foreign currency denominated borrowing in the absence of operating incentives abstract it is well known that corporations issue foreign currency denominated debt to hedge foreign currency cash flows with offsetting interest payments we test an alternative opportunistic motive for foreign currency denominated borrowing we do so by constructing a comprehensive sample of foreign currency denominated bonds issued by sovereign government and agency issuers with no foreign currency cash flows or foreign operations we find strong and consistent evidence that the borrowers in our sample consider cross currency differences in covered and uncovered interest yields in choosing the currency in which to denominate their international debt we estimate the average gains to opportunistic covered yield borrowing to be 4 to 18 basis points interestingly we also find that the average bond offering in our sample precedes a large and beneficial depreciation of the issue currency over the course of the following year these results support what has been a frequent conjecture in the foreign debt market

too big to manage us megabanks competition by innovation and the microfoundations of financialization disagreements over the systemic implications the future of financialization can be traced in part to the absence of sustained attention to the role of banking firms in driving this secular shift forward that is the financialization literature lacks an adequate microfoundation accounting for the drivers of financialization processes solely at the macro level overlooks the problems of how these processes came about and whether they are sustainable this paper addresses this explanatory gap arguing that a key independent microeconomic driver of increasing financialization did exist the incessant efforts by money centre banks in the usa to break out of depression era restrictions on their size activities and markets these banks growth strategies in turbulent times led to an institutional meso shift the rise of a megabank centred shadow banking system that now shapes global financial architecture even while operating in ways that are unsustainable in short too big to manage megabanks are at the heart of the fragility and instability of the economy today

is there a global market for convertible bonds prior to 1984 the stock price reaction to announcements of convertible issue in the domestic market was significantly negative while the reaction to issues on the eurobond market was smaller in absolute value and not consistently negative after 1984 this difference in stock price reactions seems to have disappeared the difference in abnormal returns before 1984 cannot be explained by existing signaling models of convertible bond issues it is consistent however with the hypothesis that american firms captured some of the tax advantage of eurobonds relative to domestic bonds before the change in u s withholding taxes in july 1984 copyright 1992 by university of chicago press

arbitrage pricing with estimation risk this paper considers the arbitrage pricing theory when investors have incomplete infor mation on the parameters generating asset returns each asset in the economy may have a different amount of information available on it bayesian investors use their prior beliefs in conjunction with the total available information to assign an expected return and a set of factor betas to each asset the assigned expected returns are shown to be linear in their associated factor betas however the factor betas and prices of assets differ from those under complete information specifically risky assets with high low information are priced relatively higher lower on the other hand factor betas of high low information assets are relatively lower higher the analysis has econometric implications for testing the apt in this paper s framework maximum likelihood estimates of factor betas which are based on normality assumptions are too high low for high low information assets in addition sequentially increasing the sample size by adding new securities to a factor analysis procedure can result in the detection of apparent additional priced factors when they do not really exist

wages and human capital in the u s financial industry 1909 2006 we study the allocation and compensation of human capital in the u s finance industry over the past century across time space and subsectors we find that financial deregulation is associated with skill intensity job complexity and high wages for finance employees all three measures are high before 1935 and after 1980 but not in the interim period workers in the finance industry earn the same education adjusted wages as other workers until 1990 and significantly more afterward by 2006 the premium is 40 on average and 200 for top earners and ceos earnings risk and firm size effects account for some of the premium but the majority does not appear to be sustainable

the case for gdp indexed bonds gds indexed bonds this paper seeks to revive the case for countries to insure against economic growth slowdowns by issuing bonds indexed to the rate of growth of gdp we show that gdp indexed bonds could provide substantial benefits in reducing the likelihood of default crises and allowing countries to avoid pro cyclical fiscal policies we simulate the effects of gdp indexed bonds under different assumptions about fiscal policy reaction functions and their output effects and find that they could substantially reduce the likelihood of debt gdp paths becoming explosive the insurance premium would likely be small because cross country comovement of gdp growth rates is low and cross country gdp growth risk is thus largely diversifiable for an investor holding a portfolio of gdp indexed bonds potential obstacles to the emergence of a market for these bonds include the verifiability of gdp data the trade off between insurance and moral hazard and the need for liquidity theory and past experience suggest that financial innovation often requires official intervention and its timing and form are difficult to predict we discuss institutional fixes and suggest an approach for attempting to start up a market eduardo borensztein and paolo mauro

financial market innovation and security design an introduction abstract the article describes in the context of theory and practice this special issue of the journal of economic theory on financial market innovation and security design the main focus is on security design in incomplete financial markets possibly with asymmetrically informed traders we first survey the general equilibrium literature which emphasizes the spanning role of securities we then provide a unified framework encompassing the literature that employs a cara guassian setting to study the impact of financial innovation on risk sharing and information aggregation journal of economic literature classification numbers g10 d52

the assessment financial innovation curse or blessing as financial services go through one of their most radical restructurings of this century this as sessment analyses the factors underlying these changes a picture of the function of different fi nancial institutions emerges which allows the concerns that have been expressed about recent developments in financial markets to be re evaluated the worrying implication is that systems for correcting substantial financial disruption are not yet in place

empirical studies of financial innovation lots of talk little action this paper reviews the extant empirical studies of financial innovation adopting broad criteria we could find only somewhat more than two dozen studies and since some financial innovations are examined by more than one study they cover only seventeen phenomena especially striking is the fact that only two studies offer tests of the broad hypotheses concerning the environmental conditions spurring financial innovation e g regulation taxes unstable macroeconomic conditions and ripe technologies that have been advanced in descriptive articles we offer some tentative conjectures as to why empirical studies of financial innovation are comparatively rare among our suggested culprits is an absence of accessible data we urge financial regulators to undertake more surveys of financial innovation and to make the survey data more available to researchers

