Longstaff [Longstaff, F., 2000. The term structure of very short-term rates: new evidence for the expectations hypothesis. Journal of Financial Economics 58, 397–415] finds support for the expectations hypothesis at the very short end of the repurchase agreement (repo) term structure while other studies find calendar-time-based regularities cause rejection of the expectations hypothesis. Using Longstaff’s methods on a sample of repo rates that pre-dates Longstaff’s sample, we reject the expectations hypothesis for every maturity. The pre-Longstaff-sample repo data comes from a time period where the behavior of short-term interest rates is similar to the long-run average behavior of short-term interest rates. Our results imply that expectations hold when rates are less volatile and/or that we may be entering a period of lower volatility.

This study addresses whether asset securitizations are really asset sales or a form of secured borrowing, by estimating cross-sectional equity valuation regressions to assess whether the stock market treats securitized assets and liabilities held by a special purpose entity (SPE) as assets and liabilities of the sponsor-originator (S-O). Although all sample firms account for asset securitizations as sales, we find that the market views such SPE assets and liabilities as belonging to the S-O, i.e., the risk and rewards of ownership of the transferred assets reside with the S-O and not the SPE. Our findings are consistent with the explanation that sale-based asset securitizations enable SPE bondholders to retain priority in bankruptcy of the S-O while also enabling the S-O to obtain lower borrowing costs by implicitly guaranteeing the SPE’s debt.

This study investigates the effects of relative performance feedback and incentive compensation method on performance. We examine whether the presence and the content of relative performance feedback have different effects on performance when participants are compensated via a tournament or an individual incentive scheme. Our experimental results show a disordinal interaction between incentive scheme and feedback. Specifically, providing relative performance feedback improves the mean performance of participants compensated under an individual incentive scheme regardless of the precision or specific content of the feedback. In contrast, providing relative performance feedback deteriorates the mean performance of participants compensated under a tournament incentive scheme, but only if the feedback is sufficiently precise. Supplementary analysis suggests that this deterioration in performance is due to ineffective task strategies rather than reduced effort. We also find that in the absence of relative performance feedback, participants compensated under a tournament incentive scheme perform better, and their performance improves to a greater extent over time, compared to participants compensated under an individual incentive scheme. These results have implications for the design of accounting, control, and reporting systems in firms.

Currently, a growing literature is emerging on estimating the impact of exogenous shocks using the difference-in-difference (DD) tech? nique. Essentially, this technique compares the impact of an unexpected event in a particu? lar locale (called the treatment/experimental group) to a location or set of locations (called a control group) similar to the experimental group in all respects except for the shock itself. One challenge many DD studies face is how to choose the control group, and there is now a growing literature on this (Joshua A. Angrist and Alan B. Krueger 1999; Jeffrey D. Kubik and John R. Moran 2003; and Alberto Abadie, Alexis Diamond, and Jens Hainmueller 2007). Another challenge is whether one can general? ize one's results based on a single experimental group, as is typical for most DD analysis. This paper adopts a generalized-difference-in-dif ference (GDD) technique outlined in Ariel R. Belasen and Solomon W. Polachek (forthcom? ing) to examine the impact of hurricanes on the labor market. This technique incorporates many experimental as well as many control groups, and as such this approach addresses a number of shortcomings in current DD analyses. We find that earnings of the average worker in a Florida county rise over 4 percent within the first quarter of being hit by a major Category Four or Five hur? ricane relative to counties not hit, and rise about Wa percent for workers in Florida counties hit by less major Category One to Three hurricanes. Concomitantly, employment falls between Wi and 5 percent depending on hurricane strength. On the other hand, the effects of hurricanes on neighboring counties have the opposite effects, moving earnings down between 3 and 4 percent in the quarter the hurricane struck. To better examine the specific shocks, we also observe sectoral employment shifts. Finally, we conduct a time-series analysis and find that, over time, there is somewhat of a cobweb, with earnings and employment rising and falling each quarter over a two-year time period.

