social norms and csr performance some institutional investors e g pensions universities and religious charitable and not for profit institutions are exposed to social norms and public scrutiny prior research indicates that these norm constrained institutions engage in negative screening and invest less in firms operating in sin industries we examine whether social norms also motivate these institutions to engage in positive screening where they invest more in firms with better corporate social responsibility csr performance and csr related activism where they promote improvements in the csr of existing investees we find that firms with superior csr performance have greater ownership by norm constrained institutions consistent with positive screening and we use a natural experiment to establish causality we also find that increases in the shareholdings of norm constrained institutions are associated with subsequent improvements in csr consistent with activism further we rule out an alternative explanation for our results where the positive screening and activism are profit driven rather than driven by social pressure thus our results suggest that the influence of social norms on stock markets is more pervasive than documented in the prior literature

demand curves for stocks do slope down new evidence from an index weights adjustment weights in the toronto stock exchange 300 index are determined by the market values of the included stocks public floats in november 1996 the exchange implemented a previously announced revision of its definition of the public float this revision which increased the floats and the index weights of 31 stocks conveyed no information and had no effect on the legal duties of shareholders affected stocks experienced statistically significant excess returns of 2 3 percent during the event week and no price reversal occurred as trading volume returned to normal levels these findings support downward sloping demand curves for stocks an obvious event with which to examine the slope of demand curves for stocks is one that changes supply in the absence of new information a shift in supply should not affect stock prices if demand curves for stocks are flat scholes 1972 using a sample of secondary equity distributions asks whether stocks are unique works of art or merely abstract claims to residual cash flows with many close substitutes as is assumed in much of finance theory scholes finds that the negative price impact of secondary offerings depends on the seller s identity implying the revelation of unfavorable informationand rules out a pure supply effect mikkelson and partch 1985 also using a sample of registered and unregistered secondary offerings find weak evidence of downward sloping demand curves but are unable to cleanly distinguish this explanation from the alternative explanation based on unfavorable information a different class of events additions to widely followed stock market indexes ostensibly provides a setting where information effects should not be present shleifer 1986 documents a permanent price increase for stocks

exchange rates and the political economy of macroeconomic discipline during the last few years there has been an increasing interest in understanding the relationship between exchange rate regimes and macroeconomic stability some recurrent policy questions are a why do countries still choose fixed nominal exchange rate regimes 25 years after the abandonment of the bretton woods system b do fixed exchange rate regimes impose an effective constraint on monetary and fiscal behavior thus lowering inflation rates over the long run and c are exchangerate based stabilization programs superior to money based programs this paper deals with the first question the selection of the exchange rate regime from a politicaleconomy perspective why certain countries choose a particular type of exchange rate regime is a highly relevant question why does austria have a fixed exchange rate for example while the united kingdom has a flexible one why has argentina chosen a fixed exchange rate while chile has a flexible cumbands system more generally in december 1992 why did 84 countries out of the 167 reported in the imf s international financial statistics peg their currencies to a major currency or a currency composite the theoretical discussion deals with the trade off between credibility and flexibility and it emphasizes the role of politics and institutions in the empirical section i use a large cross country panel data set to analyze the role of various factors including political instability in decid

do stock investors value corporate sustainability evidence from an event study this paper analyzes the impacts of index inclusions and exclusions on corporate sustainable firms by studying a sample of us stocks that are added to or deleted from the dow jones sustainability world index over the period 2002 2008 the impacts are measured in terms of stock return risk and liquidity we cannot find any strong evidence that announcement per se has any significant impact on stock return and risk however on the day of change index inclusion exclusion stocks experience a significant but temporary increase decrease in stock return liquidity deteriorates after the announcement day and bounces back significantly near the day of change systematic risk shows little change after announce ments but idiosyncratic risk is higher after announcements the overall results support harris and eitan s the journal of finance41 4 815 829 1986 price pressure hypothesis which posits that event announcement does not carry information and any shift in demand and hence the corresponding price change and liquidity change is temporary

information costs and liquidity effects from changes in the dow jones industrial average list we examine the stock market effect of changes in the composition of the dow jones industrial average djia unlike s p 500 listing studies we find that the price and the trading volume of newly listed djia firms are unaffected we attribute this result to a lack of index fund rebalancing since index trading is limited for most of our sample period and index funds mimic the s p 500 not the djia firms removed from the index however experience significant price declines we consider information signaling price pressure imperfect substitutes and information cost liquidity explanations for these asymmetric findings the evidence is consistent with the information cost liquidity explanation which holds that investors demand a premium for higher trading costs and for holding securities that have relatively less available information

strategic corporate social responsibility in controversial industry sectors the social value of harm minimisation this paper examines how it is possible for firms in controversial sectors which are often marked by social taboos and moral debates to act in socially responsible ways and whether a firm can be socially responsible if it produces products harmful to society or individuals it contends that a utilitarian justification can be used to support the legal and regulated provision of goods and services in these areas and the regulated and legal provision of these areas produces less harm than the real alternative illegal and unregulated supply utilitarianism is concerned as much with harm minimisation as good maximisation and both are equally important when it comes to maximising welfare bentham 1789 1970 mill 1863 1964 any adequate theory of csr must therefore have the capacity to handle a business that minimises harm as well as those that more straightforwardly maximise good in this paper we therefore attempt two tasks first we argue that the legal but regulated provision of products and services may be better from an overall utilitarian perspective than a situation in which these harmful or immoral goods and services are illegal but procurable via a black market porter and kramer s 2006 strategic csr framework is then presented to describe how firms in these controversial sectors can act in socially responsible ways this model highlights the importance of firm strategy in selecting areas of socially responsible behaviours that can be acted upon by firms in each industry