optimal innovation of futures contracts this article presents a simple model of the innovation of new futures contracts by transaction volume maximizing futures exchanges in incomplete markets under uncertainty with mean variance preferences and proportional transactions costs we characterize the set of nash equilibria for a number of exchanges simultaneously or sequentially choosing contracts the optimal monopolistic contract design is shown to be pareto optimal an example shows the failure of pareto optimality for aparticularnash equilibrium likewise in a monopolistic multiperiod setting an example shows the failure of pareto optimality given an incentive for the exchange to induce turnover

an integrated production distribution model for a multi national company operating under varying exchange rates research modeling the production planning and logistics decisions for multi national companies mnc s operating under varying inflation and exchange rates is scanty decisions regarding the products to be made in different facilities and the markets which these facilities would serve are critical to the mnc s success also decisions regarding when to open retain and close facilities are equally important these decisions are sensitive to both inflation and exchange rates accordingly we incorporate these parameters in the development of an integrated production planning and distribution model for an mnc we elicit the performance of the model through examples our results indicate profit reduces by as much as 45 77 depending on the exchange rates initial capacities and restrictions imposed on the more profitable facility

a theory of mandatory convertibles abstract the objective of this paper is to develop a theoretical analysis of mandatory convertibles which are securities that automatically mandatorily convert to common stock on a pre specified date we consider a firm facing a financial market characterized by asymmetric information and significant costs in the event of financial distress the firm can raise capital either by issuing mandatory convertibles or by issuing more conventional securities like straight debt ordinary convertibles or equity we show that in equilibrium the firm issues straight debt or ordinary convertibles if the extent of asymmetric information facing it is large but the probability of being in financial distress is relatively small it issues mandatory convertibles if it faces a smaller extent of asymmetric information but a greater probability of financial distress our model provides a rationale for the three commonly observed features of mandatory convertibles mandatory conversion capped or limited capital appreciation and a higher dividend yield compared to common stock we also characterize the equilibrium design of mandatory convertibles

financial innovations and arbitrage pricing in economies with frictions revisited abstract existing literature points to the role of market frictions in providing motivations for financial innovations in this paper we study the effectiveness of the arbitrage pricing approach and the design and pricing of innovated securities in economies with restrictions on short sales in the process we also define the no arbitrage conditions that is appropriate for such economies the differences between our results and chen s 3 are pointed out when appropriate journal of economic literature classification numbers c61 g10 g12 g20

why there are organized futures markets i shall present an explanation of the existence of organized futures markets with more predictive power than the two prevailing rival views my explanation briefly is this an organized futures market facilitates trade among strangers one of the rival prevailing views is a defense of futures trading it asserts that an organized futures market furnishes legitimate businessmen with a means of hedging so that they can obtain insurance against price risk the other prevailing view is an attack on organized futures markets it asserts that such markets enable speculators to manipulate prices to the detriment of outsiders who are less well informed and to the detriment of legitimate businessmen such as farmers the attack on organized futures markets likens them to gambling casinos the defense sees them as a form of insurance neither the attack nor the defense is valid the correct explanation is closely related to why we conduct trade using money instead of by barter

optimal security design how should new securities be designed traditional theories have little to say on this the literature on capital structure and general equilibrium theories with incomplete markets take the securities firms issue as exogenous this paper explicitly incorporates the transaction costs of issuing securities and develops a model where the instruments that are traded are chosen optimally and the economy s market structure is endogenous among other things it is shown that the firm s income stream should be split so that in every state all payoffs are allocated to the security held by the group that values them most this abstract was borrowed from another version of this item

the determinants of technology adoption the case of the banking firm using data on the adoption of automatic teller machines by firms in the banking industry this study examines the relationship between the decision to adopt new technology and its determinants since banking firms differ considerably in terms of the competitive environments in which they operate focusing on this one innovation in this industry allows a stronger test of the relationship between market structure and the adoption of new technology than has been previously conducted using a failure time estimation procedure we find that larger banks and banks operating in more concentrated local banking markets register a higher conditional probability of adopting this new technology all else equal we also find that other results are consistent with the underlying model and that the bank s regulatory environment shapes its adoption decision in plausible ways

the role of financial innovation in raising capital evidence from deep discount debt offers abstract we investigate the market s reaction to original issue deep discount oid bonds which are issued at prices well below par and with coupons set below the market rate until july 1982 oid debt offered large tax advantages before that date stock price responses to announcements of oid debt are significantly positive in contrast to the negative albeit insignificant responses associated with par debt announcements no stock price gains are observed for oid debt issued after the tax advantages are removed we conclude that in 1981 82 opportunities provided by financial innovation offset the negative information effects typically associated with debt financing announcements

corporate issues of foreign currency exchange warrants a case study of financial innovation and risk management abstract we argue that hedging and risk management activities of modern corporations arise as a direct consequence of attempts to create shareholder wealth through financial innovation we formalize this argument by examining in detail corporate issues of foreign currency exchange warrants we then focus on one multiple issuer to demonstrate how the foreign exchange risk created by the sale of the warrants can be eliminated the use of off balance sheet risk management techniques to lock in the benefits of selling overpriced securities raises questions about the information content of innovative corporate financing decisions

corporatism monetary policy and macroeconomic performance a simple game theoretic analysis the effects of corporatism on inflation and output are analyzed in a model of a game between a government and a union this model allows consideration of aspects of corporatism other than centralization of wage bargaining and permits monetary policy to be endogenized corporatist attitudes on the part of the union have beneficial effects on economic performance provided the game is played noncooperatively with simultaneous moves through the nature of their impact depends critically on the government s preferences if the government leads certain forms of corporatism can be inflationary cooperative play reduces inflation but has an ambiguous effect on output copyright 1995 by the editors of the scandinavian journal of economics

