targeting target shareholders we integrate heterogeneity and uncertainty in investor valuations into a model of takeovers investors have dispersed valuations holding shares in firms they value more highly and a successful offer must win approval from the median target shareholder we derive the consequences for an acquiring firm s takeover offer its size and cash equity structure and implications for takeover premia firm returns share price dynamics the probability that a takeover succeeds and shareholder welfare we characterize when the acquirer prefers cash offers and when equity offers are best our model collectively reconciles various empirical regularities that have proven elusive to explain in one unified framework and we derive new testable predictions this paper was accepted by neng wang finance

diversification and heterogeneity of investor beliefs abstract in the paper we find that diversification reduces the heterogeneity of investor beliefs on firm value we obtain this finding by comparing not only between diversified and focused firms but also between diversifying and non diversifying mergers we also find that the reduced heterogeneity of investor beliefs on a diversified firm relative to its focused peers is negatively associated with its contemporaneous excess value and positively associated with its future excess value overall our results contribute to the understanding about how corporate organization structure affects the heterogeneity of investor beliefs and further firm value

cooperation and competition in climate change policies mitigation and climate engineering when countries are asymmetric we study a dynamic game of climate policy design in terms of emissions and solar radiation management srm involving two heterogeneous countries or group of countries countries emit greenhouse gasses ghgs and can block incoming radiation by unilateral srm activities thus reducing global temperature heterogeneity is modelled in terms of the social cost of srm the environmental damages due to global warming the productivity of emissions in terms of generating private benefits the rate of impatience and the private cost of geoengineering we determine the impact of asymmetry on mitigation and srm activities concentration of ghgs and global temperature and we examine whether a tradeoff actually emerges between mitigation and srm our results could provide some insights into a currently emerging debate regarding mitigation and srm methods to control climate change especially since asymmetries seem to play an important role in affecting incentives for cooperation or unilateral actions

limit order submission strategies under asymmetric information abstract this paper provides evidence that informed traders dominate the response of limit order submissions to shocks in a pure limit order market in the market we study informed traders are highly sensitive to spreads volatility momentum and depth by contrast uninformed traders are relatively insensitive to all these market conditions the dominance of the informed over limit order submissions is magnified by contrasts between them and the uninformed in the use of aggressively priced limit orders

nonlinear dynamics in deviations from the law of one price a broad based empirical study abstract in this paper we test empirically the validity of the law of one price using data for five major bilateral us dollar exchange rates and nine goods sectors during the recent floating exchange rate regime since the early 1970s using threshold autoregressive models we find strong evidence of nonlinear mean reversion in deviations from the law of one price with plausible convergence speeds consistent with theoretical arguments on international goods markets arbitrage under transactions costs and with an emerging strand of empirical literature these results contribute towards forming a consensus view in favor of discrete regime switching in deviations from the law of one price and the presence of differing nonzero transactions costs across a broad range of goods and countries

disagreement and asset prices abstract how do differences of opinion affect asset prices do investors earn a risk premium when disagreement arises in the market despite their fundamental importance these questions are among the most controversial issues in finance in this paper we use a novel data set that allows us to directly measure the level of disagreement among wall street mortgage dealers about prepayment speeds we examine how disagreement evolves over time and study its effects on expected returns return volatility and trading volume in the mortgage backed security market we find that increased disagreement is associated with higher expected returns higher return volatility and larger trading volume these results imply that there is a positive risk premium for disagreement in asset prices we also show that volatility in and of itself does not lead to higher trading volume instead only when disagreement arises in the market is higher uncertainty associated with more trading finally we are able to distinguish empirically between two competing hypotheses regarding how information in markets gets incorporated into asset prices we find that sophisticated investors appear to update their beliefs through a rational expectations mechanism when disagreement arises

the effect of unions on the structure of wages a longitudinal analysis this paper studies the effects of unions on the structure of wages using an estimation technique that explicitly accounts for misclassification errors in reported union status and potential correlations between union status and unobserved productivity the econometric model is estimated separately for five skill groups using a large panel data set formed from the u s current population survey the results suggest that unions raise wages more for workers with lower levels of observed skills in addition the patterns of selection bias differ by skill group among workers with lower levels of observed skill unionized workers are positively selected whereas union workers are negatively selected from among those with higher levels of observed skill despite a large and sophisticated literature there is still substantial disagreement over the extent to which differences in the structure of wages between union and nonunion workers represent an effect of trade unions rather than a consequence of the nonrandom selection of unionized workers over the past decade several alternative approaches have been developed to control for unobserved heterogeneity between union and nonunion workers 2 one method that has been successfully applied in other areas of applied microeconometrics is the use of longitudinal data to measure the wage gains or losses of workers who change union status unfortunately longitudinal estimators are highly sensitive to measurement error even a small fraction of misclassified union status changes can lead to significant biases if the true rate of mobility between union and nonunion jobs is low this sensitivity led lewis 1986 to essentially dismiss the longitudinal evidence in his landmark survey of union wage effects in this paper i present some new evidence on the union wage effect based on a longitudinal estimator that explicitly accounts for misclassification errors in reported union status the estimator uses external information on union status misclassification rates along with the reduced form coefficients from a multi variate regression of wages on the observed sequence of union status indicators to isolate the causal effect of unions from any selection biases introduced by a correlation between union status and the permanent component of unobserved wage heterogeneity recognizing that unions may raise wages more or less for

