This paper examines a fundamental question of interest to researchers and regulators: Does the market treat disclosed financial statement information as if it is less reliable than information recognized in the body of the financial statements? Specifically, we compare the perceived reliability of liabilities for retiree benefits other than pensions (PRBs) disclosed prior to adoption of Statement of Financial Accounting Standards No. 106 (SFAS No. 106) with the perceived reliability of PRB liabilities subsequently recognized under SFAS No. 106. Overall, the evidence is consistent with the market treating disclosed PRB liabilities as less reliable than recognized PRB liabilities and pension liabilities. However, once PRB liabilities are recognized, they do not appear to be any less reliable than pension liabilities. These findings are inconsistent with the Choi, Collins, and Johnson 1997 conclusion that PRB liabilities are inherently less reliable than pension liabilities. The paper also investigates factors that may have contributed to the lower perceived disclosure reliability. Our results suggest that the market perceived PRB liability disclosures to be less reliable when firms provided range disclosures, had higher probabilities of reducing plan benefits, or had lower ratios of retiree to total PRB obligations. These findings suggest that reliability may have been enhanced if more supporting details had been provided in Staff Accounting Bulletin No. 74 disclosures

Managers often explain their earnings forecasts by linking forecasted performance to their internal actions and the actions of parties external to the firm. These attributions potentially aid investors in the interpretation of management forecasts by confirming known relationships between attributions and profitability or by identifying additional causes that investors should consider when forecasting earnings. We investigate why managers choose to provide attributions with their forecasts and whether the attributions are related to security price reactions to management earnings forecasts. Using a sample of 951 management earnings forecasts issued from 1993 to 1996, we find that attributions are more likely for larger firms, less likely for firms in regulated industries, less likely for forecasts issued over longer horizons, more likely for bad news forecasts, and more likely for forecasts that are maximum type. Furthermore, attributions are associated with greater absolute price reactions to management forecasts, more negative price reactions to management forecasts (forecast news held constant), and a greater price reaction per dollar of unexpected earnings. Our findings hold after control for the aforementioned determinants of attributions and after control for other firm‐ and forecast‐specific variables that are often associated with security prices

We contribute to the debate over the reform of the Basel Accord by developing risk-based capital requirements for mortgage loans held in portfolio by financial intermediaries. Our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions. Results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification. Hence, rules that offer little risk differentiation, including the current Basel I regime and “standardized” approach proposed in Basel II result in significant divergence between regulatory and economic capital. These results highlight the incentive problems inherent in simplified methods of capital regulation

We study corporate governance within the thrift industry during a period of industry distress and legally mandated regulatory vigilance. We find evidence consistent with the Office of Thrift Supervision displacing the disciplinary role of takeovers in the market for thrift control. Poorer prior thrift performance is associated with a greater likelihood of censure while better prior performance is associated with a greater likelihood of acquisition. For thrifts that are not censured or acquired, there is no relationship between current performance and managerial turnover. Replacement due to retirement rather than board discipline explains most of these turnovers. This result is consistent with the notion that regulation may deter board disciplinary behavior, also suggested by Kole and Lehr [Journal of Financial Economics 52 (1999) 79

In response to fundamental changes in regulation and technology, the financial industry is undergoing an unprecedented wave of consolidation. A growing body of empirical literature measures the efficiency gains from mergers and acquisitions; however there is little sense of how the results might depend on the country, industry and time period analyzed. In this paper we review critically works that cover the main sectors of the financial industry (commercial and investment banks, insurance and asset management companies) in the major industrialized countries over the last 20 years, searching for common patterns that transcend national and sectoral peculiarities. We find that consolidation in the financial sector is beneficial up to a relatively small size, but there is little evidence that mergers yield economies of scope or gains in managerial efficiency

We provide an economic basis for permitting freezeouts of nontendering shareholders following successful takeovers. We describe a specific freezeout mechanism based on easily verifiable information that induces desirable efficiency and welfare properties in models of both corporations with widely dispersed shareholdings and corporations with large pivotal shareholders. The mechanism dominates previous proposals along some important dimensions. We also examine takeover premia that arise in the presence of competition among raiders. Our mechanism is closely related to the practice of takeover law in the United States; thus, our analysis may be thought of as analyzing the economic foundations of current regulations

A complex financial system comprises both financial markets and financial intermediaries. We distinguish financial intermediaries according to whether they issue complete contingent contracts or incomplete contracts. Intermediaries such as banks that issue incomplete con-tracts, e.g., demand deposits, are subject to runs, but this does not imply a market failure. A sophisticated financial system–a system with complete markets for aggregate risk and limited market participation–is incentive-efficient, if the intermediaries issue complete con-tingent contracts, or else constrained-efficient, if they issue incomplete contracts. We argue that there may be a role for regulating liquidity provision in an economy in which markets for aggregate risks are incomplete. 1 Markets, intermediaries and crises For a long time, it has been taken as axiomatic that financial crises are best avoided. We confront this conventional wisdom by showing that, under certain conditions, a laisser-faire financial system achieves the incentive-efficient or constrained-efficient allocation.1 Further-more, constrained efficiency may require financial crises in equilibrium. The assumptions

This paper examines short‐sales transactions in the five days prior to earnings announcements of 913 Nasdaq‐listed firms. The tests provide evidence of informed trading in pre‐announcement short‐selling because they reveal that abnormal short‐selling is significantly linked to post‐announcement stock returns. Also, the tests indicate that short‐sellers typically are more active in stocks with low book‐to‐market valuations or low SUEs. The levels of pre‐announcement short‐selling, however, mostly appear to reflect firm‐specific information rather than these fundamental financial characteristics. We believe that these results should encourage financial market regulators to consider providing more extensive and timely disclosures of short‐selling to investors

We develop a theory of internal commitments or “personal rules” based on self‐reputation over one’s willpower, which transforms lapses into precedents that undermine future self‐restraint. The foundation for this mechanism is the imperfect recall of past motives and feelings, leading people to draw inferences from their past actions. The degree of self‐control an individual can achieve is shown to rise with his self‐confidence and decrease with prior external constraints. On the negative side, individuals may adopt excessively rigid rules that result in compulsive behaviors such as miserliness, workaholism, or anorexia. We also study the cognitive basis of self‐regulation, showing how it is constrained by the extent to which self‐monitoring is subject to opportunistic distortions of memory or attribution, and how rules for information processing can themselves be maintained

Theory suggests that voluntary disclosure decisions are a function of conflicting incentives vis-a`-vis multiple audiences. However, few opportunities exist to investigate this issue empirically. We identify a setting that offers us such an opportunity: the electric utility industry as it transitions toward deregulation. We consider two types of voluntary disclosures: strategies to protect the firm's existing customer base and plans to exploit emerging opportunities under deregulation. We examine these particular disclosures since they are voluntary, relevant to all sample firms, and convey positive information about the firm's prospects in a deregulated environment. We consider three target audiences: industry regulators, capital market participants, and product market competitors. We find that our disclosure index is negatively associated with the magnitude of utilities' stranded costs in jurisdictions where the stranded cost recovery issue is unresolved, consistent with our predicted regulatory incentives. Further, our evidence indicates that capital market-related incentives are positively associated with our disclosure index. Finally, we find that product market-related incentives play a deterrent role in disclosure, but only after regulatory concerns have been resolved