We formulate and test the hypothesis that nonearnings disclosures of small, but not large, firms generally are "good news." Nonearnings disclosures are defined as disclosures by managers and outsiders about news other than earnings (e.g., stock splits, takeovers, new orders). "Good news" is defined as a positive stock price reaction at the time of the information disclosure. Our hypothesis is motivated by two lines of prior research. First, managers have incentives to disclose their private information voluntarily when they expect the effects of the information on firm value to exceed the disclosure costs (Verrecchia 19831. Second, the "firm-size differential information hypothesis," advanced by Atiase (1980, 1985) and the corroborating empirical evidence of Atiase (1985, 1987), Freeman (1987), and Bhushan (1989) suggest that incentives for information production and dissemination by outsiders are an increasing function of firm size. Thus, assuming that nonearnings disclosures concerning small firms are initiated primarily by managers, whereas those of large firms are not, small (but not large) firms' nonearnings disclosures are more likely to be good rather than bad news. Using firm-specific nonearnings disclosures, identified from the Dow Jones News Retrieval Service data base over the 1982 to 1987 period, we show that small firms' nonearnings disclosures, on average, are associated with significant stock price increases, whereas large firms' nonearnings disclosures, on average, are valuation-neutral. Given these results and the evidence that nonearnings disclosures are often made around the time of earnings announcements (Hoskin et al. 1986; Thompson et al. 1987), we reexamine the puzzling result of Chari et al. (1988) that on-time earnings announcements of small, but not large, firms are associated with positive abnormal returns, unconditional upon the nature of the earnings news. We hypothesize that this phenomenon is attributable to nonearnings disclosures of good news around the time of small firms' earnings announcements. We show that small and large firms' "pure" on-time earnings announcements are not associated with positive abnormal returns, and that small (but not large) firms' "contaminated" on-time earnings announcements are associated with positive abnormal returns. We conclude that the Chari et al. (1988) results do not pertain to small firms' on-time earnings announcements per se, but to those that are accompanied by nonearnings news.

Recent research on cost driver analysis by Miller and Vollman (1985) and Cooper and Kaplan (1987) suggests that transactions deriving from the diversity of a firm's product line and the complexity of its production process, in addition to output volume, drive overhead costs. As a consequence, it is argued, conventional cost accounting systems based only on volume-related measures, such as units of output, direct labor hours, or machine hours, produce biased and materially misleading cost estimates for managerial decisions on price and product line (whether to continue or discontinue products, or to offer additional products). Systematic biases in cost estimates may also lead to distortions in flexible budgeting systems, variance analyses, and responsibility-accounting systems. Perhaps more important in the long run, omission of operations-based cost drivers may distort the investigation of the likely effects on costs of changes in operating strategies. Many firms have moved ahead on the basis of this perceived need for more accurate cost estimates and have designed and implemented activity-based costing systems (Schiff 1991). From an academic perspective, however, there is a need for further formal empirical research in this field. Cooper and Kaplan's (1987) evidence is based on field-study discussions with managers in a variety of manufacturing settings and experimentation with cost allocation and product-costing systems based on transactions. Foster and Gupta (1990) provide some of the first empirical evidence on the correlation of manufacturing overhead with output volume and operations- based measures that reflect characteristics of the manufacturing process. Using data obtained from 37 plants of a single manufacturing firm, Foster and Gupta found that most of the volume-related measures of output were highly correlated with manufacturing overhead (MOH), but because only a few measures of manufacturing complexity and efficiency were highly correlated with MOH, their findings leave the impression that systems based on just volume may not significantly distort information generated for managerial decision making. In contrast, we find empirical evidence in favor of incorporating operations-based cost drivers along with measures of volume in cost driver models. We draw upon previous work in cost accounting and economics to develop analogs in the airline industry for product diversity, production run volumes, and process complexity, and propose a framework for cost driver analysis in the U.S. airline industry. Using a panel of quarterly data for 1981-1985 compiled primarily from traffic and financial statistics submitted by carriers to the Civil Aeronautics Board (CAB) and Department of Transportation (DOT), we specify and estimate a multivariate system of cost functions with multiple cost drivers for the industry during the transition following deregulation. We find both volume- and operations-based cost drivers to be statistically significant. We also demonstrate the potential managerial importance of the operations-based drivers by explaining variations in marginal costs across airlines in terms of operating strategies reflected in the cost driver values. Empirical cost driver analysis is managerially significant for the industry and period that we examine. The proportion of indirect costs is large, and identification of input consumption for specific services is difficult. During the transition following deregulation, carriers adopted a rich variety of strategies to improve productivity, reduce costs, and increase market share. These strategies directly involved both volume- and operations-based cost drivers. The analytical framework and model that we have developed on the basis of prior literature concerned with the airline industry enable us to examine the differential cost effects of some of the most important strategies adopted.

This paper uses the betting market for professional basketball games to address the issue of unexplained asset price volatility. A pricing model is presented which identifies two components in point spreads for professional basketball games. Both components—the market's estimate of relative team abilities and an idiosyncratic factor—are essentially unobserved, but can be identified ex post. The structure of this market enables tests of competing hypotheses about point spread variation. The tests reject the hypothesis that variation in the two components represents irrelevant noise. The hypothesis that unobserved fundamentals account for this variation is consistent with the data.

