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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: External agents are frequently characterized as necessary for efficiency in team production settings. At the same time, these agents must be constrained from opportunistically exercising their enforcement capabilities. I argue that collective action costs and formal institutions (e.g., golden parachute agreements) can act as substitute factors in producing this constraint. The incidence of golden parachutes in a sample of S&P 500 firms is consistent with this conjecture: golden parachutes are more likely in firms with concentrated ownership. Interpreted in this light, golden parachutes enhance efficiency by increasing the credibility with which owners can commit against opportunism.
Credible commitment, Ownership structure
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: High levels of executive pay, accounting irregularities, and historic financial market turmoil are fueling calls for a stronger shareholder-voice in corporate governance. While this strengthening can reduce important agency costs, however, it can also go too far, destabilizing business strategies and weakening contracts with other stakeholders. This article reviews evidence from the corporate finance literature that these risks are more than hypothetical, as well as the social choice literature implying that corporate governance likely benefits from a concentration of authority in management. While political pressure is building for increased shareholder-accountability, mandating that increase may weaken an already strong legal foundation for stable and productive business associations.
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: History's societies vary on numerous dimensions, but appear relatively homogenous in how they distribute socioeconomic status across sexes. This homogeneity begs the question of whether forces that are robust to formal and informal institutions influence sex differences in status. We address this question by empirically evaluating evolutionary models of hierarchical attainment where sex-differences in risk-taking play an axiomatic role. These models imply that (1) winner-take-all games favor males, but (2) successful females maintain greater skill on average. We find support for these implications in how the sex-composition of national legislatures differs across electoral mechanisms (i.e., majoritarian chambers employ a significantly greater proportion of males) and how US Representatives' re-election prospects differ by sex (i.e., females enjoy significantly longer durations). These results cannot easily be dismissed as artifacts of endogeneity bias, and alternative models can (at best) rationalize our cross-sectional or time series results, but not both.
Winner-take-all games, risk preferences, electoral rules, female representation, affirmative action
Abstract: Local exchange carriers maintain significantly smaller capital stocks in states that restrict campaign contributions. This relationship is difficult to rationalize as (i) an artifact of endogeneity bias or (ii) evidence that restrictions constrain producers' monopolistic opportunities. Instead, it finds a robust explanation in standard political economy models - i.e., restricting campaign contributions can retard economic performance by facilitating consumers' monopsonistic ambitions, weakening regulatory commitments, and easing the expropriation of real options.
Campaign Finance Laws, Regulatory Capture, Credible Commitment, Real Options, Competition Policy, Economic Performance
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: Being careful about the potential for endogeneity bias, I find robust evidence that "institutions for private property" share a more fundamental relationship with health expenditures than does national income. This research should interest a wide audience. First, health scholars may be interested in its relatively careful estimate of income's relationship to health spending. Second, institutions and commitment scholars should be interested in its evidence of institutions' primacy in a heretofore overlooked, but theoretically and substantively attractive, application. Finally, policy entrepreneurs may find important the implication that reforming governance structures can be more productive than is directly funding health services. A useful model of the macroaspect or even microaspects of an economy must build the institutional constraints into the model. (North, 1990, p. 112)
Abstract: Health expenditures scholars argue that cross-country variation in health spending is largely attributable to differences in national income. Institutions and commitment scholars, on the other hand, find that institutions for private property (e.g., systems of checks and balances) can significantly expand an economy's production possibilities. I synthesize and extend these results by employing new methods to examine a large cross-country dataset of health expenditures, national incomes, and institutional indexes. My main result - i.e., that institutions for private property exhibit a more fundamental relationship with health expenditures than does national income - should interest a wide audience. First, health expenditures scholars may be interested in the relatively careful estimates of aggregate incomes' relationship to health spending. Second, institutions and commitment scholars should be interested in this result's ability to evidence institutions' primacy in a heretofore overlooked, but theoretically and substantively attractive, application. Finally, health policy entrepreneurs may find important the implication that reforming governance structures can be more productive for advancing health than is directly funding associated services.
Institutions, Commitment, Endogenous Growth, Health Expenditures
Abstract: Electoral mobility (i.e., individuals' propensity to vote in elections) is popularly cited as reflecting a polity's health. Increased mobility can, however, diminish economic performance. For example, while mobile electorates can check producer monopolies, they can also facilitate consumer monopsonies and weaken regulatory commitments. Looking at a relatively controlled setting (i.e., the US local exchange sector), I find evidence that electoral mobility may have diminished economic performance through such channels. Moreover, I encounter considerable difficulty when attempting to dismiss this evidence as either an artifact of endogeneity bias or as support for an alternative normative inference.
