We analyze the costs and benefits of clawback provisions that enable firms to recover incentive compensation from top management if financials are restated. In a simple contracting model, we find that a clawback provision effectively lengthens the horizon of incentives and curbs misreporting. However, such a provision can add noise to the underlying performance measure, reducing managerial effort and firm value. Our empirical tests support the model’s predictions regarding which types of firms are likely to voluntarily use clawback provisions. We also document that clawback provisions are associated with higher reporting quality, greater CEO pay-for-performance sensitivity, and higher CEO compensation.

Abstract This research studies whether severance agreements may reduce fraudulent earnings management, and whether severance pay mitigates executives’ career concerns. In a sample of large U.S. firms, those with higher severance pay are less likely to be subject to accounting and auditing enforcement releases ( AAER s) by the U.S. Securities and Exchange Commission ( SEC ). Among S&P 500 firms in the post‐ SOX period with premanaged earnings below analyst forecasts, firms with higher severance pay are less likely to meet/beat the analyst forecast using abnormal accruals. Overall, these results suggest that fear of losing a lucrative severance package, and/or the insurance offered by such a package curbs earnings management.

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THE savings rate (marginal or average) is regarded as a key performance indicator by development economists, and foreign aid practitioners admonish their clients to increase their savings ratio as a primary condition for achieving a satisfactory rate of economic growth. However, not only have questions been raised regarding the significance of the savings effort as an independent determinant of economic progress, but the formulation of policies designed to increase the savings propensity has suffered from a dearth of knowledge regarding the nature of the savings function in developing countries. A number of alternative savings hypotheses (derived mainly from the literature relating to developed economies) have been advanced, but the paucity of reliable data has made it difficult to test these hypotheses and obtain results which warrant a reasonable degree of confidence. The purpose of this article is: a) to review the theoretical and empirical literature on the savings function in developing countries; b) to assess critically the findings with respect to the major hypotheses; and c) to summarize the state of our knowledge on this important topic. We shall begin with a brief review of the nature of the data on savings in developing countries with which economic analysts must work.

Abstract We propose a model of limited arbitrage based on financial relationships. Financially constrained arbitrageurs may choose to seek additional financing from banks that have the technology to profit from the strategies themselves. A holdup problem arises because banks cannot commit to providing capital. To minimize competition, arbitrageurs will choose to stay constrained and underinvest in the arbitrage unless banks have sufficient reputational capital. This problem arises when mispricing is largest. More competition among financiers, higher arbitrageur wealth, and allowing for explicit contracts can worsen the holdup problem. When arbitrage is risky, financial relationships are more valuable, mitigating the problem.

How does economic science inform the study of sustainable development? In his new book, Jeffrey D. Sachs analyzes the challenges of achieving economic growth while protecting the environment and achieving an equitable distribution of resources. This review presents an overview of this ambitious book with special emphasis on the role of the objectives of local and national leaders and their incentives to pursue the sustainability agenda. Given the huge migration to cities now playing out in the developing world, special attention is paid to the role of urbanization as a cause of sustainability opportunities and challenges. (JEL Q01, Q54, Q56, R11)

Paul Samuelson's Foundations of Economic Analysis played a major role in defining how economic theory was undertaken for many years after the Second World War. This paper fills out Samuelson's account of the book's origins and corrects some details, making clear his debt to E. B. Wilson and establishes that turning the thesis into a book was a long process. The contents of the book and its reception are then reviewed. ( JEL A22, B20, B31)

We extend a standard, rational expectation model of trade to incorporate the possibility of individual investors delegating their trades to an informed financial intermediary. In the presence of delegated trade, we show that a firm׳s risk premium is a function of both the firm׳s exposure to a common risk factor and idiosyncratic characteristics of the firm׳s information environment. We show that even in a large economy, priced risks can manifest in the form of both idiosyncratic firm characteristics and common risk factors; as a consequence, factor-based asset pricing tests cannot rule out that a particular risk is priced.