on becoming more flexible exchange rate regimes in latin america and the caribbean abstract this paper examines the shift from fixed to more flexible exchange rate regimes among countries in latin america and the caribbean in contrast to most traditional approaches the one followed here recognizes that fixed rates can be and often are adjusted but argues that policy makers incur a political cost from devaluation at the same time flexible exchange rates even managed ones may be very volatile with persistent misalignment a stylized model of regime choice is developed based on the perceived losses from exchange rate misalignment incurred under fixed versus more flexible regimes the model is estimated for a sample of 24 countries over the period 1978 1992 and empirical results are quite supportive misalignments proxied by current account deficits and moderate to high rates of inflation were associated with a move to more flexible rates during 1978 1986 misalignment indicators appear to have mattered less during 1987 1992 however there appears to have been a major reduction in the perceived difficulty of managing flexible rates during this period the paper then cautions against attributing differences in economic growth between groups of countries to their exchange regime the central point here is that the endogeneity of regime choice introduces selection biases into the samples of countries with fixed and with more flexible exchange regimes

explaining exchange rate volatility an empirical analysis of the holy trinity of monetary independence fixed exchange rates and capital mobility abstract this paper uses a panel of data from twenty two countries between 1967 and 1992 to explain exchange rate volatility focusing on potential tradeoffs between fixed exchange rates independent monetary policy and capital mobility i use monetary models to parameterize monetary divergence and factor analysis to measure capital mobility exchange rate volatility is loosely linked to both monetary divergence and the degree of capital mobility interestingly exchange rate volatility is significantly correlated with the width of the explicitly declared exchange rate band even after taking monetary divergence and capital mobility into account

the effect of additions to or deletions from the tse 300 index on canadian share prices in this paper we examine shares that have been added to or deleted from the tse 300 index to determine whether abnormal price movements have occurred we apply the dummy variable approach to event study methodology and adjust the estimated standard errors for arbitrary heteroscedasticity and clustering of events we also use a non parametric method of inference like authors of u s studies we find that the market reacts positively to inclusion and negatively to deletion albeit not significantly in the latter case the information content of inclusion does not account for the entire share price response lending support to the hypothesis of increased purchases by index funds jel classification g14 ce texte examine les titres qui ont ete ajoutes ou soustraits de l indice tse 300 pour determiner si des mouvements anormaux de prix s en sont suivis on utilise l approche des variables fictives dans le cadre d une methodologie qui etudie l impact d evenements et on ajuste les erreurs standards pour tenir compte de l heteroskedasticite arbitraire et de l agglomeration d evenements on utilise aussi une methode non parametrique d inference comme dans des etudes americaines du meme type on decouvre que les marche reagit positivement a l inclusion et negativement a la soustraction d un titre mais que l effet n est pas significatif dans ce dernier cas le contenu informationnel de l inclusion n explique pas entierement le mouvement dans le prix du titre ce qui apporte un support a l hypothese de l impact des achats accrus par des fonds indexes

democratic institutions and exchange rate commitments since the collapse of the bretton woods system countries have been able to choose from a variety of exchange rate arrangements we argue that politicians incentives condition the choice of an exchange rate arrangement these incentives reflect the configuration of domestic political institutions particularly electoral and legislative institutions in systems where the cost of electoral defeat is high and electoral timing is exogenous politicians will be less willing to forgo their discretion over monetary policy with a fixed exchange rate in systems where the costs of electoral defeat are low and electoral timing is endogenous politicians are more likely to adopt a fixed exchange rate regime consequently differences in domestic political systems can help account for variations in the choice of exchange rate arrangements we test this argument using constrained multinomial logit and binomial logit on a sample of twenty democracies over the period 1974 95 domestic political institutions have a significant effect on exchange rate regime choice even after controlling for systemic macroeconomic and other political variables

the opportunity cost of negative screening in socially responsible investing this paper investigates the impact of negative screening on the investment universe as well as on financial performance we come up with a novel identification process and as such depart from mainstream socially responsible investing literature by concentrating on individual firms conduct and by studying a much wider range of issues firstly we study the size and financial performance of fourteen potentially controversial issues abortion adult entertainment alcohol animal testing contraceptives controversial weapons fur gambling genetic engineering meat nuclear power pork embryonic stem cells and tobacco we investigate an international sample of more than 1 600 stocks for more than twenty years we then analyze the impact of applying negative screens to a market portfolio our findings suggest that the choice for negative screening strategies does matter for the size of the investment universe as well as for risk adjusted return performance investing in controversial stocks in many cases results in additional risk adjusted returns whereas excluding them may reduce financial performance these findings suggest that there are opportunity costs to negative screening

endogenous changes in the exchange rate regime a bureaucratic incentive model public choice submits that legal changes can be endogenous in such a way that they are manipulated by bureaucrats who want to maximize rents from transactions with various interest groups this paper takes the change in exchange rate regimes to empirically examine the premise it offers a two stage method in which we first show that the exchange rate is influenced by interest group pressures and subsequently that the 1990 market average regime mar as a phase in policy in korea was introduced mainly to serve bureaucratic incentives this method is expected to be useful to a host of countries for various studies attempting to test a possible existence of bureaucratic or other hidden motivations behind any isolated event of policy change

