tax arbitrage restrictions and financial leverage clienteles abstract this paper argues that while total short sale constraints are often introduced to rule out tax arbitrage such constraints are both unrealistic and conceptually problematic instead milder constraints are advocated which prevent tax arbitrage while still allow short positions it is demonstrated that a model with these constraints employed can support bond pricing as in the miller equilibrium although it leads to a richer set of tax clienteles

debt and taxes a multiperiod investigation abstract this paper extends the miller bond market equilibrium analysis to a multiperiod setting from the model developed we derive several predictions relating optimal financial leverage to firm characteristics and to the business cycle the analysis also reveals some interesting determinants of the market value of the tax subsidy associated with corporate debt

coordinating on lower prices pharmaceutical pricing under political pressure we investigate the effects of political activity on pharmaceutical prices focusing on the health care reform period in the early 1990s we characterize firms based on their vulnerability to future price regulation and find that the more vulnerable firms were more likely to take various actions to forestall regulation most notably coordinating on a specific percentage price increase during 1993 since moderating price increases could have averted regulation the coordination appears to be the industry s response to a collective action problem

gradual incorporation of information pharmaceutical stocks and the evolution of president clinton s health care reform abstract we examine the effect of the evolution of president clinton s health care reform proposal over january 1992 october 1993 on pharmaceutical stock prices we identify a 52 3 percent decline in market adjusted prices which we then associate with health care reform applying a new technique isotonic regression we find most of the decline occurred gradually much of the decline occurred as the clinton plan adopted strategies to contain health care costs including managed competition and implicit regulation indirect evidence suggests that the wealth lost by pharmaceutical companies may have been largely an anticipated transfer our results are relevant to understanding the likely effects of the clinton plan and more recent proposals many other policy changes are marked by gradual public revelation of information which may not be completely observable by a researcher our approach may uncover information about the anticipated effects of policies unavailable from a traditional event study

information as regulation the effect of community right to know laws on toxic emissions abstract there is growing academic and policy level interest in the use of information as quasi regulatory mechanisms such as toxic release inventory tri and green labels mandatory disclosure requirements have been touted as market based incentives that may affect firm behavior we provide new evidence on the effectiveness of disclosure requirements by examining firm behavior in response to disclosures of tri emissions we find that firms with the largest stock price decline on the day this information became public subsequently reduced emissions more than their industry peers this is consistent with the view that financial markets may provide strong incentives for firms to change their environmental behavior

rewards experience and decision costs in first price auctions consistent with a model of asymmetric risk aversion subjects in first price auctions consistently bid above the risk neutral nash prediction it has been argued that this is due to low opportunity cost of deviating from the risk neutral bid we increase opportunity cost and payoff levels by factors of 0 1 5 10 and 20 from the normal levels generating payoffs up to 250 for risk neutral subjects and observe an insignificant increase in the slope of individual bid functions the rmse of bids declines significantly this is consistent with a reward decision cost model of bidding behavior

using stock price data to measure the effects of regulation the interstate commerce act and the railroad industry this article usesjinancial data to measure the effects of the passage of the interstate commerce act of 1887 and subsequent legislative and judicial developments on firms in the railroad industry the results indicate that the interstate commerce act had a significant positive impact on railroad stock prices and that court decisions in the 1890s which severely restricted the powers of the interstate commerce commission caused negative stock price reactions thesefindings offer support for the revisionist view of regulatory history according to which the railroads welcomed regulation as a means offacilitating the enforcement of cartel like agreements

how to make a 29 increase look bigger the unit effect in option comparisons quantitative information can appear in different units e g 7 year warranty 84 month warranty this article demonstrates that attribute differences appear larger on scales with a higher number of units expressing quality information on such an expanded scale makes consumers switch to a higher quality option testifying to its practical importance expressing the energy content of snacks in kilojoules rather than kilocalories increases the choice of a healthy snack the unit effect occurs because consumers focus on the number rather than the type of units in which information is expressed numerosity effect therefore reminding consumers of alternative units in which information can be expressed eliminates the unit effect finally the unit effect moderates relative thinking consumers are more sensitive to relative attribute differences when the attribute is expressed on expanded scales the relation with anchoring and implications for temporal discounting and loyalty programs are discussed

strategic responses to regulatory threat in the credit card market abstract models of endogenous regulatory threat suggest that firms may cut prices in order to ease a threat of regulation i test the implications of these models using stock market data from an episode of regulatory threat in the credit card market the data show that the initial threat led to negative abnormal returns for a portfolio of credit card issuers consistent with the regulatory threat hypothesis price cuts announced after the threat led to abnormal returns that are significantly more positive than those following similar cuts outside the period of regulatory threat this pattern exists not only for those issuers announcing cuts but also for their rivals which suggests that the cuts reduced an industry wide threat of regulation factors that proxy for issuers exposure to and influence on the probability of regulation affect the size of these returns which provides corroborative evidence in favor of the regulatory threat hypothesis

