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Abstract: Does auditor independence improve earnings quality and, if so, is regulation necessary to realize such improvements? Popular characterizations of recent governance scandals answer "yes!", but lack support from scholarly investigations. This disagreement motivates our investigation of whether auditor independence affects earnings quality in ways that prior research would have missed, and what any such effect means for the efficiency-consequences of related governance regulations.
1. We relax a priori data-restrictions that ignore the potential for auditors' dependence on consulting fees to enhance earnings quality. 2. We measure unexpected accounting fees in a more defensible manner, and develop a matching estimator to examine whether fee disclosures improve asset-pricing efficiency; and
3. We empirically evaluate the potential for governance externalities to rationalize proscriptive regulations.
Our results offer some support for auditor independence improving earnings quality. Importantly, however, they also suggest that mandated fee disclosures exhausted regulatory opportunities to improve this dimension of corporate governance, and thus speak more directly than does the literature against Sarbanes-Oxley's proscription on jointly producing audit and non-audit services.
Auditor independence, earnings quality, corporate governance, externalities, disclosure mandates, Sarbanes-Oxley Act of 2002
Abstract: This paper examines whether firms jointly choose auditor-independence with alternative inputs to governance production. We find that auditor-independence is correlated with a number of alternative governance-producing mechanisms, and show that these results are unlikely to be artifacts of omitted variable bias. These findings (i) suggest that firm responses will tend to offset the intended governance enhancing consequences of any regulation that formally proscribes the level of an input to corporate governance production, such as the auditor independence provision of the Sarbanes-Oxley Act, and (ii) highlight how simple-sum indices of corporate governance can exhibit considerable bias.
Corporate Governance, Auditor Independence, Sarbanes-Oxley Act of 2002, Governance Indices
Abstract: Economists tend to agree that the recent cutting of dividends taxes will encourage investment and reduce financial distress. In addition to creating these benefits, however, the tax cut can also increase governance costs. For example, by removing a bias for leveraged capital structures, the tax cut foregoes debt's superiority on at least three dimensions: 1. Evaluating and monitoring demanders of financial capital; 2. Constraining managerial agents' from opportunistically employing capital market proceeds; and 3. Encouraging non-financial stakeholders (e.g., employees, suppliers) to make firm-specific investments. Moreover, because these privately produced services contribute to the integrity of broader financial markets (i.e., a public good), competitive forces may not fully counter the tax cut's governance consequences.
Dividends Tax, Corporate Governance
Abstract: Does auditor independence improve the quality of financial disclosures, and if it does, is regulation necessary to realize such improvements? Popular characterizations of governance scandals from the early 2000s answer, “Yes!” but lack support from scholarly investigations. This disagreement motivates our investigation of whether auditor independence matters in ways that prior research would have missed, and what any such effect means for the efficiency-consequences of related governance regulations.
1. We relax a priori data-restrictions that ignore the potential for auditors’ dependence on consulting fees to enhance the quality of earnings reports; 2. We measure unexpected accounting fees in a more firmly grounded manner, and develop a matching estimator to examine whether fee disclosures improve asset-pricing efficiency; and
Our results offer stronger support that auditor independence increases earnings quality on historically observable margins. More importantly, they also imply that an SEC requirement to disclose audit and consulting fees may have exhausted regulatory opportunities to improve this dimension of corporate governance, and thus speak more directly than does the literature against Sarbanes-Oxley’s subsequent proscription on jointly producing audit and non-audit services.
Abstract: Legislators are calling for a “systemic risk regulator”, in part to provide an early warning of financial conditions that threaten the real economy. To succeed, however, we need a forward-looking measure of systemic risk. Even more, we need a measure that varies with “pollution” from financial transactions, not private costs and benefits on which popularly cited measures (such as the TED spread) are based. Our article thus proposes a new contract, one that derives from financial correlations that emerge from systemically consequential actions (i.e., financial transactions that affect third parties), and leverages important advantages of information markets (namely, incentives for individuals who are closest to relevant information to rationally develop and truthfully reveal expectations). We also offer a statistical back-test of our proposed contract, and find evidence that it could have anticipated important changes in systemic risk over the past ten years. Finally, we consider how this type of contract can be implemented within existing information market regulations, and how information from trading the contract can improve conventional tools of financial regulation (e.g., bank examinations, capital requirements).
Systemic risk, financial contagion, information markets, financial regulation
Abstract: Empirical studies of the external effects of R&D suggest that both geographic and technological distance attenuate inter-firm spillovers from innovative activity. The results presented here indicate that the tendency for R&D spillovers to localize economic activity is conditional on the technological relation between spillover generating and receiving firms. The production function framework is generalized to control for correlation between measures of geographic and technological proximity. Coefficient estimates confirm that R&D spillovers are largest among technological neighbors. However, spillovers within narrowly defined technological groups do not appear to be attenuated by distance. Geographic proximity serves to attenuate only those inter-firm spillovers that cross narrowly defined technological boundaries.
