international evidence on the determinants of foreign exchange rate exposure of multinational corporations in this paper we explore some of the potential determinants of foreign exchange fx exposure and firm value we contribute to previous research on stock returns and firm value as we have access to a unique survey database and can include as determinants in our empirical analysis the objectives and emphasis on risk management as well as considering previous factors including the nature of the business environment we can also examine any regional influences as our sample includes uk us and asia pacific multinational companies mncs as predicted by theory we find some evidence that mncs with greater foreign operations have a larger magnitude of fx exposure however our proxy for the emphasis of fx management does not have the predicted negative association with the magnitude of fx indicating that managers may focus on short term cash flows in their fx management rather than firm value with regard to the potentially differential regional role of our variables a range of interesting results is found arguably in our most notable such finding we see that the contribution of overseas business to total revenues has no association with the magnitude of fx exposure for us mncs it has a positive role for uk mncs consistent with theory and a negative role for asia pacific mncs which could be explained by macroeconomic and or financial characteristics of the mncs in the sample

competition and microfinance abstract competition between microfinance institutions mfis in developing countries has increased dramatically in the last decade we model the behavior of non profit lenders and show that their non standard client maximizing objectives cause them to cross subsidize within their pool of borrowers thus when competition eliminates rents on profitable borrowers it is likely to yield a new equilibrium in which poor borrowers are worse off as competition exacerbates asymmetric information problems over borrower indebtedness the most impatient borrowers begin to obtain multiple loans creating a negative externality that leads to less favorable equilibrium loan contracts for all borrowers

earnings risk taking and capital accumulation in small and large community banks abstract we examine the relationships between ownership structure and both earnings and risk taking among community banks before during and after the us financial crisis we find that publicly held small community banks had lower earnings than privately held ones before the recession but had higher earnings during and after the recession publicly held small community banks exhibited similar risk taking to privately held ones before and during the recession but greater risk taking after we also find that publicly held small community banks de risked more slowly than privately held ones following the recession large community banks on the other hand show no consistent relationship between ownership structure and earnings and a strong cyclical relationship between ownership structure and risk taking these findings expand our understanding of how community bank performance and capital accumulation behaves through different cyclical periods and how ownership structure affects that behavior

margining in derivatives markets and the stability of the banking sector we investigate the effects of margining a widely used mechanism for attaching collateral to derivatives contracts on derivatives trading volume default risk and on the welfare in the banking sector first we develop a stylized banking sector equilibrium model to develop some basic intuition of the effects of margining we find that a margin requirement can be privately and socially sub optimal subsequently we extend this model into a dynamic simulation model that captures some of the essential characteristics of over the counter derivatives markets contrarily to the common belief that margining always reduces default risk we find that there exist situations in which margining increases default risk reduces aggregate derivatives trading volume and has an ambiguous effect on welfare in the banking sector the negative effects of margining are exacerbated during periods of market stress when margin rates are high and collateral is scarce we also find that central counterparties only lift some of the inefficiencies caused by margining

hedging and coordinated risk management evidence from thrift conversions we provide an explanation for hedging as a means of allocating rather than reducing risk we argue that when increases in total risk are costly firms optimally allocate risk by reducing increasing exposure to risks that provide zero positive economic rents our evidence shows that mutual thrifts that convert to stock institutions increase total risk following conversion consistent with their increased abilities and incentives for risk taking they achieve this increase by hedging interest rate risk and increasing credit risk we provide some evidence that risk management activities are related to growth capacity and management compensation structure attained at conversion

federal lending and the market for credit abstract federal lending is an important but unrecognized feature of modern credit markets this paper analyzes the effects of credit interventions on credit allocation and economic efficiency the underlying model posits asymmetric information between borrowers and lenders and allows for market clearing rationed or redlined equilibria principal results include unsubsidized credit interventions are neutral the relative effectiveness of alternative lending instruments depends on whether rationing occurs interactions among programs can have perverse effects and even without an informational advantage the government may enact welfare improving credit policies under certain conditions

the cyclical behavior of the department of justice s antitrust enforcement activity abstract we study the cyclical behavior of antitrust enforcement as measured by the number of cases initiated by the us department of justice the key result is that antitrust case activity is countercyclical this finding is robust across alternate indicators of economic activity which include stock prices corporate profits and business cycles and across different types of cases the finding of countercyclical case activity does not appear to lend support to interest group theories that predict greater regulatory protection towards producers during economic contractions one interpretation of our result would be that antitrust violations tend to increase during economic downturns leading to an increase in the number of cases initiated the broad implication being that the antitrust division primarily acts as an antitrust law enforcement agency our results show that politics as measured by the party of the president and the republican versus democrat composition of the house and senate does not have a clear impact on case activity finally the number of cases initiated are significantly affected by the extent of funding

the role of subsidies in microfinance evidence from the grameen bank the grameen bank of bangladesh has been in the vanguard of the microfinance movement showing the potential to alleviate poverty by providing credit to poor house holds part of this success has been built on subsidies in 1996 for example total subsidies evaluated at the economic opportunity cost of capital amounted to about us 26 30 million the evidence helps to explain why institutions like grameen have not just sprung up on their own as private commercial ventures and it underscores the value of openly addressing the costs and benefits of subsidization the paper also describes recent difficulties in maintaining high repayment rates q 1999 elsevier science b v all rights reserved

