ABSTRACT This paper provides an analysis of the effect of corporate and personal taxes on the firm's optimal investment and financing decisions under uncertainty. It extends the DeAngelo and Masulis capital structure model by endogenizing the firm's investment decision. The authors' results indicate that, when investment is allowed to adjust optimally, the existing predictions about the relationship between investment‐related and debt‐related tax shields must be modified. In particular, the authors show that increases in investment‐related tax shields due to changes in the corporate tax code are not necessarily associated with reductions in leverage at the individual firm level. In cross‐sectional analysis, firms with higher investment‐related tax shields (normalized by expected earnings) need not have lower debt‐related tax shields (normalized by expected earnings) unless all firms utilize the same production technology. Differences in production technologies across firms may thus explain why the empirical results of recent cross‐sectional studies have not conformed to the predictions of DeAngelo and Masulis.

The employment relationship with employees' ability and their actions both private information (thus combining adverse selection with moral hazard) is modeled as a repeated game with self-enforcing contracts being perfect Bayesian Nash equilibria. Under termination contracts, the equilibrium contract structure consists of a hierarchy of ranks, finite in number even though ability is continuous. Reputation acts as an effective device for worker discipline without the need for involuntary unemployment. Selection by bonding is not, in general, incentive compatible, but selection by promotion of employees through the ranks is. Many other features correspond to observed employment structures.

This paper adopts Keynes' view that shocks to the marginal efficiency of investment are important for business fluctuations, but incorporates it in a neoclassical framework with endogenous capacity utilization. Increases in the efficiency of newly produced investment goods stimulate the formation of "new" capital and more intensive utilization and accelerated depreciation of "old" capital. Theoretical and quantitative analysis suggests that the shocks and transmission mechanism studied here may be important elements of business cycles.

During the period from 1960 to 1973, the economic growth rate in Japan was at the rate of 10 or 11 percent per year. Japan was not the only country that grew rapidly during that period. France and Germany grew at 5.9 and 5.4 percent per year between 1960 and 1973 and Italy grew at 4.8 percent per year. Even the United Kingdom grew at a respectable 3.8 percent per year. The United States grew at 4.3 percent per year during this period. To fill out the roster of the seven major industrialized countries, Canada grew at 5.1 percent per year.' After the first oil crisis in 1973, and even more so after the second oil crisis in 197879, there was a dramatic decline of economic growth among industrialized countries. Growth in the OECD countries dipped to 2.6 percent per year between 1973 and 1979. Japanese growth dropped from the doubledigit levels of the 1960's and the early 1970's to 3.8 percent per year from 1973 to 1979. In the United States, the growth rate dropped to slightly above the OECD average at 2.8 percent per year. The rate of economic growth in Germany dropped to 2.4 percent and in France to 3.1 percent. In every major industrialized country there was a precipitous fall in the rate of economic growth. The sources of economic growth in Japan and the United States over the whole period from 1960 to 1979 are given in Table 1. If we compare Japan and the United States during the period 1960-79, we see that the growth of output over the whole period was 8.3 percent in Japan and only 3.5 percent in the United States. We can allocate this growth in output in the two countries among its three sources, namely, the contribution of capital input, the contribution of labor input and the rate of technical change. By far, the most important contributor to economic growth in both countries is the growth of capital input. This growth source accounts for about 5 percentage points of the Japanese economic growth rate and about 1.5 percentage points of the U.S. economic growth rate. This amounts to 60 percent of Japanese growth and 40 percent of U.S. growth. Labor input in the two countries is a major contributor to economic growth, accounting for 1.5 percent of the Japanese growth rate and 1.2 percent of the U.S. growth rate. The rate of technical change is an important contributor as well, at nearly 2 percent in Japan and 0.7 percent in the United States. I conclude that by far the most important contributor to economic growth in the two countries is the growth of capital input. The relative importance of capital input is much greater in Japan than in the United States. Focusing attention on the period from 1973 to 1979 after the energy crisis, we can see that capital input retained its lead as a source of economic growth in both countries. However, the decline in the growth of tDiscussants: John W. Kendrick, George Washington University; J. Randolph Norsworthy, Rensselaer Polytechnic Institute; Rolf R. Piekarz, National Science Foundation.

[This paper provides empirical evidence on a truth-inducing pay scheme widely discussed and analyzed in the incentive contracting literature. An experiment was conducted in which subjects acted as subordinates who performed a production task. Budgets were participatively set under either a truth-inducing or slack-inducing pay scheme and either the presence or absence of a superior-subordinate information asymmetry about subordinate performance capability. Slack was defined as expected performance minus the participatively set budget. The results showed that, when the information asymmetry was absent, slack did not differ significantly between the pay schemes. However, when the information asymmetry was present, slack was significantly lower under the truth-inducing scheme. Similarly, the pay scheme and information asymmetry variables interacted to affect performance.]

[The perceived limitations of historical cost net income for assessing the relative performance of oil and gas firms led the SEC and FASB to issue a series of pronouncements requiring disclosure of current value reserve-based information to supplement the information contained in the primary financial statements. This study examines whether historical cost earnings of oil and gas companies possess information in the sense of explaining cross-sectional differences in firm security returns. Additionally, we examine whether various Reserve Recognition Accounting-based measures possess incremental information relative to historical cost earnings measurements. The results indicate that for the sample period 1979-1981, historical cost earnings as well as reserve-based measures constructed from RRA data contain information relevant to valuing oil and gas firms. However, these results deteriorate for the sample period 1982-1984 where reserve-based measures are constructed from SFAS No. 69 data. The weaker relations in the latter period are consistent with the findings of Miller and Upton [1985b] and Magliolo [1986] and are attributed to the relative stability of oil prices during this time frame which results in a lower "signal-to-noise" ratio for the various reserve-based measurements.]

Abstract ABSTRACT: This study investigates empirical relations that are consistent with the hypothesis that variance in analysts' forecasts of earnings (i.e., disagreement among analysts) is useful as an ex ante measure of the market's aggregate uncertainty regarding a future earnings signal. We hypothesize and test for a positive association between the variance of analysts' forecasts and (1) the ex post magnitude of unexpected earnings. (2) the ex post variance of returns around the actual earnings announcement date. and (3) the average variance of return to maturity implied by prices of options maturing after the earnings announcement date. Our results generally confirm that the disagreement among analysts' earnings forecasts Is a useful Indicator of the market's aggregate uncertainty regarding future earnings announcements.

[This study investigates empirical relations that are consistent with the hypothesis that variance in analysts' forecasts of earnings (i.e., disagreement among analysts) is useful as an ex ante measure of the market's aggregate uncertainty regarding a future earnings signal. We hypothesize and test for a positive association between the variance of analysts' forecasts and (1) the ex post magnitude of unexpected earnings, (2) the ex post variance of returns around the actual earnings announcement date, and (3) the average variance of return to maturity implied by prices of options maturing after the earnings announcement date. Our results generally confirm that the disagreement among analysts' earnings forecasts is a useful indicator of the market's aggregrate uncertainty regarding future earnings announcements.]

[The economic theory of the firm suggests that a profit-maximizing product price may be determined by equating marginal cost and marginal revenue. Yet recent surveys suggest that most firms use cost-based pricing strategies where product costs are determined using absorption costing. Lere [1986] has drawn upon the economic theory of the firm, as well as extensive work on heuristic decision processes, to develop an empirically testable theory of product pricing based on accounting costs. This paper reports the results of an experiment in which Lere's theory was empirically tested.]