the performance of published dutch stock recommendations abstract the three most widely read dutch sources of stock recommendations are published weekly in this paper these weekly recommendations are studied for the period january 1978 until december 1983 abnormal returns are calculated using the market model as a benchmark the market index used is the best linear index which under certain assumptions can be proven to yield the most powerful market model based event study it turns out that there is no significant long term abnormal return although abnormal returns are very significant in the week of publication these short term abnormal returns are more pronounced for strong recommendations and for stocks with a small normal daily trading volume this is very strong evidence for the existence of a so called self fulfilling prophecy

cost reduction competition and industry performance in many markets firms compete over time by expending resources with the purpose of reducing their costs sometimes the cost reducing investments operate directly on costs in many instances they take the form of developing new products that deliver what customers need more cheaply therefore product development can have the same ultimate effect as direct cost reduction in fact if one thinks of the product as the services it delivers to the customer in the way that lancaster pioneered then product development often is just cost reduction

forecast accuracy of individual analysts in nine industries the purpose of this paper is to investigate whether financial analysts with superior earnings forecasting ability can be distinguished on the basis of ex post forecast accuracy i explore the question by estimating and comparing average accuracy across individuals and by considering whether the observed distribution of analyst forecast accuracies differs from the distribution expected if their relative performances each year were purely random overall i do not find systematic differences in forecast accuracy across individuals financial press coverage suggests there are superior financial analysts for example institutional investor s annual all american research team includes analysts rated by money managers as superior on a variety of criteria including earnings forecasting ability to pick stocks and the quality of written reports clearly financial analyst services other than forecast accuracy are valued by their clients i focus on only one activity earnings forecasting for two reasons first forecast data are available quantitative and can be evaluated against observable earnings outcomes services such as insightful well written research reports are harder to evaluate quantitatively second academic use of analyst forecasts as earnings expectations data in capital markets empir

implications of incomplete markets for international economies we develop a restriction that precludes implausibly high reward for risk in incomplete inter national economies to consider a theoretical problem that characterizes a lower bound on the covariance between stochastic discount factors sdfs subject to correct pricing the problem is analytically solvable and synthesizes domestic and foreign sdfs into spanned and unspanned components our novelty is that exchange rate growth need not equal the ratio of sdfs and that the sdf correlations are plausibly lowered exploiting the realities of cross country corre lations of macroeconomic quantities namely consumption wealth dividend growths and asset returns our empirical investigation refutes the speci cation of complete markets

delegated portfolio management abstract a problem of screening agents with privately known forecasting abilities and reservation utilities and then eliciting truthful information from these agents once they are employed is considered for the case of risk averse agents and large principals an approximately optimal solution is constructively characterized under the assumption that payoffs are normally distributed a significant extension of the definnetti savage probability elicitation result is developed under this extension knowledge of agent preferences is not required when the underlying conditional distributions are symmetric and this fact is exploited to solve the screening problem in a mean variance formulation

new evidence on beta stationarity and forecast for belgian common stocks abstract based on a comprehensive sample of 170 securities traded continuously on the brussels stock exchange from december 1966 to december 1983 this paper presents evidence which indicates that the stationarity of beta coefficients is not as strong as reported in previous studies which were based on smaller samples it is shown however that beta forecast can be generally improved using an adjustment method and that the improvement is highest for portfolios of increasing size

value line rank and firm size this paper studies the relation between value line s successful record in predicting relative stock price movements and the firm size effect the data suggest little direct relation between the two phen omena value line tends not to rank small firm stocks and small firm stocks that are ranked are more likely to receive a low rank than la rge firm stocks within each size sorted quintile of the market the mean payoffs on costless positions constructed according to value lin e s recommendations are positive copyright 1987 by the university of chicago

paying too much and being happy about it existence causes and consequences of tariff choice biases abstract a common assumption underlying the analysis of consumers choices among optional tariffs is that consumers choose the tariff that maximizes their surplus and thus the tariff that leads to the lowest billing rate for a given amount of usage yet there is evidence that many users prefer a flat rate even though their billing rate would be lower with a pay per use tariff flat rate bias and some users prefer a pay per use tariff even though they would save money with a flat rate pay per use bias the authors conduct four empirical analyses based on three different data sets they show that the flat rate bias is more important and has a greater regularity and time persistence than the pay per use bias they classify potential causes of the flat rate bias as insurance effect taxi meter effect convenience effect and overestimation effect and show that the insurance the taxi meter and the overestimation effects lead to a flat rate bias they provide evidence that underestimation of usag

technological expectations and adoption of improved technology abstract attention is focused upon the adoption demand rather than the creation supply of new technology which improves from time to time based on the expected flow of technological progress over which the firm demander has no control it must decide either to adopt the current best available technology or to postpone adoption the distinguishing features of the model are that more than one technological innovation is anticipated and expectations about the likelihood of such innovations are revised as time passes since the last innovation our analysis shows that the firm will adopt the current best practice if its technological lag exceeds a certain threshold moreover as time passes without new technological advances it may become profitable to purchase a technology that has been available even though it was not profitable to do so in the past

portfolio selection with mental accounts and delegation das et al 2010 develop an elegant framework where an investor selects portfolios within mental accounts but ends up holding an aggregate portfolio on the mean variance frontier this investor directly allocates the wealth in each account among available assets in practice however investors often delegate the task of allocating wealth among assets to portfolio managers who seek to beat certain benchmarks accordingly we extend their framework to the case where the investor allocates the wealth in each account among portfolio managers our contribution is threefold first we provide an analytical characterization of the existence and composition of the optimal portfolios within accounts and the aggregate portfolio second we present conditions under which such portfolios are not on the mean variance frontier and conditions under which they are third we show that the aforementioned analytical characterization is also applicable within the framework of das et al and thus improves upon their numerical approach