oligopolistic pricing over the deterministic market demand cycle some evidence from the us portland cement industry abstract haltiwanger and harrington 1991 haltiwanger j harrington j e jr 1991 the impact of cyclical demand movements on collusive behavior rand journal of economics 22 89 104 formulated a theory of self enforcing collusion assuming a deterministic demand cycle they predicted that under a self enforcing non cooperative pricing scheme for any level of demand the price in the rising part of the cycle would always be greater than the price in the falling part of the cycle they also predicted that the path of collusive profits should reach its peak before market demand we test their predictions using data from the portland cement industry the hypotheses are tested using a multi equation system differentiating the boom and the bust periods from 1974 to 1989 the results support both of haltiwanger and harrington s hypotheses

state intervention and the microcredit market the role of business development services we analyze in this paper how various forms of state intervention can impact microfinance institutions lending behavior using a simple model where entrepreneurs receive individual uncollateralized loans we show that not surprisingly state intervention through the loan guarantee increases the number of entrepreneurs receiving a loan however after modeling business development services bds provided by the microfinance institution we show that the loan guarantee can have a counterproductive effect by reducing the number of entrepreneurs benefiting from such services we therefore analyze an alternative policy bds subsidization we show that if bds are efficient enough and are targeted toward less performing borrowers then for fixed government expenditures such subsidies do better in terms of financial inclusion than the loan guarantee moreover we argue that under similar conditions bds subsidization alone does better in terms of financial inclusion than a mix of policies

interest rate risk management and the mix of fixed and floating rate debt we analyze the after swap mix of fixed and floating rate debt in a sample of non financial firms using hand collected data from a window of time when derivative positions were included in accounting disclosures to motivate the analyses we present a simple theoretical model that highlights the special features of interest rate risk consistent with the theory we find that firms that issue more fixed rate debt have higher liquidity ratios and lower operating income ratios we also document that individual firms actively vary the proportion of their fixed rate debt to a strikingly high extent there is a debate as to whether such variation should be interpreted as hedging or speculation we show that the firms more actively varying their debt mix respond to different hedging motives than those with low activity we then empirically motivate an alternative indicator of speculative activity co variation between ex post profitability of financial decisions and operating results

credit market failure intervention do government sponsored small business credit programs enrich poorer areas using local market employment rates as our measure of economic performance we find a positive and significant correlation between the average annual level of employment in a local market and the level of sba guaranteed lending in that local market furthermore the intensity of this correlation is much larger in low income markets indeed our results suggest that this correlation is positive and significant only in low income markets this result has important implications for public policy in general and sba guaranteed lending in particular

the intertemporal stability of the concentration margins relationship using a longitudinal data base we find that there has been a substantial narrowing of the spread between the price cost margins of concentrated and unconcentrated industries including measures of macroeconomic fluctuations into standard price cost margin regressions we find significant differences in cyclical behavior across market structure we also explore a possible explanation unionization for differences in cyclical behavior finally we investigate the degree to which our results are affected by the potential simultaneity of concentration advertising and the price cost margin

theories of cartel stability and the joint executive committee this article reexamines the experience of the joint executive committee an 1880s railroad cartel to assess the applicability of the green and porter 1984 and rotemberg and saloner 1986 theories of price wars after discussing necessary modifications to the theories i estimate a number of dynamic models to explore the causes of price wars the cyclical nature of pricing and the possibility that secret price cuts may have been given the estimates provide some support for the predictions of the first theory

tacit collusion in the presence of cyclical demand and endogenous capacity levels abstract we analyze tacit collusion in an industry characterized by cyclical demand and long run scale decisions firms face deterministic demand cycles and choose capacity levels prior to competing in prices our focus is on the nature of prices we find that two types of price wars may exist in one collusion can involve periods of mixed strategy price wars in the other consistent with the rotemberg and saloner 1986 definition of price wars we show that collusive prices can also become counter cyclical we also establish pricing patterns with respect to the relative prices in booms and recessions if the marginal cost of capacity is high enough holding current demand constant prices in the boom are generally lower than the prices in the recession this reverses the results of haltiwanger and harrington 1991 in contrast if the marginal cost of capacity is low enough then prices in the boom are generally higher than the prices in the recession for costs in an intermediate range numerical examples are calculated to show specific pricing patterns

modeling structural and temporal variation in the market s valuation of banking firms hidden capital exists whenever the accounting measure of a firm s net worth diverges from its economic value such unbooked capital has on balance sheet and off balancesheet sources this paper develops a model to estimate both forms of hidden capital and to test hypotheses about their determinants in effect the analysis expands the twoindex model by endogenizing the market and interest rate sensitivities of any stock and decomposing each sensitivity into on balance sheet and off balance sheet elements for a sample of banks during 1975 1985 the model finds considerable variation in both forms of hidden capital to the extent that an accounting representation of a firm s net worth diverges from its economic value the firm is said to have hidden capital two sources of hidden capital exist accountants misvaluations of portfolio positions that accounting principles designate as on balance sheet items and the systematic neglect of off balance sheet sources of value that these principles do not permit to be formally booked this paper develops a model for estimating both types of hidden capital the model makes direct use of accounting information on the bookable positions of a firm and separates bookable from unbookable sources of value we use regression analysis to partition the market value of a firm s stock i e its market capitalization mv into two components recorded capital reserves and unrecorded or hidden net worth hidden capital is in turn allocated between values that are unbooked but bookable through asset turnover or writedowns on a historical cost balance sheet under generally accepted accounting principles gaap and values which gaap currently designates as an unbookable offbalance sheet item we estimate the net unbooked value of on balance sheet positions by estimating an intermediate variation ratio k this variable expresses the ratio of the market value to the book value of the collected components of a firm s bookable

