Consumption (Economics); Income

An important differentiating attribute of the audit product is believed to be the credibility that the auditor is perceived to bring to an audit engagement. This study uses the context of the initial public offering (IPO) to investigate auditor credibility. It is contended that information asymmetry problems lead to a demand for credible auditors in companies going public. Entrepreneurs have incentives to signal their knowledge of favorable future earnings by selecting reputable auditors. Since there is limited information available on firms going public, employing credible auditors can convey monitoring cost advantages as well. Investment bankers also have a preference for credible auditors since they rely on audited financial statements in certifying the value of the firm and determining whether to underwrite the offering. In the present study, we consider auditor credibility in IPOs from the perspective of the client and the investment banker. If there is an increased demand for auditor credibility at the time of the IPO, there should be a significant number of credibility-increasing auditor changes prior to the offering. Further, if the investment banker benefits from having a more credible auditor sign off on statements prepared by the client, this should be reflected in the investment banker's fee structure. The empirical analysis is performed on companies that went public in 1985 and 1986. Relatively few auditor changes are observed prior to the offering. However, among those companies making auditor changes, there is a clear preference for more credible auditors. Logistic regression analysis shows that companies with prestigious investment bankers are more likely to change away from local auditors to more credible CPAs. The type of underwriting arrangement employed is also significant, consistent with an investment banker preference for credible auditors. A regression analysis is conducted, using the 1985 and 1986 IPOs, modeling investment banker compensation as a function of several factors, including type of auditor employed by the issuing firm. In the case of "firm commitment" offerings, the auditor type is found to be significant. Clients seem to be charged a smaller investment banking fee if they are associated with Big Eight auditors. There is no apparent auditor effect in the case of "best efforts" offerings. The evidence generally supports the hypothesis that investment bankers and their clients have a preference for credible auditors for the IPO.

Starting from a tariff-distorted equilibrium of international trade, the authors examine the welfare effects of a gradual multilateral reform of tariffs (and other trade taxes and subsidies). Necessary and sufficient conditions for the existence of strict Pareto improving multilateral (differential) tariff reforms, accompanied by international transfers of income, are obtained. These results are then applied to various concrete tariff reform proposals such as proportional reductions in tariffs and the reduction of the highest ad valorem tariff rates. Some of the authors' theorems extend the generality of previously obtained results and some new tariff reform proposals are also made.

A long-run link between money and prices is evident for the United States since the Korean War if the M2 measure of money is used and the velocity of M2 (V2) is modeled as a mean-reverting series. This link between M2 and prices is the basis for a dynamic model of inflation that compares favorably in forecasting exercises with Phillips-curve and more typical monetarist approaches. The behavior of V2 is examined from 1870 to the present, providing a basis for reconsidering previous findings that V2 follows a random walk.

Manufacturers can stimulate sales by a temporary wholesale price reduction for the retailer, a rebate directed toward consumers, or a combination of both. The trade-offs between these price promotions are analyzed, providing insights about their roles, profitability, and welfare properties. Retailers' rebates are also studied. While price discrimination is a common explanation for rebates to consumers, when a product is sold through a distribution channel, the manufacturer may also use rebates to motivate retail participation in the promotion. This explains why rebates may be offered even when all consumers use them and price discrimination does not occur.

Accounting histories have dated the advent of sophisticated cost management from the mid-1880s (Solomons 1952). The scientific management movement is credited with instituting and popularizing cost management techniques. However, it might be suspected that British entrepreneurs of the Industrial Revolution would have developed sophisticated costing techniques earlier, given their significant methodological advances in other economic areas. This article reports the findings from surviving business records of 25 sizeable British industrial firms (mostly in the iron and textile industries) from 1760 to 1850. Substantial evidence of a relatively mature cost management has been found in four major areas of activity: cost control techniques, accounting for overhead, costing for routine and special decision making, and standard costing. Speculations about the motivations for cost management and about specific factors influencing the iron and textile industries are considered. Because the accounting practices of these firms predated the genesis of "the costing renaissance" a century later, our understanding of cost management practices in the Industrial Revolution is augmented by the survey.

The authors study the price elasticity of demand for the common stock of an individual corporation. Despite the prevalance of assumptions that demand is perfectly elastic, there is little, if any, direct evidence in the literature to either support or reject that contention. Consistent with the notion of finite price elasticities, the authors find that the announcement of primary stock offerings by regulated firms depresses their stock prices and little, if any, evidence that this decline is the result of adverse information about future cash flows. Attempts to relate offer announcement effects directly to possible determinants of price elasticities, however, are inconclusive.

We study the price elasticity of demand for the common stock of an individual corporation. Despite the prevelance of assumptions that demand is perfectly elastic, there is little if any direct evidence in the literature to either support or reject that contention. Consistent with the notion of finite price elasticities, we find that the announcement of primary stock offerings by regulated firms depresses their stock prices and little if any evidence that this decline is the result of adverse information about future cash flows. Attempts to relate offer announcement effects directly to possible determinants of price elasticities, however, are inconclusive.