Returns computed with closing bid or ask prices that may not represent ‘true’ prices introduce measurement error into portfolio returns if investor buying and selling display systematic patterns. This paper finds systematic tendencies for closing prices to be recorded at the bid in December and at the ask in early January. After changing bid and ask prices are controlled for. this pattern results in large portfolio returns on the two trading days surrounding the end of the year, especially for low-price stocks. Other temporal return patterns (e.g. weekend and holiday effects) are also related to systematic trading patterns.

This paper is concerned with the use of power properties of tests in econometric applications. Inverse power functions are defined. These functions are designed to yield summary measures of power that facilitate the interpretation of test results in practice. Simple approximations are introduced for the inverse power functions of Wald, likelihood ratio, Lagrange multiplier, and Hausman tests. These approximations readily convey the general qualitative features of the power of a test. Examples are provided to illustrate their usefulness in interpreting test results. A COMMON PROBLEM faced in applied econometrics is that of interpreting the results of a hypothesis test when the test fails to reject the null hypothesis. Most practitioners realize that just because a test fails to reject a hypothesis one cannot claim to accept it. Nevertheless, it is common for this to be ignored, since the practitioner is often in a position where he would like the outcome of the test to provide useful inferences whether or not the test rejects. The purpose of this paper is to introduce inverse power (IP) summary measures that enable the practitioner to avoid such errors and make valid inferences when a test fails to reject the null hypothesis. These summary measures are widely applicable, easy to use (especially in the common case of a test concerning a single restriction), and simple to compute. When a test rejects the null hypothesis, the implication is that the data are inconsistent with each parameter point in the null in the sense that the probabil- ity of type I error for each point is small, viz., a or less. Correspondingly, when a test fails to reject the null hypothesis an analogous statement is needed regarding the error probabilities for points in the alternative hypothesis. It is not the case that all points in the alternative are inconsistent with the data in the sense that their probability of type II error is small (a or less). It is possible, however, to determine the region S in the alternative parameter space that is inconsistent with the data in this sense. The IP function introduced below evaluated at

By applying the standard tools of microeconomic analysis, I argue that democratic markets work as well as economic markets. In particular, I show that previous work has greatly exaggerated the existence of principal-agent and informational problems in electoral markets and has drawn incorrect conclusions.

[Prediction is one of the most important aspects of investment decision making. This study provides evidence that investors' predictive earnings judgments can be systematically influenced as a consequence of the combined effects of "output interference" and "availability," and that the use of financial accounting information in the prediction process seems to provide limited benefit in terms of reducing this effect. Output interference is a psychological concept that implies that whatever is thought about first interferes with, and thus inhibits, later thoughts about an issue. An availability-based prediction strategy is one in which the decision maker uses the relative number of pro versus con reasons generated, and/or the ease with which such reasons can be generated, as cues in judging the likelihood of future events. Fifty-eight investors participated in an experiment that demonstrated that the order in which they considered opposing arguments regarding the possibility of reaching a specified level of earnings had an impact on both their ability to generate supporting and opposing reasons and their subsequent probability judgment that earnings would actually reach the specified level. The outcome for which the investors were able to generate the most supporting reasons was judged more probable. Investors were able to think of more reasons supporting a particular outcome, not because there were more such reasons in the objective environment, but rather as a consequence of output interference. The systematic effect on judgment, although perhaps slightly reduced, persisted when investors had access to financial statements while considering the company's earnings prospects.]

Equity valuation effects of decisions by corporations to shift assets to master limited partnerships (MLPs) are examined for the period 1982–1987. Positive average abnormal returns are found for (1) total conversions of corporations to MLPs (5.89%), (2) rollouts of subsets of assets by distribution of MLP equity claims to parent-firm shareholders (6.41%), and (3) rollouts of subsets of assets by public sale of MLP equity claims (2.41%). The positive effects are consistent with tax advantages, reduction in free cash flow, and information signaling. The positive effects for rollouts of subsets of assets are also consistent with reductions in information asymmetry and improvements in asset management.

Measuring the labor-force response of a woman to changes in her husband's earnings is the goal of this dynamic model. Allowing for uncertainty, the model modifies the constant shadow price of initial assests framework so that the shadow price varies over time. It is shown that the change in a woman's labor supply is related to the deviation of the husband's actual work hours from the expected amount. The estimation indicates that the largest response to the loss of husband's income occurs with a divorce or separation; smaller effects are noted for widowhood, and husband's unexpected unemployment or health change. Copyright 1989 by MIT Press.