investor preference for large firms new evidence on economies of size in the last several decades industrial organization literature has been replete with studies demonstrating a systematic relationship between accounting rates of return and firm size in the direction of greater and more stable accounting profits for larger firms these studies have been subject to criticism for an alarming number of statistical and conceptual problems the most important of which alleges a serious bias in accounting profit measures as proxies for economic profit 2 the criticisms have resulted in a stalemate in the interpretation of empirical evidence on firm size and performance nevertheless there is continued interest in the area ostensibly resulting from policy concerns with large firm advantages in both product and capital markets this paper provides new evidence concerning the industrial organization literature controversy of the connection between firm size and performance stock market data are used to examine the relationship between capital market returns risk and firm size the findings suggest that even if there were no advantages of large size in the product market equal rates of operating profit large firms would still have a substantial capital raising advantage over small firms this advantage is unrelated to the widely recognized floatation cost economies even after controlling for nondiversifiable risk using the capital asset pricing model capm investors still demonstrate a statistically significant and economically important preference for the securities of larger firms investors apparently place a premium on large firms which is not attributable to large firms observed lower risk as captured by the widely used measure of nondiversifiable risk beta risk this finding a fresh contribution to the

rankings methodology for international comparisons of institutions and individuals an application to economics in australia and new zealand abstract the objectives of this paper are threefold first we critically survey and analyse the different methodologies that have been adopted in the rankings literature second using journal articles included in the econlit database and on the basis of two criteria one based on citations and the other on perceptions of journal quality we rank economics teaching departments in australia and new zealand for 1988 2002 and 1996 2002 and for individual academic economists for the periods 1988 2002 1988 1995 and 1996 2002 furthermore we identify individual star performers and recognize them in a designated hall of fame for 1988 2002 third our methodology enables us to make international comparisons on total and per capita bases previous multi country ranking studies in economics do not rank economics departments they provide rankings based on total publications in economics in universities regardless of whether the economists are in the economics departments or in other departments thus no rankings on per capita bases are provided we correct this shortcoming by providing total and per capita rankings and analysing the correlations between total and per capita rankings this is the first study to examine whether the size of the economics department matters with regard to productivity

valuing option existence and bequest demands for wilderness to assess the relative importance of current costs and future benefits of nuclear waste storage we develop a simple model of bequest value the basic model of nonparternalistic altruism is extended to account for the uncertain nature of the externality

endogenous growth and the emergence of equity finance abstract this paper characterises the development of equity markets as a dynamic process that both influences and is influenced by the development of the real sector of the economy in overlapping generations economy borrowers seek funds to run risky investment projects by drawing up contracts which may take the form of either equity or debt issue in the presence of information asymmetry between borrowers and lenders the optimal contract is determined by trading off information dilution costs against bankruptcy costs significantly the equilibrium choice of contract depends on the state of the economy which in turn depends on the contracting regime based on this analysis the paper provides a theory of the joint determination of real and financial development with the ability to explain the emergence of a stock market along the path of real development

institutional determinants of capital structure adjustment speeds abstract many authors relate a firm s performance to legal and political features and the regulatory environment in which it operates this article compares firms capital structure adjustments across countries and investigates whether institutional differences help explain the variance in estimated adjustment speeds we find that legal and financial traditions significantly correlate with firm adjustment speeds more narrowly institutional features also relate to adjustment speeds consistent with the hypothesis that better institutions lower the transaction costs associated with adjusting a firm s leverage such associations between institutional arrangements and leverage adjustment speeds are consistent with the dynamic trade off theory of capital structure choice

does anticipated information impose a cost on risk averse investors a test of the hirshleifer effect this paper theoretically and empirically investigates how the risk of future adverse price changes created by the anticipated arrival of information influences risk averse investors trading decisions in institutionally imperfect capital markets specifically i examine how the selling activity of individual investors immediately following an earnings announcement is influenced by the tradeoff between risk sharing benefits of immediate trade and explicit transaction costs imposed on such trades consistent with my theoretically derived predictions i find that investors current trading decisions are less sensitive to the incremental transaction costs created by short term capital gains taxes on trading profits as both the duration and intensity of the risk of future adverse price changes increase this evidence is consistent with an incremental cost to investors that results from the revelation of precise information which is commonly referred to as the hirshleifer effect

