an equilibrium model of asset trading with sequential information arrival in an effort to better understand the dynamic market price adjustment process this paper develops a model which describes the impact of new information on a financial market the primary emphasis is on the price change volume relationship in the presence of a margin requirement we find that the margin requirement significantly affects the relation of price change to volume furthermore this relationship is shown to be affected by the number of investors in the market the degree of information dissemination differences in interpretation of information and the implicit cost of the margin requirement

country of origin effects on product evaluations this article reviews the literature regarding the effect of country of origin on buyer evaluations of products the issue is important for countries especially resource poor developing countries that need to increase manufactured exports and for firms that source products in countries different from where sold marketing inferences are drawn and implications for future research are developed

internal capital markets and the competition for corporate resources this article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market unlike a bank headquarters has control rights that enable it to engage in winner picking the practice of actively shifting funds from one project to another by doing a good job in the winner picking dimension headquarters can create value even when it cannot help at all to relax overall firm wide credit constraints the model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects this article analyzes the process by which internal capital markets channel limited resources to different uses inside a company in so doing it seeks to address two related sets of questions first what is the fundamental economic rationale for creating an internal capital market that is under what circumstances can it make sense to combine several technologically distinct projects under one roof and have them seek funding from corporate headquarters as opposed to setting them up as stand alone companies that each raise external financing on their own second given this rationale what is the optimal size and scope of an internal capital market should headquarters be involved in funding a large number of projects or just a few and should these projects be unrelated to one another or in similar lines of business the answers to both sets of questions flow from the insight that in a credit constrained setting where not all positive npv projects can be financed headquarters can create value by actively reallocating scarce funds across projects for example the cash flow generated by one division s activities may be taken and spent on investment in another division where the returns are higher or alternatively one division s assets may be used as collateral to raise financing that is then diverted to the other division simply put individual projects must compete for the scarce funds and headquarters job is to pick the winners and losers in this competition

stock markets and development this paper asks if financial development especially stock market development affects the level and or the growth rate of economic activity it finds a substantial effect on both current wisdom suggests that the growth effects of financial intermediation could be either permanent or transitory for instance the greenwood jovanovic 1990 henceforth gj model has an ak stucture with no diminishing returns to the reproducible factor and a permanent exogenous improvement in financial structure would cause a permanent increase in the rate of growth on the other hand if the returns to the reproducible factor did diminish better intermediation could lead only to level effects since one should not a priori exclude either growth effects or level effects we shall look for both our search for growth effects will use the gj model our search for level effects will rely on an amended version of the mankiw romer and weil 1992 henceforth mrw structure

security analysis and trading patterns when some investors receive information before others in existing models of information acquisition all informed investors receive their information at the same time this article analyzes trading behavior and equilibrium information acquisition when some investors receive common private information before others the model implies that under some conditions investors will focus only on a subset of securities herding while neglecting other securities with identical exogenous characteristics in addition the model is consistent with empirical correlations that are suggestive of oft cited trading strategies such as profit taking short term position reversal and following the leader mimicking earlier trades in existing models of information acquisition all informed investors receive their information at the same time while these models provide many important insights in reality some investors either fortuitously or owing to superior skill acquire pertinent information before others by being first an investor can exploit this information to great advantage information that is uncovered only slightly later is less valuable even if it has not yet been publicly revealed we show in this article that the sequential nature of information arrival has a significant effect on both the trading decisions and the types of information collected by investors the model we develop describes the investment choices of a set of competitive risk averse investors who investigate the long term prospects of firms lucky or high ability investors uncover the

financial markets the real economy and self fulfilling uncertainties we develop a model of informational interdependence between financial markets and the real economy linking economic uncertainty to information production and aggregate economic activities in general equilibrium the mutual learning between financial markets and the real economy creates a strategic complementarity in their information production leading to self fulfilling surges in economic uncertainties in a dynamic setting our model characterizes self fulfilling uncertainty traps with two steady state equilibria and a two stage economic crisis in transitional dynamics

the product variety case for protection abstract the paper shows the existence of a case for protection in a small open economy in which there is preference diversity and potential product differentation with scale economies the optimal tariff gives partial protection only is a first best solution and must be sustained the welfare loss that is corrected by the tariff is that due to a sub optimal degree of product variety arising from market failure linked to economies of scale