a general multiple distributed lag framework for estimating the dynamic effects of promotions game attendance resulting from ticket sales is the single largest revenue stream for major league baseball mlb teams we propose a general multiple distributed lag framework following the koyck family of models for estimating mlb attendance drivers and focus specifically on the differential direct and carryover effects of in game promotions by setting various model constraints the proposed framework incorporates different forms of serial correlation and promotion specific dynamic effects using information model selection heuristics we select an optimal model of attendance drivers for the pittsburgh pirates 2010 2012 mlb seasons we demonstrate that our newly proposed model with an unrestricted serial correlation structure performs best we find that although kids promotions have the highest direct effect on attendance giveaway and entertainment promotions have substantial carryover effects and the largest total effects we use our results to optimize the pirates promotional schedule and find that a reallocation of resources across promotional categories can increase profits between 39 and 88 data as supplemental material are available at http dx doi org 10 1287 mnsc 2013 1856 this paper was accepted by eric bradlow special issue on business analytics

the economics of predation what drives pricing when there is learning by doing predatory pricing a deliberate strategy of pricing aggressively in order to eliminate competitors is one of the more contentious areas of antitrust policy and its existence and efficacy are widely debated the purpose of this paper is to formally characterize predatory pricing in a modern industry dynamics framework that endogenizes competitive advantage and industry structure our framework encompasses important phenomena such as learning by doing network effects switching costs dynamic demand and certain types of adjustment costs due to its prominent role in legal cases involving alleged predation we examine learning by doing in more detail we first show that predation like behavior arises routinely in our learning by doing model equilibria involving predation like behavior typically coexist with equilibria involving much less aggressive pricing to disentangle predatory pricing from mere competition for efficiency on a learning curve we next decompose the equilibrium pricing condition and develop alternative characterizations of a firm s predatory pricing incentives we finally measure the impact of these incentives on industry structure conduct and performance we show that forcing a firm to ignore the predatory incentives in setting its price can have a large impact and that this impact stems from eliminating equilibria with predation like behavior along with the predation like behavior however a fair amount of competition for the market is eliminated

the learning curve and competition abstract the problem of duopoly price competition when there is cost reducing learning is examined in an infinite horizon model with stochastic demand shocks it is shown that in a markov perfect equilibrium the long run outcome depends sensitively on the early history of chance events so that either firm may dominate the market or both firms may share the market asymmetric long term outcomes can arise even when both firms are identical it is also shown that a producer with higher long run costs may eventually dominate the market

factor related and specific returns of common stocks serial correlation and market inefficiency one of the most basic tests of market efficiency is the test for serial correlation of returns if the return on a typical stock in period t is correlated with its return in period t 1 then the best unbiased minimum mean square error prediction for the return in period t equals the prior return multiplied by the correlation coefficient an investor concerned only about the mean and variance of portfolio return would use the prediction to improve the mean variance trade off of portfolio return by shading the portfolio toward stocks predicted to have high returns and away from stocks predicted to have low returns hence using knowledge about the previous month s returns the investor produces a portfolio with superior mean variance performance this violates the weak form of market efficiency fama 1 in the sense that the expected return for each stock based upon knowledge of the previous month s return is different from the expected return based only upon the current stock price the same argument may be applied to any component of returns as distinct from total return for example in a linear multiple factor plus specific return model of security returns total excess return is decomposed into factor related return and specific return the empirical results in this paper find positive serial dependence in the factor related component and negative serial dependence in the specific component which nearly offset one another resulting in zero correlation in total excess returns formally

discrete expectational data and portfolio performance in this article we examine the information content in analysts recommendations which are made on a five point buy hold or sell scale our data set includes data on 10 000 forecasts per month unlike most prior studies our data set does not suffer from selection or survivorship bias we find information in analysts changes in recommendations approximately 4 5 extra return can be earned by purchasing new buys rather than new sells

the effect of value line investment survey rank changes on common stock prices abstract the information content of value line investment survey rank changes is investigated the results suggest rank changes affect common stock prices but the effect varies by the type of rank change changes from rank 2 to rank 1 have the most dramatic impact on prices a cross sectional analysis finds small firms have a greater reaction to a rank change than larger firms which supports theories on the frequency of report arrival and precision of information a speed of adjustment test concludes the prices of individual securities adjust to the information in a rank change over a multiple day period

innovation diversity and diffusion a self organisation model a number of features of innovation diffusion are identified appropriability diversity expectations selection learning and spillover externalities a dynamic model is formul ated to embed the diffusion question into a more general framework of disequilibrium competition the model incorporates distinct vintage structures reflecting a change in technological trajectory learning by using a nd expectations driven investment rules of thumb simulation studies reveal robust quasi logistic curves but a complicated pattern of net market share gains and losses uncertainty regarding the rationality of early or late adoption it is argued ensures that the requisite behavioral variety is present to generate these diffusion patterns copyright 1988 by royal economic society

seller beware how bundling affects valuation abstracthow does bundling affect valuation this research proposes the asymmetry hypothesis in the valuation of bundles consumers demand more compensation for the loss of items from bundles compared with the loss of the same items in isolation yet they express lower willingness to pay for items added to bundles compared with the same items purchased separately this asymmetry persists because bundling causes consumers to perceive multiple items as a single inseparable gestalt unit thus consumers resist altering the whole of the bundle by removing or adding items six studies demonstrate this asymmetry across judgments of monetary value studies 1 and 2 and dis satisfaction study 3 moreover bundle composition the ability of different items to create the impression of a whole moderates the effect of bundling on valuation study 4 and the need to replace missing items i e restoring the whole mediates the effect of bundling on compensation demanded for losses study 5 finally the a

