Malthusian theory asserts that high population growth in poor countries retards economic development. 2 authors Simon and Pilarski have recently challenged this theory on the basis of their own research; it is their contention that previous studies of population growth and education (1 of the principal modes by which the Malthusian mechanism is assumed to operate) have been flawed. The defect is felt to lie in the assumption of simple rather than partial associations of the 2 variables education and population growth. On the basis of their tightened specifications they have found demographic variables to be nonsignificant in explaining educational expenditures per child once other relevant regressors have been introduced. Similarly little effect of the demographic variable on primary and tertiary school enrollment rates were found although an effect for secondary school enrollment rates was found. On examination of the theoretical framework and the several explanatory variables however the author concludes that a crucial variable which is sure to have a vital bearing on the conclusions reached has been misspecified in the equations. Further the author asserts that a more thorough specification of the tests of the hypothesis (i.e. that high population growth retards educational investment) actually provides additional support for the Malthusian conclusion on educational expenditures despite unpromising initial indications.

To draw conclusions about the information content of audit reports, one must isolate the effects of information conveyed specifically by audit-report components of aggregate signals. To do so, the information conveyed by other components of the aggregates must be controlled. This paper argues that, for most types of audit reports, the necessary control cannot be exercised with security-price research methods Accordingly, some inappropriate inferences have been drawn about the information content of certain types of opinions. Research strategies to provide and implement the necessary control are suggested.

Sampling, Upper precision limit, Internal control, Finite Bayesian procedure

Son-Nan Chen, William T. Moore, Investment Decisions under Uncertainty: Application of Estimation Risk in the Hillier Approach, The Journal of Financial and Quantitative Analysis, Vol. 17, No. 3 (Sep., 1982), pp. 425-440

N the last decade several papers have enriched the theory of pricing. Kamien and Schwartz (1971), Gaskins (1971), Baron (1973), and Flaherty (1980)' have made major contributions with dynamic and stochastic models. They predict important new implications for pricing and afford an opportunity for more refined tests of this behavior. We test these new implications and provide additional confirmation of pricing. Insights into how our tests add to the evidence can be seen by briefly examining the theories and the earlier tests. Bain's (1956) static model predicts that monopolists in markets with high barriers to entry will limit to forestall entry, rather than charge a short-run maximizing price which would encourage entry and lead to lower future profits. It also predicts that monopolists facing low barriers will not price, because their opportunity cost of short-run profits forgone to forestall entry is great. When this opportunity cost exceeds the savings from reduced entry, firms prefer the short-run maximizing price. Conversely, when barriers are high, the opportunity cost of forestalling entry is low and firms price. The new models predict intermediate results. By definition, as price exceeds the level at which entry is forestalled, the entry rate or its probability increases above zero. The new theories assume that when price is slightly above the entryforestalling level, a flood of entry is not induced but a gradual increase in its rate or probability occurs. Firms may thus price to regulate the entry rate or probability, not forestall entry. Firms select intermediate prices, setting the marginal entry cost equal to the marginal benefit of a higher price. They reflect Bain's conclusions in the sense that when barriers are low, monopolists may charge high prices, letting entry erode future profits. However, if entry barriers are at intermediate levels, a monopolist's price may be lower. At yet higher barriers optimal prices climb, but often remain above the entry forestalling price.2 These models predict that many industries with high concentration would initially have high profits, but that entry would lead to reduced concentration and profits over time. This accords with Bain's (1970) finding that high concentration tends to erode over time and Brozen's (1971) finding that high profits in initially highly concentrated industries tend to erode over time. Many empirical cross-sectional studies show that measured profit rates are positively correlated with measures of structure-entry barriers and concentration (Weiss, 1974). A related literature has examined entry rates. Harris (1973) and Orr (1974) show entry rates rising as pre-entry profits are higher and falling as barriers are higher. Both the methodologies and the interpretations of the profit rate studies have been challenged. Brozen (1969, 1971) argues that with correct specification, they disintegrate. However, his tests would reject pricing if profits eroded over time as the new theories predict. Demsetz (1973) offers another rebuttal. He notes that firms in an industry may experience efficiencies (i.e., scale economies, superior inputs, or superior foresight). Superior firms will be winners in the market, earning higher profits and expanding their market shares. Industries with such superior firms would then be characterized by high concentration and high profits. Industries without such superior firms should have neither high profit rates nor high concentraReceived for publication April 1, 1981. Revision accepted for publication January 27, 1982. * Cornell University and Oklahoma State University, respectively. We are indebted to Joe Bain, William Greene, N. Kiefer. J. D. Rea, R. Reynolds, and anonymous reviewers for useful comments. Related results appear in J. Shaanan (1979). 1 A related set of extensions have posited other approaches to entry deterrence (Spence, 1977; Salop, 1979; and Kirman and Masson, 1980). 2 This is consistent with Gaskins (1970) but not Gaskins (1971), which is a special case in which fringe firms may be driven out.

This paper examines the effect of alternative bond indenture provisions on the allocation of risk among the firm's claimants. The approach taken here differs from that of earlier studies in that risk allocation is examined while the firm's leverage (in market value terms) is held constant. In this context, four indenture provisions are examined: (1) the time to maturity, (2) the promised payment schedule, (3) financing restrictions and (4) priority rules. It is concluded that risk is transferred from stockholders to bondholders as the time to maturity and promised payment increase appropriately. Furthermore substitution of longer-term debt for an equal amount of shorter-term debt also increases the risk to bondholders while decreasing the risk to stockholders. The analysis shows that a coupon bond can be represented by a unique discount bond with the same risk and value. This permits the characterization of the effective maturity of a risky debt issue, a concept analogous to the stochastic duration of a default-free coupon bond. These results are shown to be independent of the means used to finance the debt issue. Finally, it is concluded that the relative risk associated with different bonds issued by the same firm cannot be determined by the structure of priority rules alone. It is also necessary to consider the timing of the promised payments compared to that of the other debt issues in the firm's capital structure.