Columbia Business School Research

We report on a panel discussion at the 2001 CMU Accounting MiniConference under the title "Intellectual Foundations of Accounting." We provide a background and the motivation for the discussion and present the remarks by the four panelists. A number of perspectives are taken. Professor Sunder emphasizes dualities in accounting. Professor Demski stresses the endogeneity of accounting measurement activities. Professor Fellingham examines the core and superstructure of accounting. Professor Ijiri observes the microcosmos in accounting and its philosophical connection.

In their paper, Sydney Ludvigson, Charles Stendel, and Martin Lettau examine empirically the narrow but important issue of to what extent monetary policy affects consumer spending by altering the aggregate value of wealth. Here, I first comment on the paper itsef, then discuss implications for the broader question of whether the wealth effect is important (independent of monetary policy), and then suggest some avenues for future research.

In this study we investigate the valuation implications of managerial actions undertaken by 57 Internet firms engaged in Business-to-Business (B2B) e-commerce.

In this paper we argue that allowing for uncertainty resolves the controversy over the importance of life-cycle and bequest saving by showing that these motives for saving are overlapping and cannot generally be distinguished.

When a firm practices conservative accounting, changes in the amount of its investments can affect the quality of its earnings. Growth in investment reduces reported earnings and creates reserves. Reducing investment releases those reserves, increasing earnings. If the change in investment is temporary, then current earnings is temporarily depressed or inflated, and thus is not a good indicator of future earnings. This study develops diagnostic measures of this joint effect of investment and conservative accounting.

This paper argues that the use of monetary policy in response to the Asian financial crisis worsened the economic downturn and contributed to global economic instability, that we have spent too little time thinking about the behavior of the international economic and financial institutions given the important role that they play in the global economy and that reforms are needed to return the IMF to its original mandate of focusing on global financial stability.

In this paper we develop a measure of liquidity, price impact, which quantifies the change in a firm's stock price associated with its observed trading volume. For a large set of institutional trades we compare out-of-sample, characteristic-based estimates of price impact to actual price impacts.

We examine the econometric performance of regime-switching models for interest rate data from the United States, Germany, and the United Kingdom. Regime-switching models forecast better out-of-sample than single-regime models, including an affine multifactor model, but do not always match moments very well. Regime-switching models incorporating international short-rate and term spread information forecast better, match sample moments better, and classify regimes better than univariate regime-switching models.

This article proposes a model of judgment revision, which posits that counterattitudinal challenges to a brand initially trigger a memory search for proattitudinal information about this brand. The proattitudinal information accessible from memory is then aligned with information contained in the challenge in order to assess the diagnosticity of the challenge, that is, how much it "damages" the retrieved brand information. If the challenge is not perceived to be diagnostic, the retrieved brand information is used to defend the previous attitudinal position.

We examine the valuation performance of a comprehensive list of value drivers and find that multiples derived from forward earnings explain stock prices remarkably well: pricing errors are within 15 percent of stock prices for about half our sample. In terms of relative performance, the following general rankings are observed consistently each year: forward earnings measures are followed by historical earnings measures, cash flow measures and book value of equity are tied for third, and sales performs the worst.

Multilevel factor analysis models are widely used in the social sciences to account for heterogeneity in mean structures. In this paper we extend previous work on multilevel models to account for general forms of heterogeneity in confirmatory factor analysis models. We specify various models of mean and covariance heterogeneity in confirmatory factor analysis and develop Markov Chain Monte Carlo (MCMC) procedures to perform Bayesian inference, model checking, and model comparison.

We examine how gender stereotypes affect performance in mixed-gender negotiations. We extend recent work demonstrating that stereotype activation leads to a male advantage and a complementary female disadvantage at the bargaining table (Kray, Thompson, & Galinsky, 2001). In the present investigation, we regenerate the stereotype of effective negotiators by associating stereotypically feminine skills with negotiation success.

Past research has indicated that rapport helps negotiators overcome interpersonal friction and find cooperative agreements. Study 1 explored differences in the behavioral dynamics evoked by e-mail versus face-to-face negotiation. Although some behavioral content categories differed in ways pointing to strengths of e-mail, the strongest patten was that e-mail inhibited the process of exchanging personal information through which negotiators establish rapport. The authors hypothesized that the liabilities of e-mail might be minimized by a pre-negotiation intervention of social lubrication.

This paper evaluates the specification errors of several empirical asset pricing models that have been developed as potential improvements on the CAPM. We use the methodology of Hansen and Jagannathan (J. Finance 51 (1997) 3), and the test assets are the 25 Fama-French (J. Financial Econom. 52 (1997) 557) equity portfolios sorted on size and book-to-market ratio, and the Treasury bill. We allow the parameters of each model's pricing kernel to fluctuate with the business cycle. While we cannot reject correct pricing for Campbell's (J. Political Econom.

This paper explores “revenue accounting” in contrast to traditional “cost accounting.” Revenue accounting serves the information needs of managers and investors in planning and controlling a firm’s sales activities and their financial consequences, especially in the age of e-commerce. Weaknesses of traditional accounting have become particularly evident recently, for example, the lack of 1) revenue mileposts, 2) revenue sustainability measurements, and 3) intangibles capitalization.

