A key question concerning affirmative action is whether the labor-market gains it brings to minorities can continue without it becoming a permanent fixture in the labor market. We argue that this depends on how the policy affects employers' beliefs about the productivity of minority workers. We study the joint determination of employer beliefs and worker productivity in a model of statistical discrimination in job assignments. We prove that, even when identifiable groups are equally endowed ex ante, affirmative action can bring about a situation in which employers (correctly) perceive the groups to be unequally productive, ex post.

The costs of hiring a worker generally differ in size from the firing costs. This article investigates optimal labour demand schedules for production and non-production workers of firms that operate under uncertainty and face asymmetric costs of adjusting their workforce. In the empirical part generalised methods of moments (GMM) estimates of the structural parameters of the Euler conditions for production and non-production workers are presented, together with specification and structural stability tests, using time series data of the Netherlands and U.K. manufacturing sectors. We find that asymmetric adjustment costs play an important role in the explanation of unbalanced labour demand between upward and downward movements of the business cycle. Moreover, hiring costs exceed firing costs of production workers, whereas firing costs exceed hiring costs of non-production workers.

Abstract We test several categories of ratios--short-term liquidity, performance measures, earnings per share (EPS), capital structure, and the gross margin ratio-to determine if they have equilibrium values or follow a random walk. For ratios with an equilibrium value, the speed at which the ratio returns to equilibrium from out-of-equilibrium conditions is measured. Since equilibrating forces may differ with firm size, we also test for differences in adjustment speeds between small and large firms. An accounting ratio may have an equilibrium value if management targets a certain ratio so that any deviation from the target causes management to initiate actions that will return the ratio to target. Also, although management may not be targeting a ratio, the interaction of management's actions with external market industry forces may lead to an equilibrium value. We investigate the total adjustment over time and then assess both the relative adjustment speed and the relative weights of the two main equilibrating forces: industry and management. The statistical technique used allows each firm to have its own, unknown equilibrium value. In addition, we remove an important sampling bias in measuring the autocorrelation coefficient. The results show that when firms experience a liquidity shock, equilibrating forces counterbalance a little more than a third of the shock in the next period. This finding suggests that firms' liquidity ratios have a fast adjustment to equilibrium values. EPS ratios also have a high adjustment rate to equilibrium value; about one-third to one-half of the shock is adjusted within one period. For performance measures (net operating income over sales or assets), for the equity to debt and gross margin ratios. the findings imply a relatively long adjustment process to equilibrium values. Supplementary tests suggest that smaller firms adjust their ratios to the optimal target more swiftly than large firms. Separating the ratios' total adjustment effect into industry and management components provides evidence that the adjustment rates differ for different industries. On average, the management adjustment is faster than the industry effect. A weighting measure suggests that both industry and management contribute a significant share to the total adjustment. Tests of the predictive power of the model show that historical control of performance ratios is correlated with future actual performance. Also, firms that were acquired showed better than average control of their liquidity and performance ratios and showed a destabilization of their equilibrium EPS ratios. Finally, comparing the adjustment rate with a sample of firms from an earlier time period shows a stability of the adjustment behavior over time. Information about the existence of equilibrium ratios and their adjustment speeds can help predict future values or events, and identify firms in special categories, for example, firms that will be acquired. It can also help in the evaluation of managerial actions insofar as managers have control over aspects of the financial ratios examined.

[We test several categories of ratios-short-term liquidity, performance measures, earnings per share (EPS), capital structure, and the gross margin ratio-to determine if they have equilibrium values or follow a random walk. For ratios with an equilibrium value, the speed at which the ratio returns to equilibrium from out-of-equilibrium conditions is measured. Since equilibrating forces may differ with firm size, we also test for differences in adjustment speeds between small and large firms. An accounting ratio may have an equilibrium value if management targets a certain ratio so that any deviation from the target causes management to initiate actions that will return the ratio to target. Also, although management may not be targeting a ratio, the interaction of management's actions with external market industry forces may lead to an equilibrium value. We investigate the total adjustment over time and then assess both the relative adjustment speed and the relative weights of the two main equilibrating forces: industry and management. The statistical technique used allows each firm to have its own, unknown equilibrium value. In addition, we remove an important sampling bias in measuring the autocorrelation coefficient. The results show that when firms experience a liquidity shock, equilibrating forces counterbalance a little more than a third of the shock in the next period. This finding suggests that firms' liquidity ratios have a fast adjustment to equilibrium values. EPS ratios also have a high adjustment rate to equilibrium value; about one-third to one-half of the shock is adjusted within one period. For performance measures (net operating income over sales or assets), for the equity to debt and gross margin ratios, the findings imply a relatively long adjustment process to equilibrium values. Supplementary tests suggest that smaller firms adjust their ratios to the optimal target more swiftly than large firms. Separating the ratios' total adjustment effect into industry and management components provides evidence that the adjustment rates differ for different industries. On average, the management adjustment is faster than the industry effect. A weighting measure suggests that both industry and management contribute a significant share to the total adjustment. Tests of the predictive power of the model show that historical control of performance ratios is correlated with future actual performance. Also, firms that were acquired showed better than average control of their liquidity and performance ratios and showed a destabilization of their equilibrium EPS ratios. Finally, comparing the adjustment rate with a sample of firms from an earlier time period shows a stability of the adjustment behavior over time. Information about the existence of equilibrium ratios and their adjustment speeds can help predict future values or events, and identify firms in special categories, for example, firms that will be acquired. It can also help in the evaluation of managerial actions insofar as managers have control over aspects of the financial ratios examined.]

Economic models of politics typically use the expected value of a candidate's vote share to proxy electoral probability. In this paper, the authors introduce a risk calculation to augment the evaluation of a candidate's (or party's) expected vote share and they divide this risk element into its systematic and unsystematic components. For the same reason that systematic risk is a primary focus of portfolio management, the authors discover that an analogous systematic risk component is central to presidential elections. Their approach accounts for correlations in vote swings among states, piercing the fiction of a state-by-state or 'local' campaign strategy. Copyright 1993 by MIT Press.

Should managers, when taking investment decisions, follow the signals given by the stock market even when those do not coincide with their own assessment of fundamentals? Do they? In this paper we review theoretical arguments and examine the empirical evidence. First, we look at the relation between investment, market valuation, and proxies for fundamentals over the last 90 years. Second, we look at the behavior of investment during the episodes associated with the crashes of 1929 and 1987. We find a limited role of market valuation, given fundamentals.

Because of financial market imperfections, such as those generated by asymmetric information in financial markets, which lead to breakdowns in markets, like that for equity, in which risks are shared, firms act in a risk-averse manner. The resulting macroeconomic model accounts for many widely observed aspects of actual business cycles: (a) cyclical movements in real product wages, (b) cyclical patterns of output and investment including inventories, (c) sensitivity of the economy to small perturbations, and (d) persistence. More downward flexibility in wages and prices may exacerbate the plight of an economy that is in a deep recession.

For a sample of NYSE firms, we show that wide spreads are accompanied by low depths, and that spreads widen and depths fall in response to bigger volume. Spreads widen and depths fall in anticipation of earnings announcements; these effects are more pronounced for announcements with larger subsequent price changes. Spreads are also wider following earnings announcements, but this effect dissipates quickly after controlling for volume. Collectively, our results suggest liquidity providers are sensitive to changes in information asymmetry risk and use both spreads and depths to actively manage this risk.