the evolving landscape of banking the structure of the financial services industry is in flux liberalization deregulation and advances in information technology have changed the financial landscape dramatically interbank competition has heated up and banks face increasing competition from nonbanking financial institutions and the financial markets the predictability of the industry with low levels of financial innovation little innovation in distribution channels and well defined and rigid institutional structures is gone product innovations new distribution channels and emerging new competitors are in abundance moreover the subprime crisis that has hit the financial sector in 2007 2008 appears to have a major impact on the structure of the industry this article emphasizes the importance of understanding the economics of banking for assessing the changes in the industry in particular we point at relationship banking as a prime source of the banks comparative advantage the proliferation of transaction oriented banking trading and financial market activities does however seriously challenge relationship banking in order to focus on these issues in a rigorous way we will evaluate the key insights from the relationship banking literature including the potential complementarities and conflicts of interest between intermediated relationship banking activities and financial market underwriting securitization etc activities we also address the issue of the optimal conglomeration of bank activities including the empirical evidence on scope and scale economies we analyze the strategic positioning of banks in the currently highly uncertain competitive arena and link this to the theory of the firm and particularly firm boundaries and learning

on the patterns and wealth effects of vertical mergers we use industry commodity flows information to measure vertical relations in completed mergers from 1962 to 1996 almost one third of the mergers display vertical relatedness vertical merger activity is more intensive in the 1980s and 1990s and less so in the 1960s and the 1970s vertical mergers generate positive wealth effects that are significantly larger than those for diversifying mergers the wealth effects in vertical mergers are comparable to those in pure horizontal mergers

taxation and the allocation of risk inside the multinational firm abstract this paper provides the first theoretical and empirical analysis of how taxation shapes the joint allocation of risk and profits inside the multinational firm theoretically we identify three mechanisms through which corporate taxes may shape the within firm allocation of risk 1 transfer pricing rules requiring risk to be compensated with higher expected returns create incentives to shift risk to low tax jurisdictions as a means to shift profits 2 risk averse owners create incentives to allocate risk to high tax affiliates to maximize risk sharing with governments 3 limited loss offset creates incentives to shift risk to affiliates in other countries empirically we show that multinational firms disproportionately allocate risk to low tax countries and that the key mechanism is the nexus between risk and profits established by transfer pricing rules within firm differences in risk explain a significant fraction of the well established correlation between profits and tax rates suggesting that risk shifting is a quantitatively non negligible channel for profit shifting

does diversification destroy value evidence from the industry shocks does corporate diversification reduce shareholder value since firms endogenously choose to diversify exogenous variation in diversification is necessary to draw inferences about the causal effect we examine changes in the within firm dispersion of industry investment or diversity we find that exogenous changes in diversity due to changes in industry investment are negatively related to firm value thus diversification destroys value consistent with the inefficient internal capital markets hypothesis measurement error does not cause this finding we also find that exogenous changes in industry cash flow diversity are negatively related to firm value r 2002 elsevier science s a all rights reserved jel classification g34

left parties poor voters and electoral participation in advanced industrial societies although income inequality is an important normative issue for students of democratic politics little is known about its effects on citizens electoral participation the authors develop a formal

voter turnout in the industrial democracies during the 1980s there are two contending accounts of cross national variation in voter turnout rates one emphasizes the role of institutions and electoral attributes whereas the other stresses cultural and historical factors the authors evaluate the merits of these two arguments they first apply the model developed by r w jackman to turnout rates during the 1980s expanding the sample of industrial states to include three newer democracies with recent authoritarian histories greece portugal and spain they then examine the potential impact of cultural variables on voter turnout rates the authors conclude that the institutional argument outperforms the cultural account of conventional political participation

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

redistribution income and voting a model that reconciles the positive association between income and voting found in cross sectional studies with the negative correlation between income and turnout over time is developed voting is modeled as a group rational activity voter turnout rates in the united states for the 1948 1960 1968 and 1980 elections are used to test the model voter turnout is found first to fall and then to rise as families move up the income distribution voter turnout also rises as real wages fall as educational attainment increases as elections become closer and as poll taxes and literacy tests are removed

revisiting the bright and dark sides of capital flows in business groups prior studies report that the business group structure and the associated intra group capital flows are prone to conflicts of interest between controlling shareholders and minority investors yet business group is a prevalent and stable structure around the globe particularly where capital markets are underdeveloped using data from china this paper empirically studies the trade off between the negative and positive roles played by intra group capital flows and tests the efficiency implications of such trade off we find that from the perspective of the whole group intra group capital flows are most efficient when the groups are least subject to conflicts of interest between controlling shareholders and minority shareholders and when they face strong external financing constraints