the interrelation of stock and options market trading volume data this research empirically investigates the relation between common stock and call option trading volumes the paper hyothesizes and tests a sequential flow of information between the stock and option markets if information trading for cboe listed firms is predominantly accomplished through option trading then existing research methodologies may be biased against finding any significant economic consequences in those instances where option listing is an important variable results indicate that trading in call options leads trading in the underlying shares with a one day lag black 2 suggests that information traders may prefer trading in options rather than shares due to economic incentives provided by reduced transaction costs capital requirements and trading restrictions and due to the greater action afforded by option trading manaster and rendleman 12 empirically support black s 2 option information trading preference finding incremental information content in option prices up to twenty four hours prior to its reflection in stock prices jennings and starks 10 report that the stock price adjustment process upon arrival of new information differs for those firms listed on the chicago board option exchange cboe and they demonstrate that stock price adjustment to new information occurs more rapidly for firms with listed call options the results in both papers appear to warrant consideration of an optiontrading variable in the design of empirical tests both manaster and rendleman 12 and jennings and starks 10 investigate the price relation between shares and call options this paper investigates trading volume copeland 4 posits the use of trading volume as a proxy for the rate of information arrival he concludes that the relation between absolute value of price changes and volume is positive and linear if one accepts a sequentialinformation arrival hypothesis as valid the present research hypothesizes and tests a sequential flow of information between the stock and option markets analyses presented are based on econometric tests for causality1 derived from the works of granger 6 and sims 22 if information trading takes place

the behaviour of the real exchange rate evidence from regression quantiles abstract we test for mean reversion in real exchange rates using a recently developed unit root test for non normal processes based on quantile autoregression inference in semi parametric and non parametric settings the quantile regression approach allows us to directly capture the impact of different magnitudes of shocks that hit the real exchange rate conditional on its past history and can detect asymmetric dynamic adjustment of the real exchange rate towards its long run equilibrium it therefore provides a detailed mapping of the real exchange rate behaviour while being a robust alternative to previous unit root tests the latter is confirmed by a simulation analysis comparing the power of the alternative tests as concerns the real exchange rate our results suggest that large shocks tend to induce strong mean reverting tendencies in the exchange rate with half lives less than one year in the extreme quantiles mean reversion is faster when large shocks originate at points of large real exchange rate deviations from the long run equilibrium however in the absence of shocks no mean reversion is observed finally we report asymmetries in the dynamic adjustment of the rer

option prices as predictors of equilibrium stock prices the black scholes option pricing model modified for dividend payments is used to calculate jointly implied stock prices and implied standard deviations a comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices the implications of this finding are discussed this study investigates the role of call option prices as predictors of the equilibrium prices of their underlying stocks using the black scholes 3 bs model previous tests of the bs model have shown that the formula is highly successful in explaining the observed market prices of options see black and scholes 2 galai 8 chiras and manaster 6 and macbeth and merville 12 according to the model the option price is a function of the current value of the underlying stock the instantaneous variance of the stock s rate of return the time to maturity of the option the risk free rate of interest and the exercise price of the option 1 given an observed option price and known values of all input parameters to the bs model except the stock price one can determine the price of the underlying stock that equates the observed option price to its calculated value it follows from the underlying logic of the model that the implied price is the value of the underlying stock for which a continuously revised option bond portfolio would be a perfect substitute for the stock hence if options are actually priced according to the model implied stock prices will be the option market s assessment of equilibrium stock values previous empirical studies have assumed that observed stock prices are the relevant stock prices for option valuation however just as stock prices may differ in the short run from one exchange to another i e nyse midwest

climate treaties and approaching catastrophes abstract if the threshold that triggers climate catastrophe is known with certainty and the benefits of avoiding catastrophe are high relative to the costs treaties can easily coordinate countries behavior so as to avoid the threshold where the net benefits of avoiding catastrophe are lower treaties typically fail to help countries cooperate to avoid catastrophe sustaining only modest cuts in emissions these results are unaffected by uncertainty about the impact of catastrophe by contrast uncertainty about the catastrophic threshold normally causes coordination to collapse whether the probability density function has thin or fat tails makes little difference

potential pitfalls for the purchasing power parity puzzle sampling and specification biases in mean reversion tests of the law of one price the ppp puzzle is based on empirical evidence that international price differences for individual goods loop or baskets of goods ppp appear highly persistent or even nonstationary the present consensus is these price differences have a half life that is of the order of five years at best and infinity at worst this seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons typically days or weeks however current empirics rely on a particular choice of methodology involving i relatively low frequency monthly quarterly or annual data and ii a linear model specification in fact these methodological choices are not innocent and they can be shown to bias analysis towards findings of slow convergence and a random walk intuitively if we suspect that the actual adjustment horizon is of the order of days then monthly and annual data cannot be expected to reveal it if we suspect arbitrage costs are high enough to produce a substantial band of inaction then a linear model will fail to support convergence if the process spends considerable time random walking in that band thus when testing for ppp or loop model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets

the value of shorting abstract this paper assesses the effects of short sale constraints on asset prices the analysis focuses on a particular period in sweden during which shorting stocks was impossible but stock options were traded firstly the effect on both stock options and the underlying stock was investigated jointly by considering deviations from put call parity secondly the effects on only the derivatives were investigated by considering their implied volatilites the main findings are i the impact on pricing are consistent with a short sale constraint ii these effects are much more pronounced when shorting is not possible iii these effects are not solely attributable to the mispricing of the stock as previous research indicates and iv access to international shorting markets can alleviate local short sale constraints

averting catastrophes the strange economics of scylla and charybdis faced with numerous potential catastrophes nuclear and bioterrorism mega viruses climate change and others which should society attempt to avert a policy to avert one catastrophe considered in isolation might be evaluated in cost benefit terms but because society faces multiple catastrophes simple cost benefit analysis fails even if the benefit of averting each one exceeds the cost we should not necessarily avert them all we explore the policy interdependence of catastrophic events and develop a rule for determining which catastrophes should be averted and which should not jel d61 q51 q54

job queues and the union status of workers this paper develops a model of the determination of the union status of workers that allows for the possibility of queuing for union jobs the empirical results derived using a sample from the university of michigan panel study of income dynamics are supportive of the queuing hypothesis the no queue model can be rejected using a likelihood ratio test this suggests that a simple probit or logit model for union status is misspecified because it is not based on any consistent behavioral theory an important implication of the model is that because most new entrants to the labor market prefer union jobs but cannot get them and because accrual of nonunion seniority makes workers progressively less likely to desire union jobs the union status of workers is largely determined by their success in being selected from the queue early in their working life

the intergenerational transfer of solar radiation management capabilities and atmospheric carbon stocks solar radiation management srm technologies are considered one of the likeliest forms of geoengineering if developed a future generation could deploy them to limit the damages caused by the atmospheric carbon stock inherited from the current generation despite their negative side effects should the current generation develop these geoengineering capabilities for a future generation and how would a decision to develop srm impact on the current generation s abatement efforts natural scientists ethicists and other scholars argue that future generations could be more sanguine about the side effects of srm deployment than the current generation in this paper we add economic rigor to this important debate on the intergenerational transfer of technological capabilities and pollution stocks we identify three conjectures that constitute potentially rational courses of action for current society including a ban on the development of srm however the same premises that underpin these conjectures also allow for a novel possibility if the development of srm capabilities is sufficiently cheap the current generation may for reasons of intergenerational strategy decide not just to develop srm technologies but also to abate more than in the absence of srm

option volume and stock prices evidence on where informed traders trade this paper investigates the informational role of transactions volume in options markets we develop an asymmetric information model in which informed traders may trade in option or equity markets we show conditions under which informed traders trade options and we investigate the implications of this for the linkage between markets our model predicts an important informational role for the volume of particular types of option trades we empirically test our model s hypotheses with intraday option data our main empirical result is that negative and positive option volumes contain information about future stock prices the information content of trading activity is a subject of widespread interest if trades are correlated with private information then the outcome of the transaction process may portend future movements in price the extension of trading to different venues or to derivative instruments however means that this link between transactions and information need not be easily discernible if there are alternative markets in which informed traders can profit from their information then where informed traders choose to trade may have important implications not only for security p rice movements but for the behavior of related prices as well this suggests that transactions in derivative markets may be an important predictor of future security price movements in this paper we investigate the informational role of transactions volume in options markets for some readers this focus may seem puzzling an option is a derivative security so its price should be dictated unilaterally by the behavior of the stock price this unidirectional linkage is only true however in complete markets if information is impounded into prices by trading then the ability of informed traders to transact in options markets mearns

how much of the diversification discount can be explained by poor corporate governance we investigate whether the diversification discount occurs partly as an artifact of poor corporate governance in panel data models we find that the discount narrows by 16 to 21 when we add governance variables as regression controls we also estimate heckman selection models that account for the endogeneity of diversification and dynamic panel generalized method of moments models that account for the endogeneity of both diversification and governance we find that the diversification discount persists even with these controls for endogeneity however in selection models the discount disappears entirely when we introduce governance variables in the second stage and in dynamic panel gmm models the discount narrows by 37 when we include governance variables

the joint determination of union status and union wage effects some tests of alternative models the problems of estimation and interpretation of union wage differentials are examined the properties of cross section and longitudinal estimators are compared estimates are presented and those in the literature summarized conflicting results are obtained longitudinal estimators typically produce results smaller than those of ols while cross section methods instrumental variables or inverse mills ratio raise the estimate the paper offers a reconciliation of these results it supports a more optimistic conclusion than that reached in reviews by freeman and lewis who argued that little has been learned from attempts to deal with the endogeneity issue comparisons between estimators are used to throw light on the process governing union status and to suggest interpretations of union differentials consistent with the current evidence