institutional markets financial marketing and financial innovation firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations because of these agency theoretic relations institu tional behavior in financial markets is not a simple reflection of the preference structures of individuals institutional preferences give rise to a demand for new financial instru ments and innovations even when the returns on these instruments are spanned in the sense of complete pricing the innovations can be thought of as solving moral hazard problems an agency theoretic example serves to illustrate the demand supply and financial marketing of stripped securities in short institutions matter the past two decades have witnessed an explosion of financial innovations the changes are too varied and diffuse to permit an easy taxonomy but broadly they seem to fall into two classes first there are the new securities and their markets beginning with puts and calls we have moved on to euromarkets mortgage pass throughs and cmo s strips straps and swaps putable converti bles primes and scores and s p futures and all of the other instruments that inhibit the financial zoo second there are the dynamic trading strategies that make heavy use of the new instruments basket and program trading the asset pricing theories that now characterize different types of money management and the various incarnations of portfolio insurance have changed financial decision making as dramatically as the available array of instruments has changed along with these changes has come an enormous increase in the demand for the services of financial economists we are called upon not only to value the new instruments and the new strategies but to design them as well like engineers

making decisions on offshore outsourcing and backshoring a case study in the bicycle industry abstract small and medium sized enterprises smes are expected to generate new innovations as well as future growth and employment for the european economy in the last two decades a large number of european manufacturing companies have offshored their production operations to low cost countries outside of the eurozone however also bringing back home the once offshore outsourced manufacturing i e backshoring has become a notable phenomenon even if it has received less attention in research until very recently this paper reports research on consecutive offshoring and backshoring decisions of a northern european bicycle manufacturing company we identified an over 30 percent cost advantage from offshore outsourcing that turned over a two year period into an advantage for the firm s own manufacturing in the home country the main reasons for the rediscovered advantage of in house manufacturing were 1 the increasing accuracy of cost allocation procedures 2 changes in external factors such as exchange rate variations and supplier costs 3 growing sales volumes and the simultaneous requirement for shorter lead times resulting from the redefinition of the product and 4 the network level learning to combine factory and network level operations the contribution of this paper is the insight that it provides into how companies can overvalue the cost benefits of offshore outsourcing as well as highlighting factors to be considered and the sensitivity analysis to be carried out in evaluating such decisions

social corporatism a superior economic system social corporatism and economic performance introduction and conclusions jukka pekkarinen et al lessons from corporatist theorizations goran therborn corporatism and wage bargaining matti pohjola corporatism and labour market performance bob rowthorn corporatism patterns of employment and access to consumption andrew glyn saving and economic growth from a nordic perspective katri kosonen social corporation and long term economic performance michael lanesmann and juhana vartiainen industrial policies and social corporatism michael landesmann exchange rate policy and employment in small open economies sixten korkman corporatism and economic performance in sweden norway and finland jukka pekkarinen corporatism success or failure austrian experiences alois guger the swiss model corporatism or liberal capitalism wolfgang blaas the unexpected emergence of australian corporatism robin archer

drift and adjustment in organizational rule compliance explaining the regulatory pendulum in financial markets this article integrates research on rule development compliance and organizational change to model rule development and compliance in organizations using causal loop modeling from system dynamics to articulate explicitly a few key underlying processes we focus on financial markets as a case area suggesting that recurring regulatory problems in financial markets in the united states over the past 60 years although differing in specifics are structurally similar at the heart of the model is the tension between production goals that focus on short term certain salient benefits and required adherence to production constraining rules that attempt to mitigate long term uncertain nonsalient risks it describes systemically how organizations attend to rules depending on the nature of the benefits of production compared with those of rule compliance the model captures the operative mechanisms responsible for the development of pressures for production and for rule compliance in organizations providing a structural explanation both for problem prone organizations characterized by erosion of standards and increased violations and for organizations following rules more reliably drawing on studies of institutional work we conclude by suggesting research on how agency through strategic and tactical choice potentially modifies structure in rule compliance

convertible bond design and capital investment the role of call provisions if firms issue convertible securities to facilitate sequential investment the securities should be engineered to give sufficient flexibility to accommodate timing of follow on investment we examine call provisions in convertible bonds and argue that firms with investment options expected to expire sooner later will offer weaker stronger call protection we find that issues with weak or no call protection are offered by firms that invest greater amounts soon after issuance than those issuing convertibles with strong protection moreover capital expenditure levels during the 5 year period following issuance are inversely related to the length of call protection periods most convertible bonds and notes have call provisions and most provisions have important qualifications or protection broadly speaking convertibles may have absolute protection not callable hard call protection noncallable for a specified period provisional or soft call protection callable if certain conditions on stock price are met or no protection callable anytime in this study we investigate the relations between the strength and length of call protection and firms subsequent investment behavior our hypothesis is a natural implication of the sequential financing motive for convertible debt financing for example in mayers 1998 firms finance their planned multistage investment programs with convertibles besides mayers sequential financing motive other explanations for convertible financing include theories based on post issuance risk shifting jensen and meckling 1976 green 1984 heterogeneous risk assessment brennan and schwartz 1988 and asymmetric information stein 1992 in a recent study lewis rogalski and seward 2001 offer an explanation based on equity market rationing stein s 1992 model has at least an implicit role for callability but we believe mayers explanation has direct implications for the nature of call provisions that we examine here he argues that convertible financing is well suited to

cooperation and political economic performance in affluent democratic capitalism research on comparative political economic performance has traditionally followed two separate tracks one concerned with collective economic gain growth and efficiency and the other focused on distribution and redistribution cooperative institutions offer a key to understanding cross national variation among the affluent capitalist democracies in both facets of political economic performance these institutions cluster along two dimensions neocorporatism and firm level cooperation pooled time series analysis for 18 nations over 1960 89 suggests that 1 neocorporatism is a major source of distributive redistributive policies and outcomes and of several sources of collective gain 2 firm level cooperation is a key contributor to economic growth

the eurobond market and corporate financial policy abstract on average significant positive abnormal returns are associated with eurobond issues during the period 1975 1985 the cross sectional and time series distributions of the abnormal returns are consistent with the hypothesis that impediments to the adjustment of asset supplies to new demand conditions are large enough to create profitable financing opportunities for firms our analysis demonstrates how profitable financing opportunities can persist on the eurobond market and when they are most likely to arise

