an empirical assessment of the residual income valuation model abstract this paper provides an empirical assessment of the residual income valuation model proposed in ohlson ohlson j a 1995 earnings book values and dividends in security valuation contemporary accounting research 11 661 687 we point out that existing empirical research relying on ohlson s model is similar to past research relying explicitly on the dividend discounting model we establish that the key original empirical implications of ohlson s model stem from the information dynamics that link current information to future residual income our empirical results generally support ohlson s information dynamics however we find that our empirical implementation of ohlson s model provides only minor improvements over existing attempts to implement the dividend discounting model by capitalizing short term earnings forecasts in perpetuity

integrated regressors and tests of the permanent income hypothesis abstract we use recent research on estimation and testing in the presence of unit roots to argue that hall s 1978 t and f tests of whether consumption is predicted by lagged income or by lags of consumption beyond the first are asymptotically valid a monte carlo experiment suggests that the asymptotic t and f distributions provide a good approximation to the actual finite sample distribution

a multicountry characterization of the nonstationarity of aggregate output the authors compute the scaled varlogram the variances of kth differences scaled by the variance of first differences of the log of annual per capita real aggregate output gdp or gnp as measured by 1 the long series for the united states and united kingdom 2 angus maddison s 1982 long series for twelve countries and 3 the postwar ifs data for thirty two countries simulations show that the scaled varlogram of real output is nearly always more consistent with the data being generated by parsimonious difference stationary than trend stationary univariate processes in fact the data reveal some excess nonstationarity relative to parsimonious arima models the power of the scaled varlogram to discriminate between trend stationary and difference stationary processes is somewhat greater than that of a dickey fuller type f test copyright 1990 by ohio state university press

going going gone the apparent demise of the accruals anomaly consistent with public statements made by sophisticated practitioners we document that the hedge returns to sloan s sloan r g 1996 do stock prices fully reflect information in accruals and cash flows about future earnings accounting rev 71 3 289 315 accruals anomaly appear to have decayed in u s stock markets to the point that they are on average no longer reliably positive we explore some potential reasons why this has happened our empirical analyses suggest that the anomaly s demise stems in part from an increase in the amount of capital invested by hedge funds into exploiting it as measured by hedge fund assets under management and trading volume in extreme accrual firms a decline in the size of the accrual mispricing signal as measured by the magnitude of extreme decile accruals and the relative persistence of cash flows and accruals may also play a weaker role this paper was accepted by stefan reichelstein accounting

on the aggregation of euler equations for consumption in simple overlapping generations models if consumers have finite lives the aggregate consumption growth equation is affected by entries and exits births and deaths we use two and three period overlapping generations olg models to show that entries and exits produce a relationship between aggregate con sumption growth and the interest rate that is fundamentally different from the individual euler equation for consumption if aggregate data are used to estimate an aggregate euler equation under plausible assumptions we show that the estimate of the elasticity of intertem poral substitution is downward biased and that consumption growth exhibits excess sensitivity to labour income since hall s 1978 paper the life cycle model of consumption has been exten sively tested using aggregated consumption data the assumption of an infin itely lived representative agent has been exploited to justify using national accounts data to estimate the structural parameters of the model the moment restrictions implied by the first order conditions of the representative agent intertemporal optimization problem have been used to such a purpose when the over identifying restrictions implied by the model are tested they are typ ically rejected furthermore expected consumption changes are often found to be correlated with expected income changes campbell and mankiw 1989 this indicates either a violation of the hypothesis of rational behaviour or more likely a violation of one of the many other assumptions used to make the model empirically operative surprisingly enough aggregation issues have not received much attention as an explanation of the empirical failure of the model elsewhere attanasio and weber 1993 we have shown how various aspects of aggregation ranging from the issue of nonlinearities to the impossibility of controlling for individual variables that are likely to affect marginal utility can explain the rejection of the model estimated on aggregate time series data in this paper we focus on another source of aggregation bias finite lives and the lack of complete markets if consumers are identical and infinitely lived the euler equation for con sumption aggregates trivially however in the presence of finite lives and heterogeneous consumers even though the euler equation relating periods t and t 1 holds for each set of similar consumers alive in those periods when we consider aggregate consumption we do not necessarily have an aggregate euler equation

on the internationalization of corporate boards the case of nordic firms this study investigates the internationalization of corporate boards using a sample of 346 non financial listed nordic firms during 2001 2008 given a high level of international activity these firms have surprisingly few foreign directors the picture of international expertise changes considerably however if we also count the international experience of national directors the percentage of foreign directors is related primarily to financial internationalization rather than foreign sales and thus presumably to the monitoring rather than advisory functions the international experience of the nationals covaries with foreign sales and increases with the share of foreign directors thus both sources of international expertise should be considered when analyzing board internationalization

present value tests of an intertemporal model of the current account abstract this paper first demonstrates that in a simple intertemporal open economy model the current account is equal to the expected decline of the present discounted value of net output of a country net output is defined as gross domestic product less the sum of investment plus government spending it then uses econometric methods for present value models to analyze the current account for four countries in two of these countries the model does a satisfactory job of explaining the current account

