Rational expectations equilibrium in an economy with segmented capital asset markets

We develop a model of noisy rational expectations equilibrium in segmented markets. The noise emerges endogenously through intermarket effects rather than through exogenous supply noise from liquidity or naive trading as in standard noisy rational expectations equilibrium of the Hellwig type. Existence of and persistence of segmentation in equilibrium is established. A metric to determine welfare effects of the degree of segmentation is also derived. This metric is structurally different from the metric derived in the standard models and includes the latter as a special case. Empirical evidence from and observed characteristics of "real world" economies that support the economic intuition underlying the model are described in some detail.Capital market

On the demand for historical events recording and maintenance of audit trails

In decentralized economies with transaction costs in contracting, it is demonstrated that an endogenous demand exists for the recording of events that affect the firm\u27s value (“historical events”) and for the perpetual maintenance of audit trails to those records. A demand for the aggregation of records into reports (such as the financial statements) is derived from the costliness of the design, implementation and processing of contracts based on the primary data. But if principals do not control the recording or the reporting process, the agents will distort both the records and reports to their advantage. This gives rise to a demand for auditing services, which in turn creates a demand for audit trails, the causal links to verifiable facts underlying the records. Due to the costs of verification, with sufficient penalties and a positive probability of detection, random sample verification is as efficient as exhaustive verification. For random sample verification to be effective, the maintenance of audit trails for the life of the firm is necessary

Intrafirm resource allocation: the economics of transfer pricing and cost allocations in accounting

A theory of intrafirm allocation under information asymmetry based on Myerson\u27s general theory of mechanisms is developed. From the general model, it is shown that every Myerson equilibrium resource allocation mechanism is a “cost plus” type of transfer pricing. Specializing the general model to allow risk-neutral agents, we derive the exact form of the compensation schemes in dominant strategy equilibrium transfer pricing mechanism. The general Myerson agency problem is transformed into a central planner\u27s problem enabling us to bypass the first-order approach to the problem. The closed form solution shows that each of the agents\u27 compensation schemes is composed of a profit-sharing component, a cost refund, taxes, and subsidies, making it a Groves-like scheme. Additional results show that if the principal is asymmetrically informed about one of the agents only, the agent may derive rent from private information under monotonic compensation schemes, and we provide additional conditions under which Hirshleifer\u27s classical marginal cost pricing is in equilibrium

The occurrence of fibonacci numbers in time series of financial accounting ratios: Anomalies or indicators of firm survival, bankruptcy and fraud? An exploratory study

Although there have been conjectures about the possible occurrences of Fibonacci numbers and golden means and ratios in financial statements (Feroz, 1992), it is intriguing as to why managers should be reporting these rather stylized series of numbers the occurrences of which have hitherto been documented mostly in the biological sciences (Davis, 1989). One possible explanation is that these numbers are merely random occurrences and are not a part of any systematic financial reporting pattern. Still other conjectures are that these numbers are generated by a process of skilful manipulation of accounting rules (e.g. smoothing) which has been documented in the empirical accounting literature (Healy, 1985). The purpose of this study is to empirically verify the null hypothesis that the occurrence of Fibonacci numbers, golden ratio and means in financial accounting ratios, is merely a random occurrence without any statistical significance. We constructed two samples: a random sample of 200 companies, and another sample of 200 companies that have survived 20 years or more. We find that i) there is an infinity of distributions under which the null hypothesis (Ho) cannot be rejected for either sample; and ii) there is an infinity of distributions under whichH0 cannot be rejected for the sample of 200 surviving companies but can be rejected for random sample. The latter result is particularly important because it shows that it is possible to discriminate between surviving companies and randomly selected companies based on the golden mean in total debt/total invested capital ratio. © MCB UP Limited 2000

Multiple Signals, Statistical Sufficiency, and Pareto Orderings of Best Agency Contracts

In this study we identify necessary and sufficient conditions for sufficient statistics to strictly (Pareto) dominate all nonsufficient statistics as information for contracting in agencies with moral hazard. We first observe that strict dominance requires that an optimal compensation scheme itself be a sufficient statistic. Since this can occur only in settings where the family of distributions parameterized by the agent's hidden effort admits one-dimensional sufficient statistics, strict dominance is the exceptional case. Nevertheless, we are able to show that there exists a substantial class of distributions, containing many well-known families, for which strict dominance does obtain.

Managerial accountability for payroll expense and firm-size wage effects

We argue that job performance appraisal is an agency problem between a manager and his employees featuring asymmetric transfer values: Ratings given by the manager are money equivalent for the employees but only partially so for the manager. The asymmetry assumption is based on evidence that managers are not held fully accountable for payroll expense incurred, which, we argue, stems from the misalignment of managerial compensation with the profits of the firm. Other evidence also shows that the problem of managerial unaccountability is more aggravated in larger firms. In this paper, we develop a nested agency model of economic organization of a firm with unaccountable managers, which in equilibrium obtains the firm-size wage effects the large-firm wage premium and inverse relationship between firm size and wage dispersion. We also relate and explain the compression of ratings phenomenon from literature on organizational psychology