behavioral rationality in finance the case of dividends as the title suggests this paper attempts to get to the specifics of the behavioral rationality theme of this conference by focusing on an area in the main core of finance namely the demand and supply of dividends where by common consent the essentially rationalist paradigm of the field seems to be limping most noticeably important and pervasive behavior patterns on both the paying and the receiving ends have despairingly been written off as puzzles even by theorists as redoubtable as fischer black see esp his much cited 1976 article behaviorists have homed in on precisely these same dividendrelated soft spots in the current body of theory see esp shefrin and statman 1984 we seem to have in sum an ideal place to look for signs of an imminent paradigm shift in the behavioral direction of precisely the kind envisioned by some of the other contributors to this conference the dividend related difficulties and supposed anomalies at issue here are more than just the parochial concern of finance specialists the dividends seem a natural area in finance where the introduction of behavioral cognitive elements might help resolve long standing anomalies particularly the seeming failure of supply to adjust to taxinduced price penalties a closer look at the empirical record however particularly at evidence of responsiveness to major structural changes shows behavior of the aggregates to be less anomalous than conventional handwringing might suggest behavioral cognitive elements whatever they might contribute to the description of particular microdecisions do not appear to be essential adjuncts to the basic finance model in the major comparative static applications for which it was intended helpful comments on an earlier version of this paper have been received from nai fu chen jean marie gagnon gur huberman kose john james poterba and especially melvin reder

what determines mutual fund trading in foreign stocks abstract we examine the portfolio rebalancing measured by the equity churn rate of mutual funds from 29 countries based on annual stockholdings over the 1999 2006 period we find that funds more often trade the stocks of companies located in countries with higher degree of information asymmetry and are less familiar to fund managers after we control for the effects of stock market development and investor protection consistent with the behavioral bias fund managers more often rebalance stocks in foreign markets that perform well this bias is exacerbated when fund managers are less familiar with and less informed about those markets

evaluating the productive performance of uk universities as cost constrained revenue maximizers an empirical analysis the study presents an empirical analysis of the relative revenue efficiency of uk universities in providing teaching and research with government policies pressurizing the largely public funded universities to secure efficiency in both input usage and output revenue university producers are modelled as cost constrained revenue maximizers taking explicit account of the quality of research output the methodology uses linear programming techniques to construct nonparametric cost indirect production frontiers and to compute revenue efficiency relative to these frontiers revenue efficiency is then decomposed into its output allocative and technical components further analysis investigates the sources of allocative and technical inefficiencies

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

forest conservation in costa rica when nonuse benefits are uncertain but rising stochastic dynamic programming is used to investigate optimal holding of primary tropical forest in humid costa rica when future nonuse benefits of forest conservation are uncertain and increasing the quasi option value of maintaining primary forests is included as a component of investment in natural capital although the impact of uncertainty on conservation incentives is substantial our results indicate that a rising trend in future benefits and compensation by the international community for beneficial spillovers are more important factors in determining optimal holdings of forest stocks without compensatory payments however further deforestation may be warranted

on estimating the option value of preserving a wilderness area in this paper option pricing theory is used to analyse whether or not to preserve a wilderness area a numerical approach is demonstrated that can be applied to any generalized stochastic process the impact of assuming that amenity value follows a logistic process rather than geometric brownian motion is considered the calculation of critical levels for amenity value necessary to justify preserving a wilderness area such as the killarney provincial park in ontario or the headwaters forest in california is demonstrated the impact of changing the assumed growth and volatility of amenity value is also examined jel classifcation d81 q26 ce memoire utilise la theorie de la tarification d une option pour analyser si on doit preserver un espace naturel on utilise une approche numerique qui peut etre appliquee a tout processus stochastique generalise on examine l impact de possibilites que le profil de la valeur de la ressource dans la temps suive un processus logistique plutot qu un pattern geometrique de type brownien le texte montre le calcul des niveaux critiques de la valeur de la ressource qui seraient necessaires pour justifier la preservation d une espace naturel comme le parc provincial killarney en ontario ou les forets headwaters en californie l impact de postulats differents quant a la croissance et a la volatilite de la valeur de la ressource est examine