the nature and source of economies of scale in cement production this paper examines the cement production process in the framework of production processes in chemical industries put forth by greenberg hill and newburger 8 the model assumes that production occurs within a finite set of well defined alternative processes although the ratio of inputs does vary as output varies inputs cannot be traded off within a given process the production technique therefore does not allow for smooth substitutability between inputs the model is tested using operating data for a sample of twentyseven u s and canadian plants during the period 1963 to 1965 the major results are a cement production is characterized by large economies of scale in capital and labor with the extent varying by type of plant wet or dry and by type of capital input kiln or accessory machine b for wet plants there is support for the engineering two thirds rule and c material inputs display fixed proportions with factor coefficients varying by type of plant the paper proceeds in three parts section ii provides a description of the cement production process section iii reviews prior evidence on the existence and nature of economies of scale in cement production finally section iv describes and estimates an econometric model of cement production

enforcement in informal saving groups abstract informal groups cannot rely on external enforcement to insure that members abide by their obligations it is generally assumed that these problems are solved by social sanctions and reputational effects the present paper focuses on roscas one of the most commonly found informal financial institutions in the developing world we first show that in the absence of an external social sanctioning mechanism roscas are never sustainable even if the defecting member is excluded from all future roscas we then argue that the organizational structure of the rosca itself can be designed so as to address enforcement issues the implications of our analysis are consistent with first hand evidence from rosca groups in a kenyan slum

does executive portfolio structure affect risk management ceo risk taking incentives and corporate derivatives usage abstract this paper extends the investigation of the effect of managerial motives on hedging policy i utilize a proxy variable that incorporates ceo incentives to increase risk relative to incentives to increase stock price the variable is directly measured using observed characteristics of ceo portfolios of stock and option holdings furthermore ceo risk taking incentives are modeled as a choice variable to eliminate the simultaneity bias of modeling risk taking incentives as an exogenous variable if modeled as a simultaneous system of equations a strong negative link between ceo risk taking incentives and the amount of derivative holdings exists this result is consistent with the notion that derivatives are used for hedging purposes both the characteristics of stock and option holdings are important in determining cross sectional differences in corporate derivative holdings

balancing incentives in the compensation contracts of nonprofit hospital ceos abstract given the considerable insight into corporate governance achieved through studies of executive compensation in proprietary firms it is surprising that executive contracting in nonprofit organizations remains largely unexplored in this paper we use the multitask principal agent model of holmstrom and milgrom the journal of law economics and organization 7 1991 suppl 24 to argue that nonprofit hospitals represent an optimal response to information asymmetries between managers and boards for a board with multidimensional objectives the agency problem is getting top executives to distribute their efforts across all dimensions of the hospital s mission the nonprofit form is preferred because the absence of high powered incentives such as share ownership reduces executives incentives to place undue emphasis on improving financial performance at the expense of important but less observable tasks using newly available compensation data we test the model by comparing the conditional distributions of earnings for industrial and nonprofit hospital ceos in ontario our best estimates are that ceos in publicly traded firms earn twice as much on average as those in similarly sized nonprofit hospitals but bear roughly eight times the income variance estimates of the associated degree of risk aversion are well within conventional bounds and are consistent with the trade off between insurance and incentives predicted by the theory

commodity market dynamics and the joint executive committee 1880 1886 using weekly spot and future commodity prices in chicago and new york we construct expected transportation rates for grain between these two cities expected inventory levels in new york and realized errors in the expectations of such variables we incorporate these exogenous commodity market dynamics into porter s 1983 structural modeling of the joint executive committee railroad cartel as in porter we model marginal cost as a parametric function of instrumented output among other factors unlike porter we model pricing over marginal cost as a nonparametric function of a set of variables which include expectations of deterministic demand cycles and cartel stability we estimate the pricing and demand equation simultaneously and semiparametrically our estimated weekly markups during periods of cartel stability are shown to reflect optimal collusive pricing over deterministic business cycles as modeled in haltiwanger and harrington 1991 periods of cartel instability are proven to be trigger

unsubsidized microfinance institutions this paper starts from the observation that 23 of the world s microfinance institutions mfis manage without subsidies we examine how unsubsidized institutions cope with their social mission overall the lack of subsidies worsens social performances however our results show that strategies to achieve financial self sufficiency differ substantially across regions african and asian mfis compensate for non subsidization by charging higher interest rates in eastern europe and central asia unsubsidized mfis find it more suitable to target less poor clients unsubsidized latin american mfis tend to reduce their share of female borrowers

ratings quality over the business cycle credit rating agencies cras have long held that reputational concerns discipline their behavior the value of reputation however depends on economic fundamentals that vary over the business cycle in a model of ratings incorporating endogenous reputation and a market environment that varies we find that ratings quality is countercyclical specifically a cra is more likely to issue less accurate ratings when fee income is high competition in the labor market for analysts is tough and securities default probabilities are low persistence in economic conditions can diminish our results while mean reversion exacerbates them the presence of naive investors reduces overall quality but quality remains countercyclical finally we demonstrate that competition among cras yields similar results

