learning your earning are labor income shocks really very persistent in this paper we examine the risk situation facing individuals in the labor market the current consensus in the literature is that the labor income process has a large random walk component we argue two points first the estimates of persistence from income data appear to be upward biased due to the omission of heterogeneity in income pro les across the population that would be implied for example by a human capital model with heterogeneity when we allow for dierences in pro les the estimated persistence falls from 0 99 to about 0 8 moreover the main evidence against pro le heterogeneity in the existing literature that the autocorrelations of income changes are small and typically negative is also replicated by the pro le heterogeneity model we estimate casting doubt on the previous interpretation of this evidence second we embed this process in a life cycle model to examine how it alters individuals consumption saving decision we assume that as seems plausible individuals do not know their pro les exactly at the beginning of life but learn in a bayesian way with successive income observations we nd that learning is very slow and aects consumption decision throughout the life cycle the model generates substantial rise in consumption inequality over the life cycle which matches empirical observations deaton and paxson 1994 moreover the shape of the age inequality pro le is non concave as in the data but unlike in a model with very persistent shocks finally the consumption pro les of college graduates are steeper than those of high school graduates in the model consistent with the data because they face a wider dispersion of and hence uncertainty about income growth rates overall this evidence indicates that income shocks may be signi cantly less persistent than what is currently assumed

speculative investor behavior and learning as traders learn about the true distribution of some asset s dividends a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred small differences in prior beliefs lead to large speculative premiums during the learning process this phenomenon helps explain a paradox concerning the pricing of initial public offerings the result casts light on the significance of the common prior assumption in economic models

mutual funds ownership and firm performance evidence from china mutual funds have emerged and rapidly developed since 2000 in china this study tests empirically the impact of mutual funds ownership on firm performance in china using a large sample for the period of 2001 2005 we find that equity ownership by mutual funds has a positive effect on firm performance the result is robust to several measures of firm performance and various estimations our finding supports recent regulatory efforts in china to promote mutual funds as a corporate governance mechanism and suggests that pooling diffuse minority interests of individual shareholders who are prone to free rider problems via mutual funds is beneficial

a generalization of the endogenous grid method abstract this paper extends carroll s 2005 the method of endogenous gridpoints for solving dynamic stochastic optimization problems national bureau of economic research technical working paper 309 endogenous grid method to perform value function iteration in models with more than one control variable we propose to mix the endogenous grid method with standard value function iteration to achieve higher efficiency we illustrate the method using the stochastic neoclassical growth model with and without labor leisure choice we report important gains in efficiency that make value function iteration an attractive computational method in terms of both computing time and accuracy

does corporate governance influence earnings management in latin american markets although us and european research has documented improvement in earnings quality associated with corporate governance characteristics the situation in latin america is questionable given the business environment in which firms operate which is characterized by controlling family ownership and weak legal protection the purpose of this study is to examine the relation between the internal mechanisms of corporate governance and earnings management measured by discretionary accrual we use a sample of listed latin american non financial companies from the period 2006 2009 our results show how in the latin american context the role of external directors is limited and that boards which meet more frequently take a more active position in the monitoring of insiders so showing a lower use of manipulative practices in addition we find a non linear relation between insider ownership and discretionary accruals also pointing to the fact that ownership concentration may be a manipulative practices constrictor mechanism only when the ownership of main shareholders is moderate the findings have important policy implications since this is to the best of our knowledge the first study to analyze the relation between the effectiveness of the government and the earnings management behavior as policy implications we document how when a country implements controls aimed at reducing corruption strengthening the rule of law or improving the effectiveness of government this leads to a reduction in firm earnings management

the japanese saving rate despite much work economists have not been able to quantitatively account for the differences in the japanese and u s saving rates after world war ii in this paper we show that the use of actual japanese total factor productivity growth rates in a standard growth model generates saving rates that are reasonably similar to the japanese data between 1956 and 2000 jel e21 e22 o41 o47

observability and the payback criterion among the enigmas of corporate finance theory that have received little attention is the puzzling use of the payback method as a capital budgeting tool although the payback method has many drawbacks it is widely used in industry see klammer 1972 fremgren 1973 schall sundem and geijsback 1978 1 gordon 1955 attempted to explain this anomaly by observing that the inverse of the payback period is an approximation for the internal rate of return but as sarnat and levy 1969 point out the accuracy of the approximation depends on the life of the project and its irr for low values of irr the inverse of payback is a very poor approximation moreover it is difficult to believe that corporations that use complex and sophisticated technologies need a rule of thumb to approximate something as simple to compute as the irr in fact empirical evidence shows that most firms compute both the irr and the payback period see schall the payback criterion continues to be widely used in industry although there is little support for it among the academicians this paper attempts to find an economic rationale for it by using an incentive model with asymmetric information it argues that when the managers possess private information regarding projects selected for implementation it is in their interest to choose ceteris paribus projects that pay back faster since manager s wages depend on output because their productivity is unknown by choosing projects that pay back fast they hope to improve their reputations i wish to thank milton harris and an anonymous referee for their helpful suggestions while i retain the responsibility for any remaining errors 1 it has been found that payback is rarely used as a primary capital budgeting method it is used as a secondary criterion to a discounted cash flow method such as npv net present value or irr internal rate of return