unions and workers welfare in chinese firms based on a survey of 1 268 firms in 12 cities this article empirically studies unions effects on worker welfare in china regressions carried out on a rich set of specifications show that unionization is significantly associated with higher hourly wages and larger pension coverage and weakly associated with lower monthly working hours further econometric analysis finds that unions promote individual and collective contracts the effect of collective contracts vanishes when unions are present whereas individual contracts have independent and positive effects in addition unions have effects on workers welfare independent of collective and individual contracts

quote based competition and trade execution costs in nyse listed stocks abstract this study examines quotations order routing and trade execution costs for seven markets that compete for orders in large capitalization nyse listed stocks the competitiveness of quote updates from each market varies with measures of the profitability of attracting additional order and with volatility and inventory measures the probability of a trade executing on each market increases when the market posts competitive quotes execution costs for non nyse trades when the local market posts competitive non competitive quotes are virtually the same substantially exceed costs for matched nyse trades collectively these results imply a significant degree of quote based competition for order flow and are consistent with off nyse liquidity providers using competitive quotations to signal when they are prepared to give better than normal trade executions

compensation for state and local government workers are state and local government workers overcompensated this question has re state and local government workers overcompensated this question has taken on considerable heat in the last year or two as many states and localitaken on considerable heat in the last year or two as many states and localities face budgetary stress in this paper we step back from the highly charged ties face budgetary stress in this paper we step back from the highly charged rhetoric and address this question with the two primary data sources for looking at rhetoric and address this question with the two primary data sources for looking at compensation of state and local government workers the current population survey compensation of state and local government workers the current population survey cps conducted by the bureau of the census for the bureau of labor statistics cps conducted by the bureau of the census for the bureau of labor statistics and the employer costs for employee compensation ecec microdata collected as and the employer costs for employee compensation ecec microdata collected as part of the national compensation survey ncs of the bureau of labor statistics part of the national compensation survey ncs of the bureau of labor statistics the fundamental difference between these two sources of data is that the cps is the fundamental difference between these two sources of data is that the cps is a household survey while the ecec is a survey of employers data from the ncs a household survey while the ecec is a survey of employers data from the ncs have been used in studies of union nonunion interindustry and occupational wage have been used in studies of union nonunion interindustry and occupational wage differentials gittleman and pierce 2007 2011 levenson and zoghi 2011 and in differentials gittleman and pierce 2007 2011 levenson and zoghi 2011 and in studies of compensation inequality pierce 2001 2010 however while ncs publistudies of compensation inequality pierce 2001 2010 however while ncs publications regularly present tabulations separately for the private sector on the one cations regularly present tabulations separately for the private sector on the one hand and state and local government on the other the microdata from the ncs hand and state and local government on the other the microdata from the ncs have not been previously used to compare compensation in the private sector to that have not been previously used to compare compensation in the private sector to that in the state and local government sectors in the state and local government sectors we begin by presenting some tabulations on pay differences across sectors we begin by presenting some tabulations on pay differences across sectors from these two data series both raw pay differences between public and private from these two data series both raw pay differences between public and private sectors and also some breakdowns by education level of workers for the current sectors and also some breakdowns by education level of workers for the current population survey and skill level of the job for the employer costs for employee population survey and skill level of the job for the employer costs for employee

one market stocks futures and options during october 1987 we provide new evidence regarding the degree of integration among markets for stocks futures and options prior to and during the october 1987 market crash where previous analyses have resulted in recommendations for the implementation of circuit breakers the coordination of margin requirements across markets and changes in regulatory jurisdiction our analysis indicates that delinkage between markets during the crash was primarily caused by an antiquated mechanism for processing stock market orders the results suggest that market integration may be better served by efficient order execution than by further restricting markets

adapting to climate change equilibrium welfare implications for large and small economies we show that the availability of adaptation can be welfare reducing in the non cooperative equilibrium in a setting with multiple countries adaptation is a private good while abatement is a public good this means that substitution out of abatement and into adaptation by any one country imposes a negative externality on all other countries the potentially deleterious impact of adaptation is asymmetric small economies are most likely to be hurt by the availability of adaptation because they control a small fraction of global emissions relative to the biggest emitters

worldwide reach of short selling regulations abstract we characterize legality and incidence of short selling in a worldwide multimarket framework home country short selling restrictions curtail home market stock borrowing by 45 and reduce short selling of the country s american depository receipts adrs by 68 due to regulatory reach also the 2008 us ban on short selling of financial firms reduced borrowing in foreign locations these findings are robust to controls for option availability enforcement returns firm size trading volume dividends adr level volatility days to cover and industry sector further we show that investor conduct resulting from adherence to professional standards is a more powerful mechanism of regulatory reach than intergovernment cooperation