testing static oligopoly models conduct and cost in the sugar industry 1890 1914 we explore the widespread methodology of using demand information to infer market conduct and unobserved cost components under the hypothesis of static oligopoly behavior direct measures of marginal cost and conduct indicating small market power serve as benchmarks the more competitive models yield better cost estimates the best cost estimates occur when conduct is estimated as a free parameter which in turn only slightly underestimates our direct measure it also tracks the decline in market power accompanying the industry s structural changes the methodology is largely validated although partial cost information can improve its predictive power conclusions are robust to demand function

the profitability concentration relation market power or efficiency industrial economists have been studying the relationship between profitability and concentration using cross industry samples for many years now however as sometimes happens once it appeared that some consensus had been achieved with few exceptions market concentration and industry profitability are positively correlated peltzman i977 p 229 people began to question the interpretation of those results in particular demsetz e g i973 i974 and others suggested that rather than concentration market power leading to higher prices and profits the causal direction in fact ran from greater efficiency to both higher profits and incidentally to higher concentration our purpose here is to subject these conflicting hypotheses to cross industry empirical test using u k data in order to do this we first develop a model which is sufficiently general to allow for both alternative explanations of a positive concentration profitability correlation in the light of this model we then examine the implications for the within industry relation between market share and firm level profitability more specifically we explore demsetz s claim that the empirical form of this relationship should signal which of the alternative hypotheses is consistent with the between industry profitability concentration correlation our model suggests that in certain special circumstances this claim is partly justified in that it should be possible to assess the relative strengths of the market power and efficiency effects from the within industry relation more generally however factors such as product differentiation and scale economies may seriously impair the information content of the relation with at least a strong suspicion that the estimates will tend to exaggerate the evidence in favour of the efficiency hypothesis in the event our results tend to confirm that for most industries the within industry data offer little conclusive support for either hypothesis but for a not insignificant minority of industries the evidence suggests some support for the view that both efficiency and market power are at work simultaneously our model is detailed in section ii and estimated on u k data in section iii after which we offer a few comments in section iv first however we drovide a backcloth to the later analysis

dynamic pricing in retail gasoline markets supergame models of tacit collusion show that supportable price cost margins increase with expected future collusive profits ceteris paribus as a result collusive margins will be larger when demand is expected to increase or marginal costs are expected to decline using panel data on sales volume and gasoline prices in 43 cities over 72 months we find behavior consistent with tacit collusion in retail gasoline markets controlling for current demand and cost current margins increase with expected next month demand and decrease with expected next month cost the results are not consistent with intertemporal l inkages due to inventory behavior or customer loyalty

accounting conservatism and managerial risk taking corporate acquisitions abstract watts 2003 and ball and shivakumar 2005 argue that accounting conservatism decreases managerial incentives to make negative net present value investments i develop and test a new hypothesis that accounting conservatism is associated with managers making less risky investments i find that under more conservative accounting managers make less risky acquisitions and that firms with accounting based debt covenants drive this association this result is consistent with conservative firms avoiding risky investments because of the potential for large losses to trigger debt covenants conservatism reducing risk shifting can in part explain debt holders demand for conservative accounting

moral hazard and optimal commodity taxation abstract this paper demonstrates that in an economy with moral hazard and more than one commodity competitive equilibrium is not constrained efficient to correct the market failure differential commodity taxation is necessary a general optimal tax formula is derived and special cases of is discussed

microcredit and mechanism design individual microcredit loans are not necessarily simple fixed debt obligations but rather may have contingencies and procedures suggested by the theory of mechanism design further group or joint liability lending may not be the single miracle cure practitioners claim nor operate the way the logic of a single theory might suggest there are multiple theories these theories can be distinguished in data on repayment rates and the best fit theory may vary with the environment finally the debate about whether to lend to individuals or lend to groups may be misplaced under simple theories of selection the pareto superior regime which is predicted to emerge varies with exogenous environmental characteristics jel d5 d82 g2 o17

dynamic pricing in the spanish gasoline market a tacit collusion equilibrium abstract during the last twenty years the spanish petrol market has undergone an intensive restructuration process it has changed from being a state owned monopoly to total liberalization and privatization this liberalization process was accompanied by measures that facilitated the creation of a national champion the repsol group which is a huge vertically integrated company with a high market share in all the industry s segments using a dynamic model this paper analyses whether the prices established by companies in the spanish gasoline market after the restructuration process fits with a tacit collusion equilibrium the empirical results show that a strategic behaviour of companies occurs and is compatible with a tacit collusion price strategy so the restructuration process does not seem to have introduced effective competition into the spanish gasoline market

optimal managerial contracts and equilibrium security prices recent developments in economic theory have focused attention on efficient methods for providing incentives within a corporation especially to top management jensen meckling 12 have examined some implications of incentive or agency problems for corporate finance in this paper we combine a simple model of security market equilibrium with that of an optimal managerial incentive contract using results of harris raviv 8 and holmstrom 9 we provide a rationale for including security prices in the managerial incentive contracts of publicly held firms in this model we also show that non systematic diversifiable risks will be considered in the capital budgeting decisions of a managerial firm operated in the interests of its stockholders this is in contrast to the implication of the arbitrage pricing theory a similar result follows from the capital asset pricing model which abstracts from incentive problems and suggests that only systematic risks ought to be considered the optimal contract model of the corporation takes the following view of the firm since decision makers within a firm are not sole owners of the business but employed agents the decisions which they make depend on the incentives which the organization provides these incentives are embodied explicitly in employment contracts and implicitly through the threat of dismissal or effect on reputation the contract whether explicit or not describes the decision maker s anticipation of the consequences to him conditional on various observable outcomes these outcomes are used to provide information useful in determining whether he did his job properly in the simplest optimal contract scenario there is a single principal and a single agent whose decision concerns the level of effort he expends the level of effort affects the level of output of the firm but not unambiguously because the output is also governed by other stochastic elements as a result some information about the agent s level of effort can be inferred

