This study examines whether security analysts underreact or overreact to prior earnings information, and whether any such behavior could explain previously documented anomalous stock price movements. We present evidence that analysts' forecasts underreact to recent earnings. This feature of the forecasts is consistent with certain properties of the naive seasonal random walk forecast that Bernard and Thomas (1990) hypothesize underlie the well-known anomalous post-earnings-announcement drift. However, the underreactions in analysts' forecasts are at most only about half as large as necessary to explain the magnitude of the drift. We also document that the “extreme” analysts' forecasts studied by DeBondt and Thaler (1990) cannot be viewed as overreactions to earnings, and are not clearly linked to the stock price overreactions discussed in DeBondt and Thaler (1985, 1987) and Chopra, Lakonishok, and Ritter (Forthcoming). We conclude that security analysts' behavior is at best only a partial explanation for stock price underreaction to earnings, and may be unrelated to stock price overreactions.

This study measures the heterogeneity of establishment-level employment changes in the U. S. manufacturing sector over the 1972 to 1986 period. We measure this heterogeneity in terms of the gross creation and destruction of jobs and the rate at which jobs are reallocated across plants. Our measurement efforts enable us to quantify the connection between job reallocation and worker reallocation, to evaluate theories of heterogeneity in plant-level employment dynamics, and to establish new results related to the cyclical behavior of the labor market.

Panel data on consumer bank deposit interest rates reveal asymmetric impacts of market concentration on the dynamic adjustment of prices to shocks. Banks in concentrated markets are slower to raise interest rates on deposits in response to rising market interest rates, but are faster to reduce them in response to declining market interest rates. Thus, banks with market power skim off surplus on movements in both directions. Since deposit interest rates are inversely related to the price charged by banks for deposits, the results suggest that downward price rigidity and upward price flexibility are a consequence of market concentration.

We study environments in which agents may borrow sequentially from more than one lender. Although debt is prioritized, additional lending imposes an externality on prior debt because, with moral hazard, the probability of repayment of prior loans decreases. Equilibrium interest rates are higher than they would be if borrowers could commit to borrow from at most one bank. Even though the loan terms are less favorable than they would be under commitment, the indebtedness of borrowers is greater. Further, additional lending causes the probability of default to increase. The results apply to markets for consumer, corporate, and international debt.

We study environments in which agents may borrow sequentially from more than one lender. Although debt is prioritized, additional lending imposes an externality on prior debt because, with moral hazard, the probability of repayment of prior loans decreases. Equilibrium interest rates are higher than they would be if borrowers could commit to borrow from at most one bank. Even though the loan terms are less favorable than they would be under commitment, the indebtedness of borrowers is greater. Further, additional lending causes the probability of default to increase. The results apply to markets for consumer, corporate, and international debt.

Thomas P. Frazier, Matthew S. Goldberg, Thomas R. Gulledge, Jr., Department of Defense Profit Policy and Capital Investment in the Military Aircraft Industry, The Review of Economics and Statistics, Vol. 74, No. 3 (Aug., 1992), pp. 394-403

The growth of employee benefits in academe has closely paralleled their economy-wide growth. This study estimates a complete system describing the demand for benefits and wages using panel data on 1477 institutions of higher learning. the demand for benefits is very responsive to changes in real income and the tax price of benefits. These conclusions are robust with respect to varying definitions of the tax price, treating it as endogenous, and accounting for unmeasured individual effects on demand. Simulations suggest that the Tax Reform Act of 1986 sharply reduced the demand for benefits. Extrapolating the impact to the entire economy, the annual flow of compensation shifted away from benefits by at least $15 billion.

The results of prior research on Statement of Financial Accounting Standards No. 33 (FASB 1979) and the effects of required disclosure of inflation have been mixed. Many studies report little or no information content for such disclosures (Beaver and Landsman 1983), although more recent studies (Bublitz et al. 1985; Lobo and Song 1989) report evidence of stock price reactions to releases of information on current cost. These studies were conducted at the aggregate level of the market and did not examine the trading behavior of particular classes of market agents. In contrast, this study focuses on the trading behavior of corporate insiders, and, instead of the commonly used security returns, a non-price variable is the dependent variable of interest. Managers (insiders) could have information about how disclosure might affect the value of a firm through political and contracting costs borne by the firm (Smith and Warner 1979; Holthausen 1981) well in advance of other traders (Jaffe 1974; Larcker et al. 1983). In conformance with their fixation on reported income and their general skepticism of market efficiency (Mayer-Sommer 1979), managers might perceive that investors would react negatively to the new information required by SFAS No. 33, especially when current-cost adjusted income falls below historical-cost income. As a consequence, they would be expected to sell their stocks in anticipation of a negative stock market reaction. For a sample of 441 firms, this study investigates the relation between the initial release of inflation-adjusted information and the trading behavior of insiders. Specifically, it is hypothesized that the expectation that disclosure income will be lower than historical-cost income leads to net selling by managers prior to the initial disclosures under SFAS No. 33. The results are generally consistent with the hypothesis. The analyses show results that are statistically significant (at conventional levels) for both the independent variables in this study-a proxy for income shrinkage and a proxy for earnings change in the expected direction. But one must keep in mind the limitations of inferences from analyses of insider-trading data (Larcker et al. 198;j). Specifically, since there is no comprehensive theory of insider trading, it is difficult to interpret insidertrading activity, and the results of this study must be kept in perspective as additional evidence on the effect of SFAS No. 33 disclosures.