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

gift giving guanxi and illicit payments in buyer supplier relations in china analysing the experience of uk companies this paper explores the relationship between gift giving guanxi and corruption through a study of the relationships between uk manufacturing companies in china and their local component suppliers the analysis is based on interviews in the china based operations of 49 uk companies interviews were carried out both with senior often expatriate staff and with local line managers who were responsible for everyday purchasing decisions and for managing relationships with suppliers the results suggest that gift giving is perceived to be a significant problem in uk owned companies in china however the relationship between these payments and established understanding of gift giving within guanxi networks appears to be weak gift giving appears to be associated with illicit payments corruption and the pursuit of self interest firms seek to reduce the incidence of illicit transactions by changing staff roles instituting joint responsibilities which include the separation of different aspects of sourcing purchasing ineasing the involvement of senior staff in the process and through the education of employee and suppliers

price formation and liquidity in the u s treasury market the response to public information the arrival of public information in the u s treasury market sets off a two stage adjustment process for prices trading volume and bid ask spreads in a brief first stage the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume demonstrating that price reactions to public information do not require trading the spread widens dramatically at announcement evidently driven by inventory control concerns in a prolonged second stage trading volume surges price volatility persists and spreads remain moderately wide as investors trade to reconcile residual differences in their private views how do financial markets form prices and provide liquidity when information arrives efforts to address this issue have led to an extensive microstructure literature on equity markets and to a lesser extent on the foreign exchange fx market relatively little work has focused on the u s treasury market however in spite of its importance in its own right and the advantages it offers as an alternative testing ground for microstructure hypotheses

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

institutional investment patterns and corporate financial behavior in the united states and japan abstract this paper examines the agency problem between shareholders and debtholders of japanese and u s firms whereas u s institutional investors are restricted from doing so japanese financial institutions take large equity positions in firms to which they lend particularly in firms more susceptible to the agency problem debt ratios of u s firms are negatively related to the firm s potential to engage in risky suboptimal investments whereas japanese debt ratios show no such relation the evidence is consistent with the notion that the agency problem is mitigated to a greater degree in japan than in the u s

financial report readability and stock return synchronicity in this study we investigate the impact of firm specific information processing cost proxied by annual report readability on investors firm specific information usage proxied by firm stock ret

institutional herding in international markets abstract this paper studies herding behavior of institutional investors in international markets first we document the existence of wide spread herding in 41 countries referred to as target countries hereafter in the sample we then examine the relation between contemporaneous institutional demand and future returns and find that institutional herding stabilizes prices next we examine the relation between institutional investors herding behavior and the level of information asymmetry in the target countries we measure the degree of information asymmetry in each target country along five dimensions 1 stock market development 2 ease of access to information 3 corporate transparency 4 investor rights and 5 macroeconomic factors that relate to the information environment we find evidence that institutional investors herd more in markets characterized by low levels of information asymmetry high level of information transparency this result suggests that institutional investors herding behavior is likely driven by correlated signals from fundamental information lastly we show that price adjustment is faster in informationally transparent markets

should we regulate financial information regulations that require asset issuers to disclose payoff relevant information to potential buyers sound like obvious measures to increase investor welfare but in many cases such regulations harm investors in an equilibrium model asset returns compensate investors for risk by making payoffs less uncertain disclosure reduces risk and therefore reduces return as high risk high return investments disappear investor welfare falls of course information is still valuable to each individual investor but acquiring information is like a prisoners dilemma each investor is better off with the information but collectively investors are better off if they remain uninformed the only cases in which providing information improves investors welfare are ones where there would otherwise be severe asymmetric information using a model of information markets the paper explores when such outcomes are likely to arise when we extend the model so that financial markets with information allocate the real capital stock more efficiently these conclusions do not change disclosure improves efficiency but more efficient firms do not have more risk and therefore do not offer investors higher return instead they simply command a higher price which only benefits the asset issuer since the efficiency gains are fully internalized by asset issuers who can choose to disclose without disclosure being mandatory the efficiency argument is not a logical rationale for regulation

how are stock prices affected by the location of trade abstract we examine pairs of large siamese twin companies whose stocks are traded around the world but have different trading and ownership habitats twins pool their cash flows so with integrated markets twin stocks should move together however the difference between the prices of twin stocks appears to be correlated with the markets on which they are traded most i e a twin s relative price rises when the market on which it is traded relatively intensively rises we examine several explanations of this phenomenon including the discretionary use of dividend income by parent companies differences in parent expenditures voting rights currency fluctuations ex dividend date timing issues and tax induced investor heterogeneity only the last hypothesis can explain some but not all of the empirical facts we conjecture that a country specific sentiment shocks might affect share intensity b investors are rational but markets are segmented by frictions other than international transactions costs such as agency problems

