In this paper, we embed the double entry accounting structure in a simple belief revision (estimation) problem. We ask the following question: Presented with a set of financial statements (and priors), what is the reader's “best guess” of the underlying transactions that generated these statements? Two properties of accounting information facilitate a particularly simple closed form solution to this estimation problem. First, accounting information is the outcome of a linear aggregation process. Second, the aggregation rule is double entry.

Whether welfare benefits affect marriage and fertility decisions of the low-income population has been the subject of much research. The substantial bias in the U.S. welfare system toward female-headed families, relative to either married couples or single childless individuals, provides a clear financial incentive for early nonmarital childbearing, postponement of marriage, divorce, postponement of remarriage, and other behaviors that make eligibility for welfare benefits more likely or that avoid the loss of eligibility after it has been achieved. The findings in the cross-sectional research literature through 1995, summarized in Moffitt (1998), exhibit a clear central tendency pointing toward an effect of welfare on some aspects of family structure, namely, marriage and fertility. However, there is also agreement that the time-series evidence is inconsistent with that from crosssectional data, for real benefits have been falling for over 20 years, while female headship has been rising. Moreover, bringing other programs such as Food Stamps and Medicaid into the picture helps explain rising female headship increases in the late 1960's and early 1970's, when those programs were introduced and solidified, but does less well in explaining the

We study the relationship between bank participation in derivatives contracting and bank lending for the period 30 June 1985 through the end of 1992. Since 1985 commercial banks have become active participants in the interest-rate derivative products markets as end-users, or intermediaries, or both. Over much of this period significant changes were made in the composition of bank portfolios. We find that banks using interest-rate derivatives experience greater growth in their commercial and industrial (C&I) loan portfolios than banks that do not use these financial instruments. This result is consistent with the model of Diamond (Review of Economic Studies 51, 1984, 393–414) which predicts that intermediaries' use of derivatives enables increased reliance on their comparative advantage as delegated monitors.

Statement of Financial Accounting Standards (SFAS) No. 130 requires companies to report comprehensive income in a primary financial statement, but allows its presentation in either a statement of comprehensive income or a statement of stockholders' equity (Financial Accounting Standards Board [FASB] 1997). In an experiment, we examine whether and how alternative presentation formats affect nonprofessional investors' processing of comprehensive-income information, specifically, information disclosing the volatility of unrealized gains on available-for-sale marketable securities. The results show that nonprofessional investors' judgments of corporate and management performance reflect the volatility of comprehensive income only when it is presented in a statement of comprehensive income. We provide evidence consistent with our psychology-based framework that these findings occur because format affects how nonprofessional investors weight comprehensive-income information and not whether they acquire this information or how they evaluate it.

This paper demonstrates that the use of GARCH-type models for the calculation of minimum capital risk requirements (MCRRs) may lead to the production of inaccurate and therefore inefficient capital requirements. We show that this inaccuracy stems from the fact that GARCH models typically overstate the degree of persistence in return volatility. A simple modification to the model is found to improve the accuracy of MCRR estimates in both back- and out-of-sample tests. Given that internal risk management models are currently in widespread usage in some parts of the world (most notably the USA), and will soon be permitted for EC banks and investment firms, we believe that our paper should serve as a valuable caution to risk management practitioners who are using, or intend to use this popular class of models.

Per-capita income in many sub-Saharan African countries, such as Chad and Niger, is less than 1/30th of that of the United States. Most economists and social scientists suspect that this is in part due to institutional failures that stop these societies from adopting the best technologies. A particularly interesting historical example comes from the di®usion of railways in the nineteenth century. While railways are regarded as a key technology driving the industrial revolution, there were large lags in its di®usion. For example, in 1850 the United States had 14,518km of track, Britain 9,797km and Germany 5,856km, in the Russian and Hapsburgh Empires there were just 501km and 1,357km, respectively (all data from Mitchell, 1993). Why do societies, as in this example, fail to adopt the best available technologies? One answer is that existing powerful `interest groups ' block the introduction of new technologies in order to protect their economic rents, and societies are able to make technological advances only if they can defeat such groups. Economic monopolies may be one example. A monopolist might wish to block the intro-

Contributions to 401(k) plans are now the most important form of retirement saving. Since 401(k) plans were introduced in the early 1980’s, they have expanded rapidly and continuously. By 1998, roughly half of all households were eligible to participate in 401(k) plans, and more than 36 million workers made contributions to these employer-provided saving plans. In 1995, the last year for which the U.S. Department of Labor has released definitive data, 401(k) contributions amounted to $87.4 billion, or 55 percent of all contributions to employer-sponsored pension plans. The level of contributions, and their share of all pension contributions, is probably significantly higher today. The spread of 401(k) plans is the most important indicator of the move to personal retirement saving. In 1980, almost 92 percent of pension-plan contributions were to traditional employer-provided plans, and about 64 percent of these contributions were to conventional defined-benefit plans. Today, almost 60 percent of contributions are to personal retirement accounts, including 401(k), IRA, and Keogh plans. Including employerprovided, non-401(k) defined-contribution plans, over 76 percent of contributions are to plans that are controlled in large measure by individuals. These individuals make participation, contribution, asset-allocation, and withdrawal decisions. In this paper, we describe the likely importance of 401(k) assets for future older Americans and the effect of investment decisions on asset accumulation. We also examine the extent to which retirement assets may be affected by several decisions: preretirement withdrawals, management fees and expenses, contribution rates, and early retirement. Our analysis focuses on 401(k) saving, but applies more broadly to other forms of individual retirement saving.

The countercyclical pattern of inventory-sales ratios is a striking feature of inventory behavior. In a model where inventories are productive for sales, both the markup of price over marginal cost and expected changes in marginal cost are key determinants of that ratio. This paper argues that costly variation in factor utilization gives rise to countercyclical markups in production-to-stock manufacturing industries. The markup turns out to be more important than intertemporal substitution in explaining the behavior of inventory-sales ratios. (JEL E22, E32)

We investigate the behavior of stock market indices across 33 countries around political election dates during the sample period 1974–1995. We find a positive abnormal return during the two-week period prior to the election week. The positive reaction of the stock market to elections is shown to be a function of a country’s degree of political, economic and press freedom, and a function of the election timing and the success of the incumbent in being re-elected. In particular, we find strong positive abnormal returns leading up to the elections (i) in less free countries won by the opposition, and (ii) called early and lost by the incumbent government. These results are consistent with the uncertain information hypothesis (UIH) of Brown et al. (Brown, K.C., Harlow, W.V., Tinic, S.M., 1988. Journal of Financial Economics 22, 355–385) and the model of election behavior of Harrington (Harrington, J.E., 1993. The American Economic Review 83, 27–42).