the effects of cross border bank mergers on bank risk and value abstract this paper examines the effects of cross border bank mergers on the risk and abnormal returns of acquiring banks we find that overall the acquirers risk neither increases nor decreases in particular on average neither their total risk nor their systematic risk falls relative to banks in their home banking market the abnormal returns to acquirers are negative and significant but are somewhat higher when risk increases relative to banks in the acquirer s home country

political and economic determinants of the likelihood of privatizing argentine public banks abstract this paper discusses the political economy of bank privatization in argentina following institutional changes related to the implementation of the convertibility plan and to the tequila crisis the empirical results strongly support the hypothesis that political incentives affect the likelihood of privatization we find 1 poorly performing banks were more likely to be privatized 2 overstaffing tended to reduce the probability of privatization 3 large banks were less likely to be privatized and 4 higher levels of provincial unemployment and higher shares of public employees reduced the probability of privatization although the hypotheses were tested for a specific industry in a specific country which makes it possible to control for enterprise performance and institutional characteristics it seems reasonable that similar results might hold in other industries and countries

trading on inside information evidence from the share structure reform in china abstract we examine stock trading activities in days before chinese listed firms made public announcement to start share structure reform there is significant evidence that relative to a benchmark period institutional investors bought more event firms shares in the last two trading days prior to announcement randomization tests show significant differences in institutional trading activities between event firms and matched control firms which suggests that some institutions had inside information moreover large trades account for a significant proportion of daily stock price changes in the last 2 days the evidence is consistent with the prediction by holden and subrahmanyam 1992 that when multiple informed investors acquire the same piece of information they will trade aggressively we also find that over the reform period the median share value change of event firms is 6 higher than that of control firms our findings have important implications for enforcement of insider trading regulations in china

privatization competition and supercompetition in the mexican commercial banking system abstract much literature before and after the privatization of mexico s commercial banking system in 1991 1992 argued that the system was collusive and noncompetitive and would likely continue to be for years banks would collude to underloan so that at least in comparison with what would happen in a competitive system they could overcharge because a parallel literature on lending after bank privatization suggests that the problem is often not too little but too much we resolved to test for competitive behavior in the mexican banking system using an empirical approach developed by shaffer econom lett 29 1989 321 j money credit bank 25 1993 49 federal reserve bank of philadelphia working paper no 93 28r we find a structural break in the middle of the privatization period that signals the start of an episode of what shaffer calls supercompetitive behavior in such a supercompetition banks run at levels of output where marginal cost exceeds marginal revenue this behavior is consistent with a struggle in which banks take losses now because they think the market share they get in the bargain offers a positive present value of expected future return the behavior can also be consistent with just the sort of banking crises that ensued in mexico

financial literacy and participation in the derivatives markets we set out in this study to determine whether individuals with higher levels of financial literacy are more likely to be active participants in the derivatives markets our empirical results based upon an official national survey undertaken by the financial supervisory commission of taiwan reveal that even after controlling for stock market participation rates financial literacy represents a significant benefit to individuals since it helps them to lower the entry barriers to purchasing complex derivatives products we also find that household wealth gender residential location and diverse sources of information have significant effects on participation rates in the derivatives markets furthermore when taking into consideration issues of accessibility or measurement error the positive effects of financial literacy on derivatives market participation are found to remain largely unchanged

the optimal enforcement of insider trading regulations regulating insider trading lessens the adverse selection problem facing market makers enabling them to quote better prices an optimal enforcement policy must balance these benefits against the costs of enforcement such a policy must specify i the conditions under which the regulator conducts an investigation ii the penalty schedule imposed if an insider is caught and iii a transaction tax to fund enforcement we derive the policy that maximizes investors welfare this policy entails investigations following large trading volumes or large price movements or both insiders caught making large trades are assessed the maximum penalty but small trades are not penalized given this policy insiders trade most aggressively on news with an intermediate price impact but refrain from trading on moderate or extreme news