the market for tax benefits evidence from leveraged esops abstract this paper examines the competitiveness of the financial markets with respect to taxes a unique set of interest rates from leveraged esops enables precise measures of the effect of a debt subsidy on prices i find that the market shifts most of the tax benefits to borrowers indicative of an elastic supply curve for lenders lenders are compensated for incremental costs such as reductions in tax rates and barriers to entry evidence is also presented that esop lenders are high taxpaying banks suggesting the existence of a tax clientele

the price effect of option introduction this paper examines the price effect of option introduction from 1974 to 1980 the introduction of individual options causes a permanent price increase in the underlying security beginning approximately three days before introduction the price effect appears to be associated with introduction and not announcement throughout the sample period excess returns volatility declines with option introduction systematic risk is unchanged there is a positive relation between the price increase and a measure of activity in the options market copyright 1989 by american finance association

corporatism as an impediment to ecological sustenance the case of finnish waste management abstract this study set out to improve the capacity of finnish policy makers to design and implement long term waste management policies since policy makers must frequently act on incomplete information and process the information they receive through mental models that can lead to inefficient or myopic choices the methodological approach was to analyze the structure substance and institutional context of the mental models with which key policy makers in finnish waste management rationalize their long term decisions individual scenarios were analyzed for inconsistencies that indicate how institutions constrain policy decisions and what institutional changes might enable policy makers to better prepare for the long term future to map the cognitive models that underlie waste management policies interviews were conducted in 1992 with 24 decision makers and experts on finnish waste management the main finding is that the exclusion of long term ecological sustenance is a systemic built in characteristic of finnish corporatism corporatist institutions nurture environmental policy makers short sighted mental models which in turn are the rationale for the short sighted corporatist institutions the principle unifying the recommendations is the administrative and procedural separation of conflicting environmental policy interests and the simultaneous empowering of sustainable goals with appropriate institutions

financial innovation in the uk this study employs a national survey of over 1100 british financial firms to ascertain the determinants of financial innovation and their sales success using the logit and the generalized tobit models we find that the likelihood of financial innovation rises with the size of financial firms employee education greater expenditure on research and development the availability of finance and the extent to which firms cooperate with each other perceptions of economic risk and innovation costs are also influential r d cooperation and human capital are the main variables driving the success of financial innovation measured by the percentage share of innovations sold firms in london the south have a significantly greater tendency to innovate though scotland also does well stock broking fund management and related activities are more innovative than firms in the financial intermediation and pension insurance sectors

network externality an uncommon tragedy economists have defined network externality and have examined putative inframarginal market failures associated with it this paper distinguishes between network effects and network externalities where the latter are market failures the authors argue that while network effects are important network externalities are theoretically fragile and empirically undocumented some network externalities are merely pecuniary network ownership or transactions among network participants can internalize some network effects the type of market failure that has been associated with these externalities is a transition problem that has little to do with externality

competition and innovation evidence from financial services abstract this paper presents new evidence on the relationship between competition and innovation by extending previous literature from manufacturing to financial services we introduce a new measure of overall innovation by estimating and enveloping annual minimum cost frontiers to create a global frontier the distance to the global frontier constitutes each bank s technology gap which decreases if the bank manages to innovate our innovation measure enables us to derive and estimate the model of aghion et al 2005b at the firm level for the us banking industry based on individual bank call report data for the period 1984 2004 consistent with theoretical and empirical work by aghion et al we find evidence of an inverted u relationship between competition and innovation that is robust over several different specifications further evidence on major structural changes in the us banking industry indicates that banks moved beyond their optimal innovation level and that interstate banking deregulation resulted in lower bank innovation policy implications to financial reform and prudential regulation are discussed also

boom and bust patterns in the adoption of financial innovations we develop a dynamic model of the adoption of financial innovations each period firms decide whether or not to adopt an innovation of uncertain value and the profitability of each period s adoptions reveals information about the innovation s value we show that characteristics of financial innovation waves cited by critics as evidence of irrational excess are in fact consistent with fully rational behavior we also show that social welfare is enhanced when more firms adopt innovations of questionable value and that financial intermediaries base an incentive to encourage such adoption article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

measuring welfare effects of unbundling financial innovations the case of collateralized mortgage obligations abstract the proposition that market extending financial innovations enhance welfare has strong theoretical support however quantification of these welfare benefits has previously been unavailable in this paper we demonstrate that such quantification is possible for market extending innovations that unbundle an existing asset by selling its cash flows in two or more parts we apply this approach to a prominent recent example of an unbundling innovation collateralized mortgage obligations and find the benefits to have been substantial

market structure and inefficiency in the foreign exchange market abstract this paper investigates the intradaily operational efficiency of the us foreign exchange market by conducting computer simulation experiments with market structure the numbers of market makers brokers and customers the results indicate significant operational inefficiencies which can be explained by temporary inventory imbalances inherent in a decentralized market the results also suggest that much of this inefficiency could be alleviated through a centralization of price information jel f31 g15

bank capital regulation and structured finance we construct a model in which bank capital regulation and financial innovation interact innovation takes the form of pooling and tranching of assets and the creation of separate structures with different seniority different risk and different capital charges a process that captures some stylized features of structured finance regulation is motivated by the divergence of private and social interests in future profits capital regulation lowers bank profits and may induce banks to innovate in order to evade the regulation itself we show that structured finance can improve welfare in some cases however innovation may also be adopted to avoid regulation even in cases where it decreases welfare

the impact of global equity offerings this article examines the impact of u s firms issuing equity in multiple markets we compare the stock price reactions to announcements of global equity offers to a control group of issues offered exclusively in the domestic u s market all else equal the adverse price reaction that typically accompanies equity issuance is reduced by 0 8 percent when some shares are sold abroad the overall evidence suggests global offers are effective in expanding demand and reducing the price pressure effects associated with share issuance the benefits of global offers appear to be associated with an increase in the number of foreign shareholders the search for new capital markets and lower costs of capital is an ongoing search for most firms in recent years the number of u s firms issuing common equity in international markets has increased significantly in 1985 u s firms raised 89 million through follow on equity offers in foreign markets and this amount increased to 18 915 million in 1995 a greater than 200 fold increase in nominal terms this paper focuses on follow on global equity issues by u s firms and attempts to assess why firms widely acknowledged to have access to broad and deep domestic capital markets increasingly seek to raise equity abroad the global equity offerings we examine involve a simultaneous sale of common equity at the same offer price in the u s market and one or more international markets we examine the characteristics of the issuers and issues and investigate to what extent the wider distribution of shares affects the pricing and costs of these issues our main line of inquiry examines whether the distribution of shares to multiple markets results in a higher offer price for equity shares than would be obtained had the shares been sold exclusively in the u s market domes