the impact of foreign board membership on firm value abstract this study examines the effect of foreign anglo american board membership on corporate performance measured in terms of firm value tobin s q using a sample of firms with headquarters in norway or sweden the study indicates a significantly higher value for firms that have outsider anglo american board member s after a variety of firm specific and corporate governance related factors have been controlled for we argue that this superior performance reflects the fact that these companies have successfully broken away from a partly segmented domestic capital market by importing an anglo american corporate governance system such an import signals a willingness on the part of the firm to expose itself to improved corporate governance and enhances its reputation in the financial market

habit formation in consumer preferences evidence from panel data this paper tests for the presence of habit formation using household data a simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time when the condition is estimated with food consumption data from the panel study on income dynamics the results yield no evidence of habit formation at the annual frequency this finding is robust to a number of changes in the specification it also holds for several proxies for nondurables and services consumption created by combining psid variables with weights estimated from consumer expenditure survey data

consumer response to tax rebates many households received income tax rebates in 2001 of 300 or 600 these rebates represented advance payments of the tax cut from the new 10 percent tax bracket based on a survey of a representative sample of households this paper finds that only 22 percent of households receiving the rebate would spent it instead they would either save it or use it to pay off debt this very low rate of spending represents a striking break with past behavior which would have suggested a much higher rate of spending the low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand this abstract was borrowed from another version of this item

resistance to change in the corporate elite female directors appointments onto nordic boards in this empirical study we investigate the variation in firms response to institutional pressure for gender balanced boards focusing specifically on the preservation of prevailing practices of director selection and its impact on the representation of women on the board of directors using 8 years of data from publicly listed nordic corporations we show societal pressure to be one of the determinants of female directorship moreover in some corporations the director selection process may work to maintain a traditional type of board in such boards demographic diversity among male members appears to be associated with a lower share of female directors although we cannot establish wether this reflects discrimination or a desire to maintain critical competencies with this paper we add to the theoretical understanding of the factors underlying female board appointments by adopting an institutional theory lens to study female board representation viewing the demands for gender balanced boards in terms of societal pressure for the de institutionalization of the prevailing norms and practices we highlight preferences for maintaining established practices as a potentially important barrier to institutional change on these grounds we conjecture on the relationship between the gender diversity of boards and other diversity dimensions we suggest that a board room gender quota if implemented is supplemented by policies to ensure the transparency of board changes in order to prevent the crowding out of other diversity dimensions

internal equity financing and the performance of multinational subsidiaries in emerging economies we examine the internal equity financing of the multinational subsidiary which retains and reinvests its own earnings internal equity financing is a type of firm specific advantage fsa along with other traditional fsas in innovation research and development brands and management skills it also reflects subsidiary level financial management decision making here we test the contributions of internal equity financing and subsidiary level financial management decision making to subsidiary performance using original survey data from british multinational subsidiaries in six emerging countries in the south east asia region our first finding is that internal equity financing acts as an fsa to improve subsidiary performance our second finding is that over 90 of financing sources including capital investment by the parent firms in the british subsidiaries come from internal funding our third finding is that subsidiary level financial management decision making has a statistically significant positive impact on subsidiary performance our findings advance the theoretical empirical and managerial analysis of subsidiary performance in emerging economies

adjustment costs durables and aggregate consumption abstract previous tests of the permanent income hypothesis pih have focused on either non durables or durables expenditures in isolation this paper studies consumer purchases of non durables and durables as the outcome of a single optimization problem it is shown that with non separability in utility the presence of adjustment costs of changing durables stocks may affect the time series properties of both components of expenditure an econometric test of the pih based on the model developed in the paper is both more efficient and less prone to bias than those in some previous studies however this test confirms earlier rejections of the pih in aggregate quarterly data

an analytical approximate solution to the problem of precautionary savings abstract this paper considers the problem of precautionary savings for an expected utility specification with finite horizon the exact solution is known for only a few cases numerical methods have limited applications because of bellman s curse of dimensionality this paper derives a simple analytical approximate solution for a general specification of the felicity function which is linear in the variance of the innovations on human wealth numerically the approximation is very accurate for realistic values of the parameters of the problem

does short selling amplify price declines or align stocks with their fundamental values critics of short selling argue that short sellers amplify price declines by targeting firms with falling prices in an unwarranted manner contrary to this viewpoint we find that increases in short interest for firms following a price decline are associated with measures of overpricing based on financial statement analysis our results extend to short selling activity following marketwide declines we also find evidence consistent with the profitability of short selling following price declines being driven by valuation based positions overall our findings suggest short sellers primarily undertake valuation based strategies following price declines and have implications for regulators limiting short selling following price declines is likely to impede efficient price discovery this paper was accepted by mary barth accounting

precautionary behavior migrant networks and household consumption decisions an empirical analysis using household panel data from rural china abstract we develop a test of precautionary behavior in the consumption decisions of rural agricultural households among surveyed households facing a median level of consumption risk 10 of savings can be attributed to a precautionary motive and this increases to 15 for households with consumption per capita below the poverty line we next use distant lags of local rainfall shocks uncorrelated with current consumption growth to identify the size of migrant networks outside the village and then present evidence that both poor and nonpoor households engage in less precautionary saving as the size of the village migrant network increases

bread and peace voting in u s presidential elections a simple bread and peace model shows that aggregate votes forpresident in postwar elections were determined entirely byweighted average growth of real disposable personal income percapita during the incumbent party s term and the cumulativenumbers of american military personnel killed in action as aresult of u s intervention in the korean and vietnamese civilwars the model is subjected to robustness tests against twenty two variations in functional form inspired by the extensiveliterature on presidential voting not one of these variationsadds value to the bread and peace model or significantly perturbsits coefficients