Pricing is one of the most crucial determinants of sales. Besides the actual price, how the price offering is presented to consumers also affects consumer evaluation of the product offering. Many studies focus on "price framing," i.e., how the offer is communicated to the consumer?is the offered price given along with a reference price, is the reference price plausible, is a price deal communicated in dollar or percentage terms. Other studies focus on "situational effects," e.g., is the evaluation for a national brand or a private brand, is it within a discount store or a specialty store.

We analyze a unique data set on multiunit auctions, which contains the actual demand schedules of the bidders as well as the auction awards in over 400 Swedish Treasury auctions. First, we document that bidders vary their prices, bid dispersion, and the quantity demanded in response to increased uncertainty at the time of bidding. Second, we find that bid shading can be explained by a winner's curse driven model in which each bidder submits only one bid, despite the fact that the bidders in our data set use much richer bidding strategies.

This paper examines the consequences of capital market liberalization, with special reference to its effects under different exchange rate regimes. Capital market liberalization has not lead to faster growth in developing countries, but has led to greater risks. It describes how International Monetary Fund policies have exacerbated the risks, as a result of the macro-economic response to crises, with bail-out packages that have intensified moral hazard problems. The paper provides a critique of the arguments for capital market liberalization.

Regulatory changes that appear comprehensive will have little impact on the functioning of a developing market if they fail to lead to foreign portfolio inflows. We specify a reduced-form model for a number of financial time series and search for a common, endogenous break in the data generating process. We also estimate a confidence interval for the break. Our endogenous break dates are accurately estimated but do not always correspond closely to dates of official capital market reforms.

A pervasive theme in both accounting and statistics is aggregation. However, in contrast to statistics, a customary standard for determining the best aggregation rule in accounting is unavailable or, at least, not explicitly defined. Also, most accounting procedures follow a well-specified recursive algorithm of updating a summarized history number (a beginning balance sheet number) by the current period's activities (changes).

The financial press and accounting regulators (e.g., the Securities and Exchange Commission and Financial Accounting Standards Board) have expressed concern about pressures on Internet firms to report high levels of revenue. This study verifies the association between market capitalization and revenue, and examines economic factors that potentially influence Internet company managers' decisions to adopt allegedly aggressive revenue-recognition policies. Specifically, we examine factors hypothesized to influence the reporting of advertising barter revenue and grossed-up sales levels.

Three experiments explored the role of negotiator focus in disconnecting negotiated outcomes and evaluations. Negotiators who focused on their target prices, the ideal outcome they could obtain, achieved objectively superior outcomes compared with negotiators who focused on their lower bound (e.g., reservation price). Those negotiators who focused on their targets, however, were less satisfied with their objectively superior outcomes.

Minton, Schrand and Walther (2002) (MSW) investigate whether cash flow (earnings) volatility helps predict subsequent levels of cash flow (earnings). Price is the present value of expected future cash flows, so if cash flow volatility forecasts future cash flows (the numerator in the present value calculation), it should have valuation implications. A similar motivation applies to earnings, which may be viewed as a proxy for cash flow.

Recent studies of cultural activities in America have stressed the importance of three sorts of phenomena: (1) a boundary-effacement effect in which members of different classes are to some degree homogeneous in their preferences (colloquially, "some things are liked or disliked by everybody"); (2) an omnivore effect in which upscale people tend more than their more downscale counterparts to engage in or appreciate a broad variety of cultural activities ("some people like everything"); and (3) a distinction effect in which more upscale consumers use certain cultural habits as a way of marki

We examine whether executive stock options (ESOs) provide managers with incentives to invest in risky projects. For a sample of oil and gas producers, we examine whether the coefficient of variation of future cash flows from exploration activity (our proxy for exploration risk) increases with the sensitivity of the value of the CEO's options to stock return volatility (ESO risk incentives). Both ESO risk incentives and exploration risk are treated as endogenous variables by adopting a simultaneous equations approach.

This article aims to explain how standard economic theory—reflected in much of the popular policy folklore— has served to undermine the above propositions or runs counter to them. The first section shows how policies based on a neoclassical view of the labour market ultimately weaken workers' bargaining position because of pervasive market failures. The next two sections critically discuss the welfare and employment implications of a wider set of policies?

Articles in the financial press suggest that institutional investors are overly focused on current profitability, which suggests that as institutional ownership increases, stock prices reflect less current period information that is predictive of future period earnings. On the other hand, institutional investors are often characterized in academic research as sophisticated investors and sophisticated investors should be better able to use current-period information to predict future earnings compared with other owners.

We present a simple model of an entrepreneur going public in an environment with poor legal protection of outside shareholders. The model incorporates elements of Becker's (J. Political Econ. 106 (1968) 172) "crime and punishment" framework into a corporate finance environment of Jensen and Meckling (J. Financial Econ. 3 (1976) 305). We examine the entrepreneur's decision and the market equilibrium. The model is consistent with a number of empirical regularities concerning the relation between investor protection and corporate finance.