when ownership structure matters a review of the effects of investor horizon on corporate policies this paper surveys the literature on the impact of investor horizon on corporate policies while the desire to encourage long term investor ownership is shared among managers boards and policy makers how greater long term investor ownership benefits corporate decisions and ultimately firm performance is still under academic investigation the contribution of this paper is twofold the paper s first contribution is providing an up to date review of theoretical and empirical findings this paper introduces the groups of long term and short term investors and the related classification methodologies and investor horizon proxies used to form them it further reviews the determinants of an investor s horizon then this paper organizes the literature on the impact of investor horizon on corporate policies around three main channels the short term pressure hypothesis the monitoring hypothesis and the catering hypothesis the paper s second contribution is identifying six major challenges ahead that need to be addressed to improve the understanding of the impact of long term short term investor ownership on corporates policies these challenges represent opportunities for further research

redistributive shocks and productivity shocks abstract a productivity innovation reduces labor share at impact making it countercyclical it subsequently produces a long lasting increase that peaks five years later at a level larger in absolute terms than the initial drop before slowly returning to average i e labor share overshoots we estimate a bivariate shock process to the production function that under competition in factor markets accounts for this overshooting we pose this process in an otherwise standard real business cycle economy and we find that the contribution of productivity innovations to the variance of hours is 1 of that in the standard rbc model

why did japan s household savings rate fall in the 1990s this study investigates empirically why japan s household savings rate fell in the 1990s we constructed an economic model consisting of two types of household unconstrained life cycle households and liquidity constrained households unconstrained households generally save but liquidity constrained households consume all of their disposable income we found that the proportion of liquidity constrained households increased sharply in the late 1990s which led to a decline in japan s household savings rate our simulation analysis demonstrates that if the proportion of liquidity constrained households in the 1990s had stayed at the level as that of the late 1980s the household savings rate would have increased by four points in 2001 and 2002

the bright side of managerial over optimism human estimation and inference are subject to systematic biases such as overconfidence and over optimism in contrast to prior research that has identified multiple negative consequences of these biases we focus on positive effects we empirically examine a setting in which over optimism a is a related but different bias from overconfidence b emerges dynamically in a rational economic framework and c generates higher managerial effort importantly this additional effort improves firm profitability and market value

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

man bites dog business cycles the newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact signals that are more likely to be observed after unusual events may increase both uncertainty and disagreement among agents in a simple business cycle model such signals can explain why we observe i occasional large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals ii persistent periods of high macroeconomic volatility and iii a positive correlation between absolute changes in macro variables and the cross sectional dispersion of survey expectations

disagreement and learning dynamic patterns of trade we study volume dynamics when there are disagreements among investors for that purpose we develop a dynamic model in which differences in the interpretation of public information lead to trade we obtain a simple linear equilibrium in closed form in which risk averse agents take into account future trading opportunities when solving for their optimal portfolio allocation using this framework we then study what restrictions on the disagreement process are needed to generate empirically observed patterns in volume and prices we show that having infrequent but major disagreements leads to autocorrelation in volume and correlation between volume and absolute price changes when agents disagree on past news but agree on the interpretation of current news there is learning and the convergence of agents opinions leads to trade

the cyclical and secular behaviour of the labour input comparing efficiency units and hours worked summary a monthly labour input series designed to correct for the fact that all hours worked are not of the same quality is constructed and its properties compared with unadjusted hours worked this efficiency units series is constructed from bls data on hours worked and earnings by age and sex the cyclical fluctuations displayed by the efficiency units series are smaller on average than those displayed by hours worked although the difference is not large however the secular behaviour of the series is quite different hours worked per capita displays a significant positive trend while efficiency units per capita does not

what s different about banks abstract negotiable certificates of deposit cd s trade in the capital market in competition with other securities like commercial paper and bankers acceptances if cd s must pay lenders competitive monetary interest the reserve tax on cd s is borne by bank borrowers viability of the tax means there must be something special about bank loans that makes some borrowers willing to pay higher interest rates than those on other securities of equivalent risk moreover there must be something special about banks that prevents other intermediaries from competing to assure that it never pays to finance loans with cd s

two views of inequality over the life cycle data on the life cycle profiles of inequality in wages earnings hours worked and consumption contain precious information for answering questions about the ability of households to insure labor market risk and about the sources of this risk this paper demonstrates that the choice of whether to control for cohort effects or for time effects has a drastic impact on the estimated age profiles for inequality and thus on the answers to those questions it also shows that time effects are required to account of the observed trends in inequality in 30 years of u s data whereas there is no evidence that cohort effects have been important jel c13 d31 d91 j22 j31

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

public information and uninformed trading implications for market liquidity and price efficiency abstract we develop a rational expectations equilibrium model in which noise trading comes from discretionary liquidity traders the equilibrium quantity of aggregate noise trading is endogenously determined by the population size of liquidity traders active in the financial market by improving market liquidity public information reduces the expected trading loss of liquidity traders and thus attracts more such traders to the market which negatively affects information aggregation analyzing an alternative setting that models noise trading as coming from hedgers yields similar insights in a setting with endogenous information public information can harm information aggregation both through crowding out private information and through attracting noise trading

