governmental behavior in representative democracy a synthesis of the theoretical literature what is the impact of bureaucratic behaviors on tax rates what is preferable a bureaucrat or a partisan politician does a flypaper effect occur when lobby groups influence public policies this article tries to answer these questions by analyzing and comparing six different models of public choice 1 the median voter model 2 the leviathan model 3 the slack maximizing model 4 a general model of bureaucracy 5 the partisan politicians model and 6 a general model of lobbying among several results it is shown that the median voter s income and tax share almost always play a significant role in the design of the public good tax package even if the government does not explicitly try to maximize the median voter s utility the article also provides a synthesis of the positive analysis of the flypaper effect

electric power sector reform liberalization models and electric power prices in developing countries an empirical analysis using international panel data this study aims to clarify whether the effects of electric power sector reforms should be different either across regions or between developing and developed countries an empirical model was analyzed to observe the impact of electric power prices on the selection of a liberalization model in the power sector this was achieved by the use of an ordered response fixed effect and a random effect model an instrument variable technique was also used to estimate the impact of the liberalization model on the electric power price this technique addressed the problems of simultaneity bias between the electric power price and the liberalization models selected these econometric models were designed using panel data from 78 countries in four regions developed countries asian developing countries the former soviet union and eastern europe and latin america for the period from 1985 to 2003 the research findings suggest that higher electricity prices are one of the driving forces for governments to adopt liberalization models however the development of liberalization models in the power sector does not necessarily reduce electricity prices in fact contrary to expectations there was a tendency for the price to rise in every market modeled

modeling correlated market and credit risk in fixed income portfolios abstract current risk assessment methodologies separate the analysis of market and credit risk and thus misestimate security and portfolio risk levels we propose a new approach that relates financial market volatility to firm specific credit risk and integrates interest rate interest rate spread and foreign exchange rate risk into one overall fixed income portfolio risk assessment accounting for the correlation between these significant risk factors as well as portfolio diversification results in improved risk measurement and management the methodology is shown to produce reasonable credit transition probabilities prices for bonds with credit risk and portfolio value at risk measures

implicit contracts moral hazard and unemployment this paper considers a firm whose marginal revenue product of labor is a random variable we derive the form of an optimal long term contract between workers and the firm under the assumption that labor s marginal product is observed by the firm but not by the workers we show that the existence of asymmetric information causes unemployment to be greater than in a situation where information about labor s marginal product is public or where employment is determined in spot markets in particular unemployment can occur when the marginal product of labor exceeds the reservation wage

is there a leviathan in your neighborhood this paper measures effects of decentralization in local government hierarchies on local public sector size this sector shrinks if decentralization encourages competition among governments it expands if decentralization sacrifices scale economies in a sample of 3 022 counties larger county governments reduce competition and increase aggregate local public sector size relative to aggregate county income more cities and towns increase competition and reduce its size more special and school districts sacrifice scale economies and increase it two recent articles have attempted to identify the effects of decentralization in state and local government on the size of the state and local public sector wallace oates 1985 finds no important effects michael nelson 1987 finds modest evidence that increased competition among government units reduces the size of the public sector this article demonstrates that the effects of decentralization are important and complex decentralization which encourages competition reduces the size of the local public sector decentralization which discourages scale economies increases it

to harmonize or to compete that s not the question abstract neoclassical public economists stress economic distortions induced by differential taxation and therefore favour harmonization political economists focus on political distortions and therefore reject harmonization however policy choices on the possibility frontier between economic and political distortions tend to be biased economic advisers politicians and interest groups typically favour harmonization harmonization is moreover undermined by incentives to re establish tax differences both activities prevent the possibility frontier from being simply a menu of choice popular referenda and functional overlapping competing jurisdictions focjs are institutions able to reduce political distortions and to shift the possibility frontier

information quality and market efficiency the purpose of this paper is to analyze the optimal individual behavior in acquiring infor mation and to determine the amount of information incorporated in a stock at equilibrium in the presence of a cost schedule in acquiring information our paper shows that at equi librium the cost to acquire information that is not already incorporated in the price de pends only on the representative investor s risk preferences it follows that the marginal information costs are the same across all stocks at equilibrium even though the stock s information costs schedules may differ this suggests that the prices of small stocks may not incorporate all publicly available information this paper also provides empirical evi dence that newspapers publication of publicly available information can affect the stock prices