politics and exchange rate forecasts abstract standard exchange rate models perform poorly in out of sample forecasting when compared to the random walk model we posit part of the poor performance of these models may be due to omission of political factors we test this hypothesis by including political variables that capture party specific election specific and candidate specific characteristics surprisingly we find our political model outperforms the random walk in out of sample forecasting at 1 12 month horizons for the pound dollar mark dollar pound mark and the trade weighted dollar mark and pound exchange rates

trading volume definitions data analysis and implications of portfolio theory we examine the implications of portfolio theory for the cross sectional behavior of equity trading volume two fund separation theorems suggest a natural definition for trading activity share turnover if two fund separation holds share turnover must be identical for all securities if k 1 fund separation holds we show that turnover satisfies an approximately linear k factor structure these implications are examined empirically using individual weekly turnover data for nyse and amex securities from 1962 to 1996 we find strong evidence against two fund separation and a principal components decomposition suggests that turnover is well approximated by a two factor linear model if price and quantity are the fundamental building blocks of any theory of market interactions the importance of trading volume in modeling asset markets is clear although most models of asset markets have focused on the behavior of returns predictability variability and information content their implications for trading volume have received far less attention in this article we derive the implications of various asset market models for volume and quantify their importance using recently available volume data for individual securities from the center for research in security prices crsp although the volume literature is voluminous 1 we hope to add to this literature in two ways first we develop the volume implications of popular asset market models rather than construct more specialized and often stylized models to

real exchange rate misalignment and redistribution abstract developing countries frequently maintain an overvalued nominal exchange rate resulting in real exchange rate misalignment to finance import demand at the overvalued exchange rate countries have to raise the level of income taxation or they have to resort to monetary finance this paper explains nominal and implicitly real exchange rate misalignment as the outcome of the political process more specifically the paper explains the misalignment of an import exchange rate relative to a market exchange rate used for exports voters differ in their ownership of a single factor of production real exchange rate overvaluation results if the median voter spends a relatively large share of his income on the importable good the political economy of explicit and implicit import subsidies is first analyzed in a real model which is then extended to include money holdings and exchange rate policy

an anatomy of the s p game the effects of changing the rules this study analyzes the effects of changes in s p 500 index composition from january 1986 through june 1994 a period during which standard and poor s began its practice of preannouncing changes five days beforehand the new announcement practice has given rise to the s p game and has altered the way stock prices react we find that prices increase abnormally from the close on the announcement day to the close on the effective day the overall increase is greater than under the old announcement policy although part of the increase reverses after the stock is included in the index the s p game is based upon the perceived price reaction of a stock to news that it will be added to the s p 500 the game involves buying the shares of the stock ahead of s p 500 funds and then selling after index fund demand is satisfied the opportunity to play the s p game arose in october 1989 when standard and poor s p began its practice of preannouncing changes to the s p 500 before that time s p announced the change in composition after the close of trading with the change becoming effective by the following morning s open with no lead time index funds bought the shares of the newly included stock on the day following the announcement the buying pressure caused prices to rise for additions during the period 1976 through 1983 for example shleifer 1986 found an abnormal price increase of 2 79 percent on the day following the announcement using roughly the same sample period harris and gurel 1986 reported a 3 13 percent average increase

the effect on stock price of inclusion in or exclusion from the s p 500 1987 the effect on stock price of inclusion in or exclusion from the s p 500 financial analysts journal vol 43 no 1 pp 58 65

new evidence on stock price effects associated with changes in the s p 500 index since october 1989 standard and poor s has when possible announced changes in the composition of the s p 500 index one week in advance because index funds hold s p 500 stocks to minimize tracking error index composition changes since this date provide an opportunity to examine the market reaction to an anticipated change in the demand for a stock using post october 1989 data the authors document significantly positive negative postannouncement abnormal returns that are only partially reversed following additions deletions these results indicate the existence of temporary price pressing and downward sloping long run demand curves for stocks and represent a violation of market efficiency copyright 1997 by university of chicago press

long term price effect of s p 500 addition and earnings quality when a company is added to the s p 500 index it receives a positive price response several explanations for this effect have been suggested but empirical findings do not provide a conclusive cause the inclusion of a company in the index may strengthen managerial incentives to provide high quality disclosures of financial data this study is an examination of the earnings quality of s p 500 companies before and after their addition to the index it finds that discretionary accruals significantly decrease after companies are added to the index which greatly improves earnings quality this change in earnings quality provides a possible explanation for the price response to the s p 500 addition

market microstructure and securities values evidence from the tel aviv stock exchange abstract this paper examines the value effects of improvements in the trading mechanism selected stocks on the tel aviv stock exchange were transferred gradually from a daily call auction to a mechanism where the call auction was followed by iterated continuous trading sessions this event was associated with a positive and permanent price appreciation the cumulative average market adjusted return over a period that started five days prior to the announcement and ended 30 days after the stocks started trading by the new method was approximately 5 5 in addition we find positive liquidity externalities spillovers across related stocks and improvements in the value discovery process due to the improved trading method finally there was a positive association between liquidity gains and price appreciation

the political economy of american monetary policy preface 1 introduction thomas mayer 2 studying the fed towards a broader public choice perspective thomas willett 3 the federal reserve reaction function a specification search salwa khouri 4 corporate profitability as a determinant of restrictive monetary policy estimates for the post war united states gerald epstein and juliet schor 5 federal reserve behavior since 1980 a financial market perspective william melton and v vance roley 6 the federal reserve and its institutional environment a review michael munger and brian roberts 7 the political economy of monetary policy robert hetzel 8 political monetary cycles nathaniel beck 9 congress and the fed why the dog does not bark in the night nathaniel beck 10 the federal reserve as a political power james pierce 11 monetary policy and political economy the federal reserve and the bank of japan thomas cargill and michael hutchinson 12 a positive analysis of the policymaking process at the federal reserve raymond lombra and nicholas karamouzis 13 a theory of fomc dissent voting with evidence from the time series thomas havrilesky and robert schweitzer 14 explaining fomc members votes john gildea 15 fed behaviour and x efficiency theory toward a general framework harinder singh and roger frantz 16 minimizing regret cognitive dissonance as an explanation of fomc behavior thomas mayer 17 the discount window william poole 18 leaning against the wind the behavior of the money stock in recession and recovery 1953 8 elmus wicker 19 bureaucratic self interest as an obstacle to monetary reform edward kane index

