Canada has a universal social assistance program that is almost completely administered through the federal Canada Assistance Program. However, provinces determine the levels of assistance for various groups eligible for welfare. This article exploits the variation in payments and uses microdata to estimate the effect of changes in welfare benefits on welfare participation, single parenthood, births out of wedlock, divorce, and labor force participation among low-income women. In Canada, it would appear that welfare benefits influence these decisions.

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This article provides an overview of the Canadian Unemployment Insurance (UI) program, including its evolution, salient features, relative size, and knowledge about its labor market impacts. Understanding of these impacts is limited, and we conclude that an "event-study" approach is a promising way to further this knowledge. We examine the effects of the 1976 UI disentitlement of the elderly on their labor force behavior and find evidence of significant adverse selection effects. Interactions with the public pension system suggest that poverty among the elderly could be best addressed through changes in programs other than UI.

The Myers and Majluf (1984) model predicts a nonpositive price reaction to an announcement of a new issue of equity. This paper shows that the Myers and Majluf result is a direct outcome of their assumption that all potential projects facing the firm have a nonnegative net present value. Refining the Myers and Majluf model, by allowing for the realistic possibility of potential projects having negative net present values, leads to different predictions. The refined model predicts positive as well as negative stock price responses, consistent with recent empirical evidence concerning the stock price effects of new stock issues.

This paper investigates the warrant pricing abilities of dilution-adjusted versions of the Black-Scholes and Jump-Diffusion option pricing models. Because of the typically long lives of warrants, their pricing is hypothesized to benefit from use of the Jump-Diffusion model, which relaxes the Black-Scholes restriction against stock price jumps. Empirical results indicate that while the Black-Scholes model almost uniformly provides more efficient estimates, the Jump-Diffusion model generally provides less biased estimates of market value. Particularly for the valuation of out-of-the-money warrants and warrants on stocks with a history of large and/or frequent jumps, the Jump-Diffusion model may be preferred.

This paper considers tests for parameter instability and structural change with unknown change point. The results apply to a wide class of parametric models that are suitable for estimation by generalized method of moments procedures. The asymptotic distributions of the test statistics considered here are nonstandard because the change point parameter only appears under the alternative hypothesis and not under the null. The tests considered here are shown to have nontrivial asymptotic local power against all alternatives for which the parameters are nonconstant. The tests are found to perform quite well in a Monte Carlo experiment reported elsewhere. Copyright 1993 by The Econometric Society.

First-order autoregressive/unit root models with independent identically distributed normal errors are considered, including those without an intercept, those with an intercept, and those with an intercept and time trend. The autoregressive parameter is allowed to lie in the interval (-1, 1], which includes the unit root case. Exactly median-unbiased estimators and exact confidence intervals of the autoregressive parameter are introduced. Corresponding exactly median-unbiased estimators and exact confidence intervals are also provided for the impulse response function, the cumulative impulse response, and the half life of a unit shock. An unbiased model selection procedure is discussed. The introduced procedures are applied to several data series. Copyright 1993 by The Econometric Society.

