are the most likely to hedge their exposure.

Finance theory suggests that changes in exchange rates should have little influence on asset prices in a world with integrated capital markets. Indeed, the existing literature examining the relationship between international stock prices and exchange rates finds little evidence of systematic exchange rate exposure. We argue in this paper that the absence of evidence may be due to restrictions imposed on the sample of data and the empirical specifications used in previous studies. We study a broad sample of firms in eight countries over an eighteen-year period. We find that firm-level and industry-level share values are significantly influenced by exchange rates. Further, we do not find evidence that exchange rate exposure is falling (or becoming less statistically significant) over time. Our results suggest that significant firm, industry and country-specific differences remain even as financial markets become more and more integrated.

If the market anticipates the reversing nature of abnormal working capital accruals, then the reported magnitude of earnings surprises that contain abnormal accruals will differ from the underlying magnitude that is priced by the market. We expect the market's perception of this difference to affect the ERCs associated with earnings surprises that contain abnormal accruals. We test our predictions using an abnormal accruals measure that captures the difference between reported working capital and a proxy for the market's expectations of the level of working capital required to support current sales levels. Consistent with our hypotheses, we find higher ERCs when abnormal accruals suppress the magnitude of earnings surprises, and lower ERCs when abnormal accruals exaggerate the magnitude of earnings surprises. We also find results consistent with analysts predictably considering the reversing implications of abnormal accruals in revising future earnings forecasts. These findings are consistent with market participants anticipating the reversing implications of abnormal accruals. However, analysis of subsequent stock returns provides evidence that market participants do not fully impound the pricing implications of abnormal accruals at the earnings announcement date.

This study shows experimentally that when individuals use information on intangibles expenditures to predict future profits, expensing (vs. capitalizing) the expenditures significantly reduces the accuracy, consistency, consensus, and self-insight of individuals' subjective profit predictions. The experimental design allows us to eliminate several competing explanations for this apparent fixation on accounting. Subjects do not base their judgments on a nai¨ve prior belief that expensing precludes effects on future profits; a preexperiment question shows that subjects expect intangibles expenditures will affect future profits even when expensed. Moreover, subjects do not lack, or fail to use, data that would allow them to learn the exact expenditure-profit relation. They receive data on intangibles expenditures and profits as a basis for learning, and in some respects the learning is quite successful even when intangibles are expensed; subjects' profit predictions accurately reflect the mean and standard deviation of actual profits. Nevertheless, consistent with psychological theories of learning, subjects do not learn the exact magnitude of the effect of intangibles on future profits as well when the intangibles are expensed. Although the mean of their predictions is accurate, they do not discriminate well between cases with high and low actual profits. In consequence, their prediction accuracy, consistency, consensus, and self-insight are lower when intangibles are expensed. Thus, in this case, learning does not mitigate fixation on accounting, because accounting affects the learning process itself.

This paper empirically investigates two issues largely unexplored by the literature on market discipline. We evaluate the interaction between market discipline and deposit insurance and the impact of banking crises on market discipline. We focus on the experiences of Argentina, Chile, and Mexico during the 1980s and 1990s. We find that depositors discipline banks by withdrawing deposits and by requiring higher interest rates. Deposit insurance does not appear to diminish the extent of market discipline. Aggregate shocks affect deposits and interest rates during crises, regardless of bank fundamentals, and investors' responsiveness to bank risk taking increases in the aftermath of crises.