the earnings announcement premium around the globe abstract u s stocks have been shown to earn higher returns during earnings announcement months than during non announcement months we document that this earnings announcement premium exists across the globe moreover it is not isolated to a few countries of the 20 countries with enough data to conduct a within country analysis nine exhibit a significantly positive premium a cross country analysis finds that the premium is strongest in countries with the greatest increase in idiosyncratic volatility around the time of their firms earnings announcements suggesting that uncertainty over the earnings information to be disclosed is a primary driver of the global announcement premium

continuous time methods in finance a review and an assessment i survey and assess the development of continuous time methods in finance during the last 30 years the subperiod 1969 to 1980 saw a dizzying pace of development with seminal ideas in derivatives securities pricing term structure theory asset pricing and optimal consumption and portfolio choices during the period 1981 to 1999 the theory has been extended and modified to better explain empirical regularities in various subfields of finance this latter subperiod has seen significant progress in econometric theory computational and estimation methods to test and implement continuous time models capital market frictions and bargaining issues are being increasingly incorporated in continuous time theory the roots of modern continuous time methods in finance can be traced back to the seminal contributions of merton 1969 1971 1973b in the late 1960s and early 1970s merton 1969 pioneered the use of continuous time modeling in financial economics by formulating the intertemporal consumption and portfolio choice problem of an investor in a stochastic dynamic programming setting merton 1973b also showed how such a framework can be used to develop equilibrium asset pricing implications thereby significantly extending the asset pricing theory to richer dynamic settings and expanding the scope of applications of continuous time methods to study problems in financial economics 1 within a span of about 30 years from the publication of merton s inf luential papers continuous time methods have become an integral part of financial economics indeed in certain core areas in finance such as e g asset pricing derivatives valuation term structure theory and portfolio selection continuoustime methods have proved to be the most attractive way to conduct research and gain economic intuition the continuous time approach in these areas has produced models with a rich variety of testable implications the econometric theory for testing continuous time models has made rapid strides in the last decade and has thus kept pace with the impressive progress on the theoretical front one hopes that the actual empirical investigations and estimation using the new procedures will follow suit soon

estimating social welfare using count data models an application to long run recreation demand under conditions of endogenous stratification and truncation this paper develops a negative binomial model of recreation demand that corrects for both truncation and endogenous stratification this approach recovers the demand associated with the general population not just the users of the site this model demonstrates the importance of the joint nature of the population s latent demand for trips and the consumer surplus associated with those trips the empirical results provide an estimate of the willingness to pay by washington state residents for hiking opportunities in the cascade mountain range these results are used to forecast total trips and willingness to pay over the next forty years copyright 1995 by mit press

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

stress testing the equity home bias a turnover analysis of eurozone markets abstract shifts in equity turnover happen on and around holidays because rationally bounded investors become distracted their pattern reveals a persistent equity home bias even in the eurozone a stress test case for the survival of this bias given the high level of economic and financial development and integration in this area the bias is greater for small caps because investors are reluctant to hold this class of foreign asset our study corroborates calendar anomalies in trading volumes but refutes the hypothesis regarding turnover sensitivity to stock returns common in the empirical and theoretical literature based on investor heterogeneity and short sale constraints our results reveal vanishing cost asymmetries in taking long rather than short positions