ownership structure speculation and shareholder intervention an institution holding shares in a firm can use information about the firm both for trading speculation and for deciding whether to intervene to improve firm performance intervention increases the value of the institution s existing shareholdings but intervention only increases the institution s trading profits if it enhances the precision of the institution s information relative to that of uninformed traders thus the ability to speculate can increase or decrease institutional intervention we examine key factors that affect the intervention decision the usefulness of short swing provisions and restricted shares in encouraging institutional intervention and implications for ownership structure across different firms institutional investors hold an ever greater fraction of corporate america s equity traditionally these institutions were stock pickers who tried to beat the market through trading if a firm whose stock they held seemed headed for trouble these investors headed for the door the wall street rule more recently some of these institutions have been using the ownership rights attached to their shares to pressure firms to act in the shareholders interest some have even argued that there is a synergy between gathering information for use in trading shares speculation and intelligently pressuring firms to improve performance intervention we argue that these motives can also conflict analyzing these motives allows us to predict which firms are most likely to attract institutional intervention which in turn has crosssectional implications for firm ownership structure recent examples suggest that institutional investors with large stakes sometimes intervene and sometimes follow the wall street rule so that there is indeed a choice to be studied in the early 1990s there was a wave of activism by a variety of large institutional investors among them calpers the california public employees pension fund putnam management a mutual fund manager and j p morgan a bank holding company these institu

founders heirs and corporate opacity in the united states abstract we argue that information about firm activities can vary substantially in the presence of founder or heir ownership thereby influencing the risks borne by minority investors we explore two hypotheses with regard to these controlling shareholders and corporate transparency focusing on their role as monitor in place and their potential to exploit firm opacity to accrue private benefits of control to test these notions we create an opacity index that ranks the relative transparency of the two thousand largest industrial us firms and find founder and heir ownership in 22 and 25 of these firms respectively our analysis indicates that in large publicly traded companies both founder and heir firms are significantly more opaque than diffuse shareholder firms we also find that founder and heir controlled firms exhibit a negative relation to performance in all but the most transparent firms surprisingly additional tests reveal that concerns about divergences in ownership versus control management type dual class shares and board influence appear to be substantially less important than corporate opacity in explaining the performance impacts of founder and heir control finally we decompose corporate opacity into disclosure and market scrutiny components finding that the disclosure quality component appears to be of greater importance to investors however irrespective of whether these controlling shareholders create or stay in the firm because of corporate opacity our analysis suggests that founders and heirs in large publicly traded firms exploit opacity to extract private benefits at the expense of minority investors

relative wage movements and the distribution of consumption we analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare our empirical work draws on the best available cross sectional data sets to construct synthetic panel data on u s consumption labor supply and wages during the 1980s we find that low frequency movements in the cohort education structure of pretax hourly wages among men drove large changes in the distribution of household consumption the results constitute a spectacular failure of between group consumption insurance a failure not explained by existing theories of informationally constrained optimal consumption behavior a welfare analysis indicates that the cost of between group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude

asset prices and trading volume in a beauty contest speculators buy an asset hoping to sell it later to investors with higher private valuations if agents are uncertain about the distribution of private valuations and about the beliefs of others about this distribution a beauty contest with an infinite hierarchy of beliefs arises under harsanyi s assumption of a common prior the infinite beliefs hierarchy is readily solved using bayes law this paper shows that common knowledge of the beliefs formation rule mapping the private valuation of each agent into his first order belief also simplifies the beliefs hierarchy while allowing for disagreement among agents we analyse the resulting speculation in a stylized asset market several statistics computed only from readily observable quote return and volume data are evaluated in terms of their power to discriminate between genuine disagreement and the harsanyian case only statistics that relate volume and volatility or volume and changes in best offers have the necessary discriminatory power

information diversity and complementarities in trading and information acquisition we analyze a model in which different traders are informed of different fundamentals that affect the security value we identify a source for strategic complementarities in trading and information acquisition aggressive trading on information about one fundamental reduces uncertainty in trading on information about the other fundamental encouraging more trading and information acquisition on that fundamental this tends to amplify the effect of exogenous changes in the underlying information environment due to complementarities greater diversity of information in the economy improves price informativeness we discuss the relation between our model and recent financial phenomena and derive testable empirical implications

a simple theory of advertising as a good or bad our analysis treats advertisements and the goods advertised as complements in stable metautility functions and generates new results for advertising by building on and extending the general analysis of complements by assimilating the theory of advertising into the theory of complements we avoid the special approaches to advertising found in many studies that place obstacles in the way of understanding the effects of advertising we also use this approach to evaluate advertising from a welfare perspective whether there is excessive or too little advertising depends on several variables the effects on consumer utility the degree of competition in the market for advertised goods the induced changes in prices and outputs of advertised goods and whether advertising is sold to consumers