new estimates of union wage effects in the u s abstract we present new estimates for union wage effects using a unique dataset with information on job skill requirements we find the union wage premium to be smaller at higher skill levels consistent with the view that unions work to decrease skill differentials

determinants of earnout as acquisition payment currency and bidder s value gains we examine the wealth effects of a comprehensive sample of uk bidders offering contingent payment or earnout as consideration for their acquisitions we show that bidders using earnout generate significantly higher announcement and post acquisition value gains than bidders using non earnout currencies such as cash stock exchange or mixed payments we construct a logistic model to predict when it is optimal for a bidder to offer earnout we show that bidders offering earnout optimally enjoy significantly higher announcement and post acquisition gains than bidders offering non earnout currencies consistent with our model of the choice of the optimal method of payment overall we provide robust evidence that earnout is an effective payment mechanism to mitigate valuation risk to acquirers and also enhances acquirer value during the announcement and post acquisition periods our paper contributes to the broader literature on how corporate acquirers use payment currency to manage information asymmetry and the attendant valuation risk

lost in translation the effect of cultural values on mergers around the world we find strong evidence that three key dimensions of national culture trust hierarchy and individualism affect merger volume and synergy gains the volume of cross border mergers is lower when countries are more culturally distant in addition greater cultural distance in trust and individualism leads to lower combined announcement returns these findings are robust to year and country level fixed effects time varying country pair and deal level variables as well as instrumental variables for cultural differences based on genetic and somatic differences the results are the first large scale evidence that cultural differences have substantial impacts on multiple aspects of cross border mergers

long term environmental problems and strategic intergenerational transfers the impacts of long lived stock pollutants and the measures supposed to address them link current and future generations altruism towards successor generations is a prerequisite for resolving the resulting intergenerational equity issues preference asymmetry and imperfect altruism introduce strategic conflicts between generations here a current generation decides on a combination of abatement and whether to provide an imperfect backstop the future generation decides whether to use the backstop or not we identify three outcomes 1 technology denial in which the current generation deliberately rejects the imperfect backstop to avoid misuse by the future generation 2 underabatement in which the current generation provides the backstop but reduces abatement activities and 3 overabatement in which the current generation provides the backstop but increases abatement activities the outcome depends non trivially on the assessment of collateral damages of the future generation uncertainty over future preferences renders technology denial more likely corresponding author bergheimer str 20 69115 heidelberg germany goeschl eco uni heidelberg de

a voting architecture for the governance of free driver externalities with application to geoengineering abating climate change is an enormous international public goods problem with a classical free rider structure however it is also a global free driver problem because geoengineering the stratosphere with reflective particles to block incoming solar radiation is so cheap that it could essentially be undertaken unilaterally by one state perceiving itself to be in peril this exploratory paper develops the main features of a free driver externality in a simple model motivated by the asymmetric consequences of type i and type ii errors i propose a social choice decision architecture embodying the solution concept of a supermajority voting rule and derive its basic properties

designing climate mitigation policy this us paper provides an exhaustive review of critical issues in the design of climate mitigation policy by pulling together key findings and controversies from diverse literatures on mitigation costs damage valuation policy instrument choice technological innovation and international climate policy the authors begin with the broadest issue of how high assessments suggest the near and medium term price on greenhouse gases would need to be both under cost effective stabilization of global climate and under net benefit maximization or pigouvian emissions pricing the remainder of the paper focuses on the appropriate scope of regulation issues in policy instrument choice complementary technology policy and international policy architectures

the behavior of the volatility implicit in the prices of stock index options abstract we examine stock market volatility around the quarterly expirations of stock index futures contracts and nonquarterly expirations of stock index options using estimates of the volatility implicit in the option prices the option prices reflect increases in the volatility of the underlying stock indexes around both quarterly and nonquarterly expiration dates analysis of the residual returns on index options provides evidence consistent with an unexpected increase in market volatility around expiration dates

how do diversity of opinion and information asymmetry affect acquirer returns we examine the theoretical predictions that link acquirer returns to diversity of opinion and information asymmetry theory suggests that acquirer abnormal returns should be negatively related to information asymmetry and diversity of opinion proxies for equity offers but not cash offers we find that this is the case and that more strikingly there is no difference in abnormal returns between cash offers for public firms equity offers for public firms and equity offers for private firms after controlling for one of these proxies idiosyncratic volatility jel g31 g32 g34 this article examines whether variables suggested by diversity of opinion models and information asymmetry models are helpful in understanding the cross sectional variation in acquirer announcement returns using a sample of pure equity offers and pure cash offers for public and private firmsfrom1980to2002 wedocumentthatthesevariables theuncertainty proxies explain a significant fraction of the cross sectional variation in acquirer announcement returns perhaps most strikingly after controlling for the uncertainty proxies there is no difference in abnormal returns between cash offers for public firms equity offers for public firms and equity offers for private firms using two proxies for diversity of opinion employed previously in the literature the standard deviation of analyst forecasts and breadth of ownership we show that bidder abnormal returns for acquisitions of