the bottom dollar effect the influence of spending to zero on pain of payment and satisfaction spending that exhausts a budget is shown to decrease satisfaction with purchased products relative to spending when resources remain in the budget six studies including those in which participants earn and spend real resources and evaluate real products explore this bottom dollar effect this research contributes to prior mental accounting research regarding how costs influence decision making e g bundling coupling sunk costs and to the satisfaction literature supporting the role of pain of payment in this process we show that the bottom dollar effect increases as effort required to earn budgetary resources increases decreases in the presence of windfall gains and decreases when there is less time between budget exhaustion and replenishment mediation analyses further demonstrate the role of payment pain in the bottom dollar effect implications are discussed in the context of behavioral research marketing promotions management and public policy

dynamic complexity in duopoly games abstract we discuss the occurrence of periodic and chaotic phenomena in infinite horizon duopoly games where firms maximize their discounted sum of profits and use markov perfect equilibrium strategies in the alternating case their corresponding actions are then constrained orbits of a map similar to a cournot t tonnement we show that any behavior is possible for small discount factors and that one obtains the cournot t tonnement as the discount factor goes to zero in the simultaneous case we show by mean of an example that many cournot t tonnements can be viewed as markov perfect equilibria of an infinite horizon game and that one obtains the nash equilibrium of the static game as the discount parameter goes to zero we are thus led to study in detail the dynamical properties of a cournot t tonnement

security price reactions to initial reviews of common stock by the value line investment survey this study examines daily price reactions to initial reviews of securities by the value line investment survey the reviews are found to convey information to the market as significant abnormal returns are found over a 3 day period around release of the information furthermore there is no statistically significant subsequent price reation after this 3 day period consistent with market efficiency

friction in the trading process and the estimation of systematic risk abstract this paper considers how estimates of the market model beta parameter can be biased by friction in the trading process information decision and transaction costs that a leads to a distinction between observed and true returns b causes observed returns to be generated asynchronously for a set of interdependent securities and c thereby introduces serial cross correlation into security returns several propositions are derived from which consistent estimators of beta are obtained and the effect of differencing interval length on beta estimates is specified the formulation is contrasted with the related analyses of scholes williams 1977 and dimson 1979

the learning curve market dominance and predatory pricing sufficient conditions for id and iid are given in the case of two step learning in which a firm reaches the bottom of its learning curve after just two sales however examples are also constructed for the two step learning case in which neither id nor iid holds it is also shown that in equilibrium iid implies that learning is privately disadvantageous although it is socially advantageous finally introducing avoidable fixed costs and possible exit into the model yields a new theory of predatory pricing based on the learning curve hypothesis

competing technologies the learning curve and rational expectations abstract the problem of choice between several variants of a technology subject to dynamic learning economies is examined in a rational expectations model with overlapping adopters it is shown that even with rational expectations the long term market outcome depends sensitively on the pattern of early chance events and that only one variant of the technology will come to dominate the market in the long run this variant need not be the one which is socially optimal or most promising technically

axe the tax taxes are disliked more than equivalent costs abstract tax collection is critical for the proper functioning of society however many people strongly dislike paying taxes although this distaste could be rational on economic grounds the authors show that this attitude extends beyond simply disliking the costs incurred and affects behavior in counternormative ways they demonstrate the phenomenon of tax aversion a desire to avoid taxes per se that exceeds the rational economic motivation to avoid a monetary cost across five experiments the authors provide evidence that people have a stronger preference to avoid tax related costs than to avoid equal sized or larger monetary costs unrelated to taxes tax aversion affects consumer preferences in a variety of domains including standard store purchases financial investments and job selection furthermore this tendency is most prevalent among people who identify with political parties that generally favor less taxation finally encouraging participants who identify with antitax parties to cons

the value line enigma extended an examination of the performance of option recommendations the authors extend the research on the value line enigma by examining the performance of call recommendations in value line options d galai s hedge decomposition procedure identifies the components of the calls returns abnormal call returns were most pronounced immediately following the purchase which is consistent with studies of value line s stock rankings the largest and most significant abnormal performance was by calls assigned the highest rank written on stocks judged by value line to be correctly priced abnormal call return performance by joint call and stock ranks was consistent with hypothesis that value line identifies underpriced call options copyright 1993 by university of chicago press

do analysts generate trade for their firms evidence from the toronto stock exchange abstract it has generally been assumed that the potential commission revenue is an important determinant of a sell side analyst s decision of what firms to cover and what information to publicly release however because stock volume has not been disaggregated on a brokerage firm level uncertainty remains regarding the economic importance of the relation between analyst coverage and brokerage firm volume using a unique data set that identifies the broker s involved in each trade i find that brokerage volume is significantly higher in covered stocks than in uncovered stocks on average brokers increase their market share in covered stocks by 3 8 relative to uncovered stocks

the informative role of the value line investment survey evidence from stock highlights i examine abnormal stock returns associated with stock highlights published by the value line investment survey at the time of their publication stock highlights elicit strong positive abnormal returns they also have positive abnormal returns at the time of the earnings announcement preceding stock highlight publications post earnings announcement drift is present but is much too small to explain abnormal returns at the time of the publication of stock highlights thus value line stock highlights provide useful information to investors this information is rapidly reflected in stock prices consistent with market efficiency

earnings surprise research synthesis and perspectives an investigation of the relation between earnings surprise and three empirical anomalies the p e effect the size effect and the value line enigma indicates that the standardized unexpected earnings sue effect appears to be separate and distinct from each of the three the relations between the sue phenomenon and firm risk the appropriateness of the earnings expectations model and the role of transaction costs are also investigated the sue phenomenon is not attributable to inappropriate risk adjustment use of the wrong earnings expectations model or ignoring transaction costs the sue effect may be partly explained by analysts behavior and is both predictable and profitable the sue effect has also been observed in japan