the family as an incomplete annuities market families can self insure against uncertain dates of death through implicit or explicit agreements with respect to consumption and interfamily transfers interfamily transfers need have nothing to do with altruistic feelings they may simply reflect risk sharing behavior of completely selfish family members although family annuity markets are incomplete even small families can substitute by more than 70 percent for perfect market annuities given adverse selection and transaction costs family risk pooling may be preferred to public market annuities in the absence of public annuities these risk sharing arrangements provide powerful incentives for marriage and family formation

aggregate stochastic implications of the life cycle hypothesis this paper sets forth some key aggregate stochastic implications of the modigliani brumberg 1980 life cycle hypothesis and explores the extent to which a properly aggregated life cycle model can help to explain the first and second moment properties of changes in per capita consumption the principal finding of the paper which to my knowledge is new is that smooth per capita consumption in the presence of permanent shocks to per capital labor income is exactly the outcome one should expect from a properly aggregated life cycle model in which saving for retirement as well as for consumption smoothing is a motive for asset accumulation

life cycle consumption under social interactions abstract in this paper we examine how social interactions affect consumption decisions at various levels of aggregation in a life cycle economy made up of peer groups for this purpose we consider two analytically solvable life cycle models one under certainty equivalent behavior and one under prudence and explicitly allow for three different forms of social interactions in peer groups namely conformism altruism and jealousy we show that whether social interactions have any effects on individuals optimal consumption decisions critically depends on intertemporal rather than static considerations this is true regardless of whether individuals preferences are time separable or exhibit habit formation and whether information within peer groups is homogeneous or disparate it implies that analyzing the effects of social interactions in static rather than intertemporal settings is likely to be misleading we also show that social interactions when coupled with either habit formation or prudence can significantly strengthen the effects of habit formation or prudence in the direction of resolving two well known puzzles in the literature on the permanent income hypothesis namely excess smoothness and excess sensitivity

ceo successor characteristics and the choice of foreign market entry mode an empirical study based on the upper echelons theory this study of 126 ceo successions and 271 foreign market entry events examines the relationships between successor ceo characteristics and choice of entry mode results indicate that ceo position tenure throughput functional background and international experience are associated with full control entry modes additionally these relationships were observed in the subgroup of high performing firms but not in the low performing subgroup

precaution and liquidity in the demand for housing we exploit cross sectional mortgage data to investigate the importance of liquidity constraints and a precautionary motive in the demand for housing households that are not liquidity constrained consume housing services essentially as the life cycle hypothesis suggests but with a significant precautionary component households that are liquidity constrained in terms of not meeting standard loan to value or payments to income constraints are similar to unconstrained households in most respects including the precautionary motive but they respond somewhat less to fluctuations in their lifetime income suggesting some influence of bank induced liquidity constraints we additionally find however that banks enforce liquidity constraints only weakly jel d91 d12 r21 i introduction the benchmark theory in the economics of consumption is the life cycle or permanent income hypothesis lcpi based on the work of modigliani and brumberg 1954 and friedman 1957 its empirical validity is sometimes questionable especially when compared against alternatives that incorporate liquidity constraints or the precautionary motive for saving see for instance deaton 1992 for a survey rejection of the lcpi may however be just a manifestation of the poor quality of consumption data at the micro level these data are typically subject to the reporting biases and omissions inherent in consumer surveys there are further difficulties in measuring a desired stream of consumption services nondurable consumption goods are a small fraction of total consumption and in the case of food essentials hardly a consumer choice variable durable consumption goods have the feature that they are lumpy and that the consumption services at any point in time are hard to measure we propose to test the lcpi at the micro level with a quite different type of data the data are obtained from the residential mortgage finance database collected by the national association of realtors they are based on actual home purchases and the associated mortgage transactions reported by realtors and thus avoid some of the reporting biases of the consumer surveys more important they allow us to accurately identify households that in principle have instantaneous access to additional liquidity by lowering the down payment for the house purchase or increasing the size of the loan further the purchase of a house provides an accurate measure of a relatively large fraction of consumption services obtained for a medium to long horizon and measured at the time of the consumption decision although our data also have some serious shortcomings they allow a look at the lcpi from an unconventional vantage point perhaps the most influential study employing the standard consumer survey in testing the lcpi at the micro level is that of hall and mishkin 1982 it examines food expenditure from the panel study of income dynamics one of their key results is that consumption tracks income more closely than would be expected under the lcpi they demonstrate that this result could be explained by assuming a group of liquidity constrained consumers consuming their income at each point in time of 20 of the total sample some of the drawbacks of this study are the use of food expenditures to represent consumption the underreporting of income and absence of proper wealth data inherent in the consumer survey and the associated inability to individually separate liquidity constrained consumers from the rest of the sample several previous studies have attempted to improve on this way of testing the lcpi by examining other data sets bernanke 1984 used data on durable consumption goods automobiles to overcome the drawbacks of using food consumption in the hall and mishkin study his results support the lcpi but are still suspect because of possible reporting biases and the lack of good wealth and savings observations