the term structure of credit spreads with jump risk abstract default risk analysis is important for valuing corporate bonds swaps and credit derivatives and plays a critical role in managing the credit risk of bank loan portfolios this paper offers a theory to explain the observed empirical regularities on default probabilities recovery rates and credit spreads it incorporates jump risk into the default process with the jump risk a firm can default instantaneously because of a sudden drop in its value as a result a credit model with the jump risk is able to match the size of credit spreads on corporate bonds and can generate various shapes of yield spread curves and marginal default rate curves including upward sloping downward sloping flat and hump shaped even if the firm is currently in a good financial standing the model also links recovery rates to the firm value at default so that the variation in recovery rates is endogenously generated and the correlation between recovery rates and credit ratings before default reported in altman j finance 44 1989 909 can be justified

local government internal structure external constraints and the median voter this paper examines how internal structure and external constraints affect local government ability to meet voters demands it applies the revealed preference method to us counties to identify those that fail to satisfy the pure democracy outcome of the median voter hypothesis mvh probit analysis identifies the factors associated with counties that satisfy the mvh internal government structure does not matter but restricting home rule increases the likelihood of satisfying the mvh equilibrium the latter result consistent with the leviathan model the systematic differences found for urban and rural county governments reinforce this conclusion

a neoclassical interpretation of momentum abstract the neoclassical theory of investment implies that expected stock returns are tied with the expected marginal benefit of investment divided by the marginal cost of investment winners have higher expected growth and expected marginal productivity two major components of the marginal benefit of investment and earn higher expected stock returns than losers the investment model succeeds in capturing average momentum profits reversal of momentum in long horizons long run risks in momentum and the interaction of momentum with several firm characteristics however the model fails to reproduce the procyclicality of momentum as well as its negative interaction with book to market equity

leviathan and fiscal illusion in local government overlapping jurisdictions this paper integrates twomodels of local government behavior leviathan and fiscal illusion into theframework of overlapping jurisdictions estimation of the leviathan and fiscalillusion variables without accounting forvertical effects between overlappingjurisdictions results in overestimation ofthe horizontal effects using a medianvoter model and municipal and county datawe find support for the leviathan modelusing traditional tests these effects arelargely offset however when the test isset within the context of the verticalrelationship we find that municipal percapita expenditures and county per capitaexpenditures are symmetricallycomplementary

modelling of insurers rating determinants an application of machine learning techniques and statistical models abstract in recent years financial regulations such as basel ii and solvency ii have highlighted the utility of credit risk assessments through internal rating systems particularly for estimating the probability of default pd of credit exposures financial entities must provide clear definitions of their internal ratings thus it is possible to associate internal grades to some external rating scale and then to attribute the external pd to the internal grades however this mapping must be based on an extensive comparison of both internal and external rating criteria a substantial body of research has been undertaken of rating determinants for banks and large industrial corporations however the academic literature on insurers rating determinants is very limited and fitness measures have not traditionally been provided this paper proposes a three step model to analyse rating determinants and it is applied to a sample of european insurance firms firstly a feature selection process is performed that mixes statistical bayesian and machine learning approaches from selected features several multivariate models are run both in the statistical field mda logit models and the decision trees research area c4 5 cart their accuracies are compared through bootstrapping strategies and a final model is proposed results show that the feature selection process selects a small group of relevant attributes regarding multivariate models the cart gini oblique decision tree appears to be a good strategy providing a quite satisfactory equilibrium between precision and comprehensibility

a learning curve of the market chasing alpha of socially responsible firms abstract this paper explores stock market reactions to corporate social performance we construct a value weighted portfolio based on the list of 100 best csr companies in the world published on the forbes website by reputation institute this portfolio yields statistically significant annual abnormal returns of 1 81 and 1 26 by controlling for carhart four factors and fama french five factors respectively 2 41 and 1 84 respectively for an equal weighted portfolio moreover such abnormal returns decrease as time passes especially after the inaugural publication of the csr lists in 2013 furthermore we find that companies with better social performance are more likely to have positive earnings surprises and that their returns are more sensitive to earnings surprises the results have three implications firstly csr reputation contributes positively to a firm s short term superior equity performance secondly the csr lists facilitate market correction of mispricing intangibles such as csr reputation abnormal returns decrease as the market gradually learns about the value of firms social performance lastly the paper contributes to the socially responsible investing sri screens and provides guidance for investors who would like to do well financially by doing good socially