market and industry structure and corporate cost of capital the impact of the structural attributes of industries on the cost of capital to constituent firms is examined within the framework of the capital asset pricing model capm the relationship between industry structure and systematic risk which the capm posits as the sole determinant of security returns is investigated using regression methodology the results show that industry characteristics such as capital intensity capital to labour ratio and entry barriers such as advertising have a significant influence on systematic risk and hence on the cost of capital to firms recent us studies e g sullivan 1982 have investigated the relationship between market power and the stock market return on equity using the capital asset pricing model capm within the capm framework investor required return is a linear function of systematic risk the impact of industry structure on expected return is therefore likely to be transmitted through investors perceptions of the relationship between the structural variables and firm systematic risk some recent theoretical studies have attempted to model such a relationship this paper reports an empirical examination of the predictions resulting from these and other related models for a sample of uk firms our results show that industry structural characteristics e g capital intensity have a significant influence on systematic risk and hence cost of capital of firms although the predictions of the extant theoretical models are only partly confirmed the next section identifies a number of microeconomic determinants of corporate systematic risk section iii discusses the methodology employed in the study section iv describes the sampling procedure and explanatory variables results are discussed in section v the final section provides a summary and the conclusions

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

the effect of promotion on consumption buying more and consuming it faster the authors empirically demonstrate the existence of flexible consumption rates in packaged goods products how this phenomenon can be modeled and its importance in assessing the effectiveness of

estimating and adjusting for the intervalling effect bias in beta the concept of beta as the measure of systematic risk has been widely accepted in the academic and financial community increasingly betas are being used to estimate the cost of capital for corporations despite this however biases are generally present in ordinary least squares ols estimates of beta in particular empirical estimates of beta are affected by friction in the trading process which delays the adjustment of a security s price to informational change and hence leads to an intervalling effect bias in this paper we present and empirically test two procedures for correcting this bias the first is to estimate the asymptotic value that ols beta approaches as the differencing interval is lengthened without bound the second procedure is to infer the value of beta by adjusting ols beta for cross sectional differences in the intervalling effect as a function of the depth of the market for a security as measured by its value of shares outstanding our results suggest that a substantial correction is needed to get true beta estimates from short differencing interval data

transaction decoupling how price bundling affects the decision to consume abstract in today s marketplace price bundling is widespread manufacturers and retailers routinely offer multiple products for a single bundled price although the effects of price bundling on purchase behavior have been well researched the effects of price bundling on postpurchase consumption behavior have received almost no attention in this article the authors build on the sunk cost literature e g thaler 1980 1985 and predict that price bundling leads to a disassociation or decoupling of transaction costs and benefits thereby reducing attention to sunk costs and decreasing a consumer s likelihood of consuming a paid for service e g a theater performance four studies show this to be the case in two lab studies the authors show that having a bundled four day ski pass as opposed to four one day ski tickets decreases a person s likelihood of skiing on the final day of a four day ski vacation they replicate this result in a field study showing that multiperformance ticket holders are

the stability of uk risk measures and the problem of thin trading this paper examines the problems of estimating risk measures and their stability in thin markets it shows analytically that conventional approaches used in previous studies can lead to serious overestimates of the stability of risk measures when shares are subject to thin trading it then demonstrates using uk data that this is in fact a serious practical problem and that the resultant biases are of precisely the form predicted finally the paper presents reliable evidence on the stability of uk risk measures by using an estimation method designed to avoid thin trading bias using this approach risk measures are found to be as stable in the uk as they are in the usa this paper examines the stability of risk measures in the uk the focus is on providing reliable evidence in a market where many of the shares suffer from thin trading this is important because thin trading can seriously distort stability measures leading to incorrect conclusions indeed this is a problem which has almost certainly afflicted many previous studies of stability the paper makes four main contributions first it shows analytically that thin trading can lead to serious overstatements about stability second it uses uk data to illustrate that this is in fact a serious practical problem and that the biases are of precisely the form predicted this is important for anyone who wishes to interpret previous claims on beta stability in thin markets third the paper presents reliable evidence on the stability of uk betas by using an estimation method designed to avoid thin trading bias besides avoiding bias our

a note on testing an aggressive investment strategy using value line ranks one of the better known investment advisory services is the value line investment survey an unresolved debate has been in progress in the literature for a decade as to whether the performance of the value line investment service is inconsistent with the efficient market hypothesis for example black 2 states that the vl system can produce extra returns even when transaction costs are considered but he does not report his exact test procedure or any quantitative results of his study on the other hand kaplan and weil 10 11 do not believe that vl can generate abnormal returns we shall show in the following sections that the vl system represents a borderline case when transaction costs are neglected abnormal returns are obtained when realistic transaction costs are used active trading according to vl recommendations does not yield abnormal returns for a buy and hold policy however vl recommendations do yield abnormal returns even when transaction costs are considered

measuring investment performance in a rational expectations equilibrium model much research has been concerned with evaluating the performance of managed portfolios e g mutual funds and examining whether portfolio managers display in some sense superior performance superior performance would seemingly turn on the possession of superior information that is utilized in managing portfolios in general a fund s asset holdings or portfolio weights might not be observable to an outsider whether they are or not however they are likely to change over time this happens especially when better performance is a result of superior information since managers will change their portfolio composition on obtaining private information since such changes must be taken into account the problem of measuring performance of managed portfolios is inherently different from that of evaluating the performance of individual assets groups of assets or generally portfolios with constant and known composition