the determinants of the maturity of corporate debt issues we document the determinants of the term to maturity of 7 369 bonds and notes issued between 1982 and 1993 our main finding is that large firms with investment grade credit ratings typically borrow at the short end and at the long end and of the maturity spectrum while firms with speculative grade credit ratings typically borrow in the middle of the maturity spectrum this pattern is consistent with the theory that risky firms do not issue short term debt in order to avoid inefficient liquidation but are screened out of the long term debt market because of the prospect of risky asset substitution traditionally capital structure research has focused on how much of a firm s future cash flows should be paid out to debtholders instead of equityholders an equally important issue is when future cash flows should be paid out to debtholders a firm that finances its projects with short term debt risks serious financial difficulty if the debt cannot be extended similarly a firm that finances its activities with long term debt can sacrifice profits by needlessly risking mismanagement of resources after cash flows are returned from investments but before they are due to debtholders this study investigates the factors that firms consider when choosing the maturity of their liabilities we document the determinants of the maturity of 7 368 public debt issues made by u s corporations between 1982 and 1993 our empirical tests are based on existing theoretical models that relate the maturity of a firm s borrowings to the riskiness of its cash flows the time until investments pay off the quality of information held by outsiders the expected

the emergence and regulation of contingent commitment banking abstract in but a relatively few years banking has changed considerably now it is very much a business of making contingent promises or commitments and even just a decade ago it was not recognizing change is apparently easier though than accounting for it or than not worrying about it in this paper an attempt is made to account for the change from traditional to contingent commitment banking an attempt which must however be regarded as less than brilliantly successful and responding to the concern that has been expressed by among others federal reserve officials it is argued that even if banking keeps on changing until the last vestige of the traditional has disappeared the federal reserve need not in the end be less effective as the u s monetary authority than it is at present there is also a concern shared by some federal reserve officials that if change persists then unless bank regulatory policy is altered appropriately financial stability will be increasingly threatened that could be but as is argued in the paper it is far from obvious that more capital and or a risk adjusted capital requirement will make bank failures rarer than they otherwise would be

the legal environment banks and long run economic growth this paper examines the relationship between the legal system and banlding development and traces this connection through to long run rates of per capita gdp growth capital stock growth and productivity growth the data indicate that countries where the legal system 1 emphasizes creditor rights and 2 rigorously enforces contracts have better developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax furtherrnore the exogenous component of banking development the component defined by the legal environment is positively and robustly associated with per capita growth physical capital accumulation and productivity growth this paper addresses two questions first do crosscountry differences in the legal rights of creditors the efficiency of contract enforcement and the origin of the legal system explain cross country differences in the level of banking development second do better developed banks cause faster economic development that is is the component of banking development defined by the legal environment positively associated with long run rates of economic growth capital accumulation and productivity growth examining the relationship between the legal system and banking development is valuable irrespective of issues associated with long run growth first banks may influence the level of income per capita and the magnitude of cyclical fluctuations bernanke and gertler 1989 1990 second many economists stress that understanding the evolution of legal and financial systems is essential for understanding economic development north 1981 engerman and sokoloff 1996 consequently quantitative information on the relationship between the legal environment and banks will improve our understanding of business cycles and the process of economic development furthermore examining the causal links between banks and economic growth has both conceptual and policy implications on the conceptual front a long literature debates the importance of banks in economic development starting as early as bagehot 1873 economists have argued that better banks banks that are better at identifying creditworthy firms mobilizing savings pooling risks and facilitating transactions

is the internet delivery channel changing banks performance the case of spanish banks abstract in spite of the conspicuous use of the internet as a delivery channel there is a relative dearth of empirical studies that provide a quantitative analysis of the impact of the internet on banks financial performance this paper attempts to fill this gap by identifying and estimating the impact of the adoption of a transactional web site on financial performance using a sample of 72 commercial banks operating in spain over the period 1994 2002 the impact on banks performance of transactional web adoption takes time to appear the adoption of the internet as a delivery channel involves a gradual reduction in overhead expenses particularly staff marketing and it this effect is statistically significant after one and a half years after adoption the cost reduction translates into an improvement in banks profitability which becomes significant after one and a half years in terms of roa and after three years in terms of roe the paper also concludes that the internet is being used as a complement to rather than a substitute for physical branches

financial innovation the last twenty years and the next the word revolution is entirely appropriate for describing the changes in financial institu tions and instruments that have occurred in the past twenty years the major impulses to successful financial innovations have come from regulations and taxes the outlook for the future is for a slowing down of the rate of financial innovation but much growth and improvement are still in prospect

a model for designing callable bonds and its solution using tabu search abstract we formulate the problem of designing callable bonds as a non linear global optimization problem the data of the model are obtained from simulations of holding period returns of a given bond design which are used to compute a certainty equivalent return viz some target assets the design specifications of the callable bond are then adjusted so that the certainty equivalent return is maximized the resulting problem is multi modal and a tabu search procedure implemented on a distributed network of workstations is used to optimize the bond design the model is compared with the classical portfolio immunization model and the tabu search solution technique is compared with simulated annealing for solving the global optimization program it is shown that the global optimization model yields higher returns than portfolio immunization it is also shown that tabu search is computationally more efficient than simulated annealing in solving the model and it produces better solutions

