In this paper, the authors examine the profitability of insider trading in firms whose securities trade in the OTC/NASDAQ market. Although the evidence suggests timing and forecasting ability on the part of insiders, high transaction costs (especially bid-ask spreads) appear to eliminate the potential for positive abnormal returns from active trading. By implication, outside investors who mimic the trading of insiders are also precluded from earning abnormal profits. In addition, the authors provide evidence on the determinants of insiders' profits. The data suggest that insiders closer to the firm trade on more valuable information than insiders removed from the firm.

This paper demonstrates how the incentive of manager-equityholders to substitute toward riskier assets, commonly referred to as the "asset substitution problem," is related to the level of observable risk in the firm. When observable and unobservable risks are sufficiently positively correlated, increases (decreases) in observable risk generate the incentive for manager-equityholders to increase (decrease) unobservable risk. Thus, credible commitments to hedge observable risk can benefit the firm's manager-equityholders by reducing the incentive to shift risk and the associated agency cost of debt. This provides a positive rationale for hedging diversifiable risk at the firm level.

ABSTRACT This paper demonstrates how the incentive of manager‐equityholders to substitute toward riskier assets, commonly referred to as the “asset substitution problem,” is related to the level of observable risk in the firm. When observable and unobservable risks are sufficiently positively correlated, increases (decreases) in observable risk generate the incentive for manager‐equityholders to increase (decrease) unobservable risk. Thus, credible commitments to hedge observable risk can benefit the firm's manager‐equityholders by reducing the incentive to shift risk and the associated agency cost of debt. This provides a positive rationale for hedging diversifiable risk at the firm level.

[This article provides a link between two conflicting approaches to accounting theory. One approach focuses on "proper" income measurement or asset valuation. Under this approach, income is often viewed as economic income plus error, where the error arises from institutional constraints. The other approach focuses on information disclosure. According to this other approach, income is generally viewed as an informative random variable that assists in deriving, say, an economic valuation of the entity. The former approach tends to view the economic norm as a desideratum, thereby leaving the demand for accounting services outside of the formal theory. The latter approach tends to view the information content as a desideratum, thereby leaving most accounting structure outside of the formal theory. These two approaches are linked in this article by treating income measurement as a process by which useful information is conveyed, using the language of proper income measurement or asset valuation. Why this particular language is adopted is not addressed. Thus, the question of why one might select a particular measurement scale (e.g., Celsius) over some other scale (e.g., Fahrenheit) is not examined. Rather, the question asked is whether there is any loss of generality by confining the accounting system to income measurement techniques. The answer is no. The argument runs as follows. First, an exogenous stream of net cash flows and realizations of some (informative) random variable are postulated. Then, an accounting system is introduced. At periodic intervals, this system must compute the expected present value of the future net cash flows from (only) the realized net cash flow and random variable. The accounting system then reports the net cash flow and income (defined to be the sum of net cash flow and the change in expected present value) in each period. Finally, it is determined whether reporting net cash flows and income in this manner discloses fully the information contained in the original stream of net cash flows and realizations of the random variable. This may be the case. If not, a conservative accounting treatment can always be constructed that does disclose the information fully. Hence, the accounting apparatus, coupled with conservatism, provides the link between the two approaches to accounting theory. The information content of the accounting measure is ensured even when the measure is computed in a classical manner. A key feature of the argument is that "accounting value" and "economic value" may diverge. Paradoxically, this divergence may be essential to conveying the information. Therefore, it may not be correct to claim that inability to value particular resources or transactions is the important feature in defining the accounting domain.]

This paper presents a dynamic general equilibrium model of North-South trade in which research and development races between firms determine the rate of product innovation in the North. Tariffs designed to protect dying industries in the North from Southern competition reduce the steady-state number of dominant firms in the North, reduce the rate of product innovation, and increase the relative wage of Northern workers.

This paper concerns the regulation of hazardous economic activities. Economists have generally viewed ex ante regulations (safety standards, Pigouvian fees) that regulate an activity before an accident occurs as substitutes for ex post policies (exposure to tort liability) for correcting externalities. This paper shows that where there is uncertainty, there are inefficiencies associated with the exclusive use of negligence liability and that ex ante regulation can correct the inefficiencies. In such a case it is efficient to set the safety standard below the level of precaution that would be called for if the standard were used alone.

Our analysis of growth assumes endogenous fertility and a rising rate of return on human capital as the stock of human capital increases. When human capital is abundant, rates of return on human capital investments are high relative to rates of return on children, whereas when human capital is scarce, rates of return on human capital are low relative to those on children. As a result, societies with limited human capital choose large families and invest little in each member; those with abundant human capital do the opposite. This leads to two stable steady states. One has large families and little human capital; the other has small families and perhaps growing human and physical capital.