consensus forests of corporate earnings analysts forecasts and time series methods an alternative to using a single forecasting method is to average the forecasts made by various methods in this paper we examine empirically combinations of financial analysts forecasts and forecasts from time series methods in order to predict corporate earnings per share we conclude that on average the primary forecasting advantages of analysts over time series methods based on annual data appear to occur over short forecast horizons less than a year neither analysts nor other time series methods substantially outperform a random walk prediction of no change when forecasts are made near the beginning of the fiscal year for predictions in the first half of the fiscal year there is evidence of forecasting benefits from combining time series and analysts forecasts especially if there are few analysts forecasts

market reactions to messages from brokerage ratings systems one dimension of the strategies investment houses use to present investment advice is the number of categories in their rating systems we studied three four and five level systems and found that in all rating systems upgrades outnumber downgrades price reactions are more pronounced to multiple level than to single level recommendation changes and to recommendation upgrades to the highest rating category these price reactions confirm that the market gleans new information from analysts research but suggest that investors at least partially recognize analysts tendency toward optimism and thus react more strongly to downgrades the price effects also show that adding more rating categories is not simply a way to portion out information in smaller bits some of the largest price reactions are to changes between the top two categories in a five level system even though the descriptions of the categories would not signal a portfolio action our results are consistent with the view that firms try to

the effect of credit on spending decisions the role of the credit limit and credibility the objective of the present research is to study consumer decisions to utilize a line of credit the life cycle hypothesis from economics argues that consumers should intertemporally reallocate their incomes over their life stream to maximize lifetime utility one form of intertemporal allocation is to use past income in the form of savings in the future a second form is the use of future income in the present this can only be done if consumers have access to a temporary pool of money that they can draw from and replenish in the future a function performed by consumer credit however our research reinforces prior findings that consumers are unable to correctly value their future incomes and that they lack the cognitive capability to solve the intertemporal optimization problem required by the life cycle hypothesis instead we argue that consumers use information such as the credit limit as a signal of their future earnings potential specifically if consumers have access to large amounts of credit they are likely to infer that their lifetime income will be high and hence their willingness to use credit and their spending will also be high conversely consumers who are granted lower amounts of credit are likely to infer that their lifetime income will be low and hence their spending will be lower however based on research in the area of consumer skepticism and inference making we also argue for a moderating role of the credibility associated with the credit limit specifically we argue that the above effect of credit availability would be particularly strong for consumers who believe that the credit limit credibly signals their future earnings potential i e a naive consumer who has limited experience with consumer credit however as consumers gain experience with credit they start discounting credit availability as a predictor of their future and start questioning the validity of the process used to set the credit limit hence with experience the effect of credit limit on the willingness to use credit should be attenuated we test these predictions in five separate studies in the first experimental study we manipulate credit limit and credibility and pose subjects with a hypothetical purchase opportunity consistent with our prediction credit limit impacted the propensity to spend but only when the credibility was high in the second experimental study we replicate these findings even when subjects were given information about their expected future salaries and also show that the credit limit influences their expectation of future earnings potential in the third study we show that the mere availability and increase of current liquidity cannot explain our findings in the fourth study we conduct a survey of consumers in which we measure a number of demographic characteristics and also ask them for their propensity to spend in a given purchase situation in the fifth study we use the survey of consumer finances scf dataset a triennial survey of u s families that is designed to provide detailed information on the use of financial services spending behaviors and selected demographic characteristics results from both studies 4 and 5 provide further support for our proposed framework credit limits influence spending to a greater extent for consumers with lower credibility younger consumers and less educated consumers across all studies we achieved triangulation by using a variety of approaches surveys and experiments subjects types young students and older consumers nature of predictor variables manipulated and measured dependent measures purchase likelihood credit card balance new charges and methods of analysis anova and regression and consistently found that increasing credit limits on a credit card increases spending especially when the credibility of the limit is high this paper joins a growing body of literature in marketing and behavioral decision theory that goes beyond the traditional domains of inquiry e g product choice effects of marketing mix variables and focuses on consumer decisions relating to the appropriate use of income to finance consumption our framework differs from prior research on the effect of payment mechanisms on spending in two significant ways first we are interested in the effects of the availability of credit on spending and not necessarily in the effect of the transaction format that is associated with each payment mechanism second while prior research has studied the point of purchase and historic i e prepurchase effects of credit the present research is concerned with the availability of credit in the future specifically our framework is invariant to the current and prior usage of credit by the consumer

tracking costs of time and money how accounting periods affect mental accounting after people incur costs to get future benefits they usually track these costs in their mental accounts and are keen to receive the benefits when they become available we introduce the notion that costs and benefits can occur either in the same accounting period day season etc or in different periods our key argument is that monetary costs are tracked across accounting periods but that temporal costs are written off at the end of the period in which they are incurred thus accounting periods lead to a time money asymmetry in the tracking of costs and consequently in the likelihood of seeking benefits in a laboratory study an online panel study and a field study with movie theater patrons we demonstrate how this relationship among accounting periods cost tracking and benefit seeking is different for time than for money our findings offer insights into the sunk cost effect time money differences and mental accounting

options taxes and ex dividend day behavior a novel way of estimating the expected as opposed to the actual share price fall off is developed using option prices this method is applied to the uk traded options market using data from 1979 to 1984 the results show that a the average expected fall off implicit in option prices is around 55 to 60 of the dividend and significantly different from it the fall off also varied inversely with the dividend yield which is consistent with the prediction of the tax clientele hypothesis b the estimates of the expected fall off were not significantly different from the actual fall off c finally the results imply that the usual assumption made in valuing options on dividend paying stocks that the fall off is equal to the dividend would lead to downward biased estimates of the option value