the roles of the state and the market in establishing property rights it is an old saw of the economics profession that markets require a clear assignment of initial entitlements to most resources and well enforced rules of contract governments intent on fostering a market economy should thus make sure to put an effective legal system in place one in which property rights are unambiguous secure and freely alienable even if the state gets some of the initial entitlements wrong it is often added the coase theorem instructs us that the parties if free to contract will correct this by appropriate private agreements the experience of postcommunist countries in eastern europe is a good reminder that economists tend to assume a can opener when one is needed indeed the statement that property and contract rights must be put in place assumes away one of the most interesting and intricate questions concerning economic development the creation of a system of enforceable entitlements to the diverse and complex forms of wealth characteristic of a modern society is itself a process subject to economic laws as i shall argue here it is in fact largely a product of market forces rather than governmental fiat

insider trading outside search and resource allocation why firms and society may disagree on insider trading restrictions we show that entrepreneurs may prefer to allow insider trading even when it is not socially optimal we examine a model in which an insider manager allocates resources on the basis of his private information and outside information conveyed through the secondary market price of the firm s shares if the manager is allowed to trade he will compete with informed outsiders reducing the equilibrium quality of outside information while the benefits to production of outside information are the same for society and entrepreneurs we show that the social and private costs are different thus entrepreneurs and society may disagree on the conditions under which insider trading restrictions should be imposed article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

bank lending in transition economies bank privatization and tighter credit enforcement are believed indispensable to facilitate the eastern european transition process we analyze lending by value maximizing banks the only source of capital in the transition faced by non performing loans to the state owned sector we show that banks have a perverse incentive to fund former debtors although less efficient and more risky than private firms because they gain the potential repayment of previous debts this leads to a lower productivity of investment and a greater concentration of risk the expansion of more efficient private firms is delayed leading to a slower recovery and a greater risk of financial crisis

where should the line be drawn on insider trading ethics finance ethics have drawn increasing attention from both government regulators and academic researchers this paper addresses the issue of insider trading ethics previous studies on insider trading ethics have failed to provide convincing arguments and consistent results in particular the arguments against insider trading are based primarily on moral and philosophical grounds and lack empirical rigor this study intends to establish and examine the relationship between the ethical issue and economic issue of insider trading we argue that the ethics of insider trading is in essence an economic rather than a moral issue it is so far not clear to what extent insider trading may increase or decrease shareholders wealth until then we must take care to avoid over regulating insider trading

risk aversion liquidity and endogenous short horizons we analyze a competitive model in which different information signals get reflected in value at different points in time if investors are sufficiently risk averse we obtain an equilibrium in which all investors focus exclusively on the short term in addition we show that increasing the variance of informationless trading increases market depth but causes a greater proportion of investors to focus on the short term signal which decreases the informativeness of prices about the long run finally we also explore parameter spaces under which long term informed agents wish to voluntarily disclose their information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

is the general public licence a rational choice open source projects are networks of developers distributors and end users of non proprietary created knowledge goods it has been argued that this form of organization has some advantages over the firm or market coordination i show that for sufficiently convex and modular projects proprietary licences are not able to sustain sequential knowledge production which however can be carried out if the project is run on the open source basis

insider trading 2 0 the ethics of information sales the sale of faster access to financial market data has recently generated public controversy ny attorney general eric schneiderman has referred to such fast data feeds as insider trading 2 0 for example thomson reuters sold the university of michigan s consumer sentiment index to computerized trading firms 2 seconds before releasing its data to its other paying clients this paper explores the ethical issues involved in the sale of such information is selling faster access ethically the same as traditional insider trading which generally involves a breach of fiduciary duty or the use of misappropriated information such practices are extremely different from traditional insider trading as there is neither a breach of fiduciary duty nor misappropriation of inside information the ethical issues are similar to other market segmentation and price discrimination issues in which different prices are charged to different customers the ability to price discriminate across segments can actually benefit large segments of the population who may receive lower prices because others such as the high speed traders are paying more the sale of faster access to information especially by exchanges raises additional ethical issues there may be adverse effects on market quality that must be addressed the moral distaste for the practice expressed by some stems from the seeming unfairness of a modern market structure that provides advantages to a small group of computerized traders