a theory of disclosure in speculative markets this paper presents a theory of disclosure in a market where investors have heterogeneous beliefs and face short sale constraints assets trade above fundamentals reflecting the value of the option to sell to more optimistic investors in the future the initial seller has an incentive to commit to an imprecise disclosure policy despite the negative effect this has on the fundamental value of the asset in order to increase the potential for disagreement and hence the magnitude of the speculative premium i show that there is a strategic complementarity between sellers in their disclosure decisions this explains why financial misreporting and episodes of speculation occur together in waves and demonstrates that the endogenous choice of imprecise disclosure amplifies the extent to which assets are overpriced this paper was accepted by amit seru finance

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 allocation and monitoring role of capital markets theory and international evidence capital markets perform two distinct functions provision of capital and facilitation of good governance through information production and monitoring i argue that the governance function has more impact on the efficiency with which resources are utilized within the firm based on industry level data across 38 countries i present evidence suggesting a positive relation between market based governance and improvements in industry efficiency the measures of governance are also positively correlated with productivity improvements and growth in real output furthermore while governance affects efficiency the capital provision services induce technological change the evidence underscores the role of capital markets as a conduit of socially valuable governance services as distinct from capital provision

voluntary disclosures and analyst feedback we study the resource allocation role of voluntary disclosures when feedback from financial markets is potentially useful to managers in undertaking value maximizing actions managers weigh the short term price implications of disclosure against the long term efficiency gains due to feedback while financial analysts strategically produce information the model can explain why managers disclose bad information e g grim outlook that reduces the stock price and why prices respond more strongly to bad news relative to good news we find that not all firms enjoy the same quality of feedback and that feedback by itself does not induce more disclosure but less

takeover motives during the conglomerate merger wave this article examines the stock market response to acquisition announcements during and immediately after the conglomerate merger wave of the late 1960s the main finding is that acquirer shareholders benefited from diversification acquisitions which implies that diversification was not driven by managerial objectives it is also shown that the market responded positively to bidders who retained the management of target companies and negatively to bidders who replaced target management this is consistent with the hypothesis that the market favored acquisitions intended to exploit managerial synergies it suggests that the market disliked takeovers that were motivated to discipline target management evidence on buyer and target price earnings ratios is presented that is inconsistent with the conjecture that conglomerates were able to mislead investors by earnings per share manipulation

explaining top management turnover in private corporations the role of cross country legal institutions and capital market forces we investigate private firms ability to identify and replace poorly performing managers across countries we document three main findings first private firms are more likely to retain poorly performing managers in countries where legal institutions that protect minority investors are weak second private firms are more likely to retain poorly performing managers than public firms only in countries where governance mechanisms inherent in public equity markets limit managerial entrenchment in public firms third private firm managers are less likely to be replaced even when poor performance continues for relatively long horizons overall our findings provide new evidence on the potential vulnerability of minority shareholders in private firms

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

crowding out and the informativeness of security prices individual investors trade less agressively on any particular piece of information as more investors observe it the trades of the new investors observing a piece of information crowd out some of the trades of the old investors who observe that same piece of information this paper shows that when traders are risk averse these crowding out effects lead the proportions of traders who choose to observe one signal versus another to differ from the proportions that maximize the informativeness of prices one of the principal functions of security markets is to provide incentives for individuals to collect economically relevant information and then to incorporate this information into pricing this paper shows that the presence of multiple types of information can have a major impact on investors incentives to acquire information and the informativeness of the resulting security price specifically the model studies the case in which there are two factors a and b whose sum is the asset s payoff and a fixed pool of investors each of which is about to choose whether to learn a or to learn b the paper addresses the question will the proportion of investors who choose to learn a in equilibrium maximize the security price s ability to predict terminal value the paper finds that when traders are risk averse the answer is no and that there is a clear economic interpretation for the forces which push the equilibrium allocation of information away from the allocation which maximizes price informativeness the paper also finds strikingly different results for risk neutral and riskaverse investors this suggests that intuitions gained from models with risk neutral strategic traders1 may not be robust to situations with riskaverse investors

