increasing dominance with no efficiency effect abstract i uncover a new force towards increasing dominance the property whereby in dynamic games the leader tends to increase his or her lead in expected terms the new effect results from the strategic choice of covariance in races i assume that players must choose not the amount of resources to spend but how to allocate those resources i show that in equilibrium the laggard chooses a less promising path in effect trading off lower expected value for lower correlation with respect to the leader this results in increasing dominance and holds true even if no joint payoff or efficiency effect is present journal of economic literature classification numbers c7 l1

equity valuation using multiples we examine the valuation performance of a comprehensive list of value drivers and find that multiples derived from forward earnings explain stock prices remarkably well pricing errors are within 15 percent of stock prices for about half our sample in terms of relative performance the following general rankings are observed consistently each year forward earnings measures are followed by historical earnings measures cash flow measures and book value of equity are tied for third and sales performs the worst curiously performance declines when we consider more complex measures of intrinsic value based on short cut residual income models contrary to the popular view that different industries have different best multiples these overall rankings are observed consistently for almost all industries examined since we require analysts earnings and growth forecasts and positive values for all measures our results may not be representative of the many firm years excluded from our sample

can falling supply explain the rising return to college for younger men a cohort based analysis although the college high school wage gap for younger u s men has doubled over the past 30 years the gap for older men has remained nearly constant in the united kingdom and canada the college high school wage gap also increased for younger relative to older men using a model with imperfect substitution between similarly educated workers in different age groups we argue that these shifts reflect changes in the relative supply of highly educated workers across age groups the driving force behind these changes is the slowdown in the rate of growth of educational attainment that began with cohorts born in the early 1950s in all three countries

combining value estimates to increase accuracy the estimates provided by discounted cash flow the method of comparables and market prices usually disagree combining two or more of these value estimates makes sense because every bona fide estimate provides information and because relying on one estimate ignores the information content of the others how then should financial analysts combine different value estimates to form a more accurate estimate than that provided by any one method drawing from bayesian decision theory the delaware block method and forecasting research this article suggests five rules of thumb for combining two or more value estimates into a superior value estimate

analysts and information gaps lessons from the ual buyout in addition to earnings forecasts and stock recommendations analysts provide potentially useful information to investors in the form of written commentary and analysis but how such fundamental research affects stock prices has been little studied i investigate the role analysts research played in the 1994 restructuring of ual corporation parent of united air lines in which employees acquired 55 percent of ual stock in exchange for 4 9 billion in wage benefit concessions focusing on the critical first two years of the buyout my analysis suggests that analysts and investors on average initially gave the company little credit for the concessions the transaction was controversial and complicated most analysts were negative or indifferent in their assessment of the deal some analysts also misinterpreted key terms of the deal ual managers responded by reporting an unconventional earnings measure that highlighted the financial concessions ual s stock price relative to the market and industry eve

the effect of immigration along the distribution of wages this paper analyses the effect immigration has on wages of native workers unlike most previous work we estimate wage effects along the distribution of wages we derive a flexible empirical strategy that does not rely on pre allocating immigrants to particular skill groups in our empirical analysis we demonstrate that immigrants downgrade considerably upon arrival as for the effects on native wages we find that immigration depresses wages below the 20th percentile of the wage distribution but leads to slight wage increases in the upper part of the wage distribution the overall wage effect of immigration is slightly positive the positive wage effects we find are although modest too large to be explained by an immigration surplus we suggest alternative explanations based on the idea that immigrants are paid less than the value of what they contribute to production generating therefore a surplus and we assess the magnitude of these effects

growth and value hybrid valuation model based on mean reversion abstractthis article proposes a novel valuation model growth and value hybrid model to estimate the stock price this proposed model combines the essence of the asset based approach the income based approach and the principle of mean reversion to develop the theoretical closed form formula consisting of three coefficients value coefficient value support coefficient and growth coefficient regression analysis is employed to fit market data to determine these coefficients moreover this study proposes the double sorting method to build the quantile regression models of the formula to estimate the stock price at a specific quantile the results show that the predictive capability of the hybrid valuation model is superior to the model without using value support coefficient which supports the assumption that the pbr is not associated with the roe when the roe is less than a threshold in different time periods of the stock market no significant difference exists on the value support coefficient howe

