The paper analytically evaluates alternative specifications of price-earnings regressions when prices lead earnings, i.e., reflect information about future earnings that is not reflected in the past time series of earnings. Because prices lead earnings, the specification using the earnings-level-deflated-by-price variable in a price-earnings regression is ‘better’, in terms of bias in the estimated earnings response coefficient and explanatory power, than specifications using earnings-change-deflated-by-price and earnings-deflated-by-lagged-earnings variables. An accurate proxy for unexpected earnings, however, outperforms the earnings-level- and earnings-change-deflated-by-price specifications.

This paper considers a general version of the hold-up problem where n agents first make relation-specific investments and then must agree on some collective action. It is shown that first-best solutions exist under a variety of different assumptions about the nature of information asymmetries.

This paper examines whether positive and negative money-supply shocks have symmetric effects on output. The results are consistent with the hypothesis that positive money-supply shocks do not have an effect on output, while negative money-supply shocks do have an effect on output. This finding is independent of whether or not expected money is assumed to affect output. The results reported in this paper imply that the Fed could increase the growth rate of real output by reducing the standard deviation of unexpected changes in the money supply.

Stock return over a period reflects the market's revision in expectation of future earnings. Accounting earnings over the same period, however, have limited ability to reflect such revised expectations. Therefore, returns anticipate earnings changes and the earnings response coefficient from a regression of returns on contemporaneous earnings changes is biased toward zero. We reduce this bias by including leading-period returns in price-earnings regressions. The resulting estimated earnings response coefficient magnitudes suggest that the capital market, on average, views earnings changes to be largely permanent. This is consistent with the random walk time series property of annual earnings.

Recent theory casts doubt on the frequently used interindustry regression method of inferring a country's abundant factors. This paper examines the empirical importance of these theoretical qualifications by comparing regression-derived estimates of factor abundance with both revealed and actual factor abundances for 35 countries and 12 resources. We demonstrate the theoretical importance of trade imbalances for the reliability of the regression estimates and therefore propose and implement a theoretically consistent trade imbalance correction. The results indicate that, despite valid theoretical concerns, the regression estimates are generally reliable indicators of revealed factor abundance. Therefore, the innumerable regression studies conducted over the past 30 years can be considered to provide reliable evidence concerning the validity of the factor abundance theory.

Paul Burkett, Robert C. Vogel; Financial Assets, Inflation Hedges, and Capital Utilization in Developing Countries: An Extension of McKinnon's Complementar

Abstract Explains how two features of regulatory process create a significant incentive for defense firms to choose inefficient production methods. Variations of the marginal impact of accounting cost on product prices; Calculating the cost of the product; Cost allocation; Costing manipulation; Defense procurement.

[Defense firms typically produce a large number of products. The purpose of this article is to explain how two features of the current regulatory process create a significant incentive for these multiple-product firms to choose inefficient production methods. The first feature is that the marginal impact of accounting cost on price varies significantly among products. Prices for a defense firm's products are set according to a rather unique process that combines elements of both competition and cost-based regulation. Defense firms typically produce some purely commercial products and prices for these products are competitively determined. Aside from standard off-the-shelf items such as army boots, most defense products are purchased from a sole source and thus their prices are nominally cost-based. In reality, the negotiated price is likely to be affected by other factors as well. In particular, in cases where closer substitutes exist or where an alternative source might not be prohibitively expensive, the potential cost of these alternatives plays a role. The important consequence of this is that the negotiated price will not necessarily decline or rise by a full dollar when the projected cost of production declines or rises by a dollar. In more competitive procurements where the cost of alternatives plays a stronger role, changes in projected accounting cost are less important. The second feature of the regulatory process concerns the method that defense firms are allowed to use to calculate the cost of each product. Following traditional commercial accounting practices, only a relatively small fraction of costs are directly charged to products. The remaining costs are grouped together into overhead pools and allocated across products usually in proportion to directly charged labor use. These two features create the following incentive problem. Given the first feature, the firm would like to be able to assign more of its costs to well-funded sole source procurements instead of to more competitive procurements or commercial products. The second feature provides a method for accomplishing this task. Namely, the firm can increase (decrease) the amount of overhead allocated to a contract by increasing (decreasing) the amount of direct labor used on the contract. This means that the firm will have an incentive to engage in pure waste by padding direct labor usage on contracts with cost sensitive revenues. It will also have the incentive to distort its input substitution decisions between labor and other inputs by using too much (too little) direct labor on contracts with cost sensitive (cost insensitive) revenues. Two major types of input substitutes for labor exist. The first is capital. Thus, we would expect the firm to purposely under-capitalize production of products with cost sensitive revenues and over-capitalize production of products with cost insensitive revenues. The second possible input substitute is material. For many subcomponents of a weapon, a firm has the potential option of subcontracting production to another firm or making the component in-house. Subcontracting will result in higher direct material costs for the firm but lower direct labor costs. Thus, engaging in more in-house production is essentially a way of substituting towards direct labor and away from direct material. In particular, then, we would expect the firm to purposely engage in too much in-house production for its products with cost sensitive revenue and too much subcontracting for its products with cost insensitive revenue. An important point to note about this incentive effect is that it does not require the firm to report any cost projections untruthfully. That is, in the behavior predicted by this article, the firm does not make money by projecting that costs will be high (in order to get a high price) and then actually having low costs. The firm actually spends all of the money that is charged as a cost. The profit occurs through shifting the assignment of these costs. The importance of this point is that auditing is very poorly equipped to deal with this type of behavior. Auditing is relatively good at determining whether the firm actually spent as much as it projected. However, it is relatively poor at determining whether any expenditure that actually occurred was necessary. Braeutigam and Panzar (1989), Brennan (1990), and Sweeney (1982) have analyzed models of public utility regulation where the utility has commercial business segments. They make the general point that, depending upon how costs are allocated, the firm may have an incentive to distort its output and/or input decisions in order to shift overhead to the regulated sector. However, none of these articles analyzes allocation schemes based on direct labor or any other input base. Braeutigam and Panzar (1989) and Sweeney (1982) consider allocation schemes based on units of output under the assumption that comparable units of output exist across different products. Brennan (1990) considers allocation schemes where each product is allocated a fixed, invariant share of overhead. Thus all of the predictions of this article regarding the particular sorts of input distortions one would expect to see in defense procurement are new to this article. Furthermore, on a technical level, the model of this article is also somewhat different because it considers a multiple product case where products are not necessarily either perfectly competitive or perfectly regulated and the level of competitiveness varies from product to product.]

This paper details resource expenditures on nonexchange, noncharity transfer activity in the United States in 1985. Expenditures designed to facilitate and inhibit nonexchange transfers, executed privately or through the state, are reported. The numbers indicate that individuals plausibly invested nearly a trillion dollars in transfer activity that year. Nominal GNP in 1985 was just over $4 trillion, which includes numerous transfer-related resource investments that arguably should be subtracted out. Transfer activity thus apparently constitutes a much larger fraction of all economic activity conducted in the United States than previously recognized.

Gerald R. Jensen, Donald P. Solberg, Thomas S. Zorn, Simultaneous Determination of Insider Ownership, Debt, and Dividend Policies, The Journal of Financial and Quantitative Analysis, Vol. 27, No. 2 (Jun., 1992), pp. 247-263