international search behavior of business group affiliated firms scope of institutional changes and intragroup heterogeneity this paper investigates whether and when affiliation to business groups enables or constrains firms international search behavior during institutional transitions we theorize that given the unique structure and complex form of business group organizations the search behavior of affiliated firms is influenced by the degree of misalignment in outlook at the group and affiliate levels of management we identify the scope of institutional changes business group attributes and affiliate characteristics as sources of such misalignment the results from panel data on 298 firms from the indian pharmaceutical industry for the 1992 2007 period show that the constraining effects of business group affiliation are observed only when institutional changes are specific to the affiliates industry and not when broad institutional changes affect the business group as a whole moreover we observe heterogeneity in the search behavior of group affiliated firms first the degree of misalignment is greater in the case of affiliates belonging to older business groups and those that are more distant in terms of age and industry since the group s founding second by contrast and suggesting an alignment in outlook we find that affiliated firms that occupy a prominent position within a group or industry are able to bargain for and receive attention and support from the business group to undertake international search our findings have implications for research on the role of business groups in a changing institutional context and for the strategic adaptation of firms embedded in complex organizational and institutional settings

does consumer sentiment forecast household spending if so why in the three months following the iraqi invasion of kuwait the university of michigan s index of consumer sentiment ics fell an unprecedented 24 3 index points to its lowest level since the 1981 1982 recession this collapse in household confidence became the focus of a great deal of economic commentary and indeed frequently was cited as an important if not the leading cause of the economic slowdown that ensued concern was fueled by the well known contemporaneous correlation between the ics and the growth of household spending figure 1 shows quarterly averages of the index 1978 1993 together with the quarterly growth in real personal consumption expenditures as measured in the national income accounts bureau of economic analysis the correlation is impressive of course it is not surprising that sentiment and the growth of spending are positively correlated this correlation may simply reflect that when economic prospects are poor households curtail their spending and also give gloomy responses to interviewers thus the contemporaneous correlation between sentiment and spending does not refute traditional life cycle or permanentincome models of consumption nor does it necessarily make the job of forecasting changes in consumption any easier from the point of view of an economic forecaster the questions of interest are first whether an index of consumer sentiment has any predictive power on its own for future changes in consumption spending and second whether it contains information about future changes in consumer spending aside from the information contained in other available indicators in section i we present evidence that the answer to the first question is a clear yes we find that lagged values of the ics taken on their own explain about 14 percent of the variation in the growth of total real personal consumption expenditures over the post1954 period further investigation shows that the answer to the second question is probably yes as well though here the margin is narrower and the evidence more murky the ics contributes about 3 percent to the r2 of a simple reduced form equation for total personal consumption expenditures in the longer of the two sample periods we examine but nothing in the shorter sample period though the latter result is heavily influenced by the observation for 1980 2 for the major subcategories of spending the contribution generally ranges between 1 percent and 8 percent overall we read the evidence as pointing toward at least some significant incremental explanatory power therefore we take as given for the remainder of the paper that sentiment forecasts spending and we turn to the issue of how that statistical relationship should be interpreted one possible interpretation is that sentiment is an independent driving factor in the economy and that changes in carroll division of research and statistics stop 80 federal reserve board washington dc 20551 fuhrer research department federal reserve bank of boston boston ma 02106 wilcox division of monetary affairs stop 71 federal reserve board washington dc 20551 we have benefited from the research assistance of stephen helwig and christopher geczy and the comments of an anonymous referee the views expressed in this paper are those of the authors and not of the federal reserve board the federal reserve bank of boston or the other members of the staff of either institution ithe conference board s consumer confidence index also plunged at the same time

the economic effects of democratic participation abstract considerable concern has been expressed in recent years about declines in voter participation rates in the united states and in several other major democratic countries some feel low participation rates introduce a class bias into the political process and thereby worsen the outcomes from it little empirical work exists however that measures the effects of lower participation on the welfare of a country this paper begins to fill this void it presents cross national evidence that high levels of democratic participation are associated with more equal distributions of income the paper s results also imply however that this reduction in income inequality comes at a cost high participation rates are related to larger government sectors which in turn lead to slower economic growth we also present evidence of the capture of government by upper income groups in latin and central american countries

the value of embedded real options evidence from consumer automobile lease contracts under the common assumption of constant interest rates we show that penalties for early termination of a lease are often structured in such a way that the cancellation option embedded in consumer automotive leases has little value furthermore our estimates drawn from a sample of three popular car models over 1990 to 2000 indicate that the stand alone value of the lease end purchase option is on average about 16 of the market value of underlying used vehicles or about 1 462 per contract finally we examine the sensitivity of our option value estimates to model parameters and default risk recent years have witnessed a dramatic growth in the leasing of automobiles for instance overall industry sales data indicate that about a third of the new vehicles and trucks sold in the united states are leased hendel and lizzeri 2002 and miller 1995 and the federal reserve board survey of family finances reports that the use of leased vehicles by individuals nonbusiness consumers has risen from 2 9 to 5 8 over the 1992 to 2001 period azicorbe kennickell and moore 2003 consumer automobile lease contracts for new cars often include two embedded options that are not associated with a typical debt contract the first is a cancellation option that allows the lessee to terminate the lease early the second is a european call option which gives the lessee the right but not the obligation to purchase the leased used vehicle at the scheduled termination of the lease at a predetermined exercise price both of these options are simple examples of real options because the asset underlying these options is a used car that is a real asset however these options constitute a special case of real options since they are embedded in the lease contract which is a financial credit instrument theoretical analyses of lease contracts show that the cancellation option is quite valuable schallheim and mcconnell 1985 with respect to the purchase option hendel and lizzeri 2002 argue that they can play an important role in