do domestic and foreign fund managers have similar preferences for stock characteristics a cross country analysis using a new unique data set on mutual fund stockholdings we identify several interesting similarities and differences in the stock preferences of domestic and foreign fund managers from 11 developed countries results show that both groups of managers prefer stocks with high return on equity large turnover and low return variability and that they also exhibit differential investment behavior domestic managers also favor firms that pay large dividends have low financial distress and high growth potential whereas foreign managers prefer to invest in corporations that are globally well known the demand for globally visible stocks by foreign managers is especially strong when their fund mandate is to diversify globally or across regions and is weakened when their stock holdings are concentrated mainly in a specific local market the results also show no difference in the stock preferences of american european and asian based funds in general our overall evidence suggests that the differential mandates of fund managers and hence the geographic allocations of their fund investments influence their stock preferences but not the geographic location of the managers

the ability of global stock exchange mechanisms to mitigate home bias evidence from euronext this paper examines the effects on equity home bias of two mechanisms adopted by euronext when it was formed by the merger of four european countries stock exchanges in 2002 the two structural mechanisms are the integration of trading platforms across the four predecessor exchanges and the creation of named segments of the integrated exchange on which firms could voluntarily list by precommitting to enhanced disclosure and transparency employing a difference in differences research design using other european union companies as a control group we document that the integration of the euronext market was associated with a reduction in home bias for firms listed on the named segments of the euronext exchange but not for the nonsegment euronext firms our results suggest that the reduction in transaction costs from the integration of the trading platforms did not make the nonsegment euronext firms more attractive to the specific investors for whom the transaction costs were reduced on the other hand the decrease in information costs due to the precommitments to enhanced transparency made the segment firms more attractive to all categories of foreign investors consistent with the information costs hypothesis this paper was accepted by mary barth accounting

capital market equilibrium with externalities production and heterogeneous agents abstract the paper studies general equilibrium in an economy with externalities production and heterogeneous agents the model developed builds on brock brock w a 1982 asset prices in a production economy in mccall j j ed the economics of information and uncertainty university of chicago press chicago pp 1 43 and merton merton r c 1987 a simple model of capital market equilibrium with incomplete information journal of finance 42 483 510 it involves both a stock market and a market for loans together with negative externalities produced by a subset of firms importantly the technological production structure of the firms is reflected in the properties of the shares traded in the stock market agents are heterogeneous in their financial choices potentially discriminating against the firms producing a negative externality the model sheds light on the utility costs of the discriminating behavior and on the impact on the price of the stock issued by the firm which is responsible for the externality the model is used to study the factors which may magnify or reduce the impact of discrimination a set of discriminated firms may be seriously affected only if the discriminating investors command a large portion of overall wealth and or they do not represent important diversification instruments the model can be applied to understanding the effects of socially responsible investment whereby investors discriminate against companies belonging to some sectors which are perceived as socially dangerous or unethical

optimal stock trading with personal taxes implications for prices and the abnormal january returns abstract the tax law confers upon the investor a timing option to realize capital losses and defer capital gains with the tax rate on long term gains and losses being about half the short term rate the law provides a second timing option to realize losses short term and gains long term if at all our theory and simulation over the 1962 1977 period establish that taxable investors should realize long term gains in high variance stocks and repurchase stock in order to realize potential future losses short term tax trading does not explain the small firm anomaly but predicts a seasonal pattern in trading volume which maps into a seasonal pattern in stock prices the january anomaly only if investors are irrational or ignorant of the price seasonality

ranking and clustering of the faculties of commerce research performance in australia there is a growing policy focus in australian higher education on quantitative research performance assessment however most of the analysis has addressed aggregate performance at the institutional level an approach inconsistent with recent policy emphasis on diversity among universities and one that ignores performance variations across disciplines using averaged and all available data for 2000 2004 cluster analysis is used to classify australian commerce faculties into groups that exhibit similar research performance measured by publication phd completion and secured competitive research grant funding we also use factor analysis to generate full multidimensional rankings within the resulting two or three clusters it is found that in terms of total research output with the exception of adelaide all the group of 8 go8 members plus university of technology sydney and griffith always belong to clusters a however when research performance is expressed in per academic staff terms an additiona