family labor supply and asset returns abstract we study how shocks to wages and asset prices affect consumption and labor supply decisions of two earner households in a life cycle framework with housing and flexible preferences we provide a micro foundation of the wealth effects on consumption and labor supply we find evidence for non separability between non durable consumption housing services and hours of work the results also highlight the importance of family labor supply in understanding how households respond to shocks to financial and housing markets

the permanent income hypothesis estimation and testing by instrumental variables the permanent income hypothesis with rational expectation is restated estimated and tested by an instrumental variables technique on the postwar u s aggregate time series data the hypothesis is accepted on a consumption series which includes service flows from consumer durables if the consumption series is the one in the national income and product accounts the hypothesis is decisively rejected an explanation is suggested to reconcile the conflicting test results

equilibrium consumption and precautionary savings in a stochastically growing economy abstract the derivation of a closed form solution for consumption based on the constant elasticity utility function in the presence of stochastic labor income has proved to be intractable this paper derives a closed form equilibrium relationship between consumption and wealth one that holds along a balanced growth path in a stochastic romer endogenous growth model by employing more general recursive preferences we can disentangle the coefficient of relative risk aversion from the intertemporal elasticity of substitution the effects of key structural parameters on equilibrium consumption and its tradeoff with leisure are analyzed a significant aspect of our analysis concerns the extent to which current risk in the economy is shared between labor and capital this plays an important role in determining the impact of risk on the economy in general and on consumption in particular formal analysis is supplemented with extensive numerical simulations

over rejections in rational expectations models abstract standard tests for rationality may not have the correct size if there is feedback from innovations to future values of the regressors it is shown that nonparametric tests reject at their nominal level and display good power in a variety of specifications of a model involving feedback

keeping it within bounds regression analysis of proportions in international business international business researchers commonly estimate proportions percentages rates or fractions so called proportional dependent variables in this paper we posit that two regression strategies are particularly pertinent to the international business field tobit and fractional regression reviewing recent international business research we find that while fractional regression is rarely used analyses from tobit regression are often incomplete or erroneously interpreted with consequences for the validity of the reported results accordingly we clarify how researchers should choose between tobit and fractional regression and interpret their results we present insights based on simple simulations and data examples with associated stata code and a decision tree for choosing between types of models for use with proportional dependent variables

understanding the determinants of managerial ownership and the link between ownership and performance comment abstract himmelberg et al j financial econom 53 1999 353 384 argue that fixed effects estimators should be used in examination of the relationship between managerial ownership and firm performance i show that managerial ownership while substantially different across firms typically changes slowly from year to year within a company with rational managers maximising long term utility small one year changes in ownership are not likely to reflect notable changes in incentives that would lead to substantive within year changes in performance by relying on within variation fixed effects estimators may not detect an effect of ownership on performance even if one exists

consumption adjustment under time varying income uncertainty we study the effect of income uncertainty on consumption in a model that includes precautionary saving in contrast to previous studies we focus on time series variation in income uncertainty our time series measure of income uncertainty is constructed from a panel of forecasts we find evidence of precautionary saving in that increases in income uncertainty are related to increases in aggregate rates of saving we also find evidence that anticipated income growth rates have less explanatory power for consumption growth rates after conditioning on income uncertainty the evidence indicates the presence of forward looking consumers who gradually adjust precautionary savings in response to changing income uncertainty

does buffer stock saving explain the smoothness and excess sensitivity of consumption one of the lasting contributions to modernday consumer theory is the idea that consumption is determined by the expected value of lifetime resources or permanent income the modern day specification of this concept is typically presented as a special case of intertemporalchoice theory where felicity functions are quadratic labor income is stochastic there are no restrictions on borrowing consumers have infinite horizons and expectations are formed rationally we refer to this model as the permanentincome hypothesis pih although the pih has considerable intuitive appeal a series of influential papers published after its inception revealed two notable discrepancies between the model s predictions and aggregate data first the model predicts that consumption growth should be more volatile than income growth if aggregate income growth has positive serial correlation as the quarterly data suggest it does yet aggregate consumption growth is in fact much smoother than aggregate income growth angus deaton 1987 john y campbell and deaton 1989 jordi gali 1991 second the pih predicts that consumption changes should be orthogonal to predictable or lagged income changes yet the coffelation between consumption growth and lagged income growth has been found to be one of the most robust features of aggregate data for example marjorie a flavin 1981 alan s blinder and deaton 1985 campbell and n gregory mankiw 1989 orazio p attanasio and guglielmo weber 1993 thus aggregate consumption growth has been described as exhibiting two puzzles it is both excessively smooth relative to current labor income growth and excessively sensitive to lagged labor income growth 2 in response to these and other empirical anomalies researchers have recently sought out modifications of the pih framework chief ludvigson federal reserve bank of new york 33 liberty street new york ny 10045 michaelides university of cyprus p o box 20537 1678 nicosia cyprus a previous version of this paper appeared under the title can we explain the consumption excesses yet aggregate consumption implications of buffer stock saving behavior for many helpful comments we thank orazio attanasio dave backus ben bernanke john y campbell christopher carroll todd clark angus deaton pierreolivier gourinchas bo honore james kahn martin lettau costas meghir christina paxson steve pischke andrew samwick christopher sims mark watson guglielmo weber michael woodford steve zeldes and two anonymous referees conference participants at the national bureau of economic research summer workshop on the aggregate implications of microeconomic consumption behavior july 1998 the tmr workshop on saving and pensions center tilburg university march 1999 and the new york area macroeconomics workshop october 1998 seminar participants at columbia university insead the new york federal reserve university college london london business school city university business school university of cyprus tel aviv university and jeffrey brown for excellent research assistance the views expressed are those of the authors and do not necessarily reflect those of the federal reserve bank of new york or the federal reserve system any errors or omissions are the responsibility of the authors 1 note that the important insight of danny quah 1990 that individuals may be better able than econometricians to distinguish short run from long run innovations to their income cannot resolve the excess smoothness puzzle laid out in campbell and deaton 1989 these authors show that in the context of the pih excess sensitivity and excess smoothness are the same phenomena in addition campbell 1987 demonstrates that superior information of the type emphasized by quah will show up in households saving behavior and using this information allows the econometrician to control for the agent s private information when predicting income since excess sensitivity is well established and controlling for saving does not eliminate it see campbell and deaton 1989 the observed smoothness of consumption cannot be explained by superior information on the part of permanent income consumers see deaton 1992 for further discussion 2 philippe bacchetta and stefan gerlach 1997 and ludvigson 1999 document another kind of excess sensitivity the correlation between consumption growth and predictable changes in consumer credit although we do not explore these findings here ludvigson finds that a bufferstock model with time varying liquidity constraints can replicate such a correlation