on the consequences of demographic change for rates of returns to capital and the distribution of wealth and welfare in the industrialized world the population is aging over time reducing the fraction of the population in working age consequently labor is expected to be scarce relative to capital with an ensuing decline in the real return on capital this paper uses demographic projections together with a large scale multi country overlapping generations model with uninsurable idiosyncratic uncertainty to quantify the distributional and welfare consequences of these changes in factor prices induced by the demographic transition in our model capital can freely flow between different regions in the oecd the u s the eu and the rest of the oecd thus international capital flows may in principle mitigate the decline in rates of returns one would expect in the u s if it were a closed economy we find exactly the opposite in the u s as an open economy rates of return are predicted to decline by 86 basis points between 2005 and 2080 if the u s were a closed economy this decline would amount to only 78 basis points this result is due to the fact that other regions in the oecd will age even more rapidly therefore the u s is importing the more severe aging problem from these regions especially europe a similar conclusion is reached if we let capital flow freely between the oecd and the rest of the world row while row currently has a younger population structure it is predicted to age even more severely in the next decades giving rise to an even more pronounced decline in world rates of return to capital in order to evaluate the welfare consequences of the demographic transition we ask the following hypothetical question suppose a household economically born in 2005 would live through the economic transition with changing factor prices induced by the demographic change but keeping her own survival probabilities constant at their 2005 values how would its welfare have changed relative to a situation without a demographic transition we find that households experience significant welfare losses due to the demographic transition in the order of 2 5 of consumption depending on their initial productivity level and the design of the pension system these losses are mainly due to the fact that lower future returns to capital make it harder for households to save for retirement on the other hand if the oecd suddenly opens up to row in 2005 and row has higher returns to capital before the world capital market integration then these losses are reduced to 1 5 2 5

informed trading before positive vs negative earnings surprises abstract this paper investigates whether institutional investors trade profitably around the announcements of positive or negative earnings surprises using korean data over the period of 2001 2010 we find that information asymmetry is larger before negative earnings surprises earnings shock among investors and that the trading volume decreases only before earnings shock announcements due to the severe information asymmetry we also find that institutions sell their stocks prior to earnings shock announcements whereas individual and foreign investors do not anticipate bad news finally we find that institutional trade imbalance is positively related to the post announcement abnormal returns of negative events this study complements and extends prior literature on informed trading around earnings announcements by documenting evidence that domestic institutions exploit their superior information around particularly earnings shock announcements

risk sharing between and within families this paper uses the panel study of income dynamics to test whether risk sharing is complete between or within american families the tests accommodate a wide variety in the configuration and availability of family data the test results reject inter as well as intra family full risk sharing even assuming that leisure is endogenous or that leisure and consumption are nonseparable

the seemingly anomalous price behavior of royal dutch shell and unilever n v plc abstract we examine two anglo dutch groups the shares of whose parents trade on several international exchanges within each group the parents corporate charters mandate the division of cash flows available for distribution this implies a specific ratio for the market prices of their securities we document persistent deviations from these ratios on both the new york and london exchanges the direction and magnitude of the mispricing are common to both pairs of stocks and both markets nevertheless we find no evidence of profitable intra or intermarket trading rules

business ties and proxy voting by mutual funds abstract the magnitude of mutual funds business ties with their portfolio firms is documented and is linked to funds proxy votes at specific firms and to overall voting practices aggregate votes at the fund family level indicate a positive relation between business ties and the propensity to vote with management votes at specific firms however reveal that funds are no more likely to vote with management of client firms than of non clients because the votes took place when funds knew their votes would be publicly scrutinized fund families with a larger client base may have adopted voting policies that led to less frequent opposition to management at all firms

managerial incentives and capital management the paper shows how career concerns rather than effort aversion can induce a natural incongruity in risk preferences between managers and superiors a model based on learning about managerial talent is developed to study second best contractual remedies we show that the optimal wage contract is an option of the value of the manager s human capital for insurance reasons and that consequently rationing of capital is often required to counterbalance the manager s resulting incentive to overinvest rationing is strictly superior to price decentralization offering one reason for the prevalence of centralized capital budgeting procedures

home bias foreign mutual fund holdings and the voluntary adoption of international accounting standards we test the assertion that a consequence of voluntarily adopting international accounting standards ias is the enhanced ability to attract foreign capital using a unique database that reports firm level holdings of over 25 000 mutual funds from around the world our multivariate tests find that average foreign mutual fund ownership is significantly higher among ias adopters we also find that ias adopters in poorer information environments and with lower visibility have higher levels of foreign investment consistent with firms using ias adoption to provide more information and or information in a more familiar form to foreign investors taken together our findings are consistent with voluntary las adoption reducing home bias among foreign investors and thereby improving capital allocation efficiency

macroeconomic news order flows and exchange rates under rational expectations and efficient markets the news contained in public information announcements is directly impounded into prices with there being no role for trades in this process of information assimilation this paper directly tests this assertion using transaction level exchange rate data and a sample of scheduled macroeconomic announcements the main result of the paper is that even information that is publicly and simultaneously released to all market participants is largely impounded into prices via the key micro level price determinant order flow we quantify the role that order flow plays and find that between a half and two thirds of price relevant information is incorporated into prices via the trading process

differential interpretation of public signals and trade in speculative markets most models of trade in speculative markets assume that agents interpret public information identically we provide empirical evidence on the relation between the volume of trade and stock returns around public announcements and we argue that the evidence is inconsistent with this assumption we then develop a model of trade around public announcements that incorporates differential interpretations and is consistent with the observed volume return relation then we test the standard model of belief revision underlying most models of trade using stock brokerage research analysts earnings forecasts the hypthesis of identical interpretations seems inconsistent with the forecast revisions in these data