price convexity and skewness this paper develops a model in which investors who are prohibited from short selling agree to disagree on the precision of a publicly observed signal the model implies that the equilibrium price is a convex function of the public signal the model predicts that 1 the stock price reacts more to good news than to bad news 2 the skewness of stock returns is positively correlated with contemporaneous returns but negatively correlated with lagged returns 3 short sale constraints increase rather than decrease skewness and 4 disagreement about information precision increases skewness empirical tests conducted find supportive evidence for all these predictions

household portfolio diversification a case for rank dependent preferences the proliferation of novel preference theories in financial economics is hampered by a lack of non experimental evidence and by the theories additional complexity which has not been shown to be critical in applications in this article i present arguments in support of preferences with rank dependency using the survey of consumer finances data i document two widespread patterns inconsistent with expected utility i many households simultaneously invest in well deversified funds and in poorly diversified portfolios of stocks and ii some households with substantial savings do not invest anything in equities i show that portfolio choice models with rank dependent preferences plausibly parameterized and under fully rational assumptions are quantitatively consistent with the observed diversification these results call for further efforts to integrate the models of rank dependent preferences in portfolio theory and asset pricing the decision theoretic literature has long acknowledged the shortcomings of the expected utility theory of von neumann and morgenstern 1944 several generalizations of the theory are inspired by the experimental evidence and aimed at improving its descriptive accuracy however there are few applications of new models of preferences in finance and expected utility continues to dominate the field 1 two principal hurdles slow the proliferation of novel preferences in financial economics first the lack of empirical non experimental or field data confirming that the behavior motivating non expected utilities is widespread outside the laboratory settings second the additional and often significant complexity of the alternative preferences which has not been shown to be critical in applications where the models based on expected utility fall short of reasonable predictions this article presents empirical and theoretical this paper was previously circulated under the title household portfolio diversification the paper has benefited from the comments of shlomo benartzi luca benzoni markus brunnermeier john dickhaut maria perozek raj singh hersh shefrin and workshop participants at minnesota finance bag lunch 2003 wharton conference household financial decision making and portfolio choice and 2003 summer meetings of econometric society i would like to thank cam harvey the editor and an anonymous referee for many helpful comments and suggestions a special thanks to jack kareken for comments and editorial help on an earlier draft i am grateful to donna zerwitz for editorial assistance the views expressed herein are those of the author and not necessarily of the federal reserve bank of minneapolis or the federal reserve system all errors and omissions are the sole responsibility of the author address correspondence to valery polkovnichenko finance 3 122 csom 319 19 th

financial system design and liquidity provision by banks and markets in a dynamic economy this paper contributes to the literature on financial system design by comparing markets and banks in a dynamic economy investors trade off their liquidity needs against the high returns on illiquid investments both the banking system and the market can provide partial liquidity insurance to investors we consider full market participation as well as limited market participation we demonstrate that the full participation market with intergenerational trading can provide more liquidity than one without insurance is provided through wealth transfer across generations instead of cross subsidization across contemporaneous types as is the case in the finite economy given a full participation market that allows trading across generations only banks with initial capital can provide additional liquidity in a limited participation market with uncertainty about trading types an intergenerational bank with or without initial capital provides additional insurance to investors the need for trade is eliminated finally if there is no uncertainty about trading types then an intergenerational bank with initial capital eliminates the need for trading and improves welfare for all an intergenerational bank without initial capital improves welfare for people who do not trade

differential information and security market equilibrium we propose a simple model of equilibrium asset pricing in which there are differences in the amounts of information available for developing inferences about the returns parame ters of alternative securities in contrast with earlier work we show that parameter uncer tainty or estimation risk can have an effect upon market equilibrium under reasonable conditions securities for which there is relatively little information are shown to have relatively higher systematic risk when that risk is properly measured ceteris paribus the initially very limited model is shown to be robust with respect to relaxation of a number of its principal assumptions we provide theoretical support for the empirical examination of at least three proxies for relative information period of listing number of security returns observations available and divergence of analyst opinion

