Jayendu Patel

Earnings Management to Exceed Thresholds

Investors are keenly interested in financial reports of earnings because earnings provide important information for investment decisions. Thus, executives who are monitored by investors and directors face strong incentives to manage earnings. We introduce consideration of behavioural/institutional thresholds for earnings in this mix of incentives and governance. A model illustrates how thresholds induce specific types of earnings management. Empirical explorations find clear support for earnings management to exceed each of the three thresholds that we consider: positive profits, sustain-recent-performance, and meet-market-expectations. The thresholds are hierarchically ranked. The future performance of firms that possibly boost earnings to just cross a threshold appears to be poorer than that of less suspect control groups.

The J-Shape of Performance Persistence Given Survivorship Bias

Performance may enhance survival probability. When it does, the induced lack of randomness challenges robust and unbiased inference. If survivors are sorted into two groups based on past performance, spurious persistence has been demonstrated if variance in performance is heterogeneous. However, as we show both theoretically and with simulations, if performance is categorized finely, the spurious persistence will be J-shaped; that is, at the bottom better performance in one period predicts worse performance for another period. We propose a simple t-test applied to the quadratic coefficient in a regression to distinguish between a spurious J-shape and monotonic patterns. Mutual funds, our example, exhibit the monotonically increasing pattern produced by true performance persistence.

Optimal Extraction of Nonrenewable Resources When Prices are Uncertain and Costs Cumulate

Advances in economic theory and optimal control methods have considerably improved the prescriptions for the extraction of renewable and nonrenewable resources. While the classic analyses, going back to Hotelling (1931), proceeded under assumptions of price certainty, recent work addresses the considerable uncertainty in resource prices (which is of the same order as that of stock prices). For tractability, this newer literature assumes a constant marginal cost of extraction which ignores the considerable emphasis in the older literature on increasing marginal costs. We frame and solve the nonrenewable resource extraction problem (in the context of a typical mine) that jointly accounts for the significant price uncertainties as well as the dependence of extraction costs on the extraction rate and on the cumulative amount extracted. We find that ignoring cumulating cost when determining extraction strategy can lead to significant loss of value. Our analysis also establishes the general tools to pursue, for instance, the optimal taxation of natural resource sector that is of significant policy interest to many developing countries.

Shared Price Trends: Evidence From U.S. Cities and OECD Countries

How similar is the price behavior of different commodities? Of the same commodity in different areas? Using cointegration methods, we explore the degree of shared trends among prices within and across U.S. metropolitan areas, as well as within and across Organization for Economic Cooperation and Development (OECD) countries. Within U.S. metropolitan areas, there are shared price trends among services, goods, and food, though not for rents. Across U.S. metropolitan areas, there appear to be empirically effective arbiiraging mechanisms for the prices of food, goods, and services. Within OECD nations, there do not appear to be shared price trends between commodities, which suggests that more independent factors affect prices at the national level than at the metropolitan level. Looking at single-commodity groups across these nations, we found hardly any examples of shared trends, which suggests that substantial impediments to the free flow of goods (or factors) persist among these nations. Our results argue ...