valuation of bankrupt firms this study compares the market value of firms that reorganize in bankruptcy with estimates of value based on management s published cash flow projections we estimate firm values using models that have been shown in other contexts to generate relatively precise estimates of value we find that these methods generally yield unbiased estimates of value but the dispersion of valuation errors is very widethe sample ratio of estimated value to market value varies from less than 20 to greater than 250 cross sectional analysis indicates that the variation in these errors is related to empirical proxies for claimholders incentives to overstate or understate the firm s value

the effect of incomplete information about demand on preemption abstract in certain circumstances a first mover need not preemptively invest in capacity to discourage entry into a new market asymmetric learning about buyer acceptance may make preemption unnecessary this paper explores the tension between competitive pressure to invest and the real option value in an entry opportunity under uncertainty about demand if an outsider s expectation about buyer valuation makes entry appear less attractive and if an incumbent can keep proprietary its updated information about demand then it may be able to secure its advantage and partially deter imitators without a substantial initial capacity investment

risk returns and values in the presence of differential taxation abstract we show that there exist separate security market lines smls for debt and equity securities in an equilibrium with differential taxation of debt and equity we characterize the conditions under which these smls have the same price of risk with different intercepts and the conditions under which the tax effect of leverage is linear in debt value as in the adjusted present value method we explore the implications of our results for cost of capital calculations how to calculate the cost of capital for debt and equity and how to unlever betas correctly accounting for differential taxation

optimal capital structure and bankruptcy choice dynamic bargaining versus liquidation abstract we model a firm s optimal capital structure decision in a framework in which it may later choose to enter either chapter 11 reorganization or chapter 7 liquidation creditors anticipate equityholders ex post reorganization incentives and price them into the ex ante credit spreads using a realistic dynamic bargaining model of reorganization we show that the off equilibrium threat of costly renegotiation can lead to lower leverage even with liquidation in equilibrium if reorganization is less efficient than liquidation the added option of reorganization can actually make equityholders worse off ex ante even when they liquidate on the equilibrium path

valuing and pricing ipos abstract this paper investigates how underwriters set the ipo firm s fair value an ex ante estimate of the market value using a unique dataset of 228 reports from french underwriters these reports are issued before the ipo shares start trading on the stock market and detail how underwriters determined fair value we document that underwriters often employ multiples valuation dividend discount models and discounted cash flow dcf analysis to determine fair value but that all of these valuation methods suffer from a positive bias with respect to equilibrium market value we also analyze how this fair value estimate is subsequently used as a basis for ipo pricing we report that underwriters deliberately discount the fair value estimate when setting the preliminary offer price part of the intentional price discount can be recovered by higher price updates we find that controlling for other factors such as investor demand part of underpricing stems from this intentional price discount

the equity performance of firms emerging from bankruptcy this study assesses the stock return performance of 131 firms emerging from chapter 11 using differing estimates of expected returns we consistently find evidence of large positive excess returns in 200 days of returns following emergence we also examine the reaction of our sample firms equity returns to their earnings announcements after emergence from chapter 11 the positive and significant reactions suggest that our results are driven by the market s expectational errors not mismeasurement of risk the results provide an interesting contrast but not a contradiction to previous work that has documented poor operating performance for firms emerging from chapter 11 with large corporate bankruptcies being commonplace during the late 1980s and early 1990s there has been a notable increase in the number of firms emerging from bankruptcy altman 1991 1993 when firms emerge from bankruptcy they often cancel the old stock and distribute an entirely new issue of common stock the stocks of firms emerging from a chapter 11 bankruptcy are often called orphan equities among practitioners and there have been reports in the popular press about spectacular returns in this market for example as sandler 1991 p cl states

conflicts in bankruptcy and the sequence of debt issues this paper investigates the optimal sequencing of debt issues our theoretical model suggests that once firms issue debt with one level of seniority they may have an incentive to alternate seniorities because of violations of the priced absolute priority rule apr when we introduce explicit costs of class conflict the model yields cases of alternating seniorities and other cases in which firms issue only one class of debt the implications of the model are consistent with the observed regularities in a large database of debt issues we test several other implications of our model as well

endogenous asset ownership structures in deregulated markets abstract this paper determines the equilibrium ownership structure in an emerging market deregulated by a joint privatization and investment liberalization it is shown that bidding competition in the privatization stage is not sufficient for reaching an efficient equilibrium market structure competition in the ensuing entry stage is also required otherwise one firm can induce another to take the role of the weak firm in the subsequent product market competition by making concessions in the bidding in the privatization auction it is also shown that employment guarantees may help the buyer of the privatized firm abstain from investing and thus create a less competitive market structure