does home bias affect firm value evidence from holdings of mutual funds worldwide this study finds strong evidence that home bias affects firm valuation at both country and firm levels at the country level increasing the bias of domestic investors toward home equity lowers the market valuation of home equity at the firm level firm value increases as the compositions of local equities held by domestic and foreign investors tend toward the firms global market capitalization weights but decreases as their weights deviate from global weights overall the evidence is consistent with the optimal global risk sharing hypothesis that the greater risk sharing between domestic and foreign investors in international capital markets reduces the cost of capital and hence enhances market valuation

divestment of the english forestry estate an economically sound choice abstract this paper evaluates if the proposed divestment of the english forestry commission estate in 2010 was economically rational the analysis is composed of two parts first an amenity value threshold for continued public access to the estate was estimated based on a stated value of the estate i e 700 million and assuming a discount rate of 3 5 the estate should never have been considered for sale however assuming a discount rate of 5 then the associated critical amenity value was estimated to be approximately 5 million second travel cost methods were employed to value public access to the forest of dean as a proxy for the estate an on site survey was conducted that yielded estimates of consumer surplus that exceed the critical amenity value of the estate by two orders of magnitude even when we employ a discount rate above that typically used in public policy decision making therefore we conclude that the policy to divest the estate for 700 million was not a good deal and as such the resulting policy reversal was an economically sensible decision

the effects of market segmentation and investor recognition on asset prices evidence from foreign stocks listing in the united states non u s firms cross listing shares on u s exchanges as american depositary receipts earn cumulative abnormal returns of 19 percent during the year before listing and an additional 1 20 percent during the listing week but incur a loss of 14 percent during the year following listing we show how these unusual share price changes are robust to changing market risk exposures and are related to an expansion of the shareholder base and to the amount of capital raised at the time of listing our tests provide support for the market segmentation hypothesis and merton s 1987 investor recognition hypothesis the globalization of u s capital markets has accelerated dramatically in the past decade increasing numbers of companies from overseas have chosen to either raise capital through global equity issues or prepare for future capital raising by way of cross listings on u s exchanges as of 1997 about 1 300 non u s companies have listed their shares for trading on the new york stock exchange nyse the american exchange amex the national association of securities dealers automation quotation nasdaq system or

more possessions more worry abstract a common wisdom asserts that the wider the universe of assets to choose from the greater the investor s welfare we show that this is not the case in practice where parameters have to be estimated even when the estimates are unbiased surprisingly risk aversion plays a crucial role corresponding to the desirability of asset expansion by dividing investors in three groups investors with very low risk tolerance and investors with very high risk tolerance are better off with asset expansion and investors with moderate risk tolerance are worse off despite the option to refrain from investing in the additional asset

direct foreign ownership institutional investors and firm characteristics in this paper we characterize foreign ownership using a dataset of ownership and attributes of swedish rms the analysis reveals that foreigners show a preference for large rms rms paying low dividends and rms with large cash positions on their balance sheets when we further analyze the preference for large rms we nd that market liquidity and presence in international markets measured through export sales or listings on other exchanges seem to characterize foreign holdings better than rm size alone foreigners also tend to underweight rms with a dominant owner importantly we demonstrate that most of the features associated with foreign ownership are driven by the fact that foreign investors typically are mutual funds or other institutional investors hence we identify an institutional investor bias rather than a foreign investor bias finally using ownership data on a country level we conclude that the results are particularly strong among u s investors who comprise the largest institutions among foreign investors 2001 elsevier science s a all rights reserved jel classixcation g1 g15

the decision to conserve or harvest old growth forest abstract the decision to harvest or conserve old growth forest is formulated as a stochastic decision problem in continuous time uncertainty in future amenity values for standing forest and in future timber revenues for harvested forest are included in the model along with the risk of catastrophic destruction by fire pest infestation etc it is shown how the decision problem can be expressed as an optimal stopping problem which can be solved analytically the optimal decision rule is shown to depend on how the ratio of current timber value to the current expected present value of amenity benefits foregone through harvesting compares with some critical level the effects of changes in uncertainty and other parameters on the optimal rule are discussed also it is shown how the cost benefit analysis and certainty equivalence procedures lead to premature harvesting and the expected loss in survival time for these sub optimal procedures is calculated