business cycles and the relationship between concentration and price cost margins using a newly constructed panel data base we examine changes in price cost margins in 284 manufacturing industries between 1958 and 1981 a key finding is a dramatic narrowing of the spread between the margins of concentrated and unconcentrated industries over this period we provide evidence that this narrowing is a result of the greater sensitivity of price cost margins in more concentrated industries to demand fluctuations this finding is robust to the inclusion of other industry variables and to measures of import competition the results indicate that cross sectional estimates of the concentration margins relationship are likely to be both biased and misleading

collusion with capacity constraints over the business cycle this paper investigates the efiect of capacity constraints on the sustainability of collusion in markets subject to cyclical demand uctuations in the absence of capacity constraints i e a limiting case of our model haltiwanger and harrington 1991 show that flrms flnd it more di cult to collude during periods of decreasing demand we flnd that this prediction can be overturned if flrms capacities are su ciently small capacity constraints imply that punishment proflts move procyclically so that periods of increasing demand may lead to lower losses from cheating even if collusive proflts are rising haltiwanger and harrington s main prediction remains valid for su ciently large capacities

multimarket contact and pricing evidence from the u s cement industry abstract we empirically examine the effect of multimarket contact on pricing in the u s cement industry a model of price and quantity formation is estimated for a panel of 25 regional cement markets over 16 years the results indicate that the divergence of price from marginal cost in a particular market is directly related to the extent of multimarket contact among firms in that market

corporate risk management and the incentive effects of debt this paper demonstrates how the incentive of manager equityholders to substitute toward riskier assets commonly referred to as the asset substitution problem is related to the level of observable risk in the firm when observable and unobservable risks are sufficiently positively correlated increases decreases in observable risk generate the incentive for manager equityholders to increase decrease unobservable risk thus credible commitments to hedge observable risk can benefit the firm s manager equityholders by reducing the incentive to shift risk and the associated agency cost of debt this provides a positive rationale for hedging diversifiable risk at the firm level in the last few years a sizeable literature has emerged which is devoted to explaining how shareholders can benefit from hedging undertaken by the firm such hedging may include the purchase of insurance the use of financial futures and options and even diversification at the level of the firm four lines of reasoning have been pursued in the literature smith and stulz 1985 and campbell and kracaw 1987 rely on the fact that under optimal contracting between managers and shareholders managers are less diversified than are shareholders hedging by the firm which reduces the manager s exposure to risk can improve on the optimal compensation contract between the manager and equityholders this argument may be applied to a firm with any capital structure or any degree of leverage the other arguments apply to firms which are financed with risky debt smith and stulz show that hedging may be useful in reducing expected bankruptcy costs they also show as does macminn 1985 that hedging by the firm may reduce the probability that depreciation tax shields may be lost due to financial distress finally diamond 1984 has shown that monitoring costs may be reduced through diversification macminn s result is of particular interest part of his analysis is based on an earlier paper by green and talmor 1985 which demonstrates that the equityholders of a levered firm will have an incentive to underinvest in risky assets if the firm cannot capture its interest and depreciation tax shields with certainty in green and talmor s analysis the firm has no mechanism to reduce or hedge the uncertainty surrounding its tax shields other than to alter its investment decisions however as macminn argues if the firm is allowed to hedge its risks

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

financial performance and outreach a global analysis of leading microbanks microfinance contracts have proven able to secure high rates of loan repayment in the face of limited liability and information asymmetries but high repayment rates have not translated easily into profits for most microbanks profitability though is at the heart of the promise that microfinance can deliver poverty reduction while not relying on ongoing subsidy the authors examine why this promise remains unmet for most institutions using a data set with unusually high quality financial information on 124 institutions in 49 countries they explore the patterns of profitability loan repayment and cost reduction the authors find that institutional design and orientation matter substantially lenders that do not use group based methods to overcome incentive problems experience weaker portfolio quality and lower profit rates when interest rates are raised substantially for these individual based lenders one key to achieving profitability is investing more heavily in staff costs a finding consistent with the economics of information but contrary to the conventional wisdom that profitability is largely a function of minimizing cost

reinsurance and corporate taxation in the united kingdom life insurance industry there are two main tax related arguments regarding the use of reinsurance the income volatility reduction and the income level enhancement arguments the income volatility reduction argument contends that firms facing convex tax schedules have incentives to hedge in order to reduce the volatility of their annual taxable income and thereby lower expected tax liabilities smith c w stulz r m 1985 optimal hedging policies journal of financial and quantitative analysis 19 127 140 the income level enhancement argument advanced by adiel adiel r 1996 reinsurance and the management of regulatory ratios and taxes in the property casualty insurance industry journal of accounting and economics 22 207 240 is more specific to hedging via reinsurance this perspective holds that reinsurance enhances current reported earnings via the receipt of reinsurance commissions and so increases tax liabilities consequently insurance firms with high marginal tax rates should use less reinsurance than those with low marginal tax rates if tax matters prior studies using data on financial derivatives have produced mixed results on the validity of the first argument while adiel 1996 finds the second argument insignificant in his study of the use of reinsurance by a sample of united states us property liability insurance firms this study tests the two tax related arguments using 1992 2001 data for a sample of united kingdom uk life insurance firms we find that uk life insurers with low before planning marginal tax rates tend to use more reinsurance in contrast tax convexity is found to have no significant impact on the purchase of reinsurance and so the volatility reduction argument is not supported