forecasting the forecasts of others implications for asset pricing we develop a dynamic asset pricing model with heterogeneously informed agents unlike previous research we focus on the general case where differential information leads to the problem of forecasting the forecasts of others and to non trivial dynamics of higher order expectations in particular we prove that the model does not admit a finite number of state variables using numerical analysis we compare equilibria characterized by identical fundamentals but different information structure we demonstrate that the distribution of information has substantial impact on equilibrium prices and returns in particular we show that asymmetric information can generate momentum in returns and high trading volume

rational asset pricing bubbles this paper provides a fairly systematic study of general economic conditions under which rational asset pricing bubbles may arise in an intertemporal competitive equilibrium framework our main results are concerned with nonexistence of asset pricing bubbles in those economies these results imply that the conditions under which bubbles are possible including some well known examples of monetary equilibria are relatively fragile this paper is concerned with the conditions under which asset prices in an intertemporal competitive equilibrium are equal to the present value of the streams of future dividends to which each asset represents a claim according to a central result of the theory of finance this is very generally true in the case of economies with trading at only a finite sequence of dates as long as there are no restrictions upon transactions other than that associated with possible incom pleteness of the set of securities that are traded the result is sometimes called the fundamental theorem of asset pricing here we consider the extent to which such a result continues to be valid in the case of trading over an infinite horizon it has often been observed in the econometric literature on asset pricing bubbles that it is possible in principle for the price of a perpetuity and the dividends on that security to satisfy at all times a present value relation for one period holding returns while the security s price nonetheless does not equal the present value of the stream of dividends expected over the infinite future in such a case the price of the perpetuity is said to involve a bubble component 2 joint stochastic processes for which this component is nonzero are sometimes argued to characterize existing assets for a recent example see froot and obstfeld 1991 but such an inference depends upon aspects of the stochastic

the association between outside directors institutional investors and the properties of management earnings forecasts we investigate the relation of the board of directors and institutional ownership with the properties of management earnings forecasts we find that firms with more outside directors and greater institutional ownership are more likely to issue a forecast and are inclined to forecast more frequently in addition these forecasts tend to be more specific accurate and less optimistically biased these results are robust to changes specification granger causality tests and simultaneous equation analyses the results are similar in the pre and post regulation fair disclosure reg fd eras additional analysis suggests that concentrated institutional ownership is negatively associated with forecast properties this association is less negative in the post reg fd environment which is consistent with reg fd reducing the ability of firms to privately communicate information to select audiences

pre announcement and event period private information abstract pre announcement information is private information gathered in anticipation of a public disclosure event period information is private information useful in conjunction with the announcement itself typically rational models of trade are based exclusively on one type of information such models are less descriptive of real market settings and misspecified empirically therefore we introduce a model of rational trade with both features and discuss its implications

the macroeconomic implications of rising wage inequality in the united states in recent decades american workers have faced a rising college premium a narrowing gender gap and increasing wage volatility this paper explores the quantitative and welfare implications of these changes the framework is an incomplete markets life cycle model in which individuals choose education intrafamily time allocation and savings given the observed history of the u s wage structure the model replicates key trends in cross sectional inequality in hours worked earnings and consumption recent cohorts enjoy welfare gains on average as higher relative wages for college graduates and for women translate into higher educational attainment and a more even division of labor within the household

consumption inequality and income uncertainty this paper places the debate over using consumption or income in studies of inequality growth in a formal intertemporal setting it highlights the importance of permanent and transitory income uncertainty in the evaluation of growth in consumption inequality we derive conditions under which the growth of variances and covariances of income and consumption can be used to separately identify the growth in the variance of permanent and transitory income shocks household data from britain for the period 1968 1992 are used to show a strong growth in transitory inequality toward the end of this period while younger cohorts are shown to face significantly higher levels of permanent inequality

the evolution of income concentration in japan 1886 2005 evidence from income tax statistics abstract this paper studies the evolution of income concentration in japan from 1886 to 2005 by constructing long run series of top income shares and top wage income shares using income tax statistics we find that i income concentration was extremely high throughout the pre wwii period during which the nation underwent rapid industrialization ii a drastic de concentration of income at the top took place in 1938 1945 iii income concentration remained low during the rest of the century but shows some sign of increase in the last decade and iv top income composition in japan has shifted dramatically from capital income to employment income over the course of the twentieth century we attribute the precipitous fall in income concentration during wwii primarily to the collapse of capital income due to wartime regulations and inflation we argue that the change in the institutional structure under the occupational reforms made the one time income de concentration difficult to reverse in contrast t

how informed are actively trading institutional investors evidence from their trading behavior before a break in a string of consecutive earnings increases we examine whether transient institutional investors i e institutions that trade actively to maximize short term profits have information that allows them to predict a break in a string of consecutive quarterly earnings increases and thereby avoid the economically significant negative stock price response associated with the break announcement we show that transient institutions predict the break at least one quarter in advance of the break quarter we also provide evidence that is consistent with transient institutions obtaining information regarding the impending break from private communications with management

stealth trading which traders trades move stock prices usingaudit trail data for a sample of nyse firms we show that medium size trades are associated with a disproportionately large cumulative stock price change relative to their proportion of all trades and volume this result is consistent with the predictions of barclay and warner s 1993 stealth tradinghypothesis we find that the source of this disproportionately large cumulative price impact of medium size trades is trades initiated by institutions this result is robust to various sensitivity checks our findings appear to confirm street lore that institutions are informed traders 2001 elsevier science s a all rights reserved