This paper uses the betting market for professional basketball games to address the issue of unexplained asset price volatility. A pricing model is presented which identifies two components in point spreads for professional basketball games. Both components—the market's estimate of relative team abilities and an idiosyncratic factor—are essentially unobserved, but can be identified ex post. The structure of this market enables tests of competing hypotheses about point spread variation. The tests reject the hypothesis that variation in the two components represents irrelevant noise. The hypothesis that unobserved fundamentals account for this variation is consistent with the data.

This study tests the tax‐induced trading hypothesis as an explanation of the turn‐of‐the‐year anomaly using Canadian and U.S. intraday data. Since the Canadian tax year‐end precedes the calendar year‐end by five business days, tax effects may be isolated. We find the anomaly is related to the degree of seller‐and buyer‐initiated trading and depends upon the incidence of the taxation year‐end. Seller‐initiated transactions (at bid prices) dominate until the tax year‐end after which buyer‐initiated trades (at ask prices) dominate. The anomaly is a function of bid‐ask prices.

This study tests the tax-induced trading hypothesis as an explanation of the turn-of-the-year anomaly using Canadian and U.S. intraday data. Since the Canadian tax year-end precedes the calendar year-end by five business days, tax effects may be isolated. We find the anomaly is related to the degree of seller-and buyer-initiated trading and depends upon the incidence of the taxation year-end. Seller-initiated transactions (at bid prices) dominate until the tax year-end after which buyer-initiated trades (at ask prices) dominate. The anomaly is a function of bid-ask prices.

Costs associated with the violation of accounting-based covenants in debt agreements are presumed to be material by both accounting regulators and researchers. The Financial Accounting Standards Board, for example, delayed the implementation of its pronouncement on pension reporting, SFAS No. 87, for two years to allow firms sufficient time to "renegotiate or to obtain waivers of provisions of some legal contracts" (FASB 1985, par. 260). Numerous studies in ace counting research hypothesize that it is costly for firms to violate accounting covenants in debt agreements, and this supposition figures in research on such issues as the economic impact of mandated and voluntary accounting changes (see, e.g., Holthausen 1981; Leftwich 1981; Lys 1984) and the determinants of accounting choice (see, e.g., Trombley 1989; Zmijewski and Hagerman 1981). Although research in financial economics has studied some of the costs shareholders bear when there are debt service defaults or bankruptcy filings, the costs associated with technical violation-the violation of covenants other than debt service-have not been documented. This study investigates the costs of technical violation for a sample of 91 firms that violated accounting-based covenants in debt agreements between 1983 and 1987. The sample includes firms for which the technical violation was sufficiently material to merit disclosure. We provide direct evidence of refinancing and restructuring costs by examining changes in terms of debt agreements, and changes in investing and financing decisions. Refinancing costs arise because lenders raise interest rates on loans and notes following violation. We estimate that increased interest costs resulting from violation range between 0.84 and 1.63 percent of the market value of sample firms' equity. Restructuring costs stem from lenders' demands for partial or full repayment. Nearly half the sample firms either refinanced their debt or divested assets within one year of violation, stating that the proceeds were to reduce the outstanding balances of violated debt agreements. We estimate that the costs of restructuring debt represent an average of 0.37 percent of sample firms' market value of equity. We also present some evidence that there are costs associated with modifying operations, although we cannot estimate their magnitude; lenders' repayment demands impose restructuring costs by forcing firms to eliminate profitable investment projects. In addition to these costs, increased lender control is an important effect of technical violation. We observe that lenders add numerous new covenants. Interestingly, few of these are accounting-based, which suggests that only slight adjustments to accounting-based monitoring are required. The majority of new covenants consists of restrictions on investing and financing to prevent further dissipation of assets. We consider whether the costs of technical violation vary according to lender response. We find that the costs are lower for firms that can obtain a waiver than for those that cannot. More important, the evidence suggests that lenders often extract fees and concessions from violators in exchange for granting waivers. This is one of the first studies to substantiate that technical violation of accounting-based covenants is costly. Depending on the assumptions made, the average costs we estimate range between 1.2 and 2 percent of market value of equity; alternatively, the losses represent between 4.4 and 7.3 percent of the outstanding balances of the violated debt agreements. Evidence on the costs of technical violation is relevant to researchers who attribute economic consequences to changes in debt covenant slack and the likelihood of violating accounting-based covenants. Furthermore, by showing that leverage proxies for the magnitude of some of the costs imposed by technical violation, we justify the use of this surrogate in accounting research.

This paper examines the welfare effects of futures price limits under a simple form of market incompleteness. When prices become volatile, shocks to liquidity and fundamentals may occur between the time investors decide to trade and the time their orders are executed. This gives rise to implementation risk that cannot be transferred with contingent claims. The authors show that price limits partially insure implementation risk. When price fluctuations are driven by news about fundamentals, judiciously chosen price limits can be (ex ante) Pareto superior to unconstrained trade. When liquidity shocks are large, price limits benefit hedgers but harm some speculators.

This paper considers the modeling of road congestion subject to peak-load demand. The standard model contains ambiguities and is poorly specified. These problems can be eliminated by working with a structural model that explicitly treats the congestion technology and drivers' behavioral decisions. The paper provides a detailed analysis of a particular structural model--William Vickrey' s model of bottleneck congestion in the morning rush-hour auto commute extended to treat elastic (i.e., price-sensitive) demand--and examin es some economic implications of the structural approach.