asset price shocks financial constraints and investment evidence from japan this paper examines investment spending of japanese firms around the asset price bubble in the late 1980s and makes three contributions to our understanding of how stock valuations affect investment first corporate investment responds significantly to nonfundamental components of stock valuations during asset price shocks fundamentals matter less clearly the stock market is not a sideshow second the time series variation in the sensitivity of investment to cash flow is affected more by changes in monetary policy than by shifts in collateral values finally asset price shocks primarily affect firms that rely more on bank financing and not necessarily those that use equity markets for financing only the investment of bank dependent firms responds to nonfundamental valuations in addition the cash flow sensitivity of bank dependent firms with large collateral assets decreases when asset prices become inflated but increases dramatically when asset prices collapse and monetary policy tightens

state capitalism and performance persistence of business group affiliated firms a comparative study of china and india business groups emerged in developing economies through direct or indirect support from the state in order to overcome a variety of institutional voids and or to further state objectives of economic growth however the efficacy of this organizational form and its associated governance structures have been debated given the dual possibility of business groups to allocate resources among its affiliates for cross subsidization or winner picking we argue that elements of the institutional environment comprising of the state s approach to organizations and the political context of these interactions vary across countries thereby influencing business groups resource allocation strategies and affecting the persistence of affiliated firms superior performance contrasting the types of state capitalism in china and india we develop and test our hypotheses we find that the effect of business group affiliation on firms superior performance persistence is stronger in a state led system of state capitalism e g china than in a co governed system e g india and that this divergence of the business group effect is weakened as affiliated firms internationalize our findings have implications for understanding business groups across institutional contexts and the influence of diversity in the types of state capitalism on organizational strategies

an explanation for why senators from the same state vote differently so frequently abstract this paper explains why rational well informed voters elect politicians with divergent platforms given well defined constituencies and the costliness of any individual politician creating transfers across all interest groups we show that different politicians from the same district can successfully represent vastly different constituencies and still have each politician producing the support maximizing level of transfers our explanation focuses on how obtaining wealth transfers reduces successful constituencies returns to obtaining additional transfers the evidence strongly rejects alternative explanations based upon the median voter and polarized policy preference approaches

did women s suffrage change the size and scope of government this paper examines the growth of government during this century as a result of giving women the right to vote using cross sectional time series data for 1870 1940 we examine state government expenditures and revenue as well as voting by u s house and senate state delegations and the passage of a wide range of different state laws suffrage coincided with immediate increases in state government expenditures and revenue and more liberal voting patterns for federal representatives and these effects continued growing over time as more women took advantage of the franchise contrary to many recent suggestions the gender gap is not something that has arisen since the 1970s and it helps explain why american government started growing when it did

creditor rights and debt allocation within multinationals we analyze the optimal debt structure of multinational corporations choosing between centralized or decentralized borrowing we identify how this choice is affected by creditor rights and bankruptcy costs taking into account managerial incentives and coinsurance considerations we find that partially centralized borrowing structures are optimal with either weak or strong creditor rights for intermediate levels of creditor rights fully decentralized centralized borrowing structures are optimal if managers have strong weak empire building tendencies decentralized borrowing is more attractive for companies focussing on short term profitability credits are rather taken in countries with better creditor rights and more efficient insolvency systems

diversification diseconomies of scope and vertical contracting evidence from the taxicab industry this paper studies how firms reorganize following diversification proposing that firms use outsourcing or vertical disintegration to manage diseconomies of scope we also consider the origins of scope diseconomies showing how different underlying mechanisms generate contrasting predictions about the link between within firm task heterogeneity and the incentive to outsource following diversification we test these propositions using microdata on taxicab and limousine fleets from the economic census the results show that taxicab firms outsource by shifting the composition of their fleets toward owner operator drivers when they diversify into the limousine business the magnitude of the shift toward driver ownership is larger in less urban markets where the tasks performed by taxicab and limousine drivers are more similar these findings suggest that 1 firms use outsourcing to manage diseconomies of scope at a particular point in the value chain and 2 interagent conflicts can be an important source of scope diseconomies