insider trading legislation and corporate governance this paper analyzes the impact of insider trading legislation on corporate governance in a context where large dominant shareholders can monitor underperforming companies managers have an incentive to give early warnings about adverse developments to dominant shareholders this information is effectively a bribe to induce dominant shareholders to sell their stock and refrain from intervention if insider trading is unregulated dominant shareholders collude with management at the expense of small shareholders the optimal regime forces the company to disclose all material information to the market private contracting between companies and shareholders leads to optimal insider trading regulation only if initial shareholders can enter a binding commitment otherwise large shareholders and managers recontract at the expense of small share holders enforcement also matters european union legislation requires inside information to be precise such a narrow definition creates a grey zone where information is private but cannot be classified as inside information as a result the effectiveness of corporate governance and firm value are reduced regulation in the us that treats shareholders with a stake exceeding 10 as insiders is potentially harmful

learning and complementarities in speculative attacks we study a model where the aggregate trading of currency speculators reveals new information to the central bank and affects its policy decision we show that the learning process gives rise to coordination motives among speculators leading to large currency attacks and introducing non fundamental volatility into exchange rates and policy decisions we show that the central bank can improve the ex ante effectiveness of its policy by committing to put a lower weight ex post on the information from the market and that transparency may either increase or decrease the effectiveness of learning from the market depending on how it is implemented

the financial and operating performance of newly privatized firms an international empirical analysis this study compares the pre and postprivatization financial and operating performance of 61 companies from 18 countries and 32 industries that experience full or partial privatization through public share offerings during the period 1961 to 1990 our results document strong performance improvements achieved surprisingly without sacrificing employment security specifically after being privatized firms increase real sales become more profitable increase their capital investment spending improve their operating efficiency and increase their work forces furthermore these companies significantly lower their debt levels and increase dividend payout finally we document significant changes in the size and composition of corporate boards of directors after privatization the last fifteen years have witnessed a significant global shift away from state socialism towards entrepreneurial capitalism one of the most important and visible aspects of this trend has been the enthusiasm with which governments of all political persuasions have sold their state owned enterprises soes to private investors in hopes that the generally unsatisfactory economic performance of these firms can be improved by the discipline of private ownership this denationalization process given its current title of privatization by the conservative government of margaret thatcher in

the efficient market hypothesis and insider trading on the stock market we study the behavior of a large trader with private information about the mean of an asset with a risky return we argue that if the variability of the return is not too great typically the trader will find it desirable to ensure that the market price does not reveal his information that is that a pooling equilibrium arises such an equilibrium has the advantage of avoiding the incentive constraints that arise in separating equilibria where information can be inferred from prices thus the efficient market hypothesis may well fail if there is imperfect competition despite the uniformativeness of prices the other competitive traders are also better off in the pooling equilibrium than in any separating equilibrium again if one assumes limited variability

the benefits of privatization evidence from mexico critics of privatization often argue that its benefits come at a high cost to society the authors test the validity of this criticism for mexico s privatization program one of the world s largest case by case programs assessing the performance of newly privatized firms in such areas as profitability and efficiency they find that these firms quickly close the gap with their peers in the private sector their findings suggest that the firms profit gains come from productivity gains 52 percent layoffs 33 percent and higher prices 15 percent

financial regulation and financial system architecture in central europe abstract at the beginning of the transition advice to central european countries with respect to how to set up their financial systems was based on models used in western economies this paper analyzes the experiences to set up a financial system in central europe the experience in the first transition years 1990 1996 with financial system architecture shows that changes are slow but that the central european countries tend to catch up more quickly with the western ones in the case of their banking systems than with respect to their stock markets

corruption and development a review of issues in this paper we start with a discussion of some of the different denotations of the problem of corruption we then consider the ways in which the damaging consequences of corruption operate in a developing economy while not ignoring its possible redeeming features in some cases we pursue the question of why corruption is perceptibly so different in different societies and also persistent finally we examine the feasible policy issues that arise in this context

performance changes and shareholder wealth creation associated with mergers of publicly traded banking institutions this paper examines the mean and cross sectional behavior of performance changes and consolidated abnormal returns among a sample of forty eight mergers occurring from 1982 to 1991 involving publicly traded banking institutions although both merger related performance changes and consolidated abnormal returns are small or nonexistent these measures show a great deal of cross sectional variation however the dispersion in performance changes and abnormal returns is related to different factors suggesting that expectations and outcomes are influenced by different variables further strengthening this notion that expectations and outcomes are unrelated are insignificant correlations of abnormal returns and performance changes copyright 1996 by ohio state university press