competition for scarce resources we model a downstream industry where firms compete to buy capacity in an upstream market which allocates capacity efficiently although downstream firms have symmetric production technologies we show that industry structure is symmetric only if capacity is sufficiently scarce otherwise it is asymmetric with one large fat capacity hoarding firm and a fringe of smaller lean capacity constrained firms as demand varies the industry switches between symmetric and asymmetric phases generating predictions for firm size and costs across the business cycle surprisingly increasing available capacity can cause a reduction in output and consumer surplus by resulting in such a switch

how do mergers create value a comparison of taxes market power and efficiency improvements as explanations for synergies there is little evidence in the literature on the relative importance of the underlying sources of merger gains prior literature suggests that synergies could arise due to taxes market power or efficiency improvements based on value line forecasts we estimate the average synergy gains in a broad sample of 264 large mergers to be 10 03 of the combined equity value of the merging firms the detailed data in value line projections allow for the decomposition of these gains into underlying operating and financial synergies we estimate that tax savings contribute only 1 64 in additional value while operating synergies account for the remaining 8 38 operating synergies are higher in focused mergers while tax savings constitute a large fraction of the gains in diversifying mergers the operating synergies are generated primarily by cutbacks in investment expenditures rather than by increased operating profits overall the evidence suggests that mergers generate gains by improving resource allocation rather than by reducing tax payments or increasing the market power of the combined firm

price competition in a capacity constrained duopoly abstract this paper characterizes the set of nash equilibria in a model of price setting duopoly in which each firm has limited capacity and demand is continuous and decreasing in general there is a unique equilibrium so that comparative static exercises are meaningful the properties of the equilibrium conform with a number of stylized facts the equilibrium prices are lower the smaller is demand relative to capacity when demand is in an intermediate range the firms use mixed strategies they randomly hold sales if capacities are chosen simultaneously before prices the set of equilibrium capacities coincides with the set of cournot quantities

hedging and vertical integration in electricity markets this paper analyzes the interactions between competitive wholesale spot retail and forward markets and vertical integration in electricity markets we develop an equilibrium model with producers retailers and traders to study and quantify the impact of forward markets and vertical integration on prices risk premia and retail market shares we point out that forward hedging and vertical integration are two separate mechanisms for demand and spot price risk diversification that both reduce the retail price and increase retail market shares we show that they differ in their impact on prices and firms utility because of the asymmetry between production and retail segments vertical integration restores the symmetry between producers and retailers exposure to demand risk whereas linear forward contracts do not vertical integration is superior to forward hedging when retailers are highly risk averse we illustrate our analysis with data from the french electricity market this paper was accepted by wei xiong finance

the relation between price and marginal cost in u s industry an examination of data on output and labor input reveals that some u s industries have marginal cost well below price the conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output in booms firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs the paper documents the disparity between price and marginal cost where marginal cost is estimated from annual variations in cost it considers a variety of explanations of the findings that are consistent with competition but none is found to be completely plausible

the failing firm defense this paper evaluates the welfare consequences of the failing firm defense ffd in the eu and u s merger laws to this end i combine an oligopoly model with an endogenous valuations auction model the ffd is shown to work reasonably well for consumers unless small firms are too small the ffd may however lead to total surplus losses due to a least danger to competition ldc condition which favors small and thus possibly inefficient firms it is also shown that in a multi firm setting the ffd increases the incentive for predation only when the assets are industry specific

optimal priority structure capital structure and investment we study the interaction between financing and investment decisions in a dynamic model where the firm has multiple debt issues and equityholders choose the timing of investment jointly optimal capital and priority structures can virtually eliminate investment distortions because debt priority serves as a dynamically optimal contract examining the relative efficiency of priority rules observed in practice we develop several predictions about how firms adjust their priority structure in response to changes in leverage credit conditions and firm fundamentals notably financially unconstrained firms with few growth opportunities prefer senior debt while financially constrained firms with or without growth opportunities prefer junior debt moreover lower rated firms are predicted to spread priority across debt classes finally our analysis has a number of important implications for empirical capital structure research including the relations between market leverage book leverage and credit spreads and tobin s q the influence of firm fundamentals on the agency cost of debt and the conservative debt policy puzzle the author 2011 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