R&D, Spillovers, Industrial Agglomeration, Geography, Empirical Studies
Abstract: Evidence is presented which suggest that an important measure of the apparent geographic localization of R&D spillovers may be an artifact of industrial agglomeration. A production function framework is used to examine the role of geographic and technological proximity for inter-firm spillovers from R&D. The largest spillovers are found to flow between firms in the same industry. However, spillovers within narrowly defined technological groups do not appear to be attenuated by distance. Geographic proximity does appear to attenuate spillovers that cross narrowly defined technological boundaries, suggesting these spillovers may play a role in the agglomeration of a diversity of industrial activity.
Abstract: We consider an environment in which participants make payments over a network and can invest in a technology that reduces the marginal cost of using the network. A network effect results in multiple equilibria; either all agents invest and usage of the network is high or no agents invest and usage of the network is low. The high-usage equilibrium can be implemented through introduction of a coordinator. Under monopoly network ownership, however, fixed costs associated with use of the network-specific technology result in a hold-up problem that implements the low-investment equilibrium. And even where subsidies can avoid such hold-up, optimal monopoly pricing of network usage may avoid investment in the network-specific technology if demand for on-network transactions is sufficiently inelastic.
Abstract: This book unifies deeply related topics in money and banking. By continually building on the assumption that economic actors are maximizers, it explains how monetary and financial services, as well as related governance mechanisms, influence economic performance. In this manner, Money, Financial Intermediation and Governance not only lets readers make sense of today's monetary authorities and financial markets, it also lets them see through superficial complexities to fundamental influences that will shape those organizations for years to come.
Mastering this analytical process is important for scholars and professionals in politics, law, and business, as well as individuals who are interested in their own financial security. Successful readers will enjoy an enduring ability to productively anticipate, respond to, and even shape macroeconomic and related politico-legal developments. This book's greatest contribution may thus be to help readers enjoy the lasting advantages of becoming careful thinkers.
Abstract: We examine incentives for network-specific investment and consider the implications for network governance. We model a two-sided market in which participants making payments over a network platform can invest in a technology that reduces the marginal cost of using the platform. A network effect results in multiple equilibria - either all agents invest and use of the platform is high or no agents invest and use of the platform is low. The high-use equilibrium can be implemented if commitment is feasible. When the platform cannot commit to usage fees, investment in the platform-specific technology will be held-up, thus implementing the low-investment equilibrium. As a result, governance structures necessary to achieve commitment will be preferred to those necessary merely to achieve coordination. For example, mutual ownership by users of a network platform may emerge where users face risk of ex post renegotiation. Such a governance structure will also be sufficient to avoid low investment attributable to the network effect.
Network, Hold-up, Commitment, Two-sided market, Payments
Abstract: In a simple search model of money, we study a special kind of memory that gives rise to an arrangement resembling a payment network. Specifically, we assume that agents can pay a cost to access a central database that tracks payments made and received. Incentives must be provided to agents to access the central database and to produce when they participate in this arrangement. We also study policies that can loosen these incentive constraints. In particular, we show that a "no-surcharge" rule has good incentive properties. Finally, we compare our model with that of Cavalcanti and Wallace.
payment networks, money, search
Abstract: We present an integrated summary of the various factors that contributed to shortages of electrical power in California in 2000. Several necessary conditions for the crisis are identified. We conclude that a sufficient remedy may be defined by policies that mitigate the limited incentives to invest in transmission capacity.
California Electricity Crisis, generation, transmission
Abstract: The global credit crisis provides new impetus for financial regulatory reform, and new risks for central bank independence. Because monetary policy is implemented using relatively blunt instruments, policy changes seldom result in narrowly defined winners and losers. In contrast, many aspects of financial regulation result in specific benefits and costs for particular firms and types of households. To the extent that specificity of policy incidence reduces the cost of collective action, expanding the Fed's scope of authority over financial regulatory policy can increase risks to central bank independence, and effective monetary policy as a result.
Federal Reserve, collective action, Treasury Blueprint, Central Bank Independence, Monetary Policy, Financial Regulation
Abstract: This study investigates the concept that, although a large population is often regarded as a prerequisite for innovation, less populous regions can actually compete in more mature technological fields.Thick markets and knowledge spillovers make populous regions more conducive to innovation, but the advantages offered by large populations are found to be greater for innovations in new technological fields than for innovations in mature technologies. An analysis of data from the National Bureau of Economic Research (NBER) on patent activity from 1990 to 1999 in 2,295 geographic areas supports the hypothesis that researchers in mature technological fields manage to avoid the high costs of operating in the city by locating in sparsely populated areas. Additional NBER data on patent activity between 1963 and 1999 suggest that innovations in later stages of the technological life cycle generally originate from less populous areas, and a report on the average patent originality coefficient by population level reveals that innovation in sparsely populated areas takes place in increments. While it may appear that innovations in mature technological classes arise from less populous places because these classes happen to be related to natural resource and agricultural industries, a look at the evolution of patent location suggests that, regardless of industry, patent activity tends to move into less populated locations as a patent class matures.The location of innovation depends on technological maturity.(SAA)
National Bureau of Economic Research (NBER), Population size, Firm location, Patents, Regions, Rural areas, Technologies, Technology innovation, Urban areas
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