speculation and risk sharing with new financial assets while the traditional view of nancial innovation emphasizes the risk sharing role of new nancial assets belief disagreements about these assets naturally lead to speculation which represents a powerful economic force in the opposite direction this paper investigates the eect of nancial innovation on portfolio risks in an economy when both the risk sharing and the speculation forces are present financial assets provide hedging services but they are also subject to speculation because traders do not necessarily agree about their payos i de ne the average variance of traders net worths as a measure of portfolio risks for this economy and i decompose it into two components the uninsurable variance de ned as the average variance that would obtain if there were no belief disagreements and the speculative variance de ned as the residual variance that results from speculative trades based on belief disagreements financial innovation always decreases the uninsurable variance because new assets increase the possibilities for risk sharing my main result shows that nancial innovation also always increases the speculative variance this is true even if traders completely agree about the payos of new assets the intuition behind this result is the hedge more bet more eect traders use new assets to hedge their bets on existing assets which in turn enables them to place larger bets and take on greater risks my second set of results concern endogenous nancial innovation when belief disagreements are su ciently large a pro t seeking market maker introduces assets that maximize the average variance among all possible choices completely disregarding the risk sharing motive for nancial innovation my third set of results concern a calibration of the model in the context of the gdp indexed assets proposed by athanasoulis and shiller 2001 when traders have reasonable amounts of belief disagreements these assets would have the unintended consequence of increasing their consumption risks

unions wages and the common interest three models have dominated recent research on the relationship between labor unions wage behavior and national economic performance a simple linear model a parabolic model and a political model this article argues that an unemployment mediated linear model is theoretically preferable in a context of low unemployment encompassing labor movements can be expected to restrain wage demands whereas localized unions have much less incentive to do so in a context of high unemployment localized unions should exhibit wage moderation and the pressure on encompassing unions to restrain wage demands is further accentuated these four models are assessed as predictors of wage changes inflation and misery index levels for 15 industrialized nations over the periods 1960 1973 1974 1979 and 1980 1990 the linear models outperform the parabolic and political models in each of the latter two time periods for the mid to late 1970s the simple linear model performs best but for the 1980s the unemployment medi

currency hedging and goods trade abstract a puzzle in empirical international finance is the difficulty in finding a large and negative effect of exchange rate volatility on international trade a common explanation is the availability of hedging instruments this paper examines the empirical validity of this explanation using data on over 1000 country pairs which countries have currency hedging instruments is not perfectly observable this paper deals with the problem by specifying an endogenous regime switching regression there are two main findings first there is no evidence in the data to support the validity of the hedging hypothesis second for country pairs with large trade potential exchange rate volatility deters goods trade to an extent much larger than that typically has been documented in the literature without using the switching regression specification

primes and scores an essay on market imperfections this paper investigates the reported relative mispricing of primes and scores to the underlying stock given transaction costs we establish arbitrage based bounds on prime and score prices we then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds we find that prime and score prices do exceed stock prices and often by a considerable amount we demonstrate that this increased value is most likely due to the score s ability to save on the costs of dynamic hedging we also show how short sale and trust size constraints impede the ability to arbitrage price disparities in an efficient market the price of a security reflects the value of its underlying assets it should not be possible therefore to create value simply by splitting a security into different parts since the underlying assets are unchanged the packaging of the cash flows should not matter the recent introduction of primes and scores suggests that this is not always the case by separating a security s cash flows into a dividend based component the prime and an appreciation or option based component the score developers of these securities have seemingly created two assets whose value separately exceeds that of the original stock since the prime and the score are based on the same underlying asset this raises a puzzling question about the actual efficiency of securities markets this paper investigates this anomaly by examining whether primies and scores are actuauy mispriced and if so why given the costs of transacting in the prime score and stock we establish bounds on prime and score prices that are consistent with no arbitrage opportunities we then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds this nonparametric procedure is designed both to confront the measurement error problems plaguing the literature i e nonobservable bid ask prices and nonsimultaneous prices see phillips and smith 1980 bhattacharya 1983 and bookstaber 1981 and to avoid the estimation of round trip transaction costs commissions we find the surprising result that prime and score prices exceed the price of the underlying stock often by a considerable amount using time series data we de monstrate that significant price differentials exist for each firm in our sample

strategy complexity and economic rent this paper discusses important friction forces that future theories of strategy must incorporate some of these are technological and environmental but the most important ones it is argued are psychological the view is developed that strategy at its core concerns the development and testing of heuristics for high stake decisions in environments too unstable and complex to be optimized the paper especially highlights the behavioral dimension in the belief that strategies should incorporate both the rational and suboptimal aspects of human behavior the rational approach is in many ways the easier as there may be only one way to be right yet the great variety in which people and companies can err gives strategy its creative and real world challenge the tension between the rational and behavioral components is what the field of strategy should seek to exploit

advantageous innovation and imitation in the underwriting market for corporate securities investment banks that develop new corporate securities systematically lead the new underwriting market despite being imitated early by equally competitive rivals we study how innovators and imitators set underwriting fees in order to identify empirically the source of this advantage using data of innovative securities since 1985 we do find that innovators set systematically higher fees than imitators this premium decreases as more issues occur and faster for later generation products imitation is also quicker for later generations this evidence supports the hypothesis that the innovator has superior skills in structuring any given issue of the new security

innovations new market instruments any measure of the volume of financial innovation would register an explosion in the last ten years for example the swap market has grown from zero to hundreds of billions of dollars in this period the number of traded financial futures contracts has increased from a handful to nearly one hundred the explosion is one of both scale and variety even the british government now issues gilts with non standard coupon rates and conversion features apparently tailored to a whole range of specialised clienteles

rival precedence and the dynamics of technology adoption an empirical analysis this study employs information on the adoption of automatic teller machines by banking firms to examine the nature of firm reactions to rival precedence in the adoption process using a failure time estimation procedure it is found that the ado ption of this innovation by rivals increases the conditional probabil ity that a decision to adopt will be made the effect of spillovers f rom technology adoption and the interaction of market concentration a nd rival precedence are also investigated finally the study shows w ith an example how the estimation procedure may be used to test the u nderpinnings of diffusion processes copyright 1987 by the review of economic studies limited