trends random walks and tests of the permanent income hypothesis abstract recent studies find that consumption is excessively sensitive to income these studies assume that income is stationary around a deterministic trend the data however do not reject the hypothesis that disposable personal income is a random walk with drift if income is indeed a random walk then the standard testing procedure is greatly biased toward finding excess sensitivity moreover if income follows either a more general non stationary process or a borderline stationary process this procedure is also seriously biased

permanent income in general equilibrium abstract this paper reviews recent tests of the permanent income hypothesis this literature suggests that consumption is too sensitive to current income relative to the predictions of the usual partial equilibrium model it is then argued that in general equilibrium attempts to move along a consumption possibilities frontier exhibiting diminishing returns would naturally give rise to endogenous changes in interest rates creating a link between consumption and current income a fully specified general equilibrium example is introduced which does indeed exhibit the same excess sensitivity reported in the literature for precisely this reason

are output fluctuations transitory according to the conventional view of the business cycle fluctuations in output represent temporary deviations from trend the purpose of this paper is to question this conventional view if fluctuations in output are dominated by temporary deviations from the natural rate of output then an unexpected change in output today should not substantially change one s forecast of output in say five or ten years our examination of quarterly postwar united states data leads us to be skeptical about this implication the data suggest that an unexpected change in real gnp of 1 percent should change one s forecast by over 1 percent over a long horizon

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

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

implications of intertemporal optimization for house and land prices the euler equation is used for the intertemporal allocation of durable goods in conjunction with a simple model of housing flow supply to derive implications for the relation between house and land prices data from england and wales fails a key time series test in this respect the rejection of the theory is shown to be mainly due to the specification of the housebuilding industry perfect competition makes house prices cointegrated with land prices and housebuilding costs there is also evidence that borrowing constraints impair the validity of the representative agent framework for the housing sector

short sales constraints and price discovery evidence from the hong kong market short sales practices in the hong kong stock market are unique in that only stocks on a list of designated securities can be sold short by analyzing the price effects following the addition of individual stocks to the list we find that short sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks for which wider dispersion of investor opinions exists these findings are consistent with miller s 1977 intuition and other optimism models we also document higher volatility and less positive skewness of individual stock returns when short sales are allowed the question of how short sales impact capital markets is highly controversial with short sale regulations varying widely across countries and capital markets 1 although short selling has been carried out for years in major financial markets around the world its effects on market efficiency especially on pricing efficiency remain of interest to financial researchers miller 1977 theorizes that in the presence of short sales constraints security prices tend to reflect a more optimistic valuation than the average opinion of potential investors and thus tend to be upward biased this overvaluation argument is based on two conditions 1 a security s short sales are either prohibited or costly and 2 investors have heterogeneous beliefs or information about the security s value the underlying intuition is quite straightforward pessimistic investors are forced to sit out of the market when short sales are not available and thus some negative information is not reflected in prices enabling enthusiastic buyers to bid prices above the level that average investors perceive as fair this argument has significant implications for market efficiency theories since one of the major functions of capital markets is price discovery indeed an efficient market should be a market in which prices always

permanent income liquidity and expenditure on automobiles evidence from panel data several recent papers have tested the permanent income cum rational expectations hypothesis using data on nondurable or semidurable consumption we show how this approach can be extended to the case of durables an application to panel data on automobile expenditures reveals no evidence against the permanent income hypothesis this result is unchanged in subsamples segregated by family holdings of liquid assets

a direct test of the permanent income hypothesis with an application to the u s states this paper tests the prediction of the permanent income hypothesis pih that news about future income induce a revision in consumption equal to the revision in permanent income we use time series data from 48 contiguous u s states to perform the test the empirical results provide some support for the pih across states

does the public sector obey the rational expectations permanent income hypothesis a multi country study of the time series properties of government expenditures 1989 does the public sector obey the rational expectations permanent income hypothesis a multi country study of the time series properties of government expenditures applied economics vol 21 no 9 pp 1257 1266

efficiency and the bear short sales and markets around the world we analyze cross sectional and time series information from 46 equity markets around the world to consider whether short sales restrictions affect the efficiency of the market and the distributional characteristics of returns to individual stocks and market indices we find some evidence that prices incorporate negative information faster in countries where short sales are allowed and practiced a common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic we find strong evidence that in markets where short selling is either prohibited or not practiced market returns display significantly less negative skewness