stock and option market divergence in the presence of noisy information we examine market behavior of the stock and option markets upon the arrival of noisy information in the form of cnbc s mad money recommendations if stock and option markets are not equally efficient they should respond differently to noisy information with the less efficient market more susceptible to noise we find that the stock market is less efficient than the option market the abnormal difference between option implied and actual stock returns is negative and significant upon exposure to noisy information this difference may yield an economically significant monthly trading profit of up to 5 we conclude that the stock market is more susceptible to noisy information than the option market and is therefore less efficient published by elsevier b v

takeovers and divergence of investor opinion we test several hypotheses on how takeover premium is related to investors divergence of opinion on a target s equity value we show that the total takeover premium the pre announcement target stock price run up and the post announcement stock price markup are all higher when investors have higher divergence of opinion we obtain identical results with higher market level investor sentiment when divergence of opinion is higher a firm is less likely to be a takeover target although takeover synergy in successful takeovers is higher our results suggest that takeovers may play a role in explaining high contemporaneous stock prices in the presence of high divergence of investor opinion the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

the value of early exercise in option prices an empirical investigation previous studies in the valuation of american options apparently undervalue the right of early exercise this study uses actual prices from the cboe s s p 100 option instead of model generated values deviations from the theoretical put call parity relationship are caused by the possibility of early exercise these deviations are used to infer the value of early exercise the actual value of early exercise is both statistically and economically significant as expected from theoretical considerations the value of early exercise for put options is greater than for call options

corporate takeover bids methods of payment and bidding firms stock returns this study explores the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids the results reveal significant differences in the abnormal returns between common stock exchanges and cash offers the results are independent of the type of takeover bid i e merger or tender offer and of bid outcomes these findings supported by analysis of nonconvertible bonds are attributed mainly to signalling effects and imply that the inconclusive evidence of earlier studies on takeovers may be due to their failure to control for the method of payment recent studies on corporate takeovers provide inconclusive results on the valuation effects of acquisitions on the common stock of bidding firms 1 substantial differences are reported between the studies that analyze acquisitions initiated as tender offers and those that confine their samples to merger proposals the existence of mixed empirical findings for the bidding firms makes it difficult to interpret existing evidence and to draw conclusions about the managers acquisition motivations nevertheless the reason for the substantial difference between empirical findings on mergers and tender offers still remains an unresolved issue it is observed however that mergers are usually common stock exchange offers whereas tender offers are usually cash offers given that different methods of financing a project have different signalling implications myers and majluf 39 the differential stock returns of bidders in mergers and tender offers may be due to the method of acquisition financing

one way arbitrage foreign exchange and securities markets a note theorem in the case of traders with exogenous needs to acquire foreign currency recently deardorff 3 coitned the phrase one way arbitrage to describe the behavior of those traders and showed that it probably precludes round trip covered interest arbitrage from breaking even deardorff s analysis focuses on the conditions under which in the presence of transaction costs there would be both spot and forward transactions on the foreign exchange markets at equilibrium in this paper we extend the analysis to derive the conditions under which transactions would exist in both the home and foreign securities markets and we generalize the results to the case of transactions in all markets

portable country governance and cross border acquisitions the agency theory and law and finance literatures show good country governance encourages financial development mitigates agency problems and increases firm value drawing on these literatures we develop a theory that benefits from good country governance are portable by firms across countries through cross border acquisitions using acquisitions from 56 countries from 1990 to 2007 we find that acquirers can transport the benefits from good country governance so that they gain more from acquiring targets with worse country governance than their own as predicted the acquirer s stock price reaction to acquisitions increases with the country governance distance between the acquirer and the target

belief dispersion in the stock market we develop a dynamic model of belief dispersion with a continuum of investors differing in beliefs the model is tractable and qualitatively matches many of the empirical regularities in a stock price its mean return volatility and trading volume we find that the stock price is convex in cash flow news and increases in belief dispersion while its mean return decreases when the view on the stock is optimistic and vice versa when pessimistic moreover belief dispersion leads to a higher stock volatility and trading volume we demonstrate that otherwise identical two investor heterogeneous beliefs economies do not necessarily generate our main results

when and how us dollar shortages evolved into the full crisis evidence from the cross currency swap market abstract this paper investigates when and how the us dollar shortages evolved into the full crisis in the cross currency swap market between major european currencies and the us dollar during the turmoil of 2007 2009 using the dynamic factor model with regime switching coefficients of each swap price with respect to the latent common factor the 1 year market entered the high crisis regime soon after the onset of the subprime problem in august 2007 the 10 year market entered that regime following the collapse of bear sterns in mid march 2008 financial credit spreads have significant predictive power for switches between high and low regimes

short sales and speed of price adjustment evidence from the hong kong stock market abstract we present empirical evidence that short sales contribute to market efficiency by increasing the speed of price adjustment to not only private public firm specific information but also market wide information shortable stocks are characterized by weaker trade continuity and stronger quote reversals they adjust faster to new information than non shortable counterparts these findings remain robust even in an up market condition in which short sales are not binding the amount of information incorporated in each trade is also significantly higher for shortable than non shortable stocks in both up and down market conditions after controlling for firm size trading volume liquidity price and option trading short sales stand out as one of the significant factors that speed up the price adjustment

