Private equity placement data allow us to determine whether sophisticated investors can uncover the true value of firms. This can be done by defining sophisticated investors as those who meet the stringent participation requirements of the private equity market. Our results show private equity issuing firms overstate their earnings in the quarter preceding private equity placement announcements and that sophisticated investors do not ask for a fair discount when purchasing the shares of the private issuing firms. We also find evidence showing that the reversal of the effects of pre-issue earnings management is a significant determinant of the long-term performance of private issues. Results further show that post-issue stock performance and operating performance of firms using “aggressive” earnings management significantly underperform those using more “conservative” earnings management.

This paper employs a firm-level collective bargaining dataset to investigate the effect of labor, as an important stakeholder of a firm, on debt contracting. I conjecture and provide evidence that firms with strong organized labor prefer bank loans to public bonds because, by communicating with banks privately, unionized firms can reduce the adverse selection costs while preserving the information asymmetry with organized labor. Furthermore, I show that organized labor influences the structure of syndicated loans. When firms with strong unions withhold public disclosures, but communicate privately with lead lenders, heightened information asymmetry between the lead lenders and the participant lenders induces the lead lenders to retain larger shares of the loans and form more concentrated syndicates. Overall, this study demonstrates that the proprietary costs of disclosure related to organized labor significantly influence firms' debt contracting decisions and outcomes. Data Availability: Data are available from sources identified in the text.

This paper investigates the determinants of residual income scaled by book value of equity, i.e., abnormal return on equity (ROE), by analyzing the impact of value-creation (economic rents) and value-recording (conservative accounting) processes on abnormal ROE. I rely on economic theories to characterize economic rents and develop an empirical measure—the conservative accounting factor—to capture the effect of conservative accounting. As expected, industry abnormal ROE increases with industry concentration, industry-level barriers to entry, and industry conservative accounting factors. Also as expected, the difference between firm and industry abnormal ROE increases with market share, firm size, firm-level barriers to entry, and firm conservative accounting factors. Integrating these determinants into the residual income valuation model significantly increases its explanatory power for the variation in the market-to-book ratio.

Reviews the book "Financial Accounting," by Loren A. Nikolai and John D. Bazley.

Reviews the book "Private Management and Public Policy: Reciprocal Impacts," edited by Lewis Benton.

In our 1980 paper we tested the joint hypothesis that prices are determined by the mean-variance (MV) capital asset pricing model (CAPM) and that beliefs are stationary. By focusing on the Invariance Law of Prices we avoided the questionable practice of estimating ex ante expectations with ex post returns. Moreover, we circumvented the need to identify the true market portfolio and hence avoided the ambiguity, noted by Richard Roll (1977), in the traditional security market line (SML) tests of the same joint hypothesis. However, Stuart Turnbull and Ralph Winter (T-W) and Richard Sweeney point to a further inconsistency in the joint hypothesis, that they believe can be removed by relaxing the stationarity assumption. This new concern is fundamental in that it applies to all empirical tests which assume stationarity of the return distribution, whether they are simply tests of the CAPM or tests employing the CAPM. The concern would apply a fortiori to tests that assume stationary betas as well. Both comments also suggest that the ad hoc addition of a random error term to our Invariance Law equation and the subsequent statistical tests of it are unnecessary. We first address these two criticisms and then address some further criticisms raised separately by T-W and Sweeney.

[This paper constructs a life-cycle model of the consumer's allocation process in which the capital market is imperfect and the consumption bundle at each instant includes both durable and nondurable goods. The nondurables are instantaneously consumed at the moment of purchase, while the durable good is accumulated and yields a flow of services over its lifetime. The durable investment is assumed to be irreversible. The consumer's optimal allocation program is shown to vary between the periods of borrowing and lending with each phase defining a different relationship between consumption and the "truncated" permanent income.]