capital markets and firm organization how financial development shapes european corporate groups we investigate the effect of financial development on the formation of european corporate groups because cross country regressions are hard to interpret in a causal sense we exploit exogenous industry measures to investigate a specific channel through which financial development may affect group affiliation internal capital markets using a comprehensive firm level data set on european corporate groups in 15 countries we find that countries with less developed financial markets have a higher percentage of group affiliates in more capital intensive industries this relationship is more pronounced for young and small firms and for affiliates of large and diversified groups our findings are consistent with the view that internal capital markets may under some conditions be more efficient than prevailing external markets and that this may drive group affiliation even in developed economies this paper was accepted by bruno cassiman business strategy

the downsian voter meets the ecological fallacy this paper presents evidence that voter participation does not depend on the probability that one vote is decisive an extensive summary of the empirical participation literature is provided which shows that most but not all studies have found that turnout in an electoral district is higher when the race is closer individual level vote regressions for the 1979 and 1980 canadian national elections are estimated using objective measures of closeness as opposed to self reported measures the main finding is that a citizen is no more likely to vote in a close election than in a lands lide election district level turnout regressions for the same elections are also estimated and a significant relation between closeness and turnout is observed this suggests that aggregation bias may generate a spurious closeness turnout relation in district level regressions

distributional conflict in organizations abstract hierarchy can function as an instrument to channel influence activities or power struggles in organizations contrary to what has frequently been argued we show that multi divisional organizations may involve lower influence costs than single tier organizations even though they offer more scope for organizational conflict and have more executives that can be influenced these benefits derive from two effects first part of the conflict in multi divisional organizations takes place on the division level where a small number of agents fight over only a fraction of the overall prize second by grouping agents into common divisions multi divisional organizations create free rider problems in rent seeking our model sheds new light on the desirability of divestitures and the transition from the u to the m form by us corporations in the 1920s

export versus fdi in services in the helpman et al model hmy costs of transportation shape the decisions of firms about serving foreign customers by exporting or by doing fdi the analysis of fdi in it related services presents a challenge given the low cost of transportation through telecom networks this study extends the hmy model by considering uncertainty in product quality this reverses the ordering of the firms that do fdi these predictions are tested using indian data in two industries chemicals and software chemicals represents a conventional setting and we find that the most productive firms invest abroad however in the case of the software industry where there is uncertainty about product quality and the transportation cost is low the results are consistent with the predictions of the extended model less productive firms invest abroad

an assessment of the contribution of consumer confidence towards household spending decisions using uk data the european commission s consumer confidence indicator cci is assembled from responses to four questions about individual and general economic prospects which form part of the eu s consumer survey however concerns may be raised about whether the four components should be constrained to exerting the same influence in a forecasting model of household consumption also in this context it would seem to be appropriate to permit a role to other information that is obtained from the eu survey consequently in this article different regression functions are specified in order to assess whether there is any gain to be achieved in predictive accuracy from adopting a more flexible approach towards using the data from the eu questionnaire with an emphasis upon parsimony an econometric analysis is performed in conjunction with uk quarterly data on household consumption expenditure for two categories of spending it is discovered that the quality of forecasts benefits from having undertaken disaggregation involving survey data beyond those which contribute towards the calculation of the cci indeed the respective consumption variables relating to non durable goods and durable goods excluding vehicles are seen to be associated with relatively volatile behaviour over the forecast interval 2008 2013

the paradox of information and voter turnout the most prominent explanation for the paradox of voter turnout is that citizens are willing to bear the cost of voting because they perceive a benefit e g fulfilling a civic duty or expressing themselves that is independent of the election outcome however a separate literature highlights the empirical importance of information for voter participation and existing explanations for this are that uninformed citizens either expect smaller benefits from voting or defer strategically to peers who know more this paper simply points out that while either of these theories offers a plausible explanation for the importance of information neither is robust if the motivation for voting is unrelated to the election outcome this is because citizens with positive net voting costs should abstain no matter how well informed while those with negative net voting costs should vote no matter how poorly informed thus the purported resolution to the turnout paradox raises a new paradox of information and voter turnout intuitively the quality of a vote should matter only if the vote is somehow instrumental suggesting that future work should continue to explore instrumental rationales for voting

explaining voter turnout patterns an information theory voting research is rich in empirical regularities yet a parsimonious theory of voter turnout that can match the facts has proven to be elusive this paper argues that voter turnout patterns can be explained by extending the traditional rational voter model to include limited information a model is presented in which utility maximizing consumers receive higher payoffs from voting the more confident they are of their vote choice the model provides an explanation for the most important cross sectional voter turnout patterns in addition it suggests a novel explanation for the post 1960 decline in u s participation

affiliated firms and financial support evidence from indian business groups abstract we investigate the functioning of internal capital markets in indian business groups we document that intragroup loans are an important means of transferring cash across group firms and are typically used to support financially weaker firms evidence suggests that an important reason for providing support may be to avoid default by a group firm and consequent negative spillovers to the rest of the group consistent with such spillovers the first bankruptcy in a group is followed by significant drops in external financing investments and profits of other firms in the group and an increase in their bankruptcy probability