the value of creditor control in corporate bonds this paper introduces a measure that captures the premium in bond prices that is due to the value of creditor control we estimate the premium as the difference in the bond price and an equivalent synthetic bond without control rights that is constructed using credit default swap cds contracts we find empirically that this premium increases as firm credit quality decreases and around important credit events such as defaults bankruptcies and covenant violations the increase is greatest for bonds most pivotal to changes in control changes in bond and cds liquidity do not appear to drive increases in the premium

ceo compensation in financially distressed firms an empirical analysis this paper studies senior management compensation policy in 77 publicly traded firms that filed for bankruptcy or privately restructured their debt during 1981 to 1987 almost one third of all ceos are replaced and those who keep their jobs often experience large salary and bonus reductions newly appointed ceos with ties to previous management are typically paid 35 less than the ceos they replace in contrast outside replacement ceos are typically paid 36 more than their predecessors and are often compensated with stock options on average ceo wealth is significantly related to shareholder wealth after firms renegotiate their debt contracts however managers compensation is sometimes explicitly tied to the value of creditors claims

tradable emission rights and strategic interaction the use of tradable emission rights as environmental policy instruments may affect the conditions for strategic interaction between regulated firms and thus have implications for competition policy this paper presents an analysis of how and under what conditions emission rights can be used strategically by oligopolistic firms for predatory and exclusionary purposes

immigrant native wage gaps in time series complementarities or composition effects previous research has shown that immigrants wages decrease when the supply of immigrants increases this negative correlation has been interpreted as evidence of immigrant native complementarities in production the present study finds that it is instead due to changing immigrant composition

collusion versus differential efficiency testing alternative hypotheses the predictions of collusion and efficiency based static equilibrium explanations of interindustry profitability differences are formally developed and tested using appropriate econometric techniques with intraindustry data on seventy u s internal revenue service minor manufacturing industries in 1963 and 1972 none of the explanations has much explanatory power the 1963 data are consistent with collusion based models while the 1972 data are inconsistent with all non null hypotheses considered patterns of profitability are sharply different in the two years in complex ways apparently unrelated to cyclical forces or the phase ii price controls implications of these results are discussed copyright 1987 by blackwell publishing ltd

the snowball effect abstract many economists think that dominant positions unprotected by strategic or operating advantages will tend to decay i demonstrate that that intuition is flawed by devising a model of noncooperative duopoly in which the initially larger competitor monopolizes all investment opportunities even though it is no more efficient than its smaller rival as part of an effort to push up output prices i also present an apparent example of this mechanism at work and discuss the implications for public policy

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

lock in effects in relationship lending evidence from dip loans do prior lending relationships result in pass through savings lower interest rates for borrowers or do they lock in higher costs for borrowers theoretical models suggest that when borrowers experience greater information asymmetry higher switching costs and limited access to capital markets they become locked into higher costs from their existing lenders firms in chapter 11 seeking debtor in possession dip financing often fit this profile we investigate the presence of lock in effects using a sample of 348 dip loans we account for endogeneity using the instrument variable iv approach and the heckman selection model and find consistent evidence that prior lending relationship is associated with higher interest costs and the effect is more severe for stronger existing relationships our study provides direct evidence that prior lending relationships do create a lock in effect under certain circumstances such as dip financing

do firms undertake self tender offers to optimize capital structure this study investigates capital structure around 286 self tender offers from 1980 to 1997 firms that undertake self tender offers generally have debt ratios below their predicted levels before the offers the debt ratios following nondefensive self tender offers are close to predicted levels while the ratios following defensive self tender offers are above predicted levels further 20 and 43 of the debt ratings are downgraded following nondefensive and defensive self tender offers respectively finally the increases in debt ratios around the offers are negatively related to the difference from the predicted debt ratio before the offers

comparable firms and the precision of equity valuations abstract i investigate the relationship between the amount of information provided by a firm s comparables i e firms in the same line of business as the firm being valued and the precision of the firm s equity valuation when investors have more information previous studies argue that investors can make a more precise estimate of a firm s true equity value and this implies a lower excess stock return volatility around corporate events such as earnings announcements i develop a simple model that shows a negative relationship between the amount of information provided by a firm s comparables and the firm s stock return volatility using alternative measures of information provided by comparables and different definitions of comparables i consistently find a negative and significant relationship between these information measures and stock return volatility ceteris paribus