the advantage to hiding one s hand speculation and central bank intervention in the foreign exchange market abstract we analyze an asymmetric information model of sterilized intervention in the foreign exchange market we characterize an equilibrium in which a central bank with inside information about its exchange rate target trades with risk averse speculators who have private information about future spot rates the model identifies circumstances in which perverse responses to intervention will be observed i e the domestic currency depreciates when the central bank purchases it and it provides conditions under which the exchange rate will be highly sensitive to intervention the model also provides an explanation for two forms of policy secrecy i secrecy about the scale of an intervention operation is always desirable ii secrecy about the target is sometimes desirable

voluntary contributions to a joint project with asymmetric agents we revisit admati and perry 1991 s model of voluntary contributions to a joint project their main result that equilibrium contributions are small appears not to be robust to the introduction of asymmetries

the legal environment banks and long run economic growth this paper examines the relationship between the legal system and banlding development and traces this connection through to long run rates of per capita gdp growth capital stock growth and productivity growth the data indicate that countries where the legal system 1 emphasizes creditor rights and 2 rigorously enforces contracts have better developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax furtherrnore the exogenous component of banking development the component defined by the legal environment is positively and robustly associated with per capita growth physical capital accumulation and productivity growth this paper addresses two questions first do crosscountry differences in the legal rights of creditors the efficiency of contract enforcement and the origin of the legal system explain cross country differences in the level of banking development second do better developed banks cause faster economic development that is is the component of banking development defined by the legal environment positively associated with long run rates of economic growth capital accumulation and productivity growth examining the relationship between the legal system and banking development is valuable irrespective of issues associated with long run growth first banks may influence the level of income per capita and the magnitude of cyclical fluctuations bernanke and gertler 1989 1990 second many economists stress that understanding the evolution of legal and financial systems is essential for understanding economic development north 1981 engerman and sokoloff 1996 consequently quantitative information on the relationship between the legal environment and banks will improve our understanding of business cycles and the process of economic development furthermore examining the causal links between banks and economic growth has both conceptual and policy implications on the conceptual front a long literature debates the importance of banks in economic development starting as early as bagehot 1873 economists have argued that better banks banks that are better at identifying creditworthy firms mobilizing savings pooling risks and facilitating transactions

earnings and price based compensation contracts in the presence of discretionary trading and incomplete contracting abstract the paper analyzes the use of reported accounting earnings and price as a basis for compensating a manager when he trades on private information and share price is set rationally based on privately held information publicly available and contractible information and publicly available but noncontractible information in addition we analyze the comparative statics of the compensation on reported earnings and price with respect to changes in the economy

trading frenzies and their impact on real investment we study a model in which a capital provider learns from the price of a firm s security in deciding how much capital to provide for new investment this feedback effect from the financial market to the investment decision gives rise to trading frenzies in which speculators all wish to trade like others generating large pressure on prices coordination among speculators is sometimes desirable for price informativeness and investment efficiency but speculators incentives push in the opposite direction so that they coordinate exactly when it is undesirable we analyze the effect of various market parameters on the likelihood of trading frenzies to arise

when does privatization work the impact of private ownership on corporate performance in the transition economies this paper compares the performance of privatized and state firms in the transition economies of central europe while controlling for various forms of selection bias it argues that privatization has different effects depending on the types of owners to whom it gives control in particular privatization to outsider but not insider owners has significant performance effects where privatization is effective the effect on revenue performance is very pronounced but there is no comparable effect on cost reduction overlooking the strong revenue effect of privatization to outsider owners leads to a substantial overstatement of potential employment losses from postprivatization restructuring

generic existence of completely revealing equilibria for economies with uncertainty when prices convey information conditions which imply the existence of strict rational expectations equilibria for most static pure exchange economies where prices convey information about the state of the world are analyzed information is aggregated and transmitted by prices because agents have different initial information and maximize the conditional expectation of state dependent utility functions major results state that if with probability one agents characteristics do not vary too much as the state of the world varies then generically there exist equilibrium price functions which reveal all initial information more precisely if the support of the image measure is contained in a compact c1 manifold satisfying some technical conditions which is of sufficiently low dimension relative to the number of commodities then existence of completely revealing equilibria is generic any economy satisfying these assumptions can be approximated by a sequence of economies which also obey these assumptions and have completely revealing equilibrium price functions slight perturbations do not destroy the existence property