why don t we agree evidence from a social network of investors we study sources of investor disagreement using sentiment of investors from a social media investing platform combined with information on the users investment approaches e g technical fundamental we examine how much of overall disagreement is driven by different information sets versus differential interpretation of information by studying disagreement within and across investment approaches overall disagreement is evenly split between both sources of disagreement but within group disagreement is more tightly related to trading volume than cross group disagreement although both sources of disagreement are important our findings suggest that information differences are more important for trading than differences across market approaches

income risk macroeconomic and demographic change and economic inequality in japan abstract using an olg model with heterogeneous households we investigate the relationship among income risk macroeconomic and demographic changes and economic inequality between 1980 and 2000 in japan by decomposing the primary factors in earnings and consumption inequality into macroeconomic variables and the demographic variable we find that our model replicates the evolution of economic inequality in japan by performing counterfactual simulations we demonstrate that two factors changes in time varying macroeconomic factors and the unexpected decline in the total factor productivity growth rate played important roles in the increase in earnings and consumption inequality in the 1990s

efficient use of information and social value of information this paper analyzes equilibrium and welfare for a tractable class of economies games that have externalities strategic complementarity or substitutability and heterogeneous information first we characterize the equilibrium use of information complementarity heightens the sensitivity of equilibrium actions to public information raising aggregate volatility whereas substitutability heightens the sensitivity to private information raising cross sectional dispersion next we define and characterize an efficiency benchmark designed to address whether the equilibrium use of information is optimal from a social perspective the efficient use of information reflects the social value of aligning choices across agents finally we examine the comparative statics of equilibrium welfare with respect to the information structure the social value of information is best understood by classifying economies according to the inefficiency if any in the equilibrium use of information we conclude with a few applications including production externalities beauty contests business cycles and large cournot and bertrand games

player and referee roles held jointly the effect of state ownership on china s regulatory enforcement against fraud this article examines the impact of the prevailing state ownership in the chinese stock market on corporate governance and the financial regulatory system respectively as the internal and external monitoring mechanisms to deter corporate fraud and protect investors in line with the literature that state ownership exaggerates the agency problem we find that the retained state ownership in privatised firms increases the incidence of regulatory enforcements against fraud for the state owned enterprises soes however larger state ownership is associated with a lower incidence of enforcement actions this is attributed to the mutual political affiliation of the fraudulent soes and the regulatory commission a new regulation solutions for listed firm checks promulgated in march 2001 has mitigated this effect by empowering the regulatory commission to increase the severity of regulatory conditions our evidence confirms the improvement in the regulatory environment and investor protection in the chinese stock market brought about by the regulatory reform and development

differential information and dynamic behavior of stock trading volume this article develops a multiperiod rational expectations model of stock trading in which investors have differential information concerning the underlying value of the stock investors trade competitively in the stock market based on their private information and the information revealed by the market clearing prices as well as other public news we examine how trading volume is related to the information flow in the market and how investors trading reveals their private information article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

good disclosure bad disclosure we study the implications of public information in a model where market prices convey information to relevant decision makers and the uctuation of market prices is driven by multiple factors disclosure has a positive direct eect of providing new information and an indirect eect of changing the price informativeness if disclosure is about a variable of which real decision makers are well informed then the indirect eect is also positive so that the direct eect is ampli ed leading to a positive overall eect on real e ciency if disclosure is about a variable that real decision markers care to learn much then the indirect eect is negative and the direct eect is attenuated moreover in markets which aggregate private information eectively the negative indirect eect can dominate so that disclosure can harm real e ciency

beauty contests and iterated expectations in asset markets in a financial market where traders are risk averse and short lived and prices are noisy asset prices today depend on the average expectation today of tomorrow s price thus iterating this relationship the date 1 price equals the date 1 average expectation of the date 2 average expectation of the date 3 price this will not in general equal the date 1 average expectation of the date 3 price we show how this failure of the law of iterated expectations for average belief can help understand the role of higher order beliefs in a fully rational asset pricing model and explain over reaction to noisy public information

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

the effects of direct to consumer advertising of pharmaceuticals on adherence we evaluate the effect of direct to consumer dtc advertising on adherence to the standard drug regimen for treating high cholesterol statins we use a rich panel data set from an insurance firm that includes all prescription drug purchases and insurance claims from 1997 to 2002 the data include the relevant demographic variables including income we match this data with unique data from nielsen monitor plus on monthly dtc advertising expenditures by therapeutic category for all media types the research strategy identifies individuals who have been diagnosed with specific chronic conditions and tracks whether adherence as measured by purchases of specific prescription drugs within designated therapeutic classes can be explained in part by the level and type of dtc advertising to which the individual was potentially exposed income has a positive effect on adherence we find that advertising has a small negative effect on the average level of adherence we find some suggestive evidence that this is b

consumption and risk sharing over the life cycle a striking feature of u s data on income and consumption is that inequality increases with age this paper asks if individual specific earnings risk can provide a coherent explanation we find that it can we construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes earnings inequality is exogenous and is calibrated to match data from the u s panel study on income dynamics consumption inequality is endogenous and matches well data from the u s consumer expenditure survey the total risk households face is decomposed into that realized before entering the labor market and that realized throughout the working years in welfare terms the latter is found to be more important than the former