return risk and yield evidence from ex ante data the purpose of this study is to investigate the relationship between return and yield in the context of ex ante data from the value line investment survey and by examining the role of dividends as a proxy for risk the use of ex ante data should substantially reduce the confounding of tax and information effects that has affected earlier studies heteroscedasticity is detected in the after tax capm and found to be negatively related to yield and positively related to beta maximum likelihood methods are used to correct for heteroscedasticity and generate efficient coefficient estimates using data for each of the years 1973 through 1983 there is an overall positive relationship between expected return and yield however coefficient estimates of yield are highly variable from year to year the relationship between dividend yields and security returns is currently a subject of extensive research in finance empirically a positive relationship is found by blume 5 gordon and bradford 12 elton gruber and rentzler

time is money rational life cycle inertia and the delegation of investment management abstract many households display inertia in investment management over their life cycles our calibrated dynamic life cycle portfolio choice model can account for such an apparently irrational outcome by incorporating the fact that investors must forgo acquiring job specific skills when they spend time managing their money and their efficiency in financial decision making varies with age resulting inertia patterns mesh well with findings from prior studies and our own empirical results from panel study of income dynamics psid data we also analyze how people optimally choose between actively managing their assets versus delegating the task to financial advisors delegation proves valuable to both the young and the old our calibrated model quantifies welfare gains from including investment time and money costs as well as delegation in a life cycle setting

fund families as delegated monitors of money managers because a money manager learns more about her skill from her management experience than outsiders can learn from her realized returns she expects inefficiency in future contracts that condition exclusively on realized returns a fund family that learns what the manager learns can reduce this inefficiency cost if the family is large enough the family s incentive is to retain any given manager regardless of her skill but when the family has enough managers it adds value by boosting the credibility of its retentions through the firing of others as the number of managers grows the efficiency loss goes to zero

the impact of tariff structure on customer retention usage and profitability of access services past research in marketing and psychology suggests that pricing structure may influence consumers perception of value in the context of two commonly used pricing schemes pay per use and two part tariff we evaluate the impact of pricing structure on consumer preferences for access services to this end we develop a utility based model of consumer retention and usage of a new service a notable feature of the model is its ability to capture the pricing structure effect and measure its impact on consumer retention usage and pricing policy using data from a pricing field experiment for a new telecommunication service we find that consumers derive lower utility from consumption under a two part tariff than pay per use pricing resulting in lower retention of customers and lower usage of the service specifically our demand analysis shows that a two part tariff structure leads to an average decline of 10 5 in the annual retention rate and an average decrease of 38 7 in yearly usage relative to pay per use pricing after controlling for income effects despite the higher customer churn and lower usage we find that the two part tariff is still the profit maximizing pricing structure however our results show that if firms ignore the pricing structure or access fee effect then they would overcharge customers for the access fee and undercharge them for the per minute price translated in terms of profitability the failure to account for the access fee effect leads to a reduction of 11 in firm profit

testing an aggressive investment strategy using value line ranks a comment recently in this journal clark holloway employed a novel and interesting approach to testing for superior performance 1 however there appear to be errors in his methodology and in the inferences he draws from his evidence holloway holds that a buy and hold policy based on value line vl recommendations yields abnormal returns even when transaction costs are considered he calculates that the annual compound rate of return of vl rank i stocks was 11 3 percent for the 1965 78 period and indeed this is the result reported by vl when dividends are not included holloway then applies a 2 percent one way commission up to may 1975 and 1 25 percent thereafter he reports that the annual abnormal return after commissions was found to be 8 6 percent italics added p 711 this abnormal return is presumably the amount the compound rate of return of rank i stocks exceeds the compound rate of the market allvl stocks prior to an adjustment for risk it is obviously too large to be correct and except for his repeating the same figure in his conclusion p 718 one would assume it is a typographical error for if we adjust rank i returns with his own commission adjustment equation p 711 a terminal value tv per dollar originally invested of 2 697 emerges this amounts to a postcommission annual rate of return of 7 34 percent the market tv for the same period before commissions also without dividends is 1 728 as for commissions there are only two commission occasions with respect to this market portfolio for the entire 1965 78 period at entry and at exit fourteen years later the postcommission return of the market is 3 75 percent annually the margin by which the rank i stocks exceeds the market therefore is the difference between 7 34 percent and 3 75 percent namely 3 6 percent prior to risk adjustment not 8 6 percent since the 3 6 percent extra return just derived did not include dividends the differential would be narrowed even more if the yield on the market is greater than on rank i stocks we can get an estimate of the differential yields using holloway s table i p 712 in table i he compares the vl reported returns with his own calculations using those vl stocks included in the crsp file according to table iv p 717 the number of rank i stocks included therein ranged from 86 to 90 out of 100 over the four year period he chooses as representative of the whole 1965 78 period the number of stocks which compose the market of allvl stocks on the file ranged from 1476 to 1482 out of about 1700 holloway s calculations of return include dividends vl s do not holloway uses the table to show how close his results were to vl s if consideration is given to dividends