returns to acquirers of privatizing financial services firms an international examination abstract while the literature reports improved performance for privatizing firms banking markets are different many privatizing financial services firms face unique problems such as an overhang of problem loans and weak credit cultures and legal systems we investigate the returns to successful bidders in privatization acquisitions of financial services firms examine short horizon performance and test whether such acquisitions result in a change in risk for the bidding firm our results show that the cumulative abnormal returns to shareholders of bidding firms are positive perhaps reflecting initial optimism that the foreign firm acquiring the privatizing firm would share in the success associated with privatization bidders also experience an increase in their total risk following the acquisition

the performance of privatized firms in the czech republic abstract with the growing importance of privatizations as a part of government policy most empirical studies of these privatizations conclude that firm performance immediately improves following privatization privatization has been the most important part of the transition from the centrally planned economies of central and eastern europe and has a larger impact on those economies than privatizations in other countries however few studies have looked at the performance of firms following mass privatization this study uses 453 separate firms 101 firms privatized in both waves for a total of 554 observations in the first and second waves of czech voucher privatization using methodology from previous studies we find that while the overall effects from privatization are positive the effects vary by privatization wave size and industry firms privatized in the first wave performed worse decline in performance following privatization than firms privatized in the second wave we also fail to find ownership concentration or debt as an important factor in restructuring the firm i believe that the results are consistent with two hypotheses first economic and political structure surrounding the privatization waves plays an important part in the success of privatization stable environments both political and economic help privatized firms restructure and improve operating performance as well as attract foreign investors and capital even in less developed countries but in transitional economies undergoing mass privatization in rapidly changing and developing economic and political environments hinder firms from restructuring and improving performance following privatization results are also consistent with the hypothesis that firms with a longer preparation period prior to privatization an implicit seasoning improve performance following privatization

insider trading in a rational expectations economy it is often argued that efficiency considerations require society to freely permit insider trading in this article an opposing efficiency argument is formalized the model incorporates an investment stage followed by a trading stage if outsiders expect insiders to take advantage of them in trading outsiders will reduce their investment the insiders loss from this diminished investor confidence may more than offset their trading gains consequently a prohibition on insider trading may effect a pareto improvement insiders are made better off if they can precommit not to trade on their privileged information govemment regulation accomplishes exactly this jel 022 026 313 the traditional rationale articulated for insider trading regulation and other securities law is that such rules promote confidence in markets indeed president franklin d roosevelt justified the first major u s securities legislation by saying it should give impetus to honest dealing in securities and thereby bring back public confidence similar language is still invoked half a century later in connection with enforcement efforts against insider trading and in proposals for tightened stock

the impact of stock market information production on internal resource allocation abstract we analyze the resource allocation decision of a manager inside a multidivision firm whose compensation is based on the firm s stock price we find that internal investments exhibit a positive correlation across the firms divisions namely when two single division firms merge the optimal investment level in one division becomes more positively related to the investment level in the other division in addition following a spinoff divisional investments decline increase whenever the separated division has a project with a low high sharpe ratio finally multidivision firms trade at a discount which is larger the more diverse the investment sets of the divisions

growth in transition what we know what we don t and what we should abstract this essay surveys macroeconomic issues that marked the transition from planned to market economy in central and eastern european and former soviet union countries we first establish stylized facts of the transition so far we then critically survey the theoretical literature on transition discussing explanations for the initial output fall and mediumterm issues such as optimal speed of transition disorganization institutions and sectoral reallocation as source of output dynamics we review the empirical literature to assess how well it translates the theoretical models and explains the stylized facts we conclude with suggestions for future research