Abstract. This paper extends the growing literature on factors affecting cross‐sectional and intertemporal variation in earnings response coefficients. It tests the empirical implications of recent theoretical work by Choi and Salamon (1989) and Holthausen and Verrecchia (1988), who model the degree of price adjustment associated with earnings announcements as a function of the amount of noise or garbling in the accounting earnings signal relative to valuation‐relevant cash flows or dividends. The particular earnings measurements considered relate to U.S. multinational companies and to the differences in income determination under Statement of Financial Accounting Standards (SFAS) No. 8 and SFAS No. 52. The study finds a modestly smaller relative price adjustment for a given amount of unexpected earnings for multinational firms than for nonmultinationals during the SFAS No. 8 period. This finding is consistent with multinationals producing “noisier” earnings signals during this time period. However, several indirect measures suggest that there was greater prior probability uncertainty associated with the future cash flows or dividends of the nonmultinational sample. Accordingly, this cannot be ruled out as a competing explanation for the observed differences in the market's response to earnings signals during the SFAS No. 8 period. Following the implementation of SFAS No. 52 , the earnings response coefficient increased substantively for firms whose accounting for translation gains or losses was most affected by this standard. These results suggest that the earnings measurements produced under SFAS No. 52 were perceived by market participants to be of higher quality (less noisy) than those produced under SFAS No. 8. The framework and analysis in this paper hold promise for investigating the relative informativeness of earnings signals produced under alternative income determination rules. Résumé. Les auteurs apportent leur contribution personnelle aux publications de plus en plus nombreuses portant sur les facteurs qui touchent la variation transversale et temporelle des coefficients de réaction aux bénéfices. Ils vérifient les conséquences empiriques des travaux théoriques récents de Choi et Salamon (1989) et de Holthausen et Verrecchia (1988), qui modélisent le degré d'ajustement du cours des valeurs associé aux annonces de bénéfices comme étant fonction de la quantité de parasites ou de l'importance du brouillage dans le signal que constituent des bénéfices comptables par rapport aux flux monétaires ou aux dividendes pertinents à l'évaluation. Les mesures particulières des bénéfices auxquelles s'intéressent les auteurs sont celles de multinationales des États‐Unis et font état de la variation des bénéfices, selon qu'ils sont évalués conformément au SFAS no 8 ou au SFAS no 52. Pour un montant donné de bénéfices inattendus, les auteurs constatent un ajustement relatif du cours des valeurs légèrement plus faible dans le cas des multinationales que dans celui des entreprises d'envergure plus modeste, au cours de la période d'application du SFAS no 8. Cette constatation est conforme à l'hypothèse voulant que les multinationales aient produit des indicateurs de bénéfices plus « brouillés » au cours de cette période. Toutefois, plusieurs mesures indirectes donnent à penser qu'il existait une incertitude plus grande quant à la probabilité a priori des flux monétaires ou des dividendes futurs dans l'échantillon des entreprises d'envergure plus modeste. Les auteurs ne peuvent donc écarter cette hypothèse à titre d'explication concurrente des différences observées dans la réaction du marché aux indicateurs de bénéfices, au cours de la période d'application du SFAS no 8. À la suite de l'instauration du SFAS no 52, le coefficient de réaction aux bénéfices a sensiblement augmenté dans le cas des entreprises dont la méthode comptable relative à la conversion des gains et des pertes était davantage touchée par cette norme. Ces résultats laissent croire que les mesures des bénéfices conformes au SFAS no 52 ont été perçues par les intéressés comme étant de plus grande qualité (c'est‐à‐dire moins brouillées) que les mesures conformes au SFAS no 8. Le cadre de référence et l'analyse contenus dans cet article sont prometteurs pour l'analyse de la qualité relative de l'information livrée par les indicateurs de bénéfices conformes à d'autres règles d'évaluation des bénéfices.

This paper provides a model of how borrowers with private information about their credit prospects choose seniority and maturity of debt. Increased short-term debt leads lenders to liquidate too often. It also increases the sensitivity of financing costs to new information, although better-than-average borrowers desire information sensitivity. The model implies that short-term debt will be senior to long-term debt, and that long-term debt will allow the issue of additional future senior debt. The model also has implications on the structure of leveraged buyouts and on how various types of lenders respond to potential defaults.