the overspending and flypaper effects of fiscal illusion theory and empirical evidence abstract this paper broadens the notion of fiscal illusion to include imperfect information where voters are unsure about how much they must pay for additional services or where they are unsure about the services received in return for higher taxes it shows how each type of voter imperfect information has different effects on public spending and modifies the overspending and flypaper effects predicted by the certainty model an empirical study of municipal expenditures provides support for the broader notion of fiscal illusion as imperfect information

price specification and the demand for public goods abstract nearly all public expenditure demand studies define the marginal price for publicly provided goods as the household s share of the local property tax burden or what is often called the tax price such a definition is at odds with two familiar facts taxes are ordinarily distortionary and property values are often influenced by the value of local services this paper constructs a theoretically consistent marginal tax price measure incorporating these considerations the new measure demonstrates that previous estimates of the price and income elasticities of demand for public services are biased except under very restrictive circumstances moreover the direction of this bias will depend upon the actual incidence of public spending and the tenure status of residents

liquidity credit quality and the relation between volatility and trading activity evidence from the corporate bond market this paper investigates the roles of illiquidity and credit risk in determining the relations between price volatility of a bond and its trading frequency and trade size based on a large transaction dataset from october 2004 to june 2012 we find a positive relation between volatility and trading frequency and a negative relation between volatility and trade size consistent with the prediction of the search based theory the relations are much stronger for illiquid and risky bonds furthermore both liquidity and credit risk become more important in times of stress and their effects are reinforcing results strongly suggest that search frictions and credit risk are important factors driving the relation between volatility and trading activity in the corporate bond market

interest rates and credit risk this paper explores the effects of shifts in interest rates on corporate leverage and default we develop a dynamic model in which the relationship between firms and their outside financiers is affected by a moral hazard problem and entrepreneurs initial wealth is scarce the link between leverage and default risk comes from the lower incentives of overindebted entrepreneurs to guarantee firm survival the need to finance new investment with outside funding pushes firms leverage ratio above some state contingent target towards which they gradually adjust through earnings retention the dynamic response of leverage and default to interest rate rises and cuts is both asymmetric and heterogeneously distributed across firms both rises and cuts increase the aggregate default rate in the short run however a higher interest rate reduces firms target leverage and hence produces lower default rates in the longer run this helps rationalize some evidence regarding the risk taking channel of monetary policy

optimal labour contracts under asymmetric information an introduction the review of economic studies has instituted a new series of lectures to be given annually by a younger british economist at the association of university teachers of economics meetings the choice of lecturer is determined by a panel whose members are currently professors hahn mirrlees and nobay this paper is a revised version of the first lecture in the series it was presented at the aute meeting held at the university of surrey in april 1982 and was refereed in the usual way mak

moody s and s p ratings are they equivalent conservative ratings and split rated bond yields we examine the relative impact of moody s and s p ratings on bond yields and find that at issuance yields on split rated bonds with superior moody s ratings are about 8 basis points lower than yields on split rated bonds with superior s p ratings this suggests that investors differentiate between the two ratings and assign more weight to the ratings from moody s the more conservative rating agency moody s becomes more conservative after 1998 and the impact of a superior moody s rating becomes stronger furthermore the differential impact of the two ratings is more pronounced for the more opaque rule 144a issues

risk perception and the financial system i examine how a country s financial system influences assessments of firm level risk consistent with theories of financial intermediation i find that firms located in a country with a bank oriented financial system are perceived as posing a lower credit risk and correspondingly are assigned higher credit ratings than otherwise similar firms in a market oriented setting even after considering elements of a country s legal infrastructure that relate to creditor protection and insolvency proceedings the financial system remains an important determinant of credit rating assignment the results are robust to the inclusion of several firm level controls including financial performance industry ownership concentration political connections and the ease with which the firm s assets can be monitored