do privatized banks in middle and low income countries perform better than rival banks an intra industry analysis of bank privatization abstract this paper presents a comprehensive analysis of the pre and post privatization operating performance and stock market performance of privatized banks and their rivals in middle and low income countries first we find that privatization announcements elicit negative abnormal returns for rival banks the effects are more pronounced for subsequent tranche sales where the proportion of government ownership in the privatized bank is reduced second we observe that the privatized banks underperformed the benchmark index in the long run investors who bought shares of the privatized banks on the first day of trading and held them for 5 years instead of investing in the market index lost 24 of their wealth the underperformance is consistent with the negative long run returns that have been documented for initial public offerings third we document marginal improvements in the post privatization operating performance of the privatized banks though the privatized banks in middle and low income countries are better capitalized than rival banks they carry higher problem loans and are overstaffed relative to other private banks in the post privatization period since most of the sample firms are partially privatized we submit that perhaps the continued government ownership of the privatized banks might have hindered managers ability to restructure the firms

intra industry effects of bank privatization a clinical analysis of the privatization of the commonwealth bank of australia abstract this paper provides a comprehensive analysis of the effects of the privatization of the commonwealth bank of australia cba on the bank s performance and that of the rival banks first we find that the major rival banks reacted negatively to the privatization announcements although the initial partial privatization and the final full privatization announcements elicited stronger stock market reaction from the rival banks second we find that the cba s long term stock market performance improved markedly as the proportion of government ownership decreased with the bank s cumulative abnormal returns being 50 more than those of its rivals three years after the bank had been fully privatized also the cba has not only been very efficient in reducing cost and improving its profitability in the post privatization period it has outperformed its rivals on almost all the operating performance measures and has become the most profitable bank in australia a particularly noteworthy finding is that the improvements in the cba s operating and stock market performance and the rival banks reaction to the partial and full privatization announcements were strongest after the bank had been fully privatized the implication of the results for governments contemplating privatization of state owned enterprises is that full privatization is necessary in order to achieve strong gains in efficiency profitability and stock market performance

why regulate insider trading evidence from the first great merger wave 1897 1903 we use event time methodology to study legal insider trading associated with mergers circa 1900 for mergers with prospective disclosures similar to today s we find substantial value gains at announcement implying participation by outside shareholders despite the absence of insider constraints furthermore preannouncement stock price runups relative to total value gain are no more than those observed for modern mergers insider regulation apparently has produced little benefit for outsiders with the inside information pricing function and related gains shifting to external information specialists other results suggest market penalties for nondisclosure i e insider trading is less successful in a restricted information environment

market based corrective actions many economic agents take corrective actions based on information inferred from market prices of firms securities examples include directors and activists intervening in the management of firms and bank supervisors taking actions to improve the health of financial institutions we provide an equilibrium analysis of such situations in light of a key problem if agents use market prices when deciding on corrective actions prices adjust to reflect this use and potentially become less revealing we show that market information and agents information are complementary and discuss measures that can increase agents ability to learn from market prices the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

investment in developed and less developed countries a number of studies have compared the investment risk of various industries and of various individual corporations in developed countries dcs the purpose of this paper is to compare investment risk in dcs with less developed countries ldcs the variance of returns to investment in common stocks provides a natural measure of investment risk and will be used in this study studies in ldcs include work of levy and sarnat 12 13 errunza 3 4 and lessard 11 levy and sarnat and errunza found low economy wide investment risk on an average for ldcs relative to dcs with stock indices being used as surrogates for economy wide risk these results are not unambiguous however because there are probable difficulties due to infrequent trading and averaging in the broad market indices used in the above studies hence we use a sample of the largest corporations that suffer little if at all from thin trading and or averaging

do demand curves for stocks slope down since september 1976 stocks newly included into the standard and poor s 500 index have earned a significant positive abnormal return at the announcement of the inclusion this return does not disappear for at least ten days after the inclusion the returns are positively related to measures of buying by index funds consistent with the hypothesis that demand curves for stocks slope down the returns are not related to s p s bond ratings which is inconsistent with a plausible version of the hypothesis that inclusion is a certification of the quality of the stock

bargaining with history dependent preferences abstract two impatient players bargain over a pie of size one according to the infinite alternating offers procedure players payoffs depend not only on the outcome but also on the process of the bargaining specifically they prefer impasse to any agreement that gives them lower discounted utility than would have been derived from accepting earlier offers we characterize the essentially unique subgame perfect equilibrium path which consists of gradual concessions the more patient players are the longer it takes them to reach an agreement when players become infinitely patient the efficiency loss is substantial yet the equilibrium division converges to the nash solution