inducing political action by workers a firm aiming to influence a governmental policy may benefit from political action by its stakeholders such as workers this article studies the behavior of such a firm showing that workers will have a greater incentive to engage in costly political activity against the governmental policy the greater their number and the higher the wage the firm may therefore profit from paying above market wages and from hiring what might appear to be an inefficiently large number of workers and because unions may overcome free rider problems of uncoordinated political effort a firm may favor unionization or be less opposed to unionization than it would otherwise be the results of this article can also explain why firms may little reduce wages in a recession and why the higher wages paid by unionized firms do not reduce survival rates of these firms

competition and pricing in the credit card market many credit card issuers charge fixed rates that remain the same for three to five years while the rest charge variable rates that are indexed to market rates the presence of these two distinct rate types forces prices at firms selling an otherwise identical product to move asynchronously variable rates move one for one with the index while fixed rates stay constant empirical and theoretical analysis shows that this pricing structure provides an explanation for the simultaneous yet seemingly contradictory existence of high rate cost margins and aggressive non price competition for new customers a phenomenon that existed in the credit card market in the early 1990s

the self regulation of commodity exchanges the case of market manipulation influential economists argue that government regulation of manipulative practices in financial markets is unnecessary because exchanges have incentives to take nearly first best precautions against the exercise of market power this article shows that the theoretical arguments underlying this proposition are weak because exchange members are likely to ignore the effects of manipulation on inframarginal traders and price informativeness competition between exchanges may be limited and collective action problems preclude efficient exchange intervention for these reasons exchanges will likely take few precautions against market power an examination of the history of self regulation at 10 exchanges prior to the passage of laws proscribing manipulation shows that they took few if any measures to curb manipulation since the characteristics of manipulation imply that it can be deterred efficiently through the use of harm based sanctions this theory and evidence strongly suggest that self regulation is a

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

the failure of competition in the credit card market the bank credit card market containing 4 000 firms and lacking regulatory barriers casually appears to be a hospitable environment for the model of perfect competition nevertheless this article reports that credit card interest rates have been exceptionally sticky relative to the cost of funds moreover major credit card issuers have persistently earned from three to five times the ordinary rate of return in banking during the periods 1983 88 the failure of the competitive model appears to be partly attributable to consumers making credit card choices without taking account of the very high probability that they will pay interest on their outstanding balances copyright 1991 by american economic association

standard errors in event studies even if true abnormal returns are uncorrelated estimated abnormal returns are not this paper presents a simple formula for the variance of estimated cumulative abnormal re turns both returns and dummy variable procedures for estimating the standard error correctly taking account of both intertemporal and contemporaneous correlation of esti mated residuals are discussed they are then applied to an event study of post merger performance it is shown that ignoring either the intertemporal or contemporaneous correlation of residuals can result in significant underestimates of standard errors

the evolution of cooperation in infinitely repeated games experimental evidence 1 for example in infinitely repeated prisoner s dilemma games with patient agents both cooperate and defect may be played in equilibrium even though the theory of infinitely repeated games has been used to explain cooperation in a variety of environments no definitive solution has been provided to the problem of equilibrium selection when both cooperation and defection are possible equilibrium outcomes which one should we expect to prevail previous experimental evidence has shown that subjects often fail to coordinate on a specific equilibrium when they play a small number of infinitely repeated games some subjects attempt to establish cooperative agreements while others defect but how would behavior evolve as subjects learn from previous repeated games would cooperation prevail when it can be supported in equilibrium or will subjects learn

how economic rewards affect cooperation reconsidered abstract recent studies suggest that payoffs in cents compared to dollars produce less defection in a repeated prisoner s dilemma game we are unable to replicate these findings with conventional economic procedures or in a direct replication

the incidence of regulatory rents in the motor carrier industry this article focuses on two questions in the debate over motor carrier regulation first did regulation create eliminate or have no effect on monopoly rents in the trucking industry second ifthere were rents what was their incidence were they received by owners oftrucking firms dissipated through higher costs or captured by the teamsters union data on share price responses to deregulation announcements reveal declines in expected profits of 8 19 of totalfirm value this suggests that regulation created monopoly profits and indicates that at least some of these rents accrued to owners of trucking firms firms responses to regulatory change are modelled as functions of company s operating characteristics and measures of unionization operating efficiency and service characteristics are shown to affect the impact of deregulation on share values

event studies in economics and finance the event study is an important research tool in economics and finance the goal of an event study is to measure the effects of an economic event on the value of firms event study methods exploit the fact that given rationality in the marketplace the effects of an event will be reflected immediately in security prices thus the impact can be measured by examining security prices surrounding the event in this paper event study methods are described including some of the potential complications an example is included to illustrate the approach