predicting individual analyst earnings forecasts in this study i propose and test a model that predicts individual analyst forecasts of corporate earnings per share eps using the change in the mean consensus forecast of other analysts since the date of the analyst s current outstanding forecast the deviation of the analyst s current forecast from the consensus forecast and cumulative stock returns since the date of the analyst s current forecast i find that these three variables explain about 38 of the variability in analyst forecast revisions while there is evidence of a relation between changes in earnings expectations and price changes virtually all of the explanatory power of my model arises from other analyst forecasts section 2 describes the data bases used and the sample selection process section 3 presents the model and method for predicting individual analyst forecasts section 4 reports the bias and accuracy of the predicted forecasts conclusions are in section 5

fragmentation and the growth of local government an assumption of the post world war ii metropolitan reform movement was that fragmentation of metropolitan regions into multiple local governments was wasteful and inefficient increasing the cost and size of government more recently polycentrists have argued that the competition between multiple governments in metropolitan regions can in factreduce the growth in government by providing a competitive check on the excessive demands of local bureaucrats for more resources in this article i explore the effects of fragmentation on growth in the size of suburban municipal government budgets and in the number of services offered competition inherent in more fragmented metropolitan regions is shown to slow the expansion in local government expenditures and service levels

productivity effects of worker participation in management profit sharing worker ownership of assets and unionization in u s firms abstract in this paper we provide our first econometric estimates of the effect of worker participation in decision making ownership and profits on productive efficiency participation has the potential for exerting several conflicting influences on firm performance simultaneously as a result both the direction and magnitude of its impact are empirical issues previous studies have empirically measured the impact of each of these forms of participation however no prior study has controlled for the influence of the other forms because of the potential for correlation among these forms of participation it is possible that omitted variables bias has affected the previous results using a new panel data set with simultaneous measures of all four types of participation in u s manufacturing establishments we model participation as disembodied technical change and estimate production function coefficients for each type while controlling for the others we use both ols and instrumental variables in order to guard against potential simultaneity the iv results indicate that participation in decision making has a large positive productivity effect while the impacts of unionization and profit sharing depend upon regression specification moderate amounts of indirect worker ownership affect productivity positively while the estimated effect of direct worker ownership is negative however this last result may reflect the industrial concentration of the direct ownership firms in our sample

the impact of diverse measures of default risk on uk stock returns a number of recent papers examine the relationship between default risk and equity returns and the results are mixed these studies employ different measures of default risk and we find that correlations between eight diverse measures of default risk tend to be less than 50 nonetheless we find that the relationship between stock returns and diverse measures of default risk tends to be consistent default risk is a significant determinant of stock returns and this relationship is hump backed as predicted by garlappi and yan 2011

tiebout bias on the demand for local public goods abstract empirical work estimating the demand for local public goods has been based upon the median voter model it has generally proceeded with little consideration given to the possibility of tiebout type migration emphasized in the property value literature in this paper we raise the question of how valid the typical cross section demand estimation procedures are when possible tiebout like migration among jurisdictions is taken into account we find that such procedures are not in fact consistent with a model in which people vote with their feet as well as with ballots we also show that if a full tiebout equilibrium has been achieved in a set of communities there is a simple and obvious way to estimate demands for local public goods which is different from the median voter approach this technique has not to our knowledge been used in existing studies and moreover has some practical as well as theoretical advantages if the workings of the tiebout process are not taken into account more is involved than just impracticality we show that the estimated effects of personal characteristics will generally be biased and that that direction of the bias can usually be determined

evidence on incentive effects of subjective performance evaluations the authors investigate the effect of managerial performance evaluation styles on employee work effort using panel data on 4 080 employees in a swiss unit of an international company for the period 1999 2002 they test two hypotheses using paid and unpaid overtime work as effort indicators the company applies two performance based remuneration mechanisms an individual surprise bonus and one in which salary is affected by the extent to which an individual has reached personalized targets the authors hypothesize that effort is higher in departments in which individual performance evaluations are more flexible over time as well as when surprise bonuses are used more frequently both hypotheses are supported and the estimated effects are substantial increases in rating flexibility or bonus payments by one standard deviation above the mean increase average overtime hours by more than 20 the findings are robust and suggest that surprise bonuses and flexible performance evaluations over time provide ef