When a job-seeker and an employer meet, find a prospective joint surplus, and bargain over the wage, conditions in the outside labor market, including especially unemployment, may have limited influence. The job-seeker's only credible threat during bargaining is to hold out for a better deal. The employer's threat is to delay bargaining. Consequently, the outcome of the bargain depends on the relative costs of delays to the parties, rather than on the payoffs that result from exiting negotiations. Modeling bargaining in this way makes wages less responsive to unemployment. A stochastic model of the labor market with credible bargaining and reasonable parameter values yields larger employment fluctuations than does the standard Mortensen-Pissarides model.

The trend toward continuous monitoring of automated business transactions by the internal audit function is growing as organizations seek to improve internal control. In this study, we demonstrate that continuous monitoring and the time horizon over which performance-contingent incentives are based can interact, thereby yielding potential functional and dysfunctional effects on managerial decisions. Seventy-two experienced corporate managers completed a between-participants experiment that randomized monitoring frequency (periodic or continuous) and incentive horizon (short-term or long-term). We found that earnings management of real activities significantly decreased as the frequency of monitoring increased in the presence of a short-term incentive horizon—a functional effect. However, with a long-term incentive horizon, the participants’ willingness to change the current level of investment in a risky but viable project significantly dropped as the frequency of monitoring increased, even though additional investment would enhance the likelihood of the project’s eventual success—a dysfunctional effect. We also observed that more frequent monitoring significantly decreased the willingness of managers to continue with a risky but viable project regardless of incentive horizon and the effect was significantly pronounced in the presence of a short-term, relative to long-term, incentive horizon—another dysfunctional consequence. Implications of the research findings to theory and practice are discussed.

Auditors often receive summary information or conclusions from management about account balances or internal controls. They must then gather evidence to assess whether this information is fairly stated. In such situations, management can be considered the “first mover” and the auditor the “second mover.” When auditors are the second mover, they are vulnerable to the curse of knowledge bias—the inability to ignore previously processed information (Fischhoff 1977). Specifically, because information from management could be incorrect or biased, auditors must arrive at an independent evaluation of the item in question (e.g., year-end book values, accounting estimates, or internal controls). This study examines the general issue of auditors being “second movers” by investigating how their awareness of management’s severity classifications of internal control problems influences auditors’ initial assessments of internal control over financial reporting (ICFR) under Auditing Standard No. 2. Our experimental design allows us to determine that management’s “first mover” influence on auditors’ judgments is an unintentional cognitive effect, rather than an intentional use of management’s classifications. We further examine whether cognitively restructuring the ICFR assessment task reduces management’s influence on auditors’ judgments by asking auditors to evaluate and explicitly document the likelihood and magnitude of the effect of an ICFR problem on the financial statements. We find that cognitively restructuring the task mitigates management’s “first mover” influence on auditors’ judgments.

We find that equity returns associated with credit risk changes are attenuated by the debt value effect of the credit risk changes, as Merton (1974) predicts. We find that the relation between credit risk changes and equity returns is significantly less negative for firms with more debt—controlling for asset value changes, credit risk increases (decreases) are associated with equity value increases (decreases). This result obtains across credit risk levels. The relation is associated with changes in both expected cash flows and systematic risk, as reflected in analyst earnings forecasts and equity cost of capital. By inverting the Merton (1974) model, we provide descriptive evidence that if unrecognized debt value changes were recognized in income, but not unrecognized asset value changes, most credit upgrade (downgrade) firms would recognize lower (higher) income. These potentially counterintuitive income effects primarily are attributable to incomplete recognition of contemporaneous asset value changes. However, for a substantial majority of downgrade firms we find that recognized asset write-downs exceed unrecognized gains from debt value decreases. This mitigates concerns that income effects from recognizing changes in debt values would be anomalous for such firms.

We find that the majority of variation in leverage ratios is driven by an unobserved time‐invariant effect that generates surprisingly stable capital structures: High (low) levered firms tend to remain as such for over two decades. This feature of leverage is largely unexplained by previously identified determinants, is robust to firm exit, and is present prior to the IPO, suggesting that variation in capital structures is primarily determined by factors that remain stable for long periods of time. We then show that these results have important implications for empirical analysis attempting to understand capital structure heterogeneity.

Information Aggregation and Strategic Abstention in Large Laboratory Elections by Marco Battaglini, Rebecca B. Morton and Thomas R. Palfrey. Published in volume 98, issue 2, pages 194-200 of American Economic Review, May 2008