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

aggregate short interest and market valuations we examine some basic data on the evolution of aggregate short interest both during the dot com era and at other times in history total short interest moves in a countercyclical fashion for example short interest in nasdaq stocks actually declines as the nasdaq index approaches its peak moreover this decline does not seem to reflect a substitution away from outright short selling and towards put options as the ratio of put to call volume displays the same countercyclical tendency the evidence suggests that i arbitrageurs are reluctant to bet against aggregate mispricings and ii short selling does not play a particularly helpful role in stabilizing the overall stock market this abstract was borrowed from another version of this item

foreign independent directors and the quality of legal institutions foreign directors can affect firm value through their advising and monitoring functions however the demand for these directors as well as their effect on firm performance is likely to be influenced by firm and country level characteristics in a large sample of non us firms we find that foreign directors are more likely to be associated with firms that have more foreign operations and an international shareholder base and firms that are located in countries with a limited supply of potentially qualified domestic directors countries with a smaller less well educated populace and lower levels of capital market development we also find that the association between foreign directors and firm performance is more positive in countries with lower quality legal institutions and when the director comes from a country with higher quality legal institutions than the firm s host country our study highlights the importance of considering national demographic factors and levels of capital market development when modeling the supply and demand for foreign directors and also underscores the importance of institutional quality in the foreign director s home and host country when assessing the effect of that director on firm performance

stock price manipulation it is generally agreed that speculators can make profits from insider trading or from the release of false information both forms of stock price manipulation have now been made illegal in this article the authors ask whether it is possible to make profits from a different kind of manipulation in which an uninformed speculator simply buys and sells shares they show that in a rational expectations framework where all agents maximize expected utility it is possible for an uninformed manipulator to make a profit provided investors attach a positive probability to the manipulator being an informed trader article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the effect of cultural distance on entry mode choice international diversification and mne performance a meta analysis although a growing literature indicates that cultural distance that is differences between national cultures is an important determinant of organizational actions and performance both empirical and theoretical concerns abound in this study the relationships of cultural distance with entry mode choice international diversification and mne performance are examined by meta analyzing data from 66 independent samples with cumulative sample sizes ranging from 2 255 to 24 152 regression results failed to provide statistical evidence of significant relationships between cultural distance and entry mode choice international diversification and mne performance the examination of moderator effects however yielded important results we found a strong negative association between cultural distance and entry mode choice for us based mnes the cultural distance international diversification relationship was negative for high technology industries while it was positive for other industries cultural distance also had a strong positive effect on mne performance for developed country investments a similar strong positive relationship was found between cultural distance and international diversification in studies with more recent samples results of this study indicate that substantial additional research is needed before the role of cultural distance is fully understood

new evidence on asymmetric gasoline price responses in a 1997 paper borenstein cameron and gilbert bcg claim that gasoline prices rise quickly following an increase in the price of crude oil but fall slowly following a decrease this note estimates an error correction model with daily spot gasoline and crude oil price data over the period 1985 1998 and finds no evidence of asymmetry in wholesale gasoline prices the sources of the difference in results are twofold first we use the standard engle granger two step estimation procedure whereas bcg used a nonstandard estimation methodology second even using bcg s nonstandard specification the use of daily rather than weekly data yields little evidence of price asymmetry

consumption puzzles and precautionary savings abstract when marginal utility is convex agents accumulate savings as a precautionary measure against labor income eventualities this paper shows that precautionary savings can go a long way in making the excess growth excess smoothness and excess sensitivity features of consumption consistent with the stochastic processes of labor income observed in the u s at the microeconomic level

consumption of spanish households evidence from cohort data in this paper empirical evidence on elasticity of intertemporal substitution for spanish household consumption is shown several recent studies have rejected the lifecycle permanent income hypothesis using aggregate time series the rejection of the theory has often been blamed on the restrictive assumptions adopted in order to test the hypothesis this article tests the household behaviour using cohort data from the spanish encuesta continua de presupuestos familiares continuous survey of household budgets this source allows us to relax some of the most restrictive assumptions by using data with a certain degree of disaggregation evidence of consumer behaviour following the theory is found indirect evidence of liquidity constraints is also found and an alternative discount rate designed to be in better accordance with the theoretical foundations of the model is proposed

precautionary savings under liquidity constraints a decomposition this paper investigates the effects of liquidity constraints on consumption saving by separating precautionary saving caused by liquidity constraints ps2 from the conventional precautionary saving made against income uncertainty ps1 it is proved that there exists a unique level of wealth below which ps2 is strictly positive and above which liquidity constraints have no effects at all the numerical simulations show that ps2 is quantitatively important depending on age and the level of wealth some empirical findings in the literature cannot be explained by ps1 alone but are consistent with the model in which ps2 is present copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a comparison of two methods for estimating income uncertainty with an application to aggregate consumption behaviour econometric theory now provides various techiniques for estimating the variance of a variable for which only a single observation is available at each sample point this paper compares the autoregressive conditional heteroskedastic arch and linear moment lm estimated of the variance of disposable labour income as measures of income uncertainty consumer theory postulates a negative relationship between uncertainty about future income and current consumption using quarterly post world war ii data with income modelled as a random walk with drift both arch and lm estimates of the variance of income are included in a standard specification of the consumption function it is found that while noth the arch and lm estimates of income uncertainty provide essentially the same predicted reduction in consumption growth as uncertainty increases the lm estimates yield a statistically significant influence on consumption while the arch estimated do not however both uncertainty measures provide a statistically