[Some corporate decisions increase stockholder wealth while reducing the wealth of bondholders. When wealth transfers are large enough, stock prices can rise from decisions that reduce firm value. Yet, rational bondholders understand that actions taken after issuance will tend to increase stockholder wealth, and they forecast the value effects of future decision when bonds are sold. In an efficient market, the bond price at issuance reflects an unbiased forecast of the effects of such future actions. Thus, on average, bondholders will not suffer losses, although the firm (and hence its stockholders) must bear the costs of nonoptimal decisions motivated by wealth transfers from debtholders. Therefore, effective control of this bondholder-stockholder conflict can increase firm value. Bond covenants that constrain activities such as asset sales or dividend payments are examples of voluntary contracts that can reduce the costs generated when stockholders of a levered firm follow a policy that deviates from maximization of the firm's value. The cost-reducing benefits of covenants accrue to the firm's owners through the higher price the bonds command when issued. Furthermore, if covenants lower the costs that bondholders incur in monitoring managers, these cost reductions also are passed to stockholders through higher bond prices at issuance. Therefore, in structuring an optimal debt contract, the firm's managers face a trade-off between increased proceeds from the debt issue and reduced flexibility with respect to future policy choices. The constraints imposed through covenants are frequently specified in terms of accounting numbers. Debt covenants that employ accounting numbers are conventionally divided into (1) affirmative covenants, which require firms to maintain specified levels of accounting-based ratios, and (2) negative covenants, which limit certain investment and financing activities unless specified accounting-based conditions are met. For example, negative covenants restrict the payment of dividends, the disposition of assets, the issuance of additional debt, and merger activity; affirmative covenants specify minimum working capital and net worth requirements. Although standard covenants in debt issues require that accounting numbers be consistent with generally accepted accounting principles (GAAP), they normally do not prohibit managers from switching between accepted methods. In some bank-loan agreements, firms are required only to provide unaudited, internally generated financial statements, but the contract also requires the firm to maintain substantially the same set of GAAP. If a change becomes necessary, the bank must be notified in writing prior to the change with the reasons detailed (see Zimmerman 1975). Since different accounting techniques imply different accounting numbers, firms have incentives to relax onerous constraints through the choice of accounting techniques. Academic accountants have devoted substantial effort to obtain empirical evidence on the importance of debt agreements in determining accounting policy. (Watts and Zimmerman [1986] and Christie [1990] provide reviews.) Initial studies adopted indirect methods to account for the effect of debt covenants on accounting decision by using the firm's debt-equity ratio as an explanatory variable in cross-sectional regressions. This ratio is a proxy for closeness to covenant constraints, as well as for the expected costs should a breach occur. Duke and Hunt (1990) and Press and Weintrop (1990) offer evidence to support the use of the debt-equity ratio as a proxy for the closeness to debt covenant constraints. Christie (1990) documents significant support for this debt hypothesis by aggregating cross-sectional studies of accounting choice, generally concluding that the larger the firm's debt-equity ratio, the more likely the firm's managers are to select accounting procedures that shift reported earnings to the current period from future periods. Researchers have generally interpreted support for this debt hypothesis as evidence that managers act opportunistically. However, Watts and Zimmerman (1990) question whether the documented association is misinterpreted by researchers. Rather than reflecting managerial opportunism, the evidence may reflect the association among firms' investment opportunity sets, financial policies, and their efficient set of accounting methods. Even in theory, it is difficult to distinguish between opportunism and contracting efficiency as determinants of accounting policy choice. Given positive contracting costs, there will be a positive efficient amount of opportunism. Distinguishing between opportunism and efficiency is difficult in empirical work also. For example, a significant relation between accounting policy choice and leverage could indicate that managers of firms with high leverage act opportunistically in selecting accounting techniques to reduce costs imposed by constraints in debt covenants. Alternately, it could indicate that corporations for which a particular set of accounting techniques is efficient also tend to be those firms for which high leverage is efficient. Firms examined in these cross-sectional studies are not necessarily close to their debt covenant constraints at the date examined. When firms are not close to debt covenant constraints, managerial opportunism is a less plausible explanation for the documented association between leverage and accounting choice. Yet, since it is costly for firms to switch back and forth between accounting procedures, firms that switch accounting methods to delay default are likely to continue to employ income-increasing accounting procedures, even if default is no longer likely (see Sweeney 1992). A firm's current accounting policies thus should depend on its historical choices and the time series of variables hypothesized to influence accounting policy. Therefore, cross-sectional studies do not provide the most direct or most powerful tests of the relation between accounting choice and debt contracts. Recent studies overcome a number of limitations inherent in cross-sectional analyses by examining accounting-based defaults in debt covenants. Careful examination of the default process, its causes and cures, provides evidence on important aspects of the lending process. In this article, I review this developing literature to provide a richer understanding of the costs of leverage. These costs have important implications. For accountants, they offer potential explanations of a firm's accounting policy choice; for financial economists, they enrich our understanding of the firm's optimal capital structure.]