distinguished lecture on economics in government exchange rate regimes is the bipolar view correct the choice of appropriate exchange rate regime which for economies with access to international capital markets increasingly means a move away from the middle ground of pegged but adjustable fixed exchange rates towards the two corner regimes of either flexible exchange rates or a fixed exchange rate supported if necessary by a commitment to give up altogether an independent monetary policy lawrence h summers 2000 p 8

real exchange rate variability and the choice of exchange rate regime by developing countries abstract this paper draws together two distinct strands of the exchange rate literature it proposes that real exchange rate variability and the choice of exchange rate regime are jointly determined i test this claim by estimating a simultaneous limited dependent variable model with data from a cross section of developing countries during the recent floating period drawing on the relevant exchange rate literature the paper examines a number of exogenous determinants of exchange rate variability and the choice of exchange rate regime

changes in the standard and poor s 500 list l harris and e gurel 1986 and a shleifer 1986 examined changes in the standard and poor s list both studies presented evidence inconsistent with efficient markets looking at newer data and at bond and option prices the authors find that case against market efficiency is not compelling copyright 1991 by university of chicago press

exchange rate regimes and export performance of developing countries a fter the breakdown of the bretton woods system in 1973 many developing countries moved away from single currency pegging to more flexible exchange rate regimes an extensive literature on the appropriateness of various exchange rate regimes for developing countries economic performance has developed one issue concerns how developing countries choice of exchange rate regime affects their export performance comparative analyses of the impact of various exchange rate regimes on developing countries exports have however been overlooked different exchange rate regimes give rise to different tendencies for exchange rate misalignments and exchange rate volatility there are two reasons why the exports of developing countries may be subject to more severe consequences of exchange rate misalignments and exchange rate volatility than the exports of developed countries first exporters in developing countries may be expected to be more vulnerable to exchange rate misalignments since developing countries exports are often made up of raw material and agricultural products in which exporters usually have little market power it follows that exporters will have to respond to exchange rate misalignments by changing the export quantity rather than the export price second since developing countries usually have underdeveloped financial markets exchange rate volatility may be more harmful

institutional ownership and changes in the s p 500 several recent articles have provided new evidence for the existence of price pressures by examining the price and volume effects associated with changes in the s p 500 the present study extends this work by examining actual changes in institutional holdings following both additions to and deletions from the s p 500 the results show that changes in institutional holdings in response to additions or deletions from the s p 500 are positively correlated in addition to providing further evidence for the existence of price pressure effects the results also provide evidence of the very large institutional elasticities of demand for stock in two recent articles in this journal shleifer 1986 and harris and gurel 1986 present important new evidence of the existence of price pressures by examining the price and volume effects associated with changes in the composition of the standard and poor s s p 500 market index specifically these authors interpret the strong increases in trading volume and economically and statistically significant increases decreases in share prices on the first trading day following additions to or deletions from the s p 500 as the result of increased decreased demand by institutional index funds rather than from information effects concerning the future return distributions of the newly listed delisted firms the results of similar price and volume studies conducted by woolridge and ghosh 1986 and lamoureux and wansley 1987 are also generally consistent with the predictions of the price pressure hypothesis while both schleifer 1986 and harris and gurel 1986 suggest that changes in institutional index fund holdings are responsible for the observed abnormal returns in response to s p 500 changes over the years between 1966 and 1983 their joint failure to examine actual institutional ownership changes following listing or delisting from the index does not allow for direct tests of this possibility this study presents results of such tests

capital gains taxes and equity trading empirical evidence individual investors have an incentive to defer selling appreciated stock until it qualifies for tax favored long term capital gains treatment shackelford and verrecchia 2002 show that these incentives can affect equity trading around public disclosures this article provides some empirical support for their theory with evidence of price increases and equity constrictions around announcements of quarterly earnings and additions to the s p 500 index we find share returns rise and trading volume falls with the incremental taxes saved by deferring the sale of appreciated property the price increases however are temporary reversing in subsequent trading days the results are consistent with buyers believing the compensation to sell before long term qualification through higher prices is less costly than holding an inappropriately weighted portfolio this finding that personal capital gains taxes affect equity trading adds to a growing literature that challenges longstanding assumptions that firm value is independent of shareholders and their taxes

disequilibrium exchange rates as industrialization policy abstract this paper deals with a long standing puzzle why are developing countries so reluctant to change their exchange rates when their currencies have become blatantly overvalued the argument developed here is the following under circumstances that are fairly common to real economies a policy which deliberately maintains the exchange rate at a disequilibrium level can be welfare increasing by promoting structural change this can come via the presence of a systematic link between the real exchange rate and the manufacturing sector s terms of trade vis a vis agriculture the paper considers a model in which there exists a relationship between these two due to technological factors using a two period two sector general equilibrium model it demonstrates that such a link provides authorities with a tool which can be manipulated to bring about industrial growth and increase welfare in the presence of unrealized learning by doing effects