the red and the black mental accounting of savings and debt in the standard economic account of consumer behavior the cost of a purchase takes the form of a reduction in future utility when expenditures that otherwise could have been made are forgone the reality of consumer hedonics is different when people make purchases they often experience an immediate pain of paying which can undermine the pleasure derived from consumption the ticking of the taxi meter for example reduces one s pleasure from the ride we propose a double entry mental accounting theory that describes the nature of these reciprocal interactions between the pleasure of consumption and the pain of paying and draws out their implications for consumer behavior and hedonics a central assumption of the model which we call prospective accounting is that consumption that has already been paid for can be enjoyed as if it were free and that the pain associated with payments made prior to consumption but not after is buffered by thoughts of the benefits that the payments will finance another important concept is coupling which refers to the degree to which consumption calls to mind thoughts of payment and vice versa some financing methods such as credit cards tend to weaken coupling whereas others such as cash payment produce tight coupling our model makes a variety of predictions that are at variance with economic formulations contrary to the standard prediction that people will finance purchases to minimize the present value of payments our model predicts strong debt aversion that they should prefer to prepay for consumption or to get paid for work after it is performed such pay before sequences confer hedonic benefits because consumption can be enjoyed without thinking about the need to pay for it in the future likewise when paying beforehand the pain of paying is mitigated by thoughts of future consumption benefits contrary to the economic prediction that consumers should prefer to pay at the margin for what they consume our model predicts that consumers will find it less painful to pay for and hence will prefer flat rate pricing schemes such as unlimited internet access at a fixed monthly price even if it involves paying more for the same usage other predictions concern spending patterns with cash charge or credit cards and preferences for the earmarking of purchases we test these predictions in a series of surveys and in a conjoint like analysis that pitted our double entry mental accounting model against a standard discounting formulation and another benchmark that did not incorporate hedonic interactions between consumption and payments our model provides a better fit of the data for 60 of the subjects the discounting formulation provides a better fit for only 29 of the subjects even when allowing for positive and negative discount rates the pain of paying we argue plays an important role in consumer self regulation but is hedonically costly from a hedonic perspective the ideal situation is one in which payments are tightly coupled to consumption so that paying evokes thoughts about the benefits being financed but consumption is decoupled from payments so that consumption does not evoke thoughts about payment from an efficiency perspective however it is important for consumers to be aware of what they are paying for consumption this creates a tension between hedonic efficiency and what we call decision efficiency various institutional arrangements such as financing of public parks through taxes or usage fees play into this tradeoff a producer developing a pricing structure for their product or service should be aware of these two conflicting objectives and should try to devise a structure that reconciles them

brokers recommendations a significant result in a recently published study in this journal dimson and fraletti i986 examined in detail the performance of stocks recommended by a leading broker they concluded that they were unable to detect any significant abnormal performance by the recommended stocks their study of the investment performance of an individual broker was a follow up study to an earlier investigation dimson and marsh i984 into the forecasting skills of different financial advisers what is surprising is that the earlier study had revealed statistically significant evidence of superior forecasting skills by some brokers in contrast in this follow up study when dimson and fraletti investigated in detail recommendations made by a broker with above average forecasting skills they failed to find evidence that this superior forecasting skill resulted in superior investment performance in this paper it will be argued that with the sample sizes available to dimson and fraletti then at all plausible levels of the broker s forecasting ability a rejection of the hypothesis of superior investment performance was almost inevitable the failure to detect abnormal performance in this case is illustrative of a more general problem with statistical tests of market efficiency stock markets are characterised by wide fluctuations in returns relative to the mean return this results in the power of many statistical tests of market efficiency being weak a natural consequence is that the statistical evidence is frequently insufficient to reject the null hypothesis that the market is efficient thus when summers i986 and poterba and summers i987 re examined some of the standard tests of weak form efficiency they concluded that the power of such tests was so weak that unavailably large sample sizes would be required to produce statistically significant positive findings a similar conclusion would appear to apply to some studies of semi strong and strong market efficiency ashton i985 re examined the data used by jensen i968 in his study of the performance of mutual fund managers he concluded that the problem with the study did not arise so much from a misspecification of the null hypothesis dybvig and ross i985 but rather from the lack of power of the statistical test used in his analysis ofthejensen study ashton i985 was concerned with the detection of fund managers ability to time the general rises and falls in the market in contrast the dimson and fraletti study is concerned with the ability of brokers to select securities which will perform well relative to the market and the analysis just cited does not apply in this paper a theoretical model of brokers forecasts is developed which enables brokers to identify those shares which will outperform a general market portfolio this model is then used to derive the expected value and variance of

buying without using biases of german bahncard buyers we use a large data set of german railway travellers to analyse the purchasing decision for fare reducing bahncards we expect that this tariff choice is neither completely rational nor irrational but bounded rational in a meaningful way actually we predict a flat rate bias i e an under use of their bahncards by many customers however we estimate that this bias is not too large the empirical results approve our hypotheses for the most part especially for the more expensive bahncard50 bc50 whereas the under use of the cheaper bahncard25 bc25 is so extensive that it is not worthwhile on average

effects of payment mechanism on spending behavior the role of rehearsal and immediacy of payments past expenses have been shown to influence future spending behavior by depleting available budgets however a prerequisite for this relationship is the accurate recall of past payments and the experiencing of the full aversive impact associated with them this article shows that the use of different payment mechanisms influences both these factors and hence moderates the effects of past payments on future spending specifically past payments strongly reduce purchase intention when the payment mechanism requires the consumer to write down the amount paid rehearsal and when the consumer s wealth is depleted immediately rather than with a delay immediacy two experiments show support for the proposed theoretical framework

testing and aggressive investment strategy using value line ranks a reply this paper answers the comments of readers of our earlier paper additional insight is gained by adding recent data to show the effect of following value line investment service recommendations in active stock market trading over the years 1974 81 we show that value line makes a statistically significant contribution which cannot be explained by the beta risk factor we offer our results as an unexplained divergence from the efficient market hypothesis but with the tentative hypothesis that investment timing i e the fact that the efficient market hypothesis does not operate instantaneously may explain much of the abnormality our previous paper 5 tested whether the performance of the value line investment service vl was inconsistent with the efficient market hypothesis emh we showed using data through 1977 that the vl system represented a borderline case when transaction costs were neglected abnormal returns were obtained when realistic transaction costs were used active trading according to vl recommendations yielded abnormal returns but not significantly so for a buy and hold policy however vl recommendations did yield abnormal returns even when transaction costs were considered our previous paper drew a number of comments from readers we offer our reply to these comments in section i below further insight into the comments is gained by considering added data and the present paper adds data for the years 1978 81 discussed in sections ii v with the benefit of the added data we show that the active trading returns already positive now become significantly positive we conclude that beta does not offer an explanation for the abnormal yields we offer our results as an unexplained divergence from the emh but with the tentative hypothesis that investment timing i e the fact that the emh does not operate instantaneously may explain much of the abnormality particularly for the active trading results