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

initial public offerings in hot and cold markets the literature offers many explanations for why the ipo market cycles from hot to cold these include theories in which hot markets represent clusters of ipos in a new industry and signaling models that predict that hot markets draw in better quality firms others suggest hot market ipos stock returns reflect their poor quality we compare ipos over cycles during 1975 2000 and find that hot and cold ipo markets do not differ so much in the characteristics of the firms that go public as in the quantity of firms that go public both hot and cold ipos are largely concentrated in the same narrow set of industries and they have few distinctions in profits age or growth potential our results suggest that hot markets are not driven primarily by changes in adverse selection costs managerial opportunism or technological innovations but more likely reflect greater investor optimism

the informational content of prices when policy makers react to financial markets abstract when can policy makers use policy relevant information from financial market prices and how does policy affect price informativeness i analyze a novel setting with noise where a policy maker tries to infer information about a state variable from prices to improve policy decisions and policy in turn affects asset values i derive a necessary and sufficient condition for the possibility of information revelation in equilibrium which might not be possible if the policy reaction to prices punishes traders for revealing their information if the policy maker is uninformed then policy objectives do not change price informativeness but they do if the policy maker has independent information about the state i also analyze policy maker transparency and find that policy makers with objectives having a large impact on asset values should publish their information before trading to make prices more informative in other cases intransparency can be optimal

privatization financial development property rights and growth abstract this study analyzes how prevailing institutional arrangements i e property rights contracting rights political institutions and corporate governance practices affect privatized firms performance capital markets development and economic growth most of the studies surveyed show that privatization enhances privatized firms performance efficiency and profitability which percolates to economic growth privatized firms performed better in countries with better regulatory and legal frameworks partial privatization may be beneficial in countries with weak institutions namely the french civil law countries the stronger the economic and the governing institutions the easier it is for privatized firms to thrive and contribute to economic growth overall privatization allows firms to achieve improved efficiency while driving the development of the financial sector

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

an empirical investigation of ipo returns and subsequent equity offerings abstract several recent papers present signaling models in which firms underprice their initial public offerings of equity ipos so that they can subsequently issue seasoned equity at more favorable prices we test the implications of these models we find a positive relation between ipo underpricing and the probability and size of subsequent seasoned offerings although these results are consistent with the implications of the signaling hypotheses the economic significance appears weak we conduct additional tests to evaluate other explanations for these findings and find the alternatives more compelling

the real effects of financial markets the impact of prices on takeovers using mutual fund redemptions as an instrument for price changes we identify a strong effect of market prices on takeover activity the trigger effect an interquartile decrease in valuation leads to a seven percentage point increase in acquisition likelihood relative to a 6 unconditional takeover probability instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover the anticipation effect our results overturn prior literature that finds a weak relation between prices and takeovers without instrumentation these findings imply that financial markets have real effects they impose discipline on managers by triggering takeover threats does a low market valuation make a firm a takeover target in theory if acquisition prices are related to market prices acquirers can profit from taking over a firm whose market value is low relative to its peers due either to mispricing or mismanagement and restore it to its potential indeed in practice acquirers and other investors appear to track a firm s valuation multiples for indications on the potential for acquisition and managers strive to maintain high market valuations to prevent a hostile takeover understanding whether such a link exists is important because if so this would suggest that the market is not a sideshow but rather exerts a powerful disciplinary effect on firm management as suggested by marris 1964 manne 1965 a ndjensen 1993 despite the above logic existing empirical studies on takeovers fail to systematically uncover a meaningful relationship between market valuations

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

financial system architecture this article builds a theory of financial system architecture we ask what is a financial market what is a bank and what determines the economic role of each starting with basic assumptions about primitives the types of agents and the nature of the informational asymmetries we provide a theory that explains which agents coalesce to form banks and which trade in the capital market it is shown that borrowers of higher observable qualities access the financial market moreover a financial system in its infancy will be bank dominated and increased financial market sophistication diminishes bank lending article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

informational feedback adverse selection and optimal disclosure policy faceless trading in a secondary stock market not only redistributes wealth among investors but also generates information that feeds back to real decisions using this observation we re evaluate the leveling the playing field rationale for disclosure to secondary stock markets by partially preempting traders information advantage established from information acquisition disclosure reduces private incentives to acquire information resulting in two opposite effects on firm value on one hand this narrows the information gap between informed and uninformed traders and improves liquidity of firm shares on the other hand this reduces the informational feedback from the stock market to real decisions this tradeoff determines the optimal disclosure policy the model explains why firm value can be higher in an environment that simultaneously promotes disclosure and private information production and why growth firms are endogenously more opaque than value firms