internal ratings systems implied credit risk and the consistency of banks risk classification policies abstract this paper aims at improving our understanding of internal risk rating systems irs at large banks of the way in which they are implemented and at verifying if irs produce consistent estimates of banks loan portfolio credit risk an important property of our work is that the size of our data set allows us to derive measures of credit risk without making any assumptions about correlations between loans by applying carey s carey mark 1998 credit risk in private debt portfolios journal of finance liii 4 1363 1387 non parametric monte carlo re sampling method we find substantial differences between the implied loss distributions of two banks with equal regulatory risk profiles both expected losses and the credit loss rates at a wide range of loss distribution percentiles vary considerably such variation will translate into different levels of required economic capital our results also confirm the quantitative importance of size for portfolio credit risk for common parameter values we find that tail risk can be reduced by up to 40 by doubling portfolio size our analysis makes clear that not only the formal design of a rating system but also the way in which it is implemented e g a rating grade composition the degree of homogeneity within rating classes can be quantitatively important for the shape of credit loss distributions and thus for banks required capital structure the evidence of differences between lenders also hints at the presence of differentiated market equilibria that are more complex than might otherwise be supposed different lending or risk management styles may emerge and banks strike their own balance between risk taking and the cost of monitoring that risk

the declining credit quality of u s corporate debt myth or reality in recent years the number of downgrades in corporate bond ratings has exceeded the number of upgrades leading some to conclude that the credit quality of u s corporate debt has declined however an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings an ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent implying that at least part of the downward trend in ratings is the result of changing standards bond ratings play a key role in corporate financing and investment decisions a corporation that can issue higher rated bonds usually receives better terms than one that can issue only lower rated bonds by law or policy some investors can purchase only bonds with an investment grade rating a restriction which in some asset pricing models would affect the relative prices of financial assets numerous articles in the popular press have presumed that the credit quality of the debt of u s corporations has been declining over the last couple of decades the comprehensive study by lucas and lonski 1992 of moody s rating changes of corporate debt is consistent with this presumption to cite their statistics in 1970 moody s downgraded 21 issues and upgraded 23 issues but over the following years the number of bonds downgraded began to exceed by substantial margins the number of bonds upgraded and by 1990 moody s downgraded 301 issues and upgraded only 61 their study includes both investment and noninvestment grade bonds but internal data from donaldson lufkin jenrette confirm that this trend also applies to investment grade bonds alone in a somewhat different context grundy 1997 documents similar trends in the ratings of preferred shares over the 1965 to 1990 period as the credit quality of a firm s corporate debt decreases that firm will face a greater probability of financial distress which at the extreme translates into bankruptcy there is some debate as to the effect of financial dis

government form and performance fiscal illusion and administrative ability in u s counties key differences in local government organizational form lie in separation of powers versus unified powers and elected versus professional chief executive officers ceos this paper studies how these features lead to differences in fiscal illusion and production cost evidence from u s counties indicates that there is less fiscal illusion under separation of powers which by itself reduces spending separation of powers however leads to greater overall spending when compared with unified governments the inelastic public demand therefore implies that separation of powers leads to services being provided at greater cost than under governments with unified powers similar conclusions hold for professional relative to elected ceos

overlapping jurisdictions substitutes or complements this paper presents a simple model of the demand relationship between the activities undertaken by overlapping governments and uses the framework to estimate the relationship between municipal and county expenditures the empirical results reveal a complementary relationship between county and city general expenditures any public sector expansion effects of monopoly power at the county level will therefore be reinforced by greater municipal spending further expanding the total size of the local public sector on the other hand changes in county police and roads expenditures appear to have no strong stable impact on municipal police and roads expenditures respectively providing no reinforcing or offsetting municipal spending responses to decisions at the county level

bond illiquidity and excess volatility we find that the empirical volatilities of corporate bond and cds returns are higher than implied by equity return volatilities and the merton model this excess volatility may arise because structural models inadequately capture either fundamentals or illiquidity our evidence supports the latter explanation we find little relation between excess volatility and measures of firm fundamentals and the volatility of firm fundamentals but some relation with variables proxying for time varying illiquidity consistent with an illiquidity explanation firm level bond portfolio returns which average out bond specific effects significantly decrease excess volatility the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

signalling by underpricing in the ipo market abstract empirical evidence suggests the existence of hot issue markets for initial public offerings in certain periods and in certain industries new issues are underpriced and rationing occurs this paper develops a model consistent with this observation which assumes the firm itself best knows its prospects in certain circumstances firms with the most favorable prospects find it optimal to signal their type by underpricing their initial issue of shares and investors know that only the best can recoup the cost of this signal from subsequent issues