collusion and predation under almost free entry abstract this study investigates the degree of cooperation that firms can support in the absence of significant barriers to entry a free entry subgame perfect equilibrium is defined by q n where q is the collusive output rate and n is the number of active firms such that there is no incentive for an active firm to deviate output from q and there is no incentive for a potential entrant to enter the industry it is shown that for all n 1 if the discount factor is sufficiently high there exists a free entry equilibrium in which active firms sustain a non trivial degree of cooperation cooperation is supported by active firms credibly threatening to respond to entry with a period of aggressive competition

risk management in the global economy a review essay abstract this paper provides a review of developments in the area of risk management at both the firm level and the macro economy we review rationales regarding why firms choose to manage risk as well as new developments in measuring and managing risk in a dynamic setting we also consider current risk sharing arrangements in light of the theory regarding optimal risk sharing the paper concludes with some suggestions for additional research that emphasizes the importance of incorporating market incompleteness in an equilibrium setting we also discuss the role of incompleteness at the macro level and speculate on how derivatives markets may influence macro economic stabilization policy

taking a view corporate speculation governance and compensation using responses to a well known confidential survey we study corporations use of derivatives to take a view on interest rate and currency movements characteristics of speculators suggest that perceived information and cost advantages lead them to take positions actively that is they do not speculate to increase risk by betting the ranch speculating firms encourage managers to speculate through incentive aligning compensation arrangements and bonding contracts and they use derivatives specific internal controls to manage potential abuse finally we examine whether investors reading public corporate disclosures are able to identify firms that indicate speculating in the confidential survey they are not derivative instruments can be used to hedge market risk exposures or to spec ulate on movements in the value of the underlying asset to hedge generally implies that the derivative position is taken with the intention of reducing risk to speculate generally implies that the derivative position is undertaken with the primary intention of making a profit or increasing risk speculation has a pejorative connotation in the financial press yet it is not clear that this repu tation is deserved in this paper we explore whether speculation is an activity that is optimal ex ante but for which we should expect to observe some large negative outcomes ex post or whether it is an activity that will decrease ex pected shareholder value to the benefit of agents of the firm that is whether it is evidence of an agency problem and governance failure the extant theoretical and empirical literature presents an abundance of ev idence about why firms should and do use derivatives to hedge 1 we know

entry sunk costs and market structure typically models that study the role of sunk costs suppose that incumbent firms face entry by a single firm each period in this paper the set of equilibrium market structures that result when all firms are free to enter or exit and set prices each period are characterized the effect of sunk costs on the market structure is examined and it is shown that sunk costs can take on various forms each having a different effect on the set of equilibrium market structures costs that are sunk due to the existence of product specific capital do not in general deter entry rather entry deterrence is a necessary outcome only when costs are sunk due to the time it would take to leave the market

market structure and price cost margins in a paper that has become a standard reference in the structure conductperformance approach to industrial economics cowling and waterson 1976 developed a theoretical rationale for expecting industry profitability to be positively correlated with the level of concentration their model based on a simple algebraic description of oligopoly behaviour has been interpreted as providing a justification for the common empirical practice of cross industry regression analysis of price cost margins in terms of concentration levels in the present paper we show that on further examination this model implies a joint determination of margins and concentration this provides some interesting comparative static results of relevance to inter industry differences in concentration levels equally however it leads to various cautionary insights concerning the meaning of price cost margin versus concentration regressions

the cyclical behavior of marginal cost and price the author examines the cyclical behavior of price marginal cost margins for u s manufac turing after 1956 short run marginal cost is markedly procyclical this is primarily due to procyclical overtime payments incurred beca use employment is not perfectly flexible in most industries output price fails to respond to the cyclical movement in marginal cost so price marginal cost margins are markedly countercyclical the res ults contradict business cycle theories that explain low production i n a recession by a high real cost of producing they support theories that explain low production in a recession by the inability of firms to sell their output copyright 1987 by american economic association

interest rate derivatives at commercial banks an empirical investigation abstract i analyze the effects of bank characteristics and macroeconomic shocks on interest rate risk management behavior of commercial banks my findings are consistent with hedging theories based on cost of financial distress and costly external financing banks with higher probability of financial distress manage their interest rate risk more aggressively both by means of on balance sheet and off balance sheet instruments as compared to the derivative users the derivative non user banks adopt conservative asset liability management policies in tighter monetary policy regimes finally i show that the derivative non user bank s lending volume declines significantly with the contraction in the money supply derivative users on the other hand remain immune to the monetary policy shocks my findings suggest that a potential benefit of derivatives usage is to minimize the effect of external shocks on a firm s operating policies

the impact of derivatives on firm risk an empirical examination of new derivative users abstract the appropriateness of financial reporting rules for derivative securities depends on corporations reasons for using the instruments empirically little is documented about how the instruments affect firms risk exposures this study examines derivatives roles in firms initiating derivatives use the results are consistent with firms using derivatives to hedge and not to increase entity risk firm risk measured several ways declines following derivatives use realized risk reductions and decisions to initiate derivatives programs vary across firms with the expected benefits from hedging the findings emphasize the importance of hedge accounting rules that incorporate the impact of derivatives and hedged items simultaneously