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

the going public decision and the development of financial markets this paper explores the linkages between stock price efficiency the choice between private and public financing and the development of capital markets in emerging economies generally the advantage of public financing is high if costly information is diverse and cheap to acquire and if investors receive valuable information without cost the value of public firms generally depends on public market size which implies that there can be a positive externality associated with going public so that an inferior equilibrium can exist where too few firms go public the model is consistent with empirical observations on financial market development

a computable general equilibrium model of the southern region of taiwan the impact of the tainan science based industrial park the primary modelling tools used to analyse regional economic issues include econometric forecasting models fixed price input output i o multi sector models social accounting matrix sam and computable general equilibrium cge models cge models combine the advantages of econometric i o models and sam strengthening the theoretical basis of the modelling effort and thus enabling more precise policy analysis current cge literature includes models used to analyse international trade tax reform energy and environment issues however application of this technique on a regional scale is rare in the scientific literature in this paper a small regional computable general equilibrium model is constructed and applied to analyse the economic impact of constructing tainan science based industrial park tsbip locating in southern taiwan the research results provide a valuable reference for decision makers in formulating industrial and regional policies as well as helping business managers with strateg

blocks liquidity and corporate control the paper develops a simple model of corporate ownership structure in which costs and benefits of ownership concentration are analyzed the model cornpares the liquidity benefits obtained through dispersed corporate ownership with the benefits from efficient management control achieved by some degree of ownership concentration the paper reexamines the free rider problem in corporate control in the presence of liquidity trading derives predictions for the trade and pricing of blocks and provides criteria for the optimal choice of ownership structure the recent incomplete contracting approach in corporate finance has considerably improved our understanding of how small firms determine their capital structure the basic setting considered in this line of research is one where a founder manager seeks funding from one or several financiers the main premise is that the founder manager in her dealings with the financiers is primarily concerned with maintaining her private benefits of control for small firms these are often quite large relative to the financial returns thus for a small firm the problem of determining the financial structure often reduces to the problem of how to obtain fundingr while giving away as little control as possible to the financiers of course most financiers insist on some form of protection so that the final compromise reached in most financial contracts for small firms is one resembling a debt contract or a venture capital contract which protects the founder manager s control as long as the firm is performing adequately this perspective for small firms does not extend naturally to large firms because the private benefits of control of the managers for large firms are likely to be small relative to the firm s monetary returns so that protection of these benefits is not an overriding consideration moreover large firms

modelling hierarchical consumer preferences an application to global food markets in the literature considerable attention has been devoted to the relationship between consumer preference and a product s country of origin papadopoulos 1993 and it is well established that the latter has an influence on quality perceptions bilkey and nes 1982 whilst empirical studies have tended to concentrate on manufactured goods there is evidence that food products exhibit strong countryof origin characteristics bonnet and simioni 2001 scarpa et al 2001 van der lans et al 2001 and furthermore that consumers typically favour domestic food varieties over foreign substitutes quagrainie et al 1998 unterschultz et al 1998 with international trade in food expanding rapidly in global markets and consumers facing an unprecedented level of variety product country images are assuming greater significance skaggs et al 1996 more importantly policy initiatives to promote regional foods and product awareness within europe peri and gaeta 1999 coupled with the growing antiglobalization sentiments of some sections of society are likely to have implications for international trade by reinforcing consumer preference for domestically produced varieties and strengthening any preference barrier effect much of the recent literature on quantitative analysis of international trade is set in the context of general equilibrium accordingly against a background of continuing liberalization of world markets and with further reforms anticipated under wto world trade organization negotiations a method of modelling endogenous hierarchical ranked consumer preferences is reported based on region of origin within a computable general equilibrium cge framework this extends the treatment of endogenous product differentiation in cge models and adds an extra dimension to the exogenous region of origin approach maintained under the commonly adopted armington assumption the first part of the paper reports technical implementation of patriotic preference in imperfectly competitive food markets this is then followed by an empirical illustration in which the impact on trade flows is isolated