are investors willing to sacrifice cash for morality the paper uses questionnaire responses provided by a sample of ethical investors to investigate willingness to sacrifice ethical considerations for financial reward the paper examines the amount of financial reward necessary to cause an ethical investor to accept a switch from good ethical performance to poor ethical performance conjoint analysis is used to allow quantification of the utilities derived from different combinations of ethical and financial performance ethical investors are shown to vary in their willingness to sacrifice ethical for financial performance and hence to display more heterogeneity than the all encompassing ethical label implies because of the existence of sub groups of ethical investors with different attitudes towards financial reward an attempt has been made to associate observable investors characteristics with their level of willingness to trade off morality for cash one sub group of investors in particular appears highly resistant to the idea of accepting higher financial return as compensation for poor ethical performance this unwillingness casts doubt on jensen and meckling s widely reported claim that trade off behaviour is ubiquitous in all areas of life

price and volume effects of changes in msci indices nature and causes abstract using changes in the msci standard country indices for 29 countries between 1998 and 2001 we document that stock returns and volumes exhibit index effects in international markets similar to those detected by the studies of us stocks the stocks added to the indices experience a sharp rise in prices after the announcement and a further rise during the period preceding the actual change though part of the gain is lost after the actual change date the stocks that are deleted from the indices on the other hand witness a steady and marked decline in their prices trading volumes increase significantly and remain at high levels after the change date for the added stocks there are also considerable cross country variations in these effects tests using data on various measures reflecting the different hypotheses fail to turn up any evidence in support of information effects our evidence appears to be more supportive of the downward sloping demand curve hypothesis there is some evidence of price pressure and mild evidence of liquidity effect particularly in japan and uk

the dartboard column second hand information and price pressure this study analyzes the effect of second hand information on the behavior of security prices and volume using analysts recommendations published in the monthly dartboard column of the wall street journal for the two days following the publication of the recommendations average positive abnormal returns of 4 percent nearly twice the level of abnormal returns documented in previous research on analyst recommendations and average volume double normal volume levels on the two days following publication of the recommendations are documented the positive abnormal return on announcement is partially reversed within 25 trading days the authors conclude that the positive abnormal return on announcement of the recommendations is a result of naive buying pressure as well as the information content of the analysts recommendations

why wine is not glue the unresolved problem of negative screening in socially responsible investing the purpose of socially responsible investing sri is to 1 allow investors to reflect their personal values and ethics in their choices and 2 encourage companies to improve their ethical social and environmental performance in order to achieve these ends the means sri fund managers employ include the use of negative screening or the exclusion of companies involved in sinful industries we argue that there are problems with this methodology both at a theoretical and at a practical level as a consequence current sri offerings cannot accurately reflect the values and ethical beliefs they propose to represent moreover the use of a priori criteria is potentially misleading as we show by discussing examples of glue and wine making applying this flawed approach sri funds fail to influence the direction of the firms they deem most in need of re directing rather than engaging in the simple a priori assumption that some industries are saints while others are sinners freeman 2007 we suggest a new framework upon which the sri screening methodology could be grounded embracing the philosophical tradition of american pragmatism we suggest that sri methodology could be improved by engaging in an analysis based on 1 the actual impacts of the company s products and services 2 the company s relationships with its specific real stakeholders and 3 the contingent environment social economic political legal and cultural in which the business operates

jobs in the bureaucratic afterlife a corruption facilitating mechanism associated with law enforcement this article starts with an observation that the employment of former regulatory officers by a regulated firm might be an integral part of the corruption facilitating mechanism cfm the article hypothesizes that such employment constitutes the deferred payment for the corruption previously supplied although anecdotal evidence of this kind of corruption abounds it has proven difficult to substantiate the article provides an explanation for why this deferred payment arrangement might be attractive to both demanders and suppliers of corruption it also offers tentative empirical support for the hypothesis that it plays a role as cfm in korea with the implication that this cfm hypothesis can be generalized to a host of regulatory countries according to a report that the berlin based transparency international ti 1997 published before the onset of the korean economic crisis korea did not fare as well as during the previous year in ti s annual country rankings concerning the prevalence of corruption in society the ti corruption perception index cpi which measured corruption in public life in particular put korea in 34th place down seven places from the previous year and korea s ranking has not improved since the essential insight that the economic models of the law enforcement process offer is that corruption comprises the implementation of government regulations since the returns realized by law enforcers in exchange for supplying corruption exceed the costs the ability of the legislature and the general public to monitor the discretionary implementation by law enforcers is naturally limited benson 1988 this article from the perspective of the economic theory of regulation mcchesney 1997 focuses on corruption mainly as it occurs during the enforcement of regulation we argue that

why are convertible bond announcements associated with increasingly negative issuer stock returns an arbitrage based explanation while convertible offerings announced between 1984 and 1999 induce average abnormal stock returns of 1 69 convertible announcement effects over the period 2000 2008 are more than twice as negative 4 59 we hypothesize that this evolution is attributable to a shift in the convertible bond investor base from long only investors towards convertible arbitrage funds these funds buy convertibles and short the underlying stocks causing downward price pressure consistent with this hypothesis we find that the differences in announcement returns between the traditional investor period 1984 1999 and the arbitrage period 2000 september 2008 disappear when controlling for arbitrage induced short selling associated with a range of hedging strategies post issuance stock returns are also in line with the arbitrage explanation average announcement effects of convertibles issued during the global financial crisis are even more negative 9 12 due to a combination of short selling price pressure and issuer issue and macroeconomic characteristics associated with these offerings

