In this paper, I present a model in which both markets for audit services and nonaudit services (NAS) are oligopolistic. Accounting firms providing both audit services and NAS will employ oligopolistic competition in each of these markets. In addition to auditors' gaining “knowledge spillovers” from auditing to consulting or vice versa, oligopolistic competition in one market will influence the counterpart in the other market ‐ what I call “competition crossovers”. Although scope economies due to knowledge spillovers (for example, cost savings) are always beneficial to auditors, such benefits can entice accounting firms to adopt strategies (for example, price reductions) to compete aggressively in the audit market so that some, or all, firms become worse off. A trade‐off arises between these two economic forces in the two oligopolistic markets. Given the trade‐off between competition crossovers and knowledge spillovers, accounting firms may not reduce their audit prices, even though supplying NAS enables firms to decrease auditing costs — a nontrivial impact of oligopolistic competition in two markets on audit pricing. The empirical implication of my results is that because of competition‐crossover effects between the auditing and consulting service markets, finding empirical evidence for knowledge‐spillover benefits is likely to be difficult. Control variables for “audit‐market concentration” concerned with competition‐crossover effects and “auditor expertise” concerned with knowledge‐spillover benefits should be included in audit‐fee regressions to increase the power of empirical tests. With regard to policy implications, my analyses help explain the impact of the Sarbanes‐Oxley Act on “market segmentation” and, hence, the profitability of accounting firms.

We design a compound real options model, which determines the timing of takeovers and characterizes the distribution of the associated surplus. We delineate a relation between the bargaining power of the acquiring firm and the takeover incentives. The takeover threshold is decreasing as a function of the expected primary takeover gain and the embedded divestment gain. Decreased implementation uncertainty stimulates takeover activity. This uncertainty concerns the delay until either primary takeover synergies or subsequent divestment gains are realized. We demonstrate how the relation between volatility and takeover timing depends on the functional form of the profit flow with implementation uncertainty.

We analyze data provided by NASDAQ to examine how quote aggressiveness affects dealer market share and whether the practice of internalization mitigates the impact of quote aggressiveness. Our empirical results show that although internalization does not reduce the impact of price aggressiveness on dealer market share, it mitigates the impact of size aggressiveness. This result suggests that although internalization may not affect the dealer's incentive to post aggressive prices, it may reduce the incentive to post large depths. We find that aggressive quotes are more effective in raising dealer market share in stocks with a less competitive (more concentrated) market structure. Our results also show that the effective spread is wider (narrower) for stocks with a smaller price (size) elasticity of dealer market share.

In this study, we present a nonstrategic, dynamic Bayesian model in which auditors' learning on the job and their choice of professional services jointly affect audit quality. While performing audits over time, auditors accumulate client‐specific knowledge so that their posterior beliefs about clients are updated and become more precise (that is, precision is our surrogate for audit quality) — what we call the learning effect. In addition, auditors can enrich their knowledge accumulation by performing nonaudit services (NAS) that, in fact, may influence clients' managerial decisions — what we call the business advisory effect. This advisory effect permits auditors to anticipate and to learn about changes in clients' business models, which in turn improves their advisory capacity. These dual “learning” and “advisory” effects are interdependent and mutually reinforcing. The advisory effect of NAS may increase or reduce auditors' engagement risk. We show that large professional fees can induce auditors to provide NAS that increase engagement risk and diminish audit quality. However, when NAS reduce engagement risk and increase audit quality, auditors may provide NAS without charging clients. The feature that distinguishes our study — the interdependence between the learning and advisory effects — provides new insight into the trade‐off between audit fees and audit quality. Consequently, our analysis helps explain why the scope of the audit has evolved over time and why the boundaries between audit and NAS are constantly shifting. A recent example of such a shift is that the Sarbanes‐Oxley Act adds control attestation to audits for public companies traded in U.S. markets.

In this paper, I selectively review recent literature on illegal migration from Mexico to the United States. I begin by discussing methods for estimating stocks and flows of illegal migrants. While there is uncertainty about the size of the unauthorized population, new data sources make it possible to examine the composition of legal and illegal populations and the time-series covariates of illegal labor flows. I then consider the supply of and demand for illegal migrants. Wage differentials between the United States and Mexico are hardly a new phenomenon, yet illegal migration from Mexico did not reach high levels until recently. An increase in the relative size of Mexico's working-age population, greater volatility in U.S.–Mexico relative wages, and changes in U.S. immigration policies are all candidate explanations for increasing labor flows from Mexico. Finally, I consider policies that regulate the cross-border flow of illegal migrants. While U.S. laws mandate that authorities prevent illegal entry and punish firms that hire unauthorized immigrants, these laws are imperfectly enforced. Lax enforcement may reflect political pressure by employers and other interests that favor open borders.

This paper reports a systematic examination of the determinants of deposit-related retail banking fees using a set of survey data that is unusual for its size, specificity, and sampling properties. The analysis focuses explicitly on six different fees associated with checking accounts and automated teller machine (ATM) usage. A preliminary analysis documents that, on average, multimarket banks charge substantially higher fees than do typically smaller, single-market banks. A more detailed econometric analysis yields results consistent with predictions of recent models. In particular, it finds that the greater the presence of multimarket banks in the local market, the higher are the retail deposit fees of single-market banks (except in highly concentrated markets) and the weaker is the positive relationship between those fees and market concentration.

Using the stochastic frontier approach to investigate the cost efficiency of commercial banks in Hong Kong, this paper found that the average X-efficiency of Hong Kong banks was about 16–30% of observed total costs. However, X-efficiency was found to decline over time, indicating that Hong Kong banks were operating closer to the cost frontier than before, consistent with technological innovations in the banking industry. Furthermore, the average large bank was found to be less efficient than the average small bank, but the size effect appears to be related to differences in portfolio characteristics among different size banks.

We examine whether the properties of bond ratings from certified agencies (designated by the Securities and Exchange Commission (SEC)) differ from those of non-certified bond-rating agencies. Bond ratings from non-certified agencies are used solely for investment advice. Certified ratings are used by a variety of constituents, many of whom write contracts incorporating these ratings. We find that the properties of the ratings from the two agency types differ in predictable ways. Our results show that the non-certified agency's ratings are consistent with their role of providing information to investors. The certified agency is generally more conservative, consistent with their significant role in contracting.

This article models, and experimentally simulates, the free-rider problem in a takeover when the raider has the option to "resolicit," that is, to make a new offer after an offer has been rejected. In theory, the option to resolicit, by lowering offer credibility, increases the dissipative losses associated with free riding. The outcomes of our experiment support this prediction and produce losses from free riding even higher than theoretically predicted. These dissipation losses reduce raider gains to less than 3% of synergy value of the acquisition

In this study we conduct an experiment to examine how qualifying an income‐decreasing accounting change in years of strong financial performance affects financial report users' assessments of strategic reporting, current financial performance, and future financial performance (performance over the next three years). We find that without the qualification, users viewed the income‐decreasing accounting change as relatively nonstrategic and that user assessments of current and future performance were not different. In the presence of the qualification, users believed that the accounting change was relatively strategic, and they discounted the income effect of the accounting change. We find further that their assessments of future performance were below their assessments of current performance but no different from the assessments of future performance in the absence of the qualification. Although our findings suggest that audit qualifications encourage users to be skeptical of income‐decreasing accounting changes, we find no evidence that they impose negative consequences on management in terms of lower assessments of financial performance.