internal capital markets and corporate politics in a banking group we analyze proprietary internal capital allocation data from a large retail banking group consisting of member banks and a headquarters organization we find that capital allocations from headquarters compensate for deposit shortfalls on the bank level suggesting that the headquarters offers deposit smoothing to member banks we then analyze how the distribution of influence within the group relates to capital allocations and lending behavior more influential banks are allocated more funds from headquarters and their loan growth is less sensitive to their deposit base the effects of influence are stronger if banks have a greater demand for deposit smoothing

a group rule utilitarian approach to voter turnout theory and evidence this paper explores a group rule utilitarian approach to understanding voter turnout inspired by the theoretical work of john c harsanyi 1980 and timothy j feddersen and alvaro sandroni 2002 it develops a model based on this approach and studies its performance in explaining turnout in texas liquor referenda the results are encouraging the comparative static predictions of the model are broadly consistent with the data and a structurally estimated version of the model yields reasonable coefficient estimates and fits the data well the structurally estimated model also outperforms a simple expressive voting model

tobin s q and the importance of focus in firm performance using tobin s q as a measure of performance we seek to estimate the relative importance of industry focus and share effects in determining firm performance our methods are analogous to those of richard schmalensee and like him we find that industry effects account for the majority of the explained variance however we also find that firm effects exist in the form of focus effects that is narrowly diversified firms do better than widely diversified firms we interpret this finding as consistent with profit maximization by firms with different factor endowments

business groups financing constraints and investment the case of india we examine the effect of business group affiliation on corporate investment behaviour in india more specifically we test whether group affiliation reduces financing constraints for the affiliated firms we use a data set containing 694 listed indian companies for the 1989 97 period we estimate a simple investment equation and find evidence that the investment cash flow sensitivity is much lower for group affiliates this suggests that business group affiliates have better access to external funds than stand alone firms

an evidential decision theory of turnout according to the standard analysis which is grounded in causal decision theory the rational decision to participate in mass elections depends on the probability of affecting the outcome the resulting prediction of abstention is clearly mistaken according to the alternative evidential decision theory voters calculate the conditional expected utility of participating rather than its causal consequences a version of this theory is introduced into a game theoretic model of electoral participation under plausible conditions the model yields positive turnout at equilibrium even as the size of the electorate increases without bound the paper also considers the model s utility in explaining group influences on political behavior and the supply of collective goods

spin offs divestitures and conglomerate investment we examine whether spin offs or divestitures cause improvements in conglomerate investment efficiency at issue are endogeneity of these restructuring decisions and correct measurement of investment efficiency endogeneity is a problem because the factors that induce firms to spin off or divest divisions may also improve investment efficiency measurement error is a problem because efficiency measures employ tobin s q as a noisy proxy for investment opportunities we find important differences between firms that divest or spin off and a control sample after accounting for these differences and for measurement error in q we find no evidence of improvements in investment efficiency

why is consumption so smooth for thirty years it has been accepted that consumption is smooth because permanent income is smoother than measured income this paper considers the evidence for the contrary position that permanent income is in fact less smooth than measured income so that the smoothness of consumption cannot be straightforwardly explained by permanent income theory the paper argues that in postwar u s quarterly data consumption is smooth because it responds with a lag to changes in income

rational turnout the neglected role of groups rational choice theories have difficulty accounting for individual participation in collective action voting is among the acts hardest to explain consumption benefits have been proposed to account for nonzero turnout the model presented here establishes a political investment basis for these benefits i argue that voters often act not in isolation but as part of groups with shared interests while individuals still vote because of consumption benefits arising from the act of voting some of these consumption benefits are provided by group leaders out of collective benefits received by the group in return for its votes the collective benefit comes from a candidate adopting policy positions closer to those of the group in passing i show that the widespread availability of public opinion polling increases the candidate s incentive to shift position finally some data from recent off year elections are shown to be consistent with the model