goals and bracketing under mental accounting abstract behavioral economics struggles to explain why people sometimes evaluate outcomes separately narrow bracketing of mental accounts and sometimes jointly broad bracketing we develop a theory of endogenous bracketing where people set goals to tackle self control problems goals induce reference points that make substandard performance painful evaluating goals in a broadly bracketed mental account insulates an individual from exogenous risk of failure but because decisions or risks in different tasks become substitutes there are incentives to deviate from goals that are absent under narrow bracketing extensions include goal revision naivete about self control income targeting and firms bundling strategies

event study methodologies and the size effect abstract this study of 862 press recommendations demonstrates that the size effect can distort longer term performance measures and hence event studies relative to similar sized companies post publication performance is neutral however market adjustments the capm and market model with equally or capitalization weighted indexes all produce biased results event studies are most exposed to such bias when the measurement interval is long event securities differ systematically in size or weighting from the index constituents the size effect is large and or volatile and when capm type methodologies are used these distortions are avoided by explicitly controlling for size

specification seeking how product specifications influence consumer preference we offer a framework about when and how specifications e g megapixels of a camera and number of air bags in a massage chair influence consumer preferences and report five studies that test the framework studies 1 3 show that even when consumers can directly experience the relevant products and the specifications carry little or no new information their preference is still influenced by specifications including specifications that are self generated and by definition spurious and specifications that the respondents themselves deem uninformative studies 4 and 5 show that relative to choice hedonic preference liking is more stable and less influenced by specifications

does it all add up benchmarks and the compensation of active portfolio managers in this article the authors examine theoretically the use of benchmark portfolios in the compensation of privately informed portfolio managers they find that the use of a benchmark and particularly the types of benchmarks often observed in practice cannot be easily rationalized specifically commonly used benchmark adjusted compensation schemes are generally inconsistent with optimal risk sharing and do not lead to the choice of an optimal portfolio for the investor moreover benchmarks do not help in solving potential contracting problems such as inducing the manager to expend effort or trying to screen out uninformed managers copyright 1997 by university of chicago press

payment depreciation the behavioral effects of temporally separating payments from consumption research suggests that individuals mentally track the costs and benefits of a consumer transaction for the purpose of reconciling those costs and benefits on completion of the transaction prelec and loewenstein 1998 thaler 1980 1985 in transactions where costs precede benefits this can lead to a systematic and economically irrational attention to sunk costs arkes and blumer 1985 thaler 1980 in this article we consider economic exchanges in which costs significantly precede benefits as with many prepayment types of consumer transactions we predict a consumer will gradually adapt to a historic cost with the passage of time thereby decreasing its sunk cost impact on the consumption of a pending benefit we label this process of gradual adaptation to costs payment depreciation in a series of experiments we find evidence of payment depreciation across a range of consumer transactions and offer insight into the behavioral implications of temporally separating costs from benefits

how buyers perceive savings in a bundle price an examination of a bundle s transaction value although bundling the selling of two or more products and or services at a single price has a history of economic research marketing oriented investigations have appeared only recently this pap

firm characteristics and analyst following abstract this paper examines the major determinants of the number of analysts following a firm a simple model of analyst following is proposed and several firm characteristics are suggested that are likely to influence the extent of a firm s analyst following by either affecting the aggregate demand for or supply of analyst services or both for the firm almost all of these characteristics are found to be strongly significant in affecting the extent of analyst following of firms and the empirical results generally accord well with economic intuition

stock price reactions to the wall street journal s securities recommendations this paper examines the impact of the heard on the street hots column of the wall street journal on common stock prices the results of the study indicate that the hots column appears to have an impact on stock prices on the publication day however we also find a smaller but statistically significant impact on two days preceding the pub lication the significant abnormal returns on these days are associated with higher trading volume the reaction of stock prices is symmetric with respect to the buy and sell recom mendations and the impact of single company recommendations is greater than the im pact of the multi company recommendations i introduction the efficient market hypothesis assumes that security prices fully and instantaneously reflect all available information considerable evidence has been accumulated during the past decades in support of the hypothesis the acceptance of the hypothesis has raised questions about the economic value of professional investment advice if the market is efficient then the management of port folios based on these recommendations should not consistently outperform the market why then are investors still willing to pay for this information examples of the advice include low cost financial publications brokerage house rec ommendations and subscription financial newsletters that sell for hundreds of dollars recent studies argue that investment advisors can provide information to investors at a lower cost than the investors cost of information production millon and thakor 1985 develop a model that explains the existence of investment advisory agencies they argue that if the information of investment advisory agencies permits security analysts to share information about common uncertainties that affect the value of firms as a whole such as the return on the market portfolio then investment advisory agencies can produce information more cheaply than individual investors this model is consistent with the study of

democracy the market and the logic of social choice this article compares the types of knowledge democracy and the market require to rationally allocate resources i argue that high levels of public ignorance and voters inability to compare the effects of different parties policies make it difficult for parties and elections to rationally allocate resources markets mitigate these problems because the simultaneous existence of multiple firms products facilitates comparisons that mimic the conditions of scientific experimentation the economy of knowledge involved in such comparisons indicates there are epistemic advantages to using firms and markets instead of political parties and elections to allocate scarce resources however in contrast to arguments that markets merely provide better information than political decisions i argue markets epistemic advantages are derived from the way they facilitate comparisons that minimize decision makers need for knowledge or understanding