Electoral Institutions, Voter Turnout, Regulatory Capture, Regulatory Commitment, Telecommunications Policy, Economic Performance
Abstract: Producers of local exchange services maintain significantly smaller capital stocks in states that elect public utility commissioners (PUCs). This relationship is difficult to rationalize as (i) an artifact of endogeneity bias or (ii) evidence that elected regulators constrain producers' monopolistic opportunities. Instead, it finds a robust explanation in standard political economy models - i.e., electoral accountability can facilitate consumers' monopsonistic ambitions, weaken regulatory commitments, and ease the expropriation of real options.
Democracy and economic performance, regulatory capture, credible commitment, telecommunications policy
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: 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: Electoral constituencies recognize favorable policy outcomes in high-turnout jurisdictions. In this article I evaluate whether underlying institutions might provide a finer explanation of this relationship. To do so I formally examine variation in telecommunications policy across U.S. states. The resulting evidence is consistent with residential customers recognizing more favorable policy when institutions reduce voting`s resource cost (measured by registration rules) or increase its nonpecuniary benefit (measured by Perot support). Measures of either force explain significantly more variation in the present data than does a measure of actual participation (i.e., turnout).
Abstract: Electoral constituencies recognize favorable policy outcomes in high-turnout jurisdictions (Key 1984 [1949]; Hamilton 1993; Fleck 1999). In the present paper, I evaluate whether underlying institutions might provide a finer explanation of this relationship. To do so, I formally examine variation in telecommunications policy across US states. The resulting evidence is consistent with residential customers recognizing more favorable policy when institutions reduce voting's resource cost (measured by registration rules) or increase its non-pecuniary benefit (measured by Perot-support). Measures of either force explain significantly more variation in the present data than does a measure of actual participation (i.e., turnout).
collective action, electoral institutions
Abstract: Drawing on a unique data set that matches legislative votes on the Confederate flag to electoral support for an anti-miscegenation law, I find evidence that legislators with "anti-miscegenation" constituents are the flag's most likely supporters. To the extent that opposing the right to marry across races reveals a preference for discrimination, support for the flag appears to have lacked motivation from an unbiased Southern heritage.
Confederate battle flag, southern heritage, racial bias, discrimination
Abstract: We empirically evaluate whether a hospital's organizational form (i.e., for-profit vs. not-for-profit or public) affects its operational scope (i.e., distribution of supplied medical procedures). Our results suggest that operational scope depends more heavily on demographic characteristics of local populations than on causal forces from organizational form per se. This suggestion is consistent with differences in objectives (e.g., altruistic motives) ultimately exerting a stronger influence on operational scope than does the organizational advantage of not-for-profits in producing higher levels of non-contractible quality. It also offers information about how the availability of different medical services might change if the hospital sector continues its trend toward for-profit organizational forms. Here, our evidence suggests that hospital conversions to for-profit status are less likely to alter the mix of available services than do outright exits of not-for-profits. Taken together, these results should appeal to readers who are broadly interested in the relationship between industrial organization and the real economy, and particularly interested in competition and health policy.
Hospital industry, organizational form, scope of operations, medical procedures
Abstract: Received evidence suggests that changes in appointer- and overseer- preferences influence monetary policy (i.e., partisan heritage matters). Evidence presented here, on the other hand, is consistent with changes in the cost of pursuing a common preference influencing policy. I draw this evidence from a panel of Federal Open Market Committee (FOMC) votes and find support for the following conclusions: (1) Federal Reserve Board (FRB) governors who were nominated and confirmed by the same party (Republican or Democrat) prefer significantly looser policy than do other FOMC members. (2) Monetary policy is significantly looser when either party controls the oversight mechanism (i.e., the presidency and Senate) than when control is split. (3) Oversight acts less forcefully on district bank presidents than on FRB governors. In short, the present evidence suggests that political agents from both parties prefer loose money and pursue this preference more efficiently when their parties are aligned.
Abstract: Received evidence suggests that changes in appointer- and overseer-preferences influence monetary policy (i.e., partisan heritage matters). Evidence presented here, on the other hand, is consistent with changes in the cost of pursuing a common preference influencing policy. I draw this evidence from a panel of Federal Open Market Committee (FOMC) votes and find support for the following conclusions. 1. Federal Reserve Board (FRB) governors who were nominated and confirmed by the same party (Republican or Democrat) prefer significantly looser policy than do other FOMC members. 2. Monetary policy is significantly looser when either party controls the oversight mechanism (i.e., the presidency and Senate) than when control is split. 3. Oversight acts less forcefully on district bank presidents than on FRB governors. In short, the present evidence suggests that political agents from both parties prefer loose money and pursue this preference more efficiently when their parties are aligned.
collective action, credible commitment, monetary policy
Abstract: Economists have long debated whether deficits matter. They do, but perhaps more for replacing voting markets that reward politically attractive redistribution with financial markets that can better support productivity. Tax-funding mechanisms evaluate proposals to spend public resources in light of distributional consequences, not against the standard of whether public actions broadly expand economic opportunities. To attract funding through deficit financing, on the other hand, public spending proposals must reasonably promise to strengthen society's repayment ability. Moreover, financial markets (not voting markets) transparently report on the credibility of such promises by continually evaluating the price at which government obligations are traded. Having to borrow, not balance budgets, can productively discipline governments by charging a high price for funds that would facilitate transfers while readily supporting public projects that strengthen economic performance.
