Recent reports of negative capital intensity coefficients in struct ure-performance equations support allegations of gross measurement error in accounting-based measures of economic profitability. This paper explores whether specification errors, rather than measurement errors alone, may explain this anomalous empirical result. Within a simultaneous equations model of capital intensity, cost of capital, and price-cost margins, the author employs Hausman specification tests to demonstrate a negative bias on capital intensity and a positive bias on concentration when one omits firm-specific cost of capital from price-cost margin equations. The roles of cost of capital and capital intensity are derived from formal structure-performance theory.

Microstructure research has recently forged two theoretical frameworks characterizing stock specialist behavior: a Walrasian inventory-theoretic individual optimization model sometimes with asymmetric information, and a queue-theoretic disequilibrium market model of the continuous auction process. To test the Brock and Kleidon (Journal of Economic Dynamics and Control, 16 (1992) 451–489) continuous auction process, two simultaneous autoregressive equations for ask prices and for bid prices are estimated using transactions data for IBM for calendar year 1988. The results support Brock and Kleidon's distinguishing implications — namely, increased trading volume raises the ask and lowers the bid, and a Hausman-type specification test fails to reject the exogeneity of order flows at the bid and the ask. Also, greater price volatility within a fifteen minute interval leads to both lower bids and lower asks as buyers are accorded a risk premium, consistent with Brown, Harlow and Tinic's (Journal of Financial Economics, 22 (1988) 355–385) uncertain information hypothesis for efficient markets.

Using synchronous transactions data for IBM from the New York, Pacific, and Midwest Stock Exchanges, we estimate an error correction model to investigate whether each of the exchanges is contributing to price discovery. Johansen's test yields two cointegrating vectors, which together verify the expected long-run equilibrium of equal prices across the three exchanges. Two error correction terms specified as the differences from IBM prices on the NYSE indicate that adjustments maintaining the long-run cointegration equilibrium take place on all three exchanges. That is, IBM prices on the NYSE adjust toward IBM prices on the Midwest and Pacific Exchanges, just as Midwest and Pacific prices adjust to the NYSE.