unions wages and skills studies uniformly conclude that union wage effects are largest for workers with low measured skills longitudinal analysis using 1989 90 1994 95 cps matched panels produces union premium estimates equivalent across skill groups following appropriate sample restrictions and control for worker specific skills nlsy evidence on aptitude scores confirms that union workers with high measured skills have relatively low unmeasured skills differential selection by skill class and skill homogeneity in union workplaces result from employer and employee sorting in response to wage standardization union organizing where skills are homogeneous and unionized employers reluctance to hire the most as well as least able workers

the union wage effect and ability bias evidence from ireland we use longitudinal data from an irish household survey to measure the union wage premium a subsample in which the worker s payslip was seen by the interviewer is unlikely to have measurement error for the union variable the results support the finding that measurement error leads to a large downward bias in fixed effects estimates of the union effect but indicate that ability bias has a small effect on the average union wage premium

covered interest parity a high frequency high quality data study profitable deviations from covered interest parity cip represent riskless arbitrage opportunities and so indicate market ineffic iency previous empirical work on cip uses noncontemporaneously sampl ed data and reports mixed results this paper uses high frequency te n minute high quality data gathered personally by the author in th e london foreign exchange market to test the cip condition the resu lts overwhelmingly support the market efficiency hypothesis copyright 1987 by the review of economic studies limited

are small firms less vulnerable to overpriced stock offers we show an inverted u relation between targetiveness probability of being targeted and firm size however this pattern describes stock offers and is more pronounced during hot markets characterized by higher stock valuations for cash offers we find a negative and monotonic relation these contrasting patterns suggest that small firms in the bottom nyse size quartile are less vulnerable to overpriced stock offers in addition we find that the stock acquirers of small targets are less overvalued than those of large targets and that the announcement returns are less negative for stock acquirers of small targets than for those of large targets

derivatives traders reaction to mispricing in the underlying equity this article examines trading behavior in the options market conditioned on mispricing in the underlying stock we investigate the price equilibrium between the observed equity asset and the options implied synthetic share as well as the relative divergence between the two prices we find a consistently positive relation between the level of stock mispricing and violations of the upper boundary condition using derivatives along with an increase in price divergence to control for the effect of shorting limitations on mispricing we further examine prices during the short sale ban in 2008 the results hold and in many instances are more significant during the ban period given the persistent disequilibria between the synthetic and observed stock prices we argue the results are evidence of informed trading in the derivatives market

does the law of one price hold in international financial markets evidence from tick data abstract this paper investigates the validity of the law of one price lop in international financial markets by examining the frequency size and duration of inter market price differentials for borrowing and lending services one way arbitrage using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency we find that the lop holds on average but numerous economically significant violations of the lop arise the duration of these violations is high enough to make it worthwhile searching for one way arbitrage opportunities in order to minimize borrowing costs and or maximize earnings on given funds we also document that such opportunities decline with the pace of the market and increase with market volatility

climate treaties and breakthrough technologies an effective climate change treaty must promote the joint supply of two global public goods climate change mitigation and knowledge of new technologies that can lower mitigation costs r d is especially needed to bring about substantial long term reductions in atmospheric concentrations of greenhouse gases for this will require the development and diffusion of revolutionary breakthrough technologies martin i hoffert et al 2002 in principle such an outcome could be realized by the kyoto protocol approach if that agreement were strengthened over time however that response may be inadequate kyoto makes no provision for r d and as i shall demonstrate unlikely to succeed can a treaty system relying directly on targeted r d and the adoption of breakthrough technologies perform better in this same setting of anarchic international relations i will show that as a general rule the answer is no essentially the same forces that undermine kyoto also challenge the r d and technology approach there is one exception to this rule r d leading to breakthrough technologies exhibiting increasing returns can improve dramatically on the kyoto approach even when these technologies are otherwise inferior to the alternatives available this suggests that our approach to treaty design should be strategic

climate engineering under deep uncertainty abstract climate engineering and in particular solar radiation management srm is attracting increasing attention as a climate policy option however its potentially strategic nature and unforeseen side effects provide major policy and scientific challenges we study the role of srm in a two country model with the notable feature of deep uncertainty modeled as model misspecification of srm side effects we find that deep uncertainty leads to a reduction in srm deployment under both global cooperation and strategic nash behavior and that the effect is larger if countries act strategically furthermore we demonstrate that if countries have different model confidence about srm impacts then the more confident country will engage more strongly in using srm leading this country to free drive

options short sale constraints and market efficiency a new perspective this paper undertakes a new investigation of the potential for options to mitigate short sale constraints i find that option introduction alleviates 79 of the price adjustment efficiency disparity between short sale constrained and unconstrained stocks in relation to negative news no significant improvement in adjustment efficiency is found in response to positive information these results are robust to controls for endogeneity biases associated with the option introduction selection process further i find evidence that post option improvement in efficiency is similar in relation to private and public information this suggests that short sale constraint effects stem at least in part from an irrational optimism bias or another behavioral source as suggested theoretically by miller 1977 collectively these results suggest that options act as an effective substitute to short sales significantly contributing to the informational efficiency of the market