financial asset demand is elastic evidence from new issues of federal home loan bank debt abstract we estimate the slope of the demand curve for newly auctioned fhlb discount notes and investigate the impacts of arbitrage risk and heterogeneity of investor beliefs on demand elasticity our unique dataset of roughly 2900 observations of two price quantity pairs the first from a pre auction dealer survey the second from actual auction results provides the quantity shift necessary to identify demand in contrast to previous findings of downward sloping demand curves for equities we show that demand for newly issued fhlb notes is nearly perfectly elastic during normal market conditions we find however that frictions like arbitrage risk and to a lesser extent heterogeneity of investor beliefs negatively affect elasticity and explain the nearly 50 drop in elasticity observed during the recent financial crisis

s p 500 index additions and earnings expectations stock price increases associated with addition to the s p 500 index have been interpreted as evidence that demand curves for stocks slope downward a key premise underlying this interpretation is that index inclusion provides no new information about companies future prospects we examine this premise by analyzing analysts earnings per share eps forecasts around index inclusion and by comparing postinclusion realized earnings to preinclusion forecasts relative to benchmark companies companies newly added to the index experience signi cant increases in eps forecasts and signi cant improvements in realized earnings these results indicate that s p index inclusion is not an information free event studies that examine the prices of common stocks when they become included in the standard poor s s p 500 index have appeared regularly in leading nance journals since 1986 fascination with the eiect of s p index inclusion on stock prices appears to stem from the possibility that inclusion in the index is an information free eventfinformation free in the sense that s p makes no claim that inclusion represents an endorsement of the newly included stock s future prospects 1 indeed s p makes an a rmative claim to the contrary company

the debt adjusted real exchange rate abstract we propose the debt adjusted real exchange rate darer that better reflects the real price of the real dollar than the rer when the economy is financing trade deficits by foreign borrowing estimates of darer for the philippines show that in episodes of heavy current account deficits overvaluation of the domestic currency is markedly underestimated by simple rer darer performs unambiguously better than rer as a predictor of devaluation in the philippines and thailand during the period 1980 1992

index composition changes and the cost of incumbency abstract this paper provides evidence of information effects and portfolio rebalancing effects that occur when stocks are added to or excluded from the sp however the portfolio rebalancing effects dominate the industry information effects

price reaction of ethically screened stocks a study of the dow jones islamic market world index this paper investigates the short term effects on the price of the ethically screened stocks of the dow jones islamic market world index djimwi quarterly revisions using a sample of 8 250 stocks from may 1999 through june 2012 we find a significant price reaction of the ethically screened stocks following additions and deletions the results show that additions deletions from emerging stock markets tend to experience a greater and significantly positive negative price response than additions deletions from the developed markets further tests reveal that the price reactions following djimwi revisions are likely to be driven by shifts in investor sentiment rather than changes in firm fundamentals

price and volume effects associated with changes in the s p 500 list new evidence for the existence of price pressures attempts to identify price pressures caused by large transactions may be inconclusive if the transactions convey new information to the market this problem is addressed in an examination of prices and volume surrounding changes in the composition of the s p 500 since these changes cause some investors to adjust their holdings of the affected securities and since it is unlikely that the changes convey information about the future prospects of these securities they provide an excellent opportunity to study price pressures the results are consistent with the price pressure hypothesis immediately after an addition is announced prices increase by more than 3 percent this increase is nearly fully reversed after 2 weeks the efficient market hypothesis emh predicts that security prices reflect all publicly available information therefore one corollary of the emh is that you can sell or buy large blocks of stock at close to the market price as long as you can convince other investors that you have no private information 1 this statement assumes that securities are near perfect substitutes for each other if so the excess demand for a single security will be very elastic and the sale or purchase of a large number of shares will have no impact on price in contrast to the emh scholes 8 kraus and stoll 5 hess and frost 4 and others propose two hypotheses which predict that a large stock sale purchase will cause the price to decrease increase even if no new information is associated with the transaction the imperfect substitutes hypothesis ish also known as the distribution effect hypothesis assumes that securities are not close substitutes for each other and hence that long term demand is less than perfectly elastic under this hypothesis equilibrium prices change when demand curves shift to eliminate excess demand price reversals are not expected because the new price reflects a new equilibrium distribution of security holders the price pressure hypothesis pph assumes that investors who accommodate demand shifts must be compensated for the transaction costs and portfolio risks that they bear when they agree to immediately buy or sell securities which they otherwise would not trade these passive suppliers of liquidity are attracted by immediate price drops rises associated with large sales purchases they are compensated for their liquidity service when prices rise drop to their fullinformation levels the pph like the emh assumes that long run demand is