econometric analysis of aggregation in the context of linear prediction models this paper deals with the problem of aggregation where the focus of the analysis is whether to predict aggregate variables using macro or micro equations the grunfeldgriliches prediction criterion for choosing between aggregate and disaggregate equations is generalized to allow for contemporaneous covariances between the disturbances of micro equations and the possibility of different parametric restrictions on the equations of the disaggregate model a new test is proposed of the hypothesis of perfect aggregation which tests the validity of aggregation either through coefficient equality or through the stability over time of the composition of the regressors across the micro units the tools developed in the paper are then applied to employment demand functions for the uk economy disaggregated by 40 industries firstly a set of unrestricted log linear dynamic specifications are estimated for the disaggregate equations and then linear parameter restrictions are imposed as appropriate corresponding unrestricted and restricted aggregate equations are estimated two different levels of aggregation are considered aggregation over the 23 manufacturing industries and aggregation over all 40 industries of the economy in both cases the hypothesis of perfect aggregation is firmly rejected for the manufacturing industries the prediction criterion marginally favors the aggregate equation but over all industries the disaggregated equations are strongly preferred

precautionary saving an explanation for excess sensitivity of consumption the permanent income hypothesis under certainty equivalence yields a martingale consumption process empirically this hypothesis is rejected because consumption is excessively sensitive to anticipated income one approach to account for excess sensitivity is to relax certainty equivalence by using utility functions that induce precautionary saving this article analyzes a hyperbolic absolute risk aversion utility function empirically some reasonable parameterizations of this specification allow one to match the excess sensitivity associated with the data these parameterizations also permit one to account for the excess smoothness problem excess sensitivity and excess smoothness however do not reflect the same phenomenon

an investigation of ricardian equivalence in a common trends model abstract to empirically discriminate between ricardian and non ricardian behaviour we have to use a method that distinguishes between expected and unexpected as well as permanent and transitory changes in taxes and government consumption one method that provides these distinctions between different types of changes is the common trends framework used in this paper which is a var model with cointegrating constraints in the empirical study of us data there is some support for the ricardian hypothesis but there are also some deviations from its predictions however the differences do not lend support to a keynesian view of budget deficits but rather to the view of expansionary fiscal contractions this can be motivated theoretically by uncertainty about future taxes in combination with prudent households

trends random walks and the expectations augmented phillips curve evidence from six countries two major empirical results are reported first it is shown that time series measuring real activity in major industrialized countries contain nonstationarities of the random walk type second it turns out that the estimated influence of unexpected changes in inflation and monetary growth strongly depends on the chosen approach concerning nonstationarity the popular assumption of a deterministic time trend proxying for growth generally yields the hypothesized positive coefficients the influence of nominal surprises however becomes indistinguishable from zero if the respective equations are estimated in stationary differences of real activity variables copyright 1988 by ohio state university press

manipulation and the allocational role of prices it is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources this paper identifies a limitation inherent in this role of prices it shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm s stock when this happens the informativeness of the stock price decreases and the beneficial allocational role of the financial market weakens the trader profits from this trading strategy partly because his trading distorts the firm s investment we therefore refer to this strategy as manipulation we show that trading without information is profitable only with sell orders driving a wedge between the allocational implications of buyer and seller initiated speculation and providing justification for restrictions on short sales

the u s productivity slowdown a peak through the structural break window i introduction productivity total and labor plays a prominent role in theories of economic growth business cycles and labor demand it is also widely accepted that productivity growth whatever its cause is a key determinant of the rate of increase in per capita output and living standards it is thus not surprising that the productivity slowdown in the united states and elsewhere since the early 1970s continues to be a significant source of concern to economists and policy makers according to one recent estimate the slowdown has reduced current consumption by nearly 30 1 the productivity slowdown experienced in the united states during the post war period is far from unique since many other industrialized countries have experienced a similar slowdown more important the severity of the productivity decline in the united states appears to be mild in comparison to other countries while these observations are often made to emphasize that the problem faced by the u s is far from unique or severe the concerns about competitiveness and the perceived decline in living standards in the united states have generated a rather pronounced and persistent negative reaction from the media as well as from some politicians a possible explanation for the pronounced reaction in the united states to the productivity decline may largely be due to the persistent trade deficits being experienced by the country there is a perception that the productivity slowdown will have an adverse long term effect on living standards evidence based on growth accounting methods to be reviewed later on in the paper supports the view that reduced productivity growth was the primary factor for the slowdown of output growth in the u s and a number of other countries this evidence is particularly important in that it absolves slower growth of inputs such as capital or labor as contributing factors of a slowdown in output growth however it introduces a puzzle as to what caused a slowdown in productivity since about 1973 while the causes and consequences of the productivity slowdown in the united states have been extensively analyzed the slowdown continues to remain somewhat of a puzzle specifically a wide variety of explanations have been offered for the productivity slowdown with little consensus as to a clear cut culprit moreover the productivity slowdown appears to be at odds with a number of recent models of economic growth we will have more to say about these issues later on in the paper for the time being it suffices to say that most studies appear to informally support the view that a productivity slowdown did take place during the 1970s the argument is so pervasive that the slowdown is often accepted as a stylized fact this paper has two objectives the first objective is to present empirical evidence based on post war annual data from 1947 1992 in support of the premise that the time series of the logarithmic level of the labor productivity variable in the united states hereafter labor productivity is not a difference stationary process pretesting for unit roots in productivity in order to assess its long run features is important due to the importance which the presence of a unit root can have for economic forecasting macroeconomic modeling using the cointegration framework and tests of granger causality we will present formal tests evidence that both supports and refutes the claim that the log level labor productivity is a first difference stationary process the support for the null hypothesis of a unit root process in the labor productivity variable against the alternative hypothesis of a linear trend stationary process is found when the familiar dickey fuller test is applied however a valid use of the conventional dickey fuller test requires assumptions that the regression utilized for the test is correctly specified which may not hold if the premise of a productivity slowdown is accepted