can consumer confidence forecast household spending evidence from the european commission business and consumer surveys 1 introductionthe analysis of the impact of consumer attitudes on consumer spending has been an area of sustained interest in the macroeconomics literature this interest in consumer attitudes reflects a popular belief that macroeconomic outcomes depend heavily on consumers expectations of future economic conditions reinforcing this belief is the fact that consumer spending accounts for 60 to 70 of the gross domestic product of highly industrialized countries such as the g 7 during the past few decades a number of single country investigations have attempted to assess the predictive power of consumer confidence in forecasting household spending for example in the united states mishkin 1978 reports that the index of consumer sentiment ics published by the university of michigan possesses good explanatory power for changes in durable goods carroll fuhrer and wilcox 1994 also find that the michigan ics has good predictive capability with regard to household expenditure but that its forecasting power decreases considerably when the index is used along with other macroeconomic variables 1 kwan and cotsomitis 2004 examine the robustness of carroll fuhrer and wilcox s 1994 findings when alternative measures of consumer confidence are used in their prediction equations they report that use of the michigan index of consumer expectations improves on the estimation results of carroll fuhrer and wilcox 1994 bram and ludvigson 1998 and ludvigson 2004 compare the forecasting performance of the michigan ics and the u s conference board s index of consumer confidence icc their findings indicate that the conference board s index provides additional information about future consumer consumption that is not captured by the michigan index however chopin and darrat 2000 utilizing a multivariate causality framework report that the conference board s icc is an unreliable predictor of u s retail sales as regards other studies using non u s data acemoglu and scott 1994 employ granger causality and regression analyses to determine if consumer confidence as measured by the gallup poll in the united kingdom can predict future consumption they find that consumer confidence is a leading indicator of future consumption growth in a subsequent study delorme kamerschen and voeks 2002 examine whether consumer confidence and rational expectations are the same in the united kingdom as they are in the united states they report that the predictive ability of the u k consumer confidence index is greater than that of the united states belessiotis 1996 using french data also reports that the consumer confidence index provides decent explanatory power for future consumer spending in canada kwan and cotsomitis 2005 find that although consumer sentiment is a reliable predictor of consumer expenditures at the national level results obtained using regional data are quite mixed fan and wong 1998 find that unlike the case in the united states or the united kingdom confidence indicators in hong kong have little or no explanatory power in forecasting household spending the existing studies on the ability of consumer confidence to predict household spending have produced mixed results the results vary depending on the sample period chosen the frequency of observations monthly or quarterly and the different survey methodologies employed to gauge consumer attitudes moreover most of these studies confine their attention to single country investigations given the diversity of results it is important to investigate the predictive power of consumer confidence on the basis of comparable time series data for as many countries as possible this paper presents a first formal attempt to study the ability of consumer confidence to forecast household spending within a multicountry framework to this end we use two confidence indices namely the consumer confidence indicator cci and the economic sentiment indicator esi both of which are derived from the european commission business and consumer survey ecbcs

environmental constraints and sigmoid utility implications for value risk sensitivity and social status abstract friedman and savage journal of political economy 4 1948 279 proposed sigmoid utility theory to model the relationship between social class and risk sensitivity their proposal has not been explicitly modeled to allow for full testing of the concept we argue that sigmoid utility arises naturally from boundary conditions imposed by finite environmental resources that engender competition we also present a sigmoid formulation and examine its empirical warrant by considering economic data from anthropological historical and sociological cases studies standard risk sensitivity measures such as arrow pratt and downside risk aversion provide expectations for which individuals are most risk prone insights from prospect theory indicate under what conditions sigmoid utility may be most useful we consider the implications of environmental constraint in the context of the sigmoid model as an explanation for the nature of political turmoil during the collapse of maya civilization ca ad 850 we consider the role lack of constraint played in the american revolution and we explore how sigmoid utility can enrich our understanding of contemporary american voting behavior

divisional diversity and the conglomerate discount evidence from spinoffs abstract existing literature argues that disparity in investment opportunities within diversified firms can erode firm value we investigate the diversity cost hypothesis of spinoffs by using post spinoff data to 1 reconstruct the diversified firm after the spinoff and assess the aggregate improvement in value and 2 relate any value improvements to changes in diversity we find that improvements in aggregate value depend significantly on changes in both a direct measure of diversity and measures based on industry proxies we conclude that diversification discounts at least partially reflect a value loss due to the diversified nature of the firm itself rather than selection bias or measurement error

how corporate governance affect firm value evidence on a self dealing channel from a natural experiment in korea abstract prior work in emerging markets provides evidence that better corporate governance predicts higher market value but very little evidence on the specific channels through which governance can increase value we provide evidence from a natural experiment in korea that reduced tunneling is an important channel korean legal reform in 1999 changed the board structure of large firms assets 2 trillion won relative to smaller firms in event studies of the reform events we show that large firms whose controllers have incentive to tunnel earn strong positive returns relative to mid sized firms in panel regressions over 1998 2004 we also show that better governance moderates the negative effect of related party transactions on value and increases the sensitivity of firm profitability to industry profitability consistent with less tunneling

forecasting bankruptcy more accurately a simple hazard model i argue that hazard models are more appropriate than single period models for forecasting bankruptcy single period models are inconsistent while hazard models produce consistent estimates i describe a simple technique for estimating a discrete time hazard model i find that about half of the accounting ratios that have been used in previous models are not statistically significant moreover market size past stock returns and idiosyncratic returns variability are all strongly related to bankruptcy i propose a model that uses both accounting ratios and market driven variables to produce out of sample forecasts that are more accurate than those of alternative models copyright 2001 by university of chicago press