a micro econometric model of capital utilization and retirement the case of the u s cement industry the paper presents a micro econometric model of capital utilization and retirement estimates of a firm s discrete decision problem with regard to an existing piece of capital whether to operate hold idle or retire it are obtained in the context of the u s cement industry by solving a discrete choice stochastic dynamic programming model the estimates are then used to simulate the effects of product and input price changes and changes in the size and age of a cement kiln on a firm s propensity to operate hold idle and retire a kiln

on the efficiency effects of subsidies in microfinance an empirical inquiry summary using an original database of rating agencies this paper gives empirical evidence on the impact of subsidy intensity on the efficiency of microfinance institutions mfis we find that subsidies have had a positive impact on efficiency in the sense that mfis that received subsidies are more efficient than those that do not however we find also that subsidization beyond a certain threshold renders the marginal effect on efficiency negative in our sample 26 of mfis receive levels of subsidization higher than that threshold which implies that a marginal cut on subsidy intensity would increase their efficiency

banking market structure and financial stability evidence from the texas real estate crisis in the 1980s abstract this paper examines the relationship between banking market structure and financial stability using data on thrifts a type of banking institution specializing in residential mortgage lending i test two related hypotheses first competition reduces franchise value second reduced franchise value induces risk taking testing the second hypothesis exploits predictions that when hit by an exogenous shock the slope of risk with respect to franchise value becomes more negative because thrifts adopt bang bang strategies and choose minimal or maximal risk using the texas real estate collapse in the 1980s as a natural experiment i find evidence supporting both hypotheses

profit sharing with workers facilitates collusion among firms we show how profit sharing by firms with workers facilitates collusion among firms in a dynamic oligopoly environment with uncertain demand we first show that firm profits can always be increased by tying wages to market conditions the optimal agreement takes the form of an option and features partial sharing because increased sharing raises the expected price wage differential but reduces price wage variability we then show that given any cartel there exist market conditions such that simply giving some expected profit to workers raises expected firm profits via the transfer s impact on the incentive to cheat on the cartel

determinants of thrift institution resolution costs this paper provides a detailed examination of the cost imposed by thrift institutions resolved during the period 1980 1988 a simple model is presented to explain the cost of resolution this model is tested empirically with a comprehensive data set that permits us to avoid some of the econometric problems present in earlier studies the empirical evidence suggests that the model that explains resolution costs in the late 1980s is significantly different from the model for either the middle or early 1980s this evidence is consistent with the changing nature of the thrift crisis and changes in the regulator s closure rule our econometric evidence moreover is consistent with the hypothesis that for troubled institutions tangible net worth systematically understates market value net worth in addition the importance of including time effects as well as institution effects as determinants of the cost of resolution is revealed the sharp increase in market interest rates in late 1979 and early 1980 and the deregulation of deposit rates led to record losses in the thrift industry in the early 1980s and to a major erosion of the industry s capital many institutions never fully recovered from these problems and most currently insolvent thrift

price response asymmetric information and competition we compare predictions from a theoretical model based on the structure of the main outdoor retail market in jerusalem with the results of an empirical analysis of price response to changes in cost we find that firms without adjacent competition exhibit both upward and downward price rigidity an outcome we ascribe to asymmetric information between the consumer and the firm given that previous studies have focused on downward price rigidities of firms with market power our findings highlight the importance of accounting for transitory information asymmetries between the consumer and the firm when studying price rigidity

do firms hedge in response to tax incentives there are two tax incentives for corporations to hedge to increase debt capacity and interest tax deductions and to reduce expected tax liability if the tax function is convex we test whether these incentives affect the extent of corporate hedging with derivatives using an explicit measure of tax function convexity we find no evidence that firms hedge in response to tax convexity our analysis does however indicate that firms hedge to increase debt capacity with increased tax benefits averaging 1 1 percent of firm value our results also indicate that firms hedge because of expected financial distress costs and firm size an increasing number of corporations use financial derivatives each year the international swaps and derivatives association reports that the notional value of outstanding otc swap contracts increased from 11 3 trillion in 1994 to more than 60 trillion by mid 2000 http 00www isda org this is interesting because financial theory tells us that corporate risk management enhances value only in the presence of costly market imperfections a number of empirical studies examine derivative holdings to identify which of the proposed theoretical incentives and imperfections lead to corporate hedging our paper adds to the hedging literature by testing whether corporations respond to two tax related incentives to hedge the incentive to reduce volatility thereby increasing debt capacity and the tax benefits of debt and the incentive to reduce expected tax liabilities by reducing the volatility of taxable income we also use a refined dependent variable to measure net

collusive market structure under learning by doing and increasing returns learning by doing and increasing returns are often perceived to have similar implications for market structure and conduct we analyse this in the context of an infinite horizon price setting game learning is shown to not reduce the viability of market sharing collusion between a given number of firms whereas intra period increasing returns invariably does we subsequently develop a model where the number of active firms is determined endogenously under the assumption that the post entry game is collusive in this model learning has no effect on concentration while scale economies increase concentration

cephalon inc taking risk management theory seriously cephalon inc a biotech firm bought call options on its own stock to meet its conditional cash flow needs we analyze this decision by using the cash flow hedging concepts of froot et al 1993 journal of finance 5 1629 1658 we identify the managerial analyses necessary to apply this theory and discuss managerial considerations absent from the theory we find that managers consider deadweight costs of risk management which theory tends to ignore theory provides little guidance in how to measure these and other deadweight costs finally uncertainty about the availability of external financing and accounting considerations are critical considerations by managers

