The academic literature has numerous definitions of earnings quality, yet few of these have theoretical support. For example, while researchers have advanced informal arguments that suggest smoother earnings are “better,” few formal arguments have been made to show when, or if, reporting smoother earnings implies the earnings are more informative or of “higher quality.” This is our research objective.
More specifically, we first characterize equilibrium disclosure strategies for a manager who has better information about the long run value of the firm. We then analyze when, if ever, the manager will be prompted to report higher quality earnings, where we define higher quality earnings as earnings closer to the long run value of the firm.
There are currently over 85,000 anthropogenic chemicals circulating in the world’s environment (City of San Francisco, 2003). Many of these chemicals have been found in the breast milk of mothers, the tissues of children, and measured in the most remote corners of the Earth (Thornton, McCally, & Houlihan, 2002). Science has established that every single day our bodies absorb and store toxic chemicals; this phenomenon is appropriately called the ‘body burden’ (Northwest Environment Watch, 2004). Some of these compounds have been determined to cause a variety of cancers and other adverse health outcomes. There is a great deal of evidence linking the increased production of chemicals to the increasing rates of breast cancer, Non-Hodgkins lymphoma, as well as childhood leukemia and brain cancer (National Cancer Institute, 2003; Solomon, Ogunseitan, & Kirsch, 2000). However, to what degree these chemicals are contributing to health problems such as cancer is under debate, as is the best policies to protect our communities. Furthermore, the economic burden of cancer has not been fully calculated or internalized. It is now believed that approximately 75% of all cancer cases in the US can be attributed to some form of environmental exposure (American Cancer Society, 2004). These cancers are entirely preventable. This study proposes that preventive measures, such as the precautionary principle (PP), are needed to sufficiently safeguard the health of our people and the environment from the effects of toxics through improved chemical regulation. The definition of the PP originates from the 1992 Rio Declaration, Principle 15: “In order to protect the environment, the precautionary approach shall be widely applied by States according to their capabilities. Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation” (United Nations, 1992). The proper mixture of common sense, scientific awareness, and preventative action will promote a sustainable future. This study will focus its attention on environmentally attributable cancers in Washington State (WA) of the United States, the current attempts made to advance the implementation of the precautionary principle, the interaction between chemicals in the environment and cancer, and the economic costs resulting from these cancers.
In January 2004, the Seattle Precautionary Principle Working Group submitted a discussion paper titled, A Policy Framework for Adopting the Precautionary Principle, to the City of Seattle and King County. The objective of this document was to incorporate the precautionary principle into the language of the 2004 city and county comprehensive plans. The Seattle and King County governing officials and policy makers are currently considering this proposal. When discussing the economic costs of childhood disease attributable to environmental quality, the authors had stated, “Researchers and policymakers do not know the overall costs of childhood illness in Washington State” (Gilbert, Diver, & Miller, 2004: 9). Their argument had to be associative using cost-estimates from other states. In response to this lack information, one fundamental goal of this analysis is to determine the economic costs of pediatric cancer. A cost assessment will bolster the argument of the Precautionary Principle Working Group to advocate for precautionary measures and promote the political ambition necessary to do so.
Standard capital market theory states that there is a risk-return trade off in equilibrium. The more risk one is willing to take, the higher the return one will be able to get. This relationship has been extensively analysed in the context of liquid assets that trade in organised markets (see e.g. Fama and MacBeth, 1973; Ghysels, Santa-Clara, and Valkanov, 2005). However, much less is known about its implications on the behaviour of banks as risk managers and profit maximisers. Banks aggregate profits have been analysed by Behr et al. (2007) and Hayden, Porath, and von Westernhagen (2007), among others, who find that more specialisation tends to yield higher returns but also a higher level of risk. However, the optimal degree of bank specialisation is not analysed by these papers. In addition, they study the different activities of banks jointly, that is, they are not able to separate market and credit activities. As already explained, the features of liquid assets are well known. Thus, my goal is to focus on the less well understood credit activities of banks.
The risk and return of loans portfolios has generally been analysed separately. On the one hand, the Basel II framework has originated the development of many quantitative models to estimate the loss distribution of loans portfolios (see Embrechts, Frey, and McNeil, 2005, for a textbook review of the literature). On the other hand, a parallel literature that studies the determinants of interest rates has simultaneously grown during the previous years (see e.g. Mart?n, Salas, and Saurina, 2007; Mueller, 2008). Unfortunately, to the best of my knowledge, an specific common framework to analyse the risk and return characteristics of bank’s loans portfolios is still missing in the literature.