credit rationing and relationship lending does firm size matter abstract using survey based data we investigate factors influencing credit rationing within a bank based financial system we show that rationing depends on various dimensions of the firm bank relationships and that the effects of relationship lending on rationing are not identical for different firm size groups multiple banking increases the probability of rationing for small and large firms debt concentration with the main bank affects positively smaller firms while the opposite is true for large companies the length of the relationship with the main bank decreases the probability of rationing for both groups but more so for large firms endowed with more bargaining power finally the firm bank spatial proximity measured by the headquarters vicinity does not affect the firm s access to credit

the assessment consumer expenditure this article aims to illuminate two sets of consumption puzzles the first concerns the behavior of aggregate saving rates in the 1980s and early 1990s collapse and rebound in scandinavia and the u k and apparently a more secular decline in the u s the second set of puzzles concerns various apparent contradictions of the rational expectations permanent income hypothesis e g in time series the excess sensitivity of consumption changes to anticipated income changes and in cross sections the tendency of consumption and income age profiles to follow each other more than standard life cycle theory implies the article discusses in relatively non technical terms the implications both for euler equations and solved out consumption functions of introducing uncertainty credit constraint consumption leisure interactions habits and durability alternative to rational expectations the illiquidity of some assets and financial deregulation it also compares the merits of euler and solved out models of aggregate consumption

the swing voter s curse in the laboratory this paper reports the first laboratory study of the swing voter s curse and provides insights on the larger theoretical and empirical literature on pivotal voter models our experiment controls for different information levels of voters as well as the size of the electorate the distribution of preferences and other theoretically relevant parameters the design varies the share of partisan voters and the prior belief about a payoff relevant state of the world our results support the equilibrium predictions of the feddersen pesendorfer model and clearly reject the notion that voters in the laboratory use naive decision theoretic strategies the voters act as if they are aware of the swing voter s curse and adjust their behavior to compensate while the compensation is not complete and there is some heterogeneity in individual behavior we find that aggregate outcomes such as efficiency turnout and margin of victory closely track the theoretical predictions

the influence of governance infrastructure and corporate governance on profit shifting in this article we develop a conceptual model to examine the influence of quality of country level governance infrastructure and corporate governance effectiveness on profit shifting we empirically test propositions derived from the model with a unique firm level data set and using multiple indicators of governance infrastructure quality and corporate governance mechanisms we estimate that on average about 6 of total pre tax income is shifted out of foreign owned firms in india we show that governance infrastructure that improves collective action and transparency in both the foreign and host country reduces shifting on the other hand secure property rights and efficient contracting in the foreign country increases shifting we also find that monitoring by foreign institutional investors restricts shifting

everyone likes a winner an empirical test of the effect of electoral closeness on turnout in a context of expressive voting under instrumental voting closer elections are expected to have higher turnout under expressive voting however turnout may increase with decreasing closeness when voters have a preference for winners an empirical test using data on belgian municipal elections supports this we find that turnout reaches a local maximum when the largest party in the election obtains just over 52 of the seats and then falls supporting the instrumental closeness argument there is however another turning point the presence of a highly dominating party receiving at least two thirds of the votes stimulates turnout despite the fact that dominance implies lower closeness

capital constraints asymmetric information and internal capital markets in banking new evidence a growing literature investigates the role of internal capital markets in mitigating financial constraints faced by the subsidiaries of a conglomerate most studies have relied on indirect tests based on correlations between the cash flows and the investment of the subsidiaries in contrast we avoid the widespread criticisms of such specifications by providing direct tests that focus on the mechanisms through which internal reallocations of funds occur we find that internal capital markets are used by multibank holding companies to mitigate capital constraints faced by individual bank subsidiaries in addition we show that internal capital management within a multibank holding company involves not only the movement of capital to those subsidiaries with a relatively greater need for capital but also the movement of assets loans from less well capitalized to better capitalized subsidiaries by means of loan sales and purchases among the subsidiaries furthermore net loan sales are used to allow efficiency enhancing specialization among bank subsidiaries insofar as those subsidiaries with the best loan origination opportunities are able to focus on loan originations even if they do not have sufficient capital to hold the loans our evidence is consistent with banks affiliated with holding companies more actively participating in loan sales and purchases because by using their internal secondary loan market they are able to avoid the lemons problem faced by stand alone banks

the strategic impact of resource flexibility in business groups we show that in business groups with efficient internal capital markets resources may be channelled to either more or less profitable units depending on the amount of internal resources a group may exit a market in response to increased competition or channel funds to the subsidiary operating in that market this has important implications for the strategic impact of group membership affiliation to a monopolistic subsidiary can make a cash rich poor firm more less vulnerable to entry deterrence also resource flexibility within a group makes subsidiaries reaction functions flatter thus discouraging rivals strategic commitments when entry is accommodated

voter participation and the redistributive state the redistributive theory of the state implies that voter participation rates should be highest among those who have the most to gain or lose or a v shaped relationship between income and voting participation should exist we use a data set that contains nearly 21 000 observations on individual survey responses about voting behavior in the u s between 1972 and 1993 to show that the participation rate generally rises monotonically with income perhaps except at very high income levels it does report other findings consistent with an economic theory of voting based on returns to association and with the hypothesis that public employees vote more

