Abstract In this article we develop a model to analyze patent-protected R&D investment projects when there is (imperfect) competition in the development and marketing of the resulting product. The competitive interactions that occur substantially complicate the solution of the problem since the decision maker has to take into account not only the factors that affect her/his own decisions, but also the factors that affect the decisions of the other investors. The real options framework utilized to deal with investments under uncertainty is extended to incorporate the game theoretic concepts required to deal with these interactions. Implementation of the model shows that competition in R&D, in general, not only increases production and reduces prices, but also shortens the time of developing the product and increases the probability of a successful development. These benefits to society are countered by increased total investment costs in R&D and lower aggregate value of the R&D investment projects.

Assessing the predictive ability of behavioral finance theories using out-of-sample data is important. Otherwise, the potentially boundless set of psychological biases underlying the behavioral explanations for security price behavior can lead to overfitting of theories to data. We test pricing effects attributed to two psychological biases, representativeness and conservatism, which underlie many behavioral finance theories. Using trends and consistency of accounting performance, we look for the pricing consequences of representativeness and conservatism. We find mixed evidence consistent with behavioral finance. Specifically, the theories based on representativeness are not supported, but we find some evidence of the pricing implications of conservatism.

This paper presents a model of an entrepreneur's acquisition and voluntary disclosure of precision information as a supplement to primary disclosure of an estimate of a tradable asset's value. Our analysis shows that equilibrium disclosure can be characterized by four regions. For estimates above (below) the prior expectation of the asset value, the entrepreneur discloses only high (low) precision information. The main idea is to enhance (diminish) confidence in estimates that improve upon (detract from) prior beliefs. We further show that the entrepreneur over-invests in the acquisition of precision information due to the option value of discretion over disclosure.

Many believe that a key innovation by the Grameen Bank is to encourage borrowers to help each other in hard times. To analyse this, we study a mechanism design problem where borrowers share information about each other, but their limited side contracting ability prevents them from writing complete insurance contracts. We derive a lending mechanism which efficiently induces mutual insurance. It is necessary for borrowers to submit reports about each other to achieve efficiency. Such cross-reporting increases the bargaining power of unsuccessful borrowers, and is robust to collusion against the bank.

Governance problems have a direct and immediate impact on the effective discount rate guiding investment decisions. Information from a transformed net present value rule and variation in firm-level panel data “reveal” the effective discount rate influencing investment. For the firms most likely to be affected by Jensen agency problems, investment behavior appears to be guided by discount rates less than the market rate by 350–400 basis points. This wedge is reduced for firms with a concentrated ownership structure. Firms facing free cash flow problems have a stock of fixed capital approximately 7–22% higher than would prevail under value maximizing behavior.

Managers prefer investors who share similar expectations of their firms' prospects. Instead of taking the distribution of investor types as given, we investigate the question of how the managers may be able to effect a change in the pattern of ownership in a world where outside shareholders hold heterogeneous expectations. Under the requirements that the mechanism is costless to the firm and involves no initial cash transfer among the shareholders, the solution is a menu of securities in the form of sidebets among the shareholders. Ex post, the mechanism allows the high-valuation investors to own a greater proportion of the firm and be rewarded with a greater share of the firm's wealth gains.

We report that insurance firms manage loss reserves to avoid violating certain test ratio bounds (known as IRIS ratios) that are used by regulators for solvency assessment. In our sample, almost two-thirds of the firms that would violate four or more IRIS ratios successfully adjust reserves to reduce the reported number of violations to less than four. This finding is significant because four violations usually trigger regulatory intervention. Our results indicate that non-earnings goals are an important influence on discretionary accounting choice. They also suggest that reserve manipulation can postpone needed regulatory intervention, sometimes for an extended period.

Reviewers use expectations about the client and preparer to help form perceptions of the probability of preparer error and relative accountability to the client and financial statement users (Gibbins and Trotman 2002; Rich et al. 1997b). Experimental findings suggest these perceptions interact to affect reviewers' agreement with the preparers' work and decisions about the amount of preparer follow-up work required. Further, the nature of reviewer cognition, as measured by the relative proportion of critical and supportive reviewer elaboration explains a significant portion of the effect of these perceptions on reviewer judgment and decisions. Elaboration is a stage of reviewers' judgment and decision-making processes in which the reviewer assesses the strengths and weaknesses of the preparer's work (Petty and Cacioppo 1986; Rich et al. 1997b; Lerner and Tetlock 1999). Although the extent of reviewer elaboration is also affected by expectations about the client and the preparer, extent of elaboration does not explain a significant portion of the effect on reviewer judgment. These findings increase our understanding of how and why expectations of the client and preparer interact to affect reviewer judgments and decisions.