Review of Quantitative Finance and Accounting

Abstract We investigate whether the introduction of state credit default swaps (CDS) affects the fiscal spending of state governments. A difference-in-differences analysis indicates that CDS-referenced states show a significant decline in government spending compared to non-CDS-referenced states when state CDS issuance introduces a more transparent fiscal information environment. We also find an improvement in state media coverage post-CDS-initiation. The results suggest that CDS initiation can provide valuable information for the fiscal conditions of state governments, which in turn leads to spending cuts. The evidence indicates the important role that credit market innovation activities play in the fiscal decisions of state governments.

Abstract This paper extends the minimum-chi-square estimation for affine term structure models to a regime switching framework, and corrects the estimation bias in the regime switching dynamic term structure model. Biases arise as a result of highly persistent bond yields, and bias correction changes the decomposition of medium- and long-term forward rates. The bias-corrected expected short rate accounts for the pronounced moves in forward rates during the 1979–1982 monetary experiment and the financial crisis. The bias-corrected term premium becomes counter-cyclical and more negatively correlated with the short-term yield. Monte Carlo simulation shows that the decomposition of forward rates is more accurate after bias correction.

Abstract This paper involves a critique of the Implied Cost of Capital (ICC) that leads to an alternative measure which, like the ICC, is extracted from accounting data. The critique deals with how the ICC handles the accounting involved. First, the ICC fails an accounting consistency condition. Second, expected earnings growth conveys risk and return, but this is not recognized when a growth rate is inserted in the reverse engineering exercise. Empirical tests so confirm. An alternative accounting-based measure accommodates these points and validates on criteria indicating risk and return. The resulting measure is a yield to maturity for equities, much like that for a bond.

Abstract We find evidence of geographic segmentation in the market for top executives and identify industry co-agglomeration as the primary driver. When top executives move from one firm to another, nearly 40% of the moves are between local firms, which is more than five times greater than predicted by available employment opportunities. Furthermore, these local moves are dominated by moves among firms in co-agglomerated industries. While the strong local move bias is also accompanied by local co-movement in the compensation of top executives, the co-movement is driven by local peers in co-agglomerated industries only but not by other local peers.