financial innovation the bright and the dark sides based on data from 32 countries over the period 1996 2010 this paper is the first to assess the relationship between financial innovation on the one hand and bank growth and fragility as well as economic growth on the other hand we find that different measures of financial innovation capturing both a broad concept and specific innovations are associated with faster bank growth but also higher bank fragility and worse bank performance during the recent crisis these effects are stronger in countries with larger securities markets and more restrictive regulatory frameworks in spite of these seemingly ambiguous findings our evidence points to a positive net effect of financial innovation on economic growth financial innovation is associated with higher growth in countries and industries with better growth opportunities

financial innovation and portfolio risks i illustrate the effect of financial innovation on portfolio risks by using an example with risk sharing needs and belief disagreements i consider two types of innovation product innovation formalized as an expansion of new financial assets and process innovation formalized as a reduction in transaction costs when belief disagreements are large both types of innovation increase portfolio risks moreover endogenous financial innovation is directed towards speculative assets that increase portfolio risks

investor yield and gross underwriting spread comparisons among u s dollar domestic yankee eurodollar and global bonds abstract the characteristics and features of domestic foreign eurobonds and global bonds differ from one another as do their regulation we develop regression models to compare investor yield differences that should logically exist at issuance for these bond market segments for u s dollar denominated bonds our empirical results show that ceteris paribus both privately placed and rule 144a eurodollar issues yield more than publicly placed bonds yankee bonds yield insignificantly more than domestic bonds and the bearer feature common to eurodollar bonds is not prized enough by institutional investors for them to accept a lower yield relative to domestic or yankee bonds we do not find a statistically significant difference between the investor yield spread on u s dollar global bonds and u s domestic bonds or yankee bonds or eurodollar bonds we also study underwriting costs of publicly traded bonds and find ceteris paribus that eurodollar bonds are far more costly for the firm to issue than domestic bonds yankee bonds or global bonds domestic and yankee bonds are more expensive than global bonds and there is no significant cost difference between domestic and yankee bonds

investor base and corporate borrowing evidence from international bonds abstract we examine international bond issues by us firms to study the benefits of investor taste for cross border security issuances we proxy for firms international investor taste with the fraction of prior international bond holding in firms domestic and international bonds and find that international investor demand increases with such taste moreover the offering yield spreads on international bonds are lower than domestic offering yield spreads for these internationally recognized firms and they have higher probability of issuing internationally such international recognition may occur for instance if the diversification benefits of adding the security to investor s portfolio outweigh the negative effects of higher renegotiation costs for international compared to domestic investors

networks and compatibility implications for antitrust in this paper we draw crucial parallels between the concepts of compatibility and networks and the more traditional concepts of complementarity and vertical relationships we also develop the important distinctions between two way networks and one way networks we then apply our framework to a number of current antitrust issues

some evidence on the uniqueness of initial public debt offerings debt initial public offerings ipos represent a major shift in a firm s financing policy by both extending debt maturity and altering the public private debt mix in contrast to findings for seasoned debt offerings we document a significantly negative stock price response to debt ipo announcements this result is consistent with debt maturity and debt ownership structure theories the equity wealth effect is negatively related to the offer s maturity and positively related to the degree of bank monitoring we find that firms with less information asymmetry and firms with higher growth opportunities experience a less adverse stock price response the decision to access the public debt market for the first time represents a major change in a firm s financing policy an initial public debt offer alters the firm s debt structure in two significant ways not only does this policy choice affect the firm s debt ownership structure by altering its mix of public relative to private debt but it also extends the average debt maturity of the firm substantially this study provides empirical evidence on the validity of some important debt structure theories by focusing on the information content of initial public debt offers debt ipos two major strands of theories have evolved in the literature the debt ownership choice theories model corporate choice of private and public debt mix see e g fama 1985 diamond 1991a and rajan 1992 while the other set of theories models corporate debt maturity choice easterbrook 1984 flannery 1986 and kale and noe 1990 a number of recent studies empirically test some of the predictions of these models barclay and smith 1995 guedes and opler 1996 houston and james 1996 johnson 1997 and stohs and mauer 1996

client discretion switching costs and financial innovation we analyze the incentives of investment banks to develop innovative products we show that client characteristics and market structure affect these incentives significantly investment banks with larger market shares have greater incentives to innovate and smaller banks are likely to share their innovations with the largest bank innovation incentives increase in volatile environments and regulatory scrutiny actually encourages loophole exploitation activity our predictions are consistent with stylized facts and the analysis has broad testable implications for innovative activity in other markets similarly characterized by a lack of comprehensive protection for intellectual property rights for example the software industry article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the role of liquidity in futures market innovations i characterize the optimal design of a new futures market an innovation by an exchange in the presence of market frictions futures markets am characterized by both the contract and the level of trader participation both can be determined by an exchange a game in which exchanges simultaneously design markets is c onsidered and a particular equilibrium not necessarily unique is constructed a game in which exchanges sequentially design markets and incur design costs is also considered and the generically unique equilibrium is constructed the nature of equilibrium with multiple exchanges is discussed in these simultaneous and sequential settings illustrating the role played by liquidity considerations both in market design and in the nature of competition between exchanges

the saga of the first stock index futures contract benchmarks models and learning in the presence of imperfect or perturbed benchmarks pricing based on relative valuation or arbitrage can be affected adversely this study highlights persistent pricing irregularities in the kansas city value line kcvl stock index futures market this contract is especially interesting because the underlying benchmark underwent a midstream change in definition from a complex equally weighted geometric index to an equally weighted arithmetic index empirical analysis reveals that during a four year period the market displayed herd like behavior and priced the kcvl geometric contract using the simple but wrong cost of carry benchmark model a dramatic change occurs around the publication of the eytan harpaz 1986 model when the market turns efficient from the perspective of this new model the market appears to have succumbed initially to a bad information cascade primarily because arbitrage was difficult to understand and carry out under complex benchmarking the evidence provides empirical extension to the observational social learning paradigms of simon 1955 banerjee 1992 and bikhchandani hirshleifer and welch 1992 that lead to behavioral herding and information cascades