Balanced budgets, public spending, deficits, financial market discipline, economic performance
Abstract: History’s societies vary on a number of dimensions, but appear more homogenous in distributing socioeconomic status across sexes. This homogeneity begs the question of whether forces that are robust to laws and regulations might contribute to the persistence of sex-differences in hierarchical attainment. We take up this question by empirically evaluating Suzanne Scotchmer’s (2008) model of sex differences in risk aversion where (1) winner-take-all games (e.g., promotions in hierarchies) favor male risk takers, but (2) successful females maintain greater skill on average, and (3) this skill-advantage depreciates with repeated play. We find support for these implications in how the sex composition of national legislatures differs across electoral mechanisms (i.e., majoritarian chambers employ a significantly greater proportion of males) and how re-election prospects for US Representatives differ by sex (i.e., females enjoy significantly longer durations, but only when evaluated early in their incumbency). These results cannot easily be dismissed as statistical artifacts, and alternative models can (at best) rationalize our cross-sectional or time series results, but not both. Finally, these results are consistent with a normative aspect of Scotchmer’s model where, rather than presenting societies with a choice between equity and efficiency, questions about affirmative action may offer a choice between policies that necessarily lack internal consistency while creating risks for economic performance.
Winner-take-all games, endogenous preference formation, risk aversion, electoral rules, female representation in legislatures, affirmative action, corporate law
Abstract: When basic competition rules cannot stop market power abuses, industry-specific regulations can improve economic performance. But regulations are also more immediately exposed to political pressures than are judicially administered antitrust laws, and this exposure can cause regulations to serve distributional rather than efficiency goals. Instead of supporting a Chicago School hypothesis where distributional forces tend to favor producers, however, I find evidence that regulations can inefficiently expand consumer surplus when producers lack a political voice. In particular, local exchange carriers maintain significantly smaller capital stocks in states that restrict campaign contributions from regulated utilities. This relationship is difficult to rationalize as either a statistical artifact or evidence that campaign finance laws discourage producers from restraining trade. Indeed, rather than endowing producers with political currency to capture regulators, allowances for campaign contributions appear to have strengthened competition by discouraging regulatory takings and balancing monopsonistic pressures from consumer-voters. These results highlight an empirically important potential for regulations to overly favor consumers, and strengthen arguments against consumer surplus as an objective for competition policies.
D72, E61, H11, K23, L43, L51, L96, M38
Abstract: When basic competition rules cannot preclude market power abuses, industry-specific regulations can improve economic performance. But regulations are also more immediately exposed to political pressures than are judicially administered antitrust laws, and this exposure can cause regulations to serve distributional rather than efficiency goals. Instead of supporting a Chicago School hypothesis where these distributional forces tend to favor producers, however, I find evidence that regulations can inefficiently expand consumer surplus when producers lack a political voice. In particular, local exchange carriers maintain significantly smaller capital stocks in states that restrict campaign contributions from regulated utilities. This relationship is difficult to rationalize as either a statistical artifact or evidence that campaign finance laws discourage producers from restraining trade. Indeed, rather than endowing producers with political currency to capture regulators, allowances for campaign contributions appear to have strengthened competition by discouraging regulatory takings and balancing monopsonistic pressures from consumer-voters. These results highlight an empirically important potential for regulations to overly favor consumers, and strengthen arguments against consumer surplus as an objective for competition policies.
Competition Policy, Antitrust, Regulation, Campaign Finance Law, Regulatory Capture, Credible Commitment, Real Options, Economic Performance
Abstract: Private investment increases in a cross-country panel when formal institutions (e.g., term limits) do not constrain executives' planning horizons. This evidence is consistent with institutions that encourage reputation-building checking opportunistic-incentives and extends evidence from domestic public choice applications to an international political economy setting. In addition, investment exhibits a non-monotonic relationship with a polity's veto-players. This relationship may reflect trade-offs between constituents' monitoring-capacity and agents' opportunistic-ability. It may also highlight a channel through which lock-in effects retard neo-classical convergence, and thus motivate different normative prescriptions than those emerging from contributions where institutions and real activity must exhibit a monotonic relationship.
Investment, term limits, veto players, credible commitments
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
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