posturing and holdup in innovation we show that the need to posture can help solve the holdup problem inherent in many multistage relationships including those between entrepreneurs and venture capitalists posturing arises when an informed party needs to send a strong signal to induce skeptical third parties like employees suppliers customers or competitors to develop maintain relationships with the firm or take other actions that increase firm value in the venture capital context this can be credibly achieved if the vc publicly invests at high prices in later rounds this tempers holdup by shifting ex post bargaining power toward the entrepreneur inducing him to exert greater effort

feedback effects and asset prices feedback effects from asset prices to firm cash flows have been empirically documented this finding raises a question for asset pricing how are asset prices determined if price affects fundamental value which in turn affects price in this environment by buying assets that others are buying investors ensure high future cash flows for the firm and subsequent high returns for themselves hence investors have an incentive to coordinate which may generate self fulfilling beliefs and multiple equilibria using insights from global games we pin down investors beliefs analyze equilibrium prices and show that strong feedback leads to higher excess volatility

inside trading and incentives the traditional arguments against inside trading insiders take advantage of other investors inside trading profits overcompensate managers see ross 1979 too much information is collected if inside trading is allowed see fama and laffer 1971 hirshleifer 1971 emphasize the social costs of prohibiting such trading without explaining the private incentives shareholders have to sanction this trading the efficiency argument in favor of inside trading inside trading improves the functioning of the stock market because information as a public good will be underproduced unless those who acquire it profit through inside trading demsetz 1969 does not explain shareholders support of inside trading because the owners of a firm do not seek to improve the efficiency of the stock market by sacrificing trading profits to insiders several alternative hypotheses for shareholders failure to impose restrictions on inside trading have been advanced this paper analyzes shareholders incentives to sanction inside trading i show that if a manager of a firm is initially compensated with earnings contingent contracts then the welfare of that manager and all of the firm s shareholders can be improved by allowing the manager to trade on his private information this result is established in the context of a multiple principal the shareholders single agent the manager model with the manager s trades observable ex post and is robust with respect to the specification of investors preferences and the definition of stock market equilibrium the topic of this paper originated in conversations with steve allen his comments as well as those of nicholas dopuch daniel fischel sanford grossman merton miller robert verrecchia and other members of the workshops on the applications of economics and on accounting research both at the university of chicago are gratefully acknowledged 1 for a list of such arguments see references in manne 1966 chap 1

using privileged information to manipulate markets insiders gurus and credibility access to private information is shown to generate both the incentives and the ability to manipulate asset markets through strategically distorted announcements the fact that privileged information is noisy interferes with the public s attempts to learn whether such announcements are honest it allows opportunistic individuals to manipulate prices repeatedly without ever being fully found out this leads us to extend sobel s 1985 model of strategic communication to the case of noisy private signals our results show that when truthfulness is not easily verifiable restrictions on trading by insiders may be needed to preserve the integrity of information embodied in prices

failure of gradualism under imperfect monitoring abstract we consider a two player prisoner s dilemma type game with continuous actions where players choose how much to contribute to a public project this game is played infinitely many times and actions are irreversible players cannot decrease their actions over time while it is strictly dominant for players not to contribute in the stage game some strictly positive level of contribution is pareto optimal it is known that when players perfectly observe each other s actions cooperation can be achieved through gradual increases in contribution levels i show that introducing an arbitrarily small amount of smooth noise in the monitoring makes cooperation impossible and players play the static nash equilibrium of the stage game forever

partially revealing rational expectations equilibrium in a competitive economy abstract a class of pure exchange economies is considered in which some agents are informed of private information and others are uninformed existence of a partially revealing rational expectations equilibrium ree is proved without restricting attention to particular functional forms for utility functions and probability distributions without introducing noise into the model and without departing from the standard definition of ree the equilibrium is robust in the sense that if the primitives of the economy are slightly perturbed the economy continues to have a qualitatively similar ree with somewhat stronger assumptions placed on the economy the equilibrium is also the unique measurable ree

financial development and economic growth views and agenda this critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive first order relationship between financial development and economic growth the body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow responding passively to economic growth many gaps remain however and the paper highlights areas in acute need of additional research