structural shifts in credit rating standards i examine the time series variation in corporate credit rating standards from 1985 to 2007 a divergent pattern exists between investment grade and speculative grade rating standards from 1985 to 2002 as investment grade standards tighten and speculative grade loosen in 2002 a structural shift occurs toward more stringent ratings holding characteristics constant firms experience a drop of 1 5 notches in ratings due to tightened standards from 2002 to 2007 credit spread tests suggest that the variation in standards is not completely due to changes in the economic climate rating standards affect credit spreads loose ratings are associated with higher default rates

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

credit ratings and stock liquidity we analyze contemporaneous and predictive relations between credit ratings and measures of equity market liquidity and find that common measures of adverse selection which reflect a portion of the uncertainty about future firm value are larger when credit ratings are poorer we also show that future rating changes can be predicted using current levels of adverse selection collectively our results validate widely used microstructure measures of adverse selection and offer new insights into the value of credit ratings and the specific nature of the information they contain copyright 2006 oxford university press

is there cyclical bias in bank holding company risk ratings abstract this paper examines whether bank holding company bhc risk ratings are asymmetrically assigned or biased over business cycles from 1986 to 2003 in a model of ratings determination which accounts for bank characteristics financial market conditions past supervisory information and aggregate macro economic factors we find that bank exam ratings exhibit inter temporal characteristics first exam ratings exhibit some evidence of examiner bias for several periods analyzed when the business cycle turns examiners sometime depart from standards that they set during the previous phases of the cycle however this bias is not widespread or systematic second exam ratings exhibit some inertia our results suggest that examiners rate on the side of not changing rather than upgrading or downgrading an institution s exam rating third we find robust evidence of a secular trend towards more stringent examination bhc ratings standards over time

the information content of municipal bond rating changes a note municipal bond rating changes have positive social value if they signal previously unavailable information on changes in municipal financial soundness weinstein 11 has found that rating changes for corporate bonds do not appear to contain relevant new information his finding is consistent with that of pinches and singleton 7 that stock price adjustments occurred several months prior to a corporate bond rating change rating agencies apparently respond to changes in corporate financial and operating conditions several months after the information is impounded in bond and stock prices 1 however as a result of institutional differences between corporate and municipal bond markets it is possible that rating changes for municipal bonds do convey new information this note examines the information content of municipal bond rating changes by evaluating municipal bond price adjustments during the period surrounding a rating change the joint hypothesis tested is that municipal bond rating changes convey information to investors which is relevant for assessing equilibrium values of the securities and that the municipal bond market is efficient so that valuation changes occur simultaneously with rating changes the following section examines the institutional setting of the municipal bond market in order to specify why information content of bond rating changes might be anticipated remaining sections of the paper describe sample selection derivation of test data findings and discussion

monetary shocks equity returns and volatility a firm level panel data analysis abstractthis article studies the impact of monetary policy shocks on equity returns and their volatility among nine industries and their affiliated firms in the united states we use an extension of the traditional capm as the analytical framework and approximate policy shocks with the unexpected component of the federal funds rate data on the characteristics of firms and industries are obtained from compustat and the center for research in security prices covering a sample period from 1987 to 2009 our results clearly show that responses to policy shocks vary by industry and across firms furthermore credit availability matters in certain industries and small financially constrained and bank dependent firms are found to be more vulnerable to unexpected federal funds rate shocks

the simple macroeconomics of profit sharing this paper is in the spirit of the temporary equilibrium approach to macroeconomics it basically extends that framework to cover a profit sharing system and then compares the macroeconomic characteristics with those of the more familiar wage system a first preliminary step is to demonstrate how a microeconomic model of monopolistic competition can be built up into a junior member of the keynesian macro family the methodology is to create from first principles including a careful formulation of a monopolistically competitive product market structurea natural underpinning for the standard aggregate demand specification the primary goal of the paper is to apply the integrated monopolistic competitionkeynesian type apparatus described above to investigate the macroeconomic properties of a profit sharing economy the existence of a consistent general framework covering both cases invites meaningful comparisons that indicate clearly why an economy based on profit sharing principles possesses natural immunity to stagflation by contrast the wage economya system we have largely accepted without critically examining its macroeconomic consequences is more prone to suffer from unemployment and inflation the policy implications for aggregate demand management in wage and share systems are analyzed and contrasted in writing this paper my philosophy has been to not shirk from using those reasonable parameterizations and functional forms which yield nice crisp results and permit me to focus sharply on the essential logic of basic issues it is certainly possible to present the main results in a somewhat more general formulation as the astute reader will appreciate but i fear only at some cost of distracting attention from those central features i wish to highlight