the internal capital markets of business groups evidence from intra group loans abstract we study business groups internal capital markets using a unique data set on intra group lending in chile 1990 2009 in line with groups financing advantage firms that borrow internally have higher investment leverage and return on equity roe than other firms at the margin controlling shareholders have higher cash flow rights in borrowing firms than in lending firms however there is no robust evidence of minority shareholders losing out from intra group loans as tunneling predicts our evidence is consistent with the idea that strict regulation and disclosure requirements for intra group loans which are features of the chilean market reduce the risk of expropriation in pyramids

the impact of stock market information production on internal resource allocation abstract we analyze the resource allocation decision of a manager inside a multidivision firm whose compensation is based on the firm s stock price we find that internal investments exhibit a positive correlation across the firms divisions namely when two single division firms merge the optimal investment level in one division becomes more positively related to the investment level in the other division in addition following a spinoff divisional investments decline increase whenever the separated division has a project with a low high sharpe ratio finally multidivision firms trade at a discount which is larger the more diverse the investment sets of the divisions

what drives investment cash flow sensitivity around the world an asset tangibility perspective motivated by ongoing debates on investment cash flow sensitivity icfs and its documented decline and disappearance in the u s we investigate the determinants of icfs using firm level data across 41 countries for the 1993 2013 period we document an important role of asset tangibility in explaining the patterns in icfs asset tangibility affects icfs through two channels investment intensity and cash flow persistence as the share of tangible capital investment and cash flow persistence has fallen in developed economies icfs has declined in contrast as developing economies operate with more tangible capital have higher investment rates and more persistent cash flows their icfs is more stable the results support our explanation of icfs as a reflection of capital investment intensity and income predictability rather than a measure of financial constraints

are internal capital markets efficient using segment information from compustat we find that the investment by a segment of a diversified firm depends on the cash flow of the firm s other segments but significantly less than it depends on its own cash flow the investment by segments of highly diversified firms is less sensitive to their cash flow than the investment of comparable single segment firms the sensitivity of a segment s investment to the cash flow of other segments does not depend on whether its investment opportunities are better than those of the firm s other segments

corporate structure liquidity and investment evidence from japanese industrial groups this paper presents evidence suggesting that information and incentive problems in the capital market affect investment we come to this conclusion by examining two sets of japanese firms the first set has close financial ties to large japanese banks that serve as their primary source of external finance and are likely to be well informed about the firm the second set of firms has weaker links to a main bank and presumably faces greater problems raising capital investment is more sensitive to liquidity for the second set of firms than for the first set the analysis also highlights the role of financial intermediaries in the investment process

internal versus external capital markets this paper presents a framework for analyzing the costs and benefits of internal versus external capital allocation we focus pritnarily on comparing an internal capital market with bank lending while both represent centralized forms of financing in the former case the financing is owner provided while in the latter ceise it is not we argue that the ownership aspect of internal capital allocation has three important consequences 1 it leads to more monitoring than bank lending 2 it reduces managers entrepreneurial incentives and 3 it makes it easier to efficiently redeploy the assets of projects that are performing poorly under existing management

guarantees leverage and taxes this paper considers the optimal joint decision on firm organization and capital structure under a tax bankruptcy trade off stressing the role of guarantees against default conditional guarantees which are embedded in parent subsidiary structures increase joint value and joint debt relative to unguaranteed stand alone firms such guarantees that are unilateral rather than mutual for moderate default costs may dominate the unconditional mutual guarantees built in mergers we study the optimal characteristics of both guarantors and beneficiaries as well as their impact on the self enforcement potential of conditional guarantees

follow the leader theory and evidence on political participation using state by state voting data for u s presidential elections the authors observe that voter turnout is a positive function of predicted closeness to explain the strategic component of political participation they develop a follow the leader model political leaders expend effort according to their chance of being pivotal which depends on the expected closeness of the race at both state and national levels and how voters respond to their effort structural estimation supports this model for example a 1 percent increase in the predicted closeness at the state level stimulates leaders efforts which increases turnout by 0 34 percent

a theory of socialistic internal capital markets abstract we develop a model of a two division firm in which the strong division has on average higher quality investment opportunities than the weak division we show that in the presence of agency and information problems optimal effort incentives are less powerful and thus managerial effort is lower in the strong division this leads the firm to bias its project selection policy against the strong division the selection bias is more severe when there is a larger spread in the average quality of investment opportunities between the two divisions

a reexamination of the conglomerate merger wave in the 1960s an internal capital markets view one possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less developed capital markets examining 392 bidder firms during the 1960s we find the highest bidder returns when financially unconstrained buyers acquire constrained targets this result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing we also find that bidders generally retain target management suggesting that management may have provided companyspecific operational information while the bidder provided capital budgeting expertise