the geography of equity listing why do companies list abroad this paper documents aggregate trends in the foreign listings of companies and analyzes their distinctive prelisting characteristics and postlisting performance in 1986 1997 many european companies listed abroad mainly on u s exchanges while the number of u s companies listed in europe decreased european companies that cross list tend to be large and recently privatized firms and expand their foreign sales after listing abroad they differ sharply depending on where they cross list the u s exchanges attract high tech and export oriented companies that expand rapidly without significant leveraging companies cross listing within europe do not grow unusually fast and increase their leverage after cross listing foreign listings are becoming an increasingly important strategic issue for companies and stock exchanges alike as companies become global in their product market and investment strategies direct access to foreign capital markets via an equity listing can yield important benefits at the same time the international integration of capital markets has led to unprecedented levels of competition among stock exchanges in this competitive struggle the winners are the exchanges that manage to attract more foreign listings and the attendant trading volume and business opportunities despite the importance of these issues still little is known about which exchanges succeed in capturing more listings from abroad and why this question is intimately related to a second issue namely which advantages companies expect to get from a foreign listing securing cheap equity capital for new investment allowing controlling shareholders to divest on a liquid market preparing for foreign acquisitions or simply enhancing the compa

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 source of information in prices and investment price sensitivity abstract this paper shows that real decisions depend not only on the total amount of information in prices but the source of this information a manager learns from prices when they contain information not possessed by him we use the staggered enforcement of insider trading laws across 27 countries as a shock to the source of information that leaves total information unchanged enforcement reduces increases managers outsiders contribution to the stock price consistent with the predictions of our theoretical model enforcement increases investment q sensitivity even when controlling for total price informativeness the effect is larger in industries where learning is likely to be stronger and in emerging countries where outsider information acquisition rises most post enforcement enforcement does not increase the sensitivity of investment to cash flow a non price measure of investment opportunities these findings suggest that extant measures of price efficiency should be rethought when evaluating real efficiency more broadly our paper provides causal evidence that managers learn from prices by using a shock to price informativeness

the real product market impact of mergers i document sources of value creation in mergers by analyzing novel data on the quality and price of goods sold by merging firms when two competitors in a product market merge their products converge in quality and prices fall relative to the competition these effects take two to three years to be fully realized and are stronger in mature industries prices do not fall however when the acquirer is diversifying into a new product market this direct evidence of real changes induced by merger activity is consistent with consolidation by related merging firms to achieve operational efficiencies and lower costs

economic perspectives on the development of complex products for increasingly demanding customers rival firms produce products with a variety of characteristics it is typically assumed that consumers purchase those products that most closely match their ideal set of characteristics orthodox production theory economics offers no analysis of how to divide limited product development budgets between different characteristics furthermore orthodox consumer economics assumes buyers make compensatory trade offs between different product characteristics this approach ignores problems caused by bounded rationality that in complex choice environments leads buyers to formulate simplifying heuristics such as hierarchical non compensatory preferences over characteristics an integrative analytical framework is developed drawing upon orthodox economics behavioural economics and evolutionary economics implications for the relationship between incremental product development and the firm s evolving capabilities are emphasized

privatization as an agency problem auctions versus private negotiations abstract this paper investigates the design of privatization mechanisms in emerging market economies characterized by political constraints that limit the set of viable privatization options our objective is to explain the striking diversity of mechanisms observed in practice and the frequent use of an apparently sub optimal privatization mechanism private negotiations we develop a simple model in which privatization is to be carried out by a government agent who plays favorites among bidders but is potentially disciplined by losing his private benefits of staying in office if the political environment is such that the privatization agent himself aims at raising the fair value for the company then privatization auctions and private negotiations are equally successful in raising public revenues if however political considerations distort the agent s incentives it may be that a seemingly transparent auction will raise less revenue than opaque private negotiations we also show that information disclosure laws may have negative welfare implications they may help the privatization agent to collude with some of the bidders to the disadvantage of non colluding bidders

investment efficiency and product market competition does more competition lead to more information production and greater investment efficiency this question is largely unexplored in the finance literature this article provides both a model and a series of extensive empirical tests the model features a 2 stage bayesian game in differentiated products market competition we find that competition causes firms to acquire less information and investments to become more inefficient relative to a first best case with the same market structure empirically the panel regression analysis provides strong support for the theory and shows that investment is more efficient in concentrated industries