polarization and ambiguity we oer a theory of polarization as an optimal response to ambiguity suppose individual a s beliefs rst order stochastically dominate individual b s they observe a common signal they exhibit polarization if a s posterior dominates her prior and b s prior dominates her posterior given agreement on conditional signal likelihoods we show that polarization is impossible under bayesian updating or after observing extreme signals however we also show that polarization can arise after intermediate signals as ambiguity averse individuals implement their optimal prediction strategies we explore when this polarization will occur and the logic underlying it some previous versions of this paper had the title ambiguity dynamic consistency

the more we know about the fundamental the less we agree on the price i allow trading horizon heterogeneity across groups in a standard differential information model of a financial market this approach can explain the well established phenomenon that after a public announcement trading volume increases more private information is incorporated into prices and volatility increases in such environments public information has the important secondary role of helping agents learn about the information of other agents therefore whenever the correlation between the private information of different groups is sufficiently low a public announcement increases disagreement among short horizon traders regarding the expected selling price even as it decreases disagreement about the fundamental value of the asset additional testable implications are also suggested

the effect of central bank transparency on exchange rate volatility abstract the increase in central bank transparency has been one of the main developments in central banking in the past two decades this leads to the question of the effect of central bank transparency on the volatility of exchange rates according to theoretical considerations more information could lead to either more precise forecasts or more noise trading this raises the need for an empirical estimation of the relationship the present study shows that the effect of central bank transparency on exchange rate volatility depends on a country s development while there is no effect of central bank transparency in the full sample and for developing countries transparency increases exchange rate fluctuations in developed countries

oligopolistic pricing and advertising abstract n sellers advertise a homogeneous good to m buyers whose only source of information is this advertising there is a unique nash equilibrium ne in which sellers choose a common advertising level and mix over prices this ne approaches marginal cost pricing as advertising costs decrease and approaches monopoly pricing as advertising costs increase more sellers induce lower prices and less advertising per seller however the social welfare effect can be negative for some advertising technologies the ne advertising level is generically less than socially optimal journal of economic literature classification numbers d00 d4 d43 d8 d83 i00 i1 i13 m37

mutual fund activism and market regulation during the pre ifrs period the case of earnings informativeness in china from an ethical perspective this paper investigates the emerging effect of mutual fund involvement on the agency problem between majority and minority shareholders during the pre ifrs period in china indicated by earnings informativeness from an ethical perspective we find that the presence of mutual fund hampers earnings informativeness implying that mutual funds in general at their early stage in china are not yet capable of serving as an effective monitor this finding is in sharp contrast to the role of institutional investors in mature markets as documented in the literature however mutual funds affiliated with banks have been found to be effective to improve earnings informativeness of chinese listed companies and the impact is more pronounced among those affiliated with joint equity banks compared to their counterparts affiliated with state owned banks

consumption taxes and economic efficiency with idiosyncratic wage shocks fundamental tax reform is examined in an overlapping generations model in which heterogeneous agents face idiosyncratic wage shocks and longevity uncertainty a progressive income tax is replaced with a flat consumption tax if idiosyncratic wage shocks are insurable i e no risk this reform improves interim efficiency a result consistent with the previous literature but if more realistically wage shocks are uninsurable this reform reduces efficiency even though national wealth and output increase over the entire transition path this efficiency loss in large part stems from reduced intragenerational risk sharing that was previously provided by the progressive tax system

changes in institutional ownership and stock returns assessment and methodology although the relation between quarterly changes in institutional investor ownership and contemporaneous stock returns is well documented the source of the relation remains unclear because institutional ownership data are unavailable at higher frequencies in this study we develop a method to generate estimates of higher frequency covariances when one variable is observed at lower frequencies e g quarterly changes in institutional ownership and monthly stock returns our method provides evidence that institutional trading has both temporary and permanent price effects and that the latter is associated with information effects

crises and prices information aggregation multiplicity and volatility crises are volatile times when endogenous sources of information are closely monitored we study the role of information in crises by introducing a financial market in a coordination game with imperfect information the asset price aggregates dispersed private information acting as a public noisy signal in contrast to the case with exogenous information our main result is that uniqueness may not obtain as a perturbation from perfect information multiplicity is ensured with small noise in addition we show that a multiplicity may emerge in the financial price itself b less noise may contribute toward nonfundamental volatility even when the equilibrium is unique and c similar results obtain for a model where individuals observe one another s actions highlighting the importance of endogenous information more generally

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed

why does financial strength forecast stock returns evidence from subsequent demand by institutional investors using institutional investor demand as a proxy for revisions in sophisticated investors expectations we test whether financial strength information is gradually impounded over time consistent with the gradual incorporation of information financial strength predicts both future returns and future institutional investor demand further consistent with the gradual incorporation of information more sophisticated transient high turnover institutions respond to financial strength signals prior to less sophisticated nontransient institutions a number of additional tests suggest that financial strength forecasts stock returns at least in part because it forecasts institutional demand and institutional demand drives prices the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press