an analysis of the wealth effects of japanese offshore dollar denominated convertible and warrant bond issues offshore dollar denominated equity linked issues were a more important source of funds for japanese companies during the 1980s than domestic equity and straight debt issues combined using a sample of japanese equity linked offshore issues from 1977 to 1989 we find that the announcement of these issues is accompanied by a significant positive abnormal return this contrasts with evidence that u s equity linked issues have a significant negative stock price reaction we provide an explanation for the difference in stock price reactions between u s and japanese issues that is based on the greater influence on managers security issue decisions of long term investors and banks in japan than in the u s

diffusion of financial innovations the case of junk bonds and note issuance facilities financial systems have experienced dramatic changes over the last twenty years a sharp acceleration in the pace of innovation has significantly transformed both domestic and international financial systems securitization probably the most dominant trend prevailing in international financial markets during the 1980s and early 1990s has had the impact of shifting credit flows from bank lending to marketable instruments and has been largely reflected in the growth of off balance sheet activities obsas a number of recent studies have examined why banks engage in obsas l benveniste and berger 1986 1987 have argued that securitization enables banks to optimize the allocation of risk sharing by shifting risk from risk averse to riskneutral investors collateralization hypothesis banks can do so by securitizing their safest assets off balance sheet and retaining their risky assets on balance sheet this hypothesis predicts a positive relationship between securitization and bank risk because the pooling problem of mixing risky and safe assets on balance sheet is more acute in risky banks moreover benveniste and berger 1986 and thomas

systems competition and network effects this paper discusses firm behavior market performance and the public and private institutions that arise in systems markets i e markets where consumers use compatible components together to generate benefits in such markets which include communications networks and hardware software networks popular products are inherently more valuable these network effects can drive corporate strategies and are critical in understanding innovation in many high technology markets the discussion here emphasizes the dynamics of consumer adoption decisions in the presence of network effects competition between incompatible systems and how suppliers choose which components are compatible and which are not

motives for forming research development financing organizations abstract we study the decision to fund r d through a separate financing organization an rdfo that takes the form of either a limited partnership or a corporation the rdfo offers tax and financial reporting benefits as a form of external funding it also creates moral hazard and adverse selection problems information costs using convertible debt as a comparative form of external funding we find that debt related but not equity related financial reporting benefits affect the decision to form rdfos the evidence is mixed on whether taxes influence the formation decision and the information costs of rdfos restrict their use

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research

collateral motivated financial innovation collateral frictions have a profound effect on our economic landscape ranging from the design of financial securities laws and institutions to various rules and regulations we analyze a model with disagreement where securities and collateral requirements are endogenous it shows that the security that isolates the variable with disagreement is optimal in the sense that alternative securities cannot generate any trading in an economy with n states investors may introduce more than n securities and markets are still incomplete the model has several novel predictions on the behavior of basis the spread between the prices of an asset and its replicating portfolio

optimal patenting and licensing of financial innovations recent court decisions starting with the state street decision in 1998 allow business methods to be patentable and now give financial institutions the option to seek patent protection for financial innovations this new patentability paradigm and the heterogeneity of characteristics associated with financial innovations pose an immediate decision problem for senior management what to patent we present a parsimonious decision framework that answers this question we show that for innovations with certain characteristics it is optimal not to patent even if the option of patenting and licensing is available our model emphasizes the role of embedded real options that arise from certain types of financial innovations the model provides an explanation of observed patenting behavior of financial institutions and the success of a wide class of innovations including swaps credit derivatives and pricing algorithms

designing portfolios of financial products via integrated simulation and optimization models we analyze the problem of debt issuance through the sale of innovative financial products the problem is broken down to questions of designing the financial products specifying the debt structure with the amount issued in each product and determining an optimal level of financial leverage we formulate a hierarchical optimization model to integrate these three issues and provide constructive answers input data for the models are obtained from monte carlo simulation procedures that generate scenarios of holding period returns of the designed products the hierarchical optimization model is specialized for the problem of issuing a portfolio of callable bonds to fund mortgage assets the upper level optimization program is multimodal and a tabu search procedure is developed for its solution empirical results illustrate the efficacy of the developed models in designing the appropriate structure of the callable bonds and making optimal allocations of equity and debt among the designed products computational results with the implementation of tabu search on both serial and parallel computers are also presented

financial innovation and the role of derivative securities an empirical analysis of the treasury strips program the role that financial innovation plays in financial markets is very controversial to provide insight into this role we examine how market participants use the highly successful treasury strips program we find that investors use the option to create treasury derivative strips primarily to make markets more complete and take advantage of tax and accounting asymmetries although liquidity related factors help explain differences in the prices of treasury bonds and strips we find little evidence that the option to strip and reconstitute securities is used for speculative or arbitrage related purposes the role of financial innovation is a central issue for both policymakers and researchers in finance 1 critics argue that financial innovations often have no economic role beyond allowing some investors to take highly leveraged speculative or arbitrage related positions in contrast advocates argue that the introduction of new products makes financial markets more complete reduces frictions and transaction costs and leads to a more optimal allocation of risk in the economy to better understand the role played by financial innovation this paper examines how investors use the successful separate trading of registered interest and principal of securities strips program of the u s treasury this program allows investors to strip treasury notes and bonds to create separate discount bonds and to reconstitute previously stripped notes and

an integrated location production distribution and investment model for a multinational corporation abstract we present a mixed integer linear formulation that extends published models on multinational corporation facility location decisions by including exogenous variables such as exchange rates and tariff rates and incorporating production distribution and investment decisions the model provides insights on production levels facility configurations distribution strategies and levels of investment needed at these facilities and explores factors that influence the facility s configuration decisions several scenarios are considered based on various facility configurations and levels of exchange and tariff rates the results obtained from these show that the model s performance and results are in complete agreement with accepted economic theories