cross listed bonds information asymmetry and conservatism in credit ratings we propose information asymmetry as an additional explanation for rating conservatism because information asymmetry is likely higher for cross listed bonds than for u s bonds we expect and find that cross listed bonds are rated more conservatively than u s domestic bonds at issuance further cross listed bonds receive less frequent upgrades and take longer to be upgraded after issuance because lower ratings might also reflect higher default risk based on agencies private information we conduct additional tests to discriminate between the rating conservatism and private information explanations the results are consistent with ratings conservatism and inconsistent with the private information explanation

conflict of interest and the credibility of underwriter analyst recommendations brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently taken public we show that stocks that underwriter analysts recommend perform more poorly than buy recommendations by unaffiliated brokers prior to at the time of and subsequent to the recommendation date we conclude that the recommendations by underwriter analysts show significant evidence of bias we show also that the market does not recognize the full extent of this bias the results suggest a potential conflict of interest inherent in the different functions that investment bankers perform

rationality and analysts forecast bias this paper proposes and tests a quadratic loos utility function for modeling corporate earnings forecasting where financial analysts trade off bias to improve management access and forecast accuracy optimal forecasts with minimum expected error are optimistically biased and exhibit predictable cross sectional variation related to analyst and company characteristics empirical evidence from individual analyst forecasts is consistent with the model s predictions these results suggest that positive and predictable bias may be a rational property of optimal earnings forecasts prior studies using classical notions of unbiasedness may have prematurely dismissed analysts forecasts as being irrational or inaccurate

are credit ratings procyclical abstract this paper studies the influence of the state of the business cycle on credit ratings in particular we assess whether rating agencies are excessively procyclical in their assignment of ratings our analysis is based on a model of ratings determination that takes into account factors that measure the business and financial risks of firms in addition to indicators of macroeconomic conditions utilizing annual data on all us firms rated by standard poor s we find that ratings do not generally exhibit excess sensitivity to the business cycle in addition we document that previously reported findings of a secular tightening of ratings standards are not robust to a more complete accounting of systematic changes to measures of risk

debt maturity and asymmetric information evidence from default risk changes asymmetric information models suggest that a borrower s choice of debt maturity depends on its private information about its default probabilities that is borrowers with favorable information prefer short term debt while those with unfavorable information prefer long term debt we test this implication by tracing the evolution of debt issuers default risk following debt issuances we find that short term debt issuance leads to a decline inborrowers asset volatility and an increase in their distance to default the opposite is true for long term debt issues the results suggest that borrowers private information about their default risk is an important determinant of their debt maturity choices

optimal retirement with unemployment risks abstract this paper investigates the optimal retirement of an individual in the presence of involuntary unemployment risks and borrowing constraints in a complete market with frictions we use an intensity model and loading factors to illustrate the involuntary unemployment risks and frictions in unemployment insurance markets using reasonably calibrated parameters we observe that high involuntary unemployment intensity and loading factors could be important explanations for the empirical findings emphasized in recent studies we also find that an individual with high leisure demand after retirement reduces consumption during retirement and increases stockholdings as retirement time approaches

have rating agencies become more conservative implications for capital structure and debt pricing rating agencies have become more conservative in assigning corporate credit ratings over the period 1985 to 2009 holding firm characteristics constant average ratings have dropped by three notches this change does not appear to be fully warranted because defaults have declined over this period firms affected more by conservatism issue less debt have lower leverage hold more cash are less likely to obtain a debt rating and experience lower growth their debt spreads are lower than those of unaffected firms with the same rating which implies that the market partly undoes the impact of conservatism on debt prices this evidence suggests that firms and capital markets do not perceive the increase in conservatism to be fully warranted