cyclical uncertainty precautionary saving and economic growth this paper studies the interaction between cyclical uncertainty precautionary saving and economic growth in a stochastic endogenous growth model the analysis provides insight into the potential connection between technological uncertainty of the sort popularized in real business cycle models and the determinants of economic growth in a stochastic version of a popular model of endogenously determined economic growth the magnitude of the link between cyclical uncertainty and growth is quantified and found to be small in terms of its effect on the growth rate but possibly large in terms of its effect on levels of macroeconomic variables moreover the welfare costs of reduced cyclical uncertainty can be substantial owing to the lower historical rate of capital accumulation induced by a decrease in precautionary saving the chief implications of the model are found to be roughly consistent with the postwar experience of several countries although the predictions of the model with regard to growth rates are too small to explain much of the variation in growth rates across time or across countries

testing for excess sensitivity in consumption a state space unobserved components approach this paper tests the joint rational expectations permanent income hypothesis using a state space unobserved components model to specify anticipated and unanticipated elements of permanent transitory and seasonal components of the income path and measure their relationships with consumption the results do not find significant excess sensitivity however a similar test that accounts for seasonality using x 11 adjusted data does thus indicating that seasonal filtering may be responsible for previous empirical rejections of the theory since the model includes consumption information in estimating the different components of income it also improves upon univariate investigations of the relative magnitudes of permanent and transitory disturbances to the income path

the permanent income hypothesis and the real interest rate some evidence from panel data abstract a test of the permanent income hypothesis in panel data is formulated taking into account both the time series and cross section variation in the rate of return the over identifying restrictions of the theory rejected

is consumption insufficiently sensitive to innovations in income deaton 1986 has noted that if income is a first order autoregressive process in first differences then a simple version of friedman s permanent income hypothesis spih implies that measured u s consumption is insufficiently sensitive to innovations in income this paper argues that this implication of the spih is a consequence of the fact that it ignores the role of the substitution effect in the consumption decision using a parametric version of the standard model of economic growth the paper shows that very small movements in interest rates are sufficient to induce an empirically plausible amount of consumption smoothing since an overall evaluation of the model s explanation for the observed smoothness of consumption requires examining its implications for other aspects of the data the paper also explores some of these

the deaton paradox in a long memory context with structural breaks this article contributes to the permanent income hypothesis pih and excess consumption smoothness debate in the context of fractional integration we show that the excess consumption smoothness result is a consequence of the quarterly data frequency commonly employed in the empirical work in fact the i 1 hypothesis is rejected for the income process with monthly data in favour of a fractional integration order lower than 1 moreover if a structural break is taken into account we observe a substantial reduction in the degree of consumption smoothness especially after the break found in 1975

from the editors endogeneity in international business research this essay builds on the exposition by thomas et al and focuses on analyzing cause and effect in international business research we attempt to explain how endogeneity problems occur and why they are so prevalent in international business research in a non technical fashion we then discuss the importance of explicitly identifying how the chosen research design best approximates a randomized controlled experiment finally we provide some guidelines on achieving this goal and emphasize the practices that seem most relevant to jibs reviewers in evaluating high quality international business research

precautionary saving in the small and in the large the theory of precautionary saving is shown to be isomorphic to the arrow pratt theory of risk aversion making possible the application of a large body of knowledge about risk aversion to precautionary saving and more generally to the theory of optimal choice under risk in particular a measure of the strength of the precautionary saving motive analogous to the arrow pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving and to give a new interpretation of the dreze modigliani substitution effect copyright 1990 by the econometric society

matchmaker matchmaker the effect of old boy networks on job match quality earnings and tenure firms often view job applicant referrals from current employees as more informative than direct applications or referrals through formal labor market intermediaries such as placement firms we argue that old boy networks reduce employers uncertainty about worker productivity using jovanovic s job matching model we show that workers hired through the old boy network should 1 earn higher initial salaries 2 experience lower subsequent wage growth on the job and 3 stay on the job longer than otherwise comparable workers hired from outside the network we find considerable support for this theory using data from the 1972 survey of natural and social scientists and engineers