exchange rate regimes and the cross country distribution of the 1997 financial crisis robin m grier we study variations in the severity of the 1997 financial crisis in a sample of 25 developing countries we use both currency depreciation and stock market returns as crisis measures our key findings are that countries that started 1997 with an exchange rate peg experienced significantly greater currency depreciation and significantly lower stock returns than would be predicted from the levels of various macroeconomic indicators jel f3 f4 i introduction the asian financial crisis of 1997 is still a very hot topic a recent search of econlit turned up 243 articles in the system with asian crisis in the subject field 1 several recent articles attempt to explain variations in the severity of the crisis across developing countries using macroeconomic and financial variables and show that the distribution of the crisis is somewhat predictable our article extends this literature in two directions first we examine whether the initial exchange rate regime in place at the beginning of 1997 had any effect on the distribution of the financial crisis once the relevant macro and financial indicators are included in the model second given that a real crisis followed on the heels of the financial one we study the relationship between exchange rate regime currency depreciation and stock market performance in 1997 our sample consists of 25 developing countries in 1997 2 though a cross sectional approach limits the generality of our results we believe we can ask and answer two interesting questions about the average performance of different exchange rate regimes in 1997 the first question is controlling for economic indicators what was the average effect of having an initially pegged exchange rate on currency depreciation there are theoretical arguments presented in section ii that can justify either positive negative or zero effects we find that on average countries with a pegged regime at the beginning of the year experienced more depreciation than what was predicted by their macro indicators the second question we study is what was the average effect of currency depreciation on stock market performance in 1997 again there are arguments presented in section iii supporting either a positive negative or neutral relationship we find that on average depreciation has a marginally significant negative impact on stock returns however in the 12 countries that began 1997 with a floating exchange rate currency depreciation had a significantly positive effect on stock returns whereas the effect of depreciation on stock returns was negative and significant for the 13 countries that started the year with a pegged currency this relationship holds for stock returns measured either in u s dollars or in local currencies the papers most similar to ours in the literature are tornell and velasco 1995 edwards 1993 corsetti et al 1999 hereafter cpr and tornell 1999 tornell and velasco and edwards study whether or not the choice of exchange rate regime affects economic outcomes 3 cpr and tornell study the asian financial crisis of 1997 in the broader context of developing country performance they create a crisis index and estimate several regressions using macro and financial indicators to predict the extent of the crisis in a sample of developing countries our article applies the idea that the choice of exchange rate regime can affect macroeconomic and financial outcomes to the study of the determinants of the severity of the 1997 crisis in a model similar to those of cpr and tornell in what follows below section ii studies the relationship between macro and financial indicators the initial exchange rate regime and currency depreciation in 1997 section iii considers the depreciation exchange rate regime stock market connection in 1997 section iv presents our conclusions ii macro indicators currency depreciation and exchange rate regime in 1997 the question of what exactly determines the value of the exchange rate is an important unsolved issue in open economy macroeconomics and we are not going to settle it here

the price response to s p 500 index additions and deletions evidence of asymmetry and a new explanation we study the price effects of changes to the s p 500 index and document an asymmetric price response there is a permanent increase in the price of added firms but no permanent decline for deleted firms these results are at odds with extant explanations of the effects of index changes that imply a symmetric price response to additions and deletions a possible explanation for asymmetric price effects arises from the changes in investor awareness results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of s p 500 index additions and deletions the long held assumption that stocks have perfect substitutes and the perfect elasticity of demand that follows from it is central to modern finance theory if securities have almost perfectly elastic demand then any supply or demand shocks that are devoid of information should have no effect on the prevailing price early empirical research on whether price changes occur in the absence of new information focused on block trades equity issues and stock splits but was unable to exclude information effects around these events since there is no obvious reason to believe ex ante that index changes contain new information they constitute a natural framework for testing whether stocks have almost perfectly elastic or horizontal demand curves a stock s excess return around such changes could be consistent with a downward sloping demand curve with the advent of indexed mutual funds in 1976 and the public announcement of s p index changes in the same year there is much evidence that such announcements are accompanied by an increase in price for firms added to the index if stocks have a short term downward sloping demand curve the price should be momentarily affected by a demand shock due to indexing but that effect

do demand curves for currencies slope down evidence from the msci global index change traditional portfolio balance theory derives a downward sloping currency demand function from limited international asset substitutability historically this theory enjoyed little empirical support we provide direct evidence by examining the exchange rate effect of a major redefinition of the msci international equity index in 2001 and 2002 the index changes implied large changes in the representation of different countries in the msci world index and therefore produced strong exogenous equity flows by index funds our event study shows a strong announcement effect in which countries with a decreasing equity representation vis a vis the u s depreciated against the dollar

do demand curves for stocks slope down since september 1976 stocks newly included into the standard and poor s 500 index have earned a significant positive abnormal return at the announcement of the inclusion this return does not disappear for at least ten days after the inclusion the returns are positively related to measures of buying by index funds consistent with the hypothesis that demand curves for stocks slope down the returns are not related to s p s bond ratings which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock

fiscal policies and the choice of exchange rate regime a common argument against either a monetary union or a regime or a fixed exchange rates is that they preclude flexible use of the inflation tax the authors address this point of view by comparing three alternative exchange rate regimes a pure float an ems regime in which the exchange rate is fixed but can be realigned and a monetary union the authors model the three regimes as alternative commitments on future seigniorage policies this approac h suggests that it is not possible to pareto rank the three regimes o n the other hand the authors provide intuitive conditions under which each of the systems is superior to the others copyright 1993 by royal economic society

saving for retirement without harming others this article discusses moral issues raised by defined contribution retirement plans specifically 401 k plans in the united states the primary aim is to defend the claim that the federal government ought to require 401 k plans to include a range of socially responsible investment sri options the analysis begins with the minimal assumption that corporations engage in behavior that imposes morally impermissible harms on others with sufficient regularity to warrant attention after motivating this assumption i argue that individual investors typically share in the responsibility for the harms imposed by corporations in which they invest and that they therefore have a moral obligation to incorporate considerations of social responsibility into their investment decisions when possible to avoid being complicit in morally impermissible corporate behavior i further argue that individuals are subject to substantial institutional and structural pressures that create a powerful incentive to invest in 401 k plans even though such plans typically lack any sri options to eliminate this pressure to commit indirect harm in the process of saving for retirement i recommend that the federal government requires 401 k plans to incorporate a range of sri options and i defend this proposal from several possible objections