deviations from purchasing power parity under different exchange rate regimes do they revert and if so how abstract we propose an empirical model for deviations from long run purchasing power parity ppp that simultaneously accounts for three key features i adjustment toward ppp may occur via nominal exchange rates and relative prices at different speeds ii different exchange rate regimes may generate regime shifts in the structural dynamics of ppp deviations iii nonlinear reversion toward ppp in response to shocks this empirical framework encompasses and synthesizes much previous empirical research using over a century of data for the g5 countries we provide evidence that long run ppp holds the relative importance of nominal exchange rates and prices in restoring ppp varies over time and across different exchange rate regimes and reversion to ppp occurs nonlinearly at a speed that is fairly consistent with the nominal rigidities suggested by conventional open economy models

flexible inflation targeting and financial stability is it enough to stabilize inflation and output abstract we investigate empirically whether a central bank can promote financial stability by stabilizing inflation and output and whether additional stabilization of asset prices and credit growth would enhance financial stability in particular we employ an econometric model of the norwegian economy to investigate the performance of simple interest rate rules that allow a response to asset prices and credit growth in addition to inflation and output we find that output stabilization tends to improve financial stability additional stabilization of house prices equity prices and or credit growth enhances stability in both inflation and output but has mixed effects on financial stability in general financial stability as measured by e g asset price volatility improves while financial stability measured by indicators that depend directly on interest rates deteriorates mainly because of higher interest rate volatility owing to a more active monetary policy

the economics of the climate i review the economic characteristics of the climate problem focusing on the choice of discount rates in the presence of a stock externality risk and uncertainty ambiguity and the role of integrated assessment models iams in analyzing policy choices i suggest that iams can play a role in providing qualitative understanding of how complex systems behave but are not accurate enough to provide quantitative insights arguments in favor of action on climate issues have to be based on aversion to risk and ambiguity and the need to avoid a small but positive risk of a disastrous outcome

longitudinal analyses of the effects of trade unions but union members are different from nonmembers in unobserved ways biasing your estimates y ou should make a selectivity bias correction simultaneously determine union status and economic outcomes develop an unobservables model use longitudinal data archetypical comment on virtually any study of the economic effects of umomsm or suitably modified on any other empirical subject

bidder discounts and target premia in takeovers on news of a takeover the sum of the stock market values of the firms involved often falls and the value of the acquirer almost always does does this mean that takeovers do not raise the values of the firms involved not necessarily we set up a model in which the equilibrium number of takeovers is constrained efficient yet upon news of a takeover a target s price rises the bidder s price falls and most of the time the joint value of the target and acquirer also falls

trading activity dealer concentration and foreign exchange market quality abstract we study the relation between foreign exchange market quality and both trading activity and dealer concentration by considering two currency pairs with significant differences along both dimensions the euro us dollar and canadian dollar us dollar a variance ratio test reveals over reaction in currency prices but that this is smallest when trading activity is high and dealer concentration at its peak a garch model shows that over reaction declines as trading activity and dealer concentration increase with the results being stronger for the euro our results confirm that trading activity is an important determinant of market quality but also point to a significant role for dealer concentration

asset float and speculative bubbles we model the relationship between asset float tradeable shares and speculative bubbles investors with heterogeneous beliefs and short sales constraints trade a stock with limited float because of insider lockups a bubble arises as price overweighs optimists beliefs and investors anticipate the option to resell to those with even higher valuations the bubble s size depends on float as investors anticipate an increase in float with lockup expirations and speculate over the degree of insider selling consistent with the internet experience the bubble turnover and volatility decrease with float and prices drop on the lockup expiration date

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

the incredible economics of geoengineering the focus of climate policy so far has been on reducing the accumulation of greenhouse gases that approach however requires broad international cooperation and being expensive has been hindered by free riding so far little action has been taken an alternative approach is to counteract climate change by reducing the amount of solar radiation that strikes the earth geoengineering in contrast to emission reductions this approach is inexpensive and can be undertaken by a single country unilaterally but geoengineering also has worrying consequences it may harm some countries it would not address ocean acidification it would pose new risks the fundamental challenge posed by this new technology is not free riding but governance who should decide if and under what circumstances geoengineering should be used

large market shocks and abnormal closed end fund price behaviour abstract this paper investigates the short term price behaviour of closed end funds following eight large market wide shocks the findings from a sample of 63 funds continuously traded on the london stock exchange indicate that prices overreact relative to equilibrium given by net asset values the speed of reversion in discounts following market wide shocks is slower than that following fund specific shocks of a similar magnitude the post shock persistence in discounts is related more to the ease of arbitrage rather than to liquidity as proxied by fund size or to the speed of recovery in the broader market the discount decays more slowly for those funds that are difficult to arbitrage