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

overseas listing as a policy tool evidence from china s h shares abstract we investigate why the chinese government chooses to perform share issue privatization sip of its state owned enterprises soes in hong kong despite the benefit of facilitating the domestic stock market development if performing sip in china subrahmanyam and titman 1999 and the higher cost to list in hong kong we address this issue by arguing that the positive effect of sips on the development of the domestic market may have limitations especially when the domestic market is not well developed and cannot absorb rapid and large scale sip activities to maintain domestic market order it may be optimal to carry out sip in overseas markets furthermore by listing shares in developed overseas markets soes from the less developed countries could leverage on the overseas markets better accounting governance and legal standards by examining a sample of 92 chinese firms listed in hong kong and the relevant control samples of purely domestically listed chinese firms during the period of 1993 2006 we find supporting evidence for both arguments

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

evidence on the effect of claw back provisions on ipo share allocation and underpricing in hong kong abstractthe article examines share allocation practices of over 300 initial public offerings ipos in hong kong during the years immediately following the enacting of a claw back provision for ipo share reallocation the examination of exhaustive micro level data reveals that small uninformed retail investors earn higher initial returns than large investors before the enacting of the claw back provision small investors were unfavourably treated in relation to large investors the pattern now prevailing in the proportion of shares allocated to small and large investors also differs from that observed previously when attempting to isolate the determinants of ipo underpricing in hong kong the article also shows that both the informed demand hypothesis and the signalling effect of underwriters reputation are significant determinants of underpricing such result not visible when pooled ols regressions are used becomes apparent through the use of a system of simultaneous equations

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

cross listing investment sensitivity to stock price and the learning hypothesis we show that the sensitivity of corporate investment to stock price is higher for firms cross listed in the u s than for firms that never cross list this difference is strong does not exist prior to the crosslisting decision and does not vanish over time after this decision moreover the impact of a u s cross listing on the investment to price sensitivity is higher for firms that rank high on measures of governance and disclosure quality which suggests that our finding is not exclusively driven by the improvement in corporate governance that follows a u s cross listing instead we argue that a crosslisting enhances managers reliance on stock price because it makes stock prices more informative to managers in support of this learning hypothesis we find that the positive impact of a u s crosslisting on the investment to price sensitivity is higher when a cross listing is more likely to stimulate trading based on information new to managers

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

the flotation of companies on the stock market abstract in some countries the size of the stock market and the number of listed companies have persistently lagged behind the growth of the economy trading externalities can help explain this fact an entrepreneur who goes public increases risk sharing opportunities for others this externality can lead to an inefficiently low number of listed companies and also generate multiple equilibria when flotation decisions are positively correlated across entrepreneurs this happens if these face borrowing constraints and lack liquidity and thus cannot diversify their portfolios unless they go public it also happens if trading shares is costly so that a sufficient number of issues must be listed to lure investors into the market

manipulation and the allocational role of prices it is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources this paper identifies a limitation inherent in this role of prices it shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm s stock when this happens the informativeness of the stock price decreases and the beneficial allocational role of the financial market weakens the trader profits from this trading strategy partly because his trading distorts the firm s investment we therefore refer to this strategy as manipulation we show that trading without information is profitable only with sell orders driving a wedge between the allocational implications of buyer and seller initiated speculation and providing justification for restrictions on short sales

sale of price information by exchanges does it promote price discovery exchanges sell both trading services and price information we study how the joint pricing of these products affects price discovery and the distribution of gains from trade in an asset market a wider dissemination of price information reduces pricing errors and the transfer from liquidity traders to speculators this effect reduces the fee that speculators are willing to pay for trading therefore to raise its revenue from trading a for profit exchange optimally charges a high fee for price information so that only a fraction of speculators buy this information as a result price discovery is not as efficient as it would be with free price information this problem is less severe if the exchange must compensate liquidity traders for a fraction of their losses this paper was accepted by wei xiong finance

information based stock trading executive incentives and the principal agent problem we examine the role of information based stock trading in affecting the risk incentive relation by incorporating an endogenous informed trading into an optimal incentive contracting model we analytically show that apart from reducing incentives a greater risk increases the level of information based trading which consequently enhances executive incentives and offsets the negative risk incentive relation we calibrate the model and find that the economic magnitude of this incentive enhancement effect is significant our empirical test using real world executive compensation data lends strong support