elevating the role of divestment in socially responsible investing the divest movement has focused attention on strategic and ethical differences in the practice of socially responsible investing sri and highlighted an unnecessary bifurcation of best of class engagement and divestment although best of class engagement is favored as a contemporary and pragmatic approach this paper calls for a more pronounced recognition of absolute dealbreakers and divestment as an underpinning for best of class engagement after linking divestment and best of class engagement to their foundations of absolutism and relativism respectively i critique best of class engagement and argue that without a distinct and explicit role for divestment best of class strategies are ethically and strategically fraught following a discussion of which types of issues suggest divestment or best of class engagement i identify the norway government pension fund as a noteworthy example and posit that divestment and engagement are best presented and employed in tandem particularly for issues that have yet to be addressed by law and convention

the political economy of overvaluation most of the literature on political business cycles e g nordhaus 1975 macrae 1977 van der ploeg i984 assumes that the incumbent political party attempts to secure re election by maximising the expected number of votes cast in its favour at the forthcoming election and to exploit lags due to adaptive expectations the government can then fool the electorate by judiciously depressing output in the early part of its term in office in order to force down the expected rate of inflation and to create a boom without too many adverse inflationary consequences towards election eve in order to gain the sympathy of the electorate such political business cycles rely on a naive electorate and cannot occur in new classical economies with market clearing and rational expectations because then the electorate would see through the government s vote maximising strategy e g mccallum 1978 minford and peel i982 if the private sector has rational expectations and prices or wages are sticky this is observationally equivalent to adaptive expectations and flexible prices and wages e g sargent 1976 but nevertheless the electorate would see through a vote maximising strategy and thus no political business cycle would occur in any case it is not clear that the empirical evidence supports this view of the political business cycle e g frey 1978 one reason for this is that it may not be realistic to assume that output can be changed instantaneously whilst inflation can through expectations only be influenced in a gradual fashion in an open economy it is much easier and faster to affect real income and consumers prices through the exchange rate than it is to have an effect on aggregate demand output and employment an appreciation of the exchange rate immediately cuts import prices and consumers prices and therefore immediately boosts real income this combined with the reduction in the real value of imports depresses aggregate demand but over time standard neoclassical substitution effects ensure that the volume of exports decreases the volume of imports decreases and therefore aggregate demand and output increase the above argument is based on the j curve effect in the balance of trade for which there is ample empirical evidence e g diaz alejandro 1966 magee 1973 this note explores the implications of the j curve effect for the political business cycle in a small open economy as suggested by van der ploeg i984 and dornbusch i987 section iv section i sets up the model of the economy section ii derives the development of the exchange rate real income and output over the course of the political business cycle section iii concludes with an interpretation and qualification of the results

the s p500 index effect reconsidered evidence from overnight and intraday stock price performance and volume abstract this study focuses on s p500 inclusions and deletions examining the impact of potential overnight price adjustment after the announcement of an s p500 index change we find evidence of a significant overnight price change that diminishes the returns available to speculators although there are still profits available from the first day after announcement until a few days after the actual event more importantly observing the tick by tick stock price performance and volume effects on the key days during the event window for the first time we find evidence of consistent trading patterns during trading hours a separate analysis of nasdaq and nyse listed stocks allows for a detailed examination of the price and volume effect at an intra day level we find that index funds appear to cluster their rebalancing activities near to and after the close on the event date suggesting that they are more concerned with tracking error than profit

democracy and markets the case of exchange rates the relationships between the workings of democratic institutions and currency markets are studied severa competing propositions about how political re equilibration affects currency markets are derived and tested the results support the view that democratic politics affects currency markets expectations and uncertainty about electoral outcomes and government survival affect the probability of switching between currency market equilibria additionally opinion polls about chief executive performance have a direct effect on the probabilities of switches between currency regimes suggesting that these polls cause currency traders to revise their expectations about the stability of governments and or the contents of public policies electoral institutions mitigate the impact of politics on currency market equilibria political effects are weaker in countries with proportional representation electoral systems than in countries with majority plurality systems there is less evidence that central bank independence consensual corporatist systems or political coherency reduces the effect of politics on currency markets he study of democracy and markets is at the heart of political economy understanding how political equilibration and economic equilibration are related is one of the main challenges facing this field the size and nature of currency markets make them especially important cases substantively with globalization currency markets have become important constraints on elected governments reducing their room to maneuver analytically in comparison to most goods markets currency markets are informationally efficient asset markets with distinctive equilibria today s exchange rate is determined by currency traders fully informed expectations about tomorrow s exchange rate the sensitivity of these markets to the arrival of new information therefore makes them particularly well suited for studying the effects of political news and uncertainty on economic equilibration 1 this article demonstrates there are informationally relevant political factors insofar as exchange rate determination is concerned factors that directly affect the transition probabilities between currency market equilibria moreover these factors vary in important ways across democracies some electoral institutions lessen the effects of politics on currency

separating economic from political influences on government decisions abstract the public interest theory is a poor predictor of government decisions relative to interest group theories but a sophisticated public interest theory is a more serious alternative to the former testing the sophisticated theory s predictions is problematic however when public interest is coincident with an interest group s interests a four step method is developed that disentangles public interest and interest group interests by separating economic from political incentives applying the method to the national forest service decisions about wilderness designations indicates whether interest groups were successful in influencing allocation decisions and whether allocation decisions were in the public interest

asymmetric changes in stock prices and investor recognition around revisions to the s p 500 index this study finds that first time additions to the sp however companies upgraded from lesser known s p indices reentering the s p 500 or dropped from the index experience temporary price changes these price patterns can be explained by changes in investor recognition