the productivity effects of employee stock ownership plans and bonuses evidence from japanese panel data the authors report the first results for japanese firms on the effects of employee stock ownership plans esops and bonuses by estimating production functions using new panel data they find that the introduction of an esop will lead to a 4 5 percent increase in productivity this productivity payoff takes three to four years there is a modest productivity gain from the bonus system the authors also find evidence that the productivity effect of bonuses is enhanced by the existence of esops suggesting that esops may create a climate conducive to profit sharing by enhancing long term commitment and peer monitoring copyright 1995 by american economic association

the effects of workers participation on enterprise performance empirical evidence from french cooperatives abstract the results of estimating production functions augmented by various measures of workers participation on a large enterprise level data set of french cooperatives are reported value added is found to be an increasing function of participation in profits in collective membership and in ownership even when a wide assortment of enterprise specific and environmental factors are taken into account this finding is very robust surviving tests between alternative specifications of technology for reverse causality for simultaneous equation bias and for multicollinearity the typical productivity effect from participation however is small around 5 of output the results suggest that western policymakers should investigate ways to increase workers participation in capital stakes and profit shares

does rating analyst subjectivity affect corporate debt pricing we find evidence of systematic optimism and pessimism among credit analysts comparing contemporaneous ratings of the same firm across rating agencies these differences in perspectives carry through to debt prices and negatively predict future changes in credit spreads consistent with mispricing moreover the pricing effects are the largest among firms that are the most opaque likely exacerbating financing constraints we find that masters of business administration mbas provide higher quality ratings however optimism increases and accuracy decreases with tenure covering the firm our analysis demonstrates the role analysts play in shaping investor expectations and its effect on corporate debt markets

inefficiency in analysts earnings forecasts systematic misreaction or systematic optimism a rational analysis of analyst behavior predicts that analysts immediately and without bias incorporate information into their forecasts several studies document analysts tendency to systematically underreact to information underreaction is inconsistent with rationality other studies indicate that analysts systematically overreact to new information or that they are systematically optimistic this study discriminates between these three hypotheses by examining the interaction between the nature of information and the type of reaction by analysts the evidence indicates that analysts underreact to negative information but overreact to positive information these results are consistent with systematic optimism in response to information the literature on financial analysts defines the phrase forecast inefficiency to mean forecasts that fail to accurately incorporate new information on a timely basis and or that are biased these forecasts have also been described as irrational or suboptimal prior studies report inefficiency in analysts forecasts finding that they are upwardly biased and inaccurately reflect available information some studies conclude from this that analysts underreact to information other studies conclude that analysts overreact if markets treat analysts forecasts as both rational and statistically optimal then inefficient forecasts could have important implications for the efficiency of pricing in securities markets in this paper we reexamine the apparent tendency of analysts to misinterpret earnings information the intent of this study is to discriminate between three hypotheses 1 that analysts systematically underreact to new earnings information 2 that analysts systematically overreact to new earnings information and 3 that analysts are systematically optimistic in their reactions for hypotheses 1 and 2 the direction of the misinterpretation i e underor overreaction is independent of the nature of the information received in contrast hypothesis 3 predicts that analysts are optimistic in interpreting

the effects of profit sharing on employment wages stock returns and productivity evidence from uk micro data this paper provides evidence based on u k firm level data that 1 the authors cannot reject the view that profit sharing firms view the total level of remuneration as the marginal cost of labor which is contrary to much of weitzman s analysis 2 there is some support for the popular view that profit sharing raises total remuneration and can therefore be inflationary and 3 the introduction of profit sharing does lead to higher productivity but this combined with the employment reducing consequences of 2 leads the authors to conclude that the net employment effect is small and uncertain copyright 1990 by royal economic society

annual bonuses employment and productivity change in taiwan s manufacturing sector abstract taiwanese manufacturing firms have traditionally made annual bonus payments to employees concentrated around the lunar new year holiday this paper uses industry data to investigate the connection between compensation volatility and the volatility and growth rate of employment we observe a significant relationship between employment and seasonally predictable compensation volatility implying that industries in which firms commit themselves to paying regular new year bonuses employ more workers more stably we also investigate the relationship between compensation profits and productivity growth we find a significant role for productivity growth in the determination of profits and for profits in the determination of bonuses however it appears that productivity growth itself is mainly determined by exogenous factors and is only slightly responsive to the bonus system