risk management strategies for banks abstract we analyze optimal risk management strategies of a bank financed with deposits and equity in a one period model the bank s motivation for risk management comes from deposits which can lead to bank runs in the event of such a run liquidation costs arise the hedging strategy that maximizes the value of equity is derived we identify conditions under which well known results such as complete hedging maximal speculation or irrelevance of the hedging decision are obtained the initial debt ratio the size of the liquidation costs regulatory restrictions the volatility of the risky asset and the spread between the riskless interest rate and the deposit rate are shown to be the important parameters that drive the bank s hedging decision we further extend this basic model to include counterparty risk constraints on the forward contract used for hedging

wages and employment in a repeated game with revenue fluctuations abstract empirical investigations suggests that the real wage is surprisingly flat over the business cycle this paper analyses a repeated game between a union and a firm which can contribute to explaining the flat wage the parties cannot enter binding contracts and revenue is fluctuating the paper focuses on the best subgame perfect equilibrium among those sharing the expected surplus in given fixed shares e g equal shares it is shown that for moderate discount factors this equilibrium has a more counter cyclical wage than what would be the case if the parties shared the surplus in each period in the same shares

why do larger buyers pay lower prices intense supplier competition abstract the paper provides a theoretical explanation of the common claim that larger buyers pay lower prices in the model suppliers compete more aggressively for the business of larger buyers much as they do in boom periods of rotemberg and saloner

the impact of cyclical demand movements on collusive behavior recent work by rotemberg and saloner 1986 investigates the effect of the business cycle on optimal collusive pricing by specifying that demand is subject to i i d shocks an implication of the i i d assumption is that firms expectations on future demand are unrelated to the current level of demand we put forth a model that allows for both the level of current demand and firms expectations on future demand to change over time thus it captures two important properties of the business cycle our analysis reveals that while the gain to deviating from a collusive agreement is greatest during booms firms find it most difficult to collude during recessions as the forgone profits from inducing a price war are relatively low an implication of this effect for pricing behavior is that at the same level of demand price is lower when demand is declining than when demand is rising consistent with previous theoretical work we find that firms price countercyclically for a range of values for the discount factor however numerical simulations reveal a greater tendency for firms to price countercyclically during recessions than during booms

collusion under risk aversion and fixed costs we analyze collusion under demand uncertainty by risk averse cartels that care about the utility derived from profits with sufficient risk aversion and non trivial fixed operating costs it becomes difficult for cartels to collusively restrict output both when demand is low and marginal dollars are highly valued and when demand is high and potential defection profits are high output relative to monopoly levels becomes a u shaped function of demand greater risk aversion or higher fixed operating costs make collusion more difficult to support in recessions but easier to support in booms

optimal health insurance for prevention and treatment this paper reexamines the efficiency based arguments for optimal health insurance extending the classic analysis to consider optimal coverage for prevention and treatment separately our paper considers the tradeoff between individuals risk reduction on the one hand and both ex ante and ex post moral hazard on the other we demonstrate that it is always desirable to offer at least some insurance coverage for preventive care if individual consumers ignore the impact of their preventive care on the health premium using a utility based framework we reconfirm the conventional tradeoff between risk avoidance by risk sharing and moral hazard for insuring treatment goods uncompensated losses that reduce effective income provide a new efficiency based argument for more generous insurance coverage for prevention and treatment of health conditions the optimal coinsurance rates for prevention and for treatment are not identical

on the determinants of corporate hedging finance theory indicates that hedging increases firm value by reducing expected taxes expected costs of financial distress or other agency costs this paper provides evidence on these hypotheses using survey data on firm s use of forwards futures swaps and options combined with computstat data on firm characteristics of 169 firms in the sample 104 firms use hedging instruments in 1986 the data suggest that firms which hedge face more convex tax functions have less coverage of fixed claims are larger have more growth options in their investment opportunity set and employ fewer hedging substitutes

deposit insurance and wealth effects the value of being too big to fail this paper investigates the effect on bank equity values of the comptroller of the currency s announcement that some banks were too big to fail and that for those banks total deposit insurance would be provided using an event study methodology we find positive wealth effects accruing to tbtf banks with corresponding negative effects accruing to non included banks we demonstrate that the magnitude of these effects differed with bank solvency and size we also show that the policy to which the market reacted was that suggested by the wall street journal and not that actually intended by the comptroller the role of deposit insurance has become a topic of increasing debate advocates argue that by removing the incentive to run deposit insurance protects individual financial institutions from instability in the intermediation process thereby providing stability to the financial system as a whole 1 the recent rise in bank failures and the concomitant crises in the s l industry however demonstrate that this stability is not guaranteed moreover critics note that deposit insurance may introduce incentive problems and wealth effects into the financial system both of which can impede the effective functioning of any deposit insurance system these problems have prompted concern about the structure of the current deposit insurance system and have led to numerous proposals regarding its restructuring 2 this paper investigates one aspect of this debate by analyzing the effect on bank equity values of the policy decision to insure completely some banks but not others specifically in september 1984 the comptroller of the currency testified before congress that some banks were simply too big to fail tbtf and that for those banks total deposit insurance would be provided while not explicitly naming the banks the comptroller admitted that this policy would apply to the eleven largest banks using an event study methodology we analyze