By analyzing a carefully constructed earnings announcements sample that discloses a ‘pro forma’ earnings number, Bhattacharya et al. (J. Account. Econom. 36 (1–3) (2003)) contribute to recent research documenting increasing differences between earnings as defined by generally accepted accounting principles (GAAP) and alternative earnings definitions followed by capital markets. The paper provides interesting descriptive data on pro forma earnings per share relative to both GAAP earnings per share and actual earnings per share as tracked by I/B/E/S. Also, the authors conduct tests of the relative informativeness and persistence of these three earnings measures. Econometric and data limitations inhibit the inferences that can be drawn from some of these tests.

This paper investigates the relation between analyst characteristics (number of analysts following a firm and their forecast dispersion) and market liquidity characteristics (bid‐ask spreads and depths and the adverse‐selection component of the spread). Prior research has found contradictory results on the relation between analyst following and market liquidity and has offered differing theories on how analysts affect liquidity. While prior research has posited analysts as proxies for privately informed trade or as signals of information asymmetry, I hypothesize that analysts provide public information, implying that analyst following (forecast dispersion) should have a positive (negative) association with liquidity. Cross‐sectional simultaneous estimations provide support for this hypothesis. The results are both statistically significant and economically important. Granger causality tests indicate that analyst characteristics lead market liquidity characteristics. These results clarify the role of analysts in providing information to financial markets and highlight benefits of increased analyst following.

In this study I investigate the relation between firm‐level insider‐trading restrictions and executive compensation. Using a trading‐window proxy for the existence of such restrictions, I test predictions that insiders will demand compensation for these restrictions and that firms will need to increase incentives to restricted insiders. I find that firms that restrict insider trading pay a premium in total compensation relative to firms not restricting insider trading, after controlling for economic determinants of pay. Furthermore, these firms use more incentive‐based compensation and their insiders hold larger equity incentives relative to firms that do not restrict insider trading. These results hold after controlling for the endogenous decision to restrict insiders and are consistent with the notion that insider trading plays a role in rewarding and motivating executives.

We examine the link between the excess value of a diversified firm and the value of its internal capital market. Subsidies to small financially constrained segments with good relative investment opportunities significantly increase excess value, while transfers of resources from segments with good relative investment opportunities significantly decrease excess value. Of interest is that subsidies to small financially constrained segments with poor relative investment opportunities also significantly increase excess value. However, there is little evidence that this result depends on the diversity of a firm's investment opportunities. We conclude that financing constraints drive the relationship between the internal capital market and firm value.

A major criticism of corporate boards of directors is the absence of objectivity in appraising and monitoring management [The Business Lawyer, 48 (1992) 59–77]. Recently, Shivdasani and Yermack [Journal of Finance LIV (5) (1999) 1829] find that CEO involvement in board selection is associated with a greater proportion of gray and a lower proportion of outside director appointments. The question addressed here is whether corporate performance, as measured by Tobin's q, is affected by management influence in the board nominating process. Agrawal and Knoeber [Journal of Financial and Quantitative Analysis, 31 (3) (1996) 377] find interdependence among seven mechanisms to control agency problems between managers and stockholders. Their finding suggests that cross-sectional OLS regressions of firm performance on a single mechanism may be misleading and that interpretation of multiple regression methods is weakened by multicollinearity. In this study, a principal component analysis (PCA) is employed to mitigate such problems. An index of management involvement in director nomination is constructed for a sample of 106 firms from 1989 to 1992 via a PCA method utilizing selected governance mechanisms within the nominating process. We find a positive relationship between management participation in the director selection process and corporate performance.

This paper develops a tractable incomplete-markets model of economic growth in which households invest in risk-free physical capital and risky human capital. The paper shows that a reduction in uninsurable idiosyncratic labor income risk decreases physical capital investment, but increases human capital investment, growth, and welfare. A quantitative analysis based on a calibrated version of the model reveals that these effects are substantial and of the same order of magnitude as the effects of distortionary income taxation. The analysis further suggests that government-sponsored severance payments to displaced workers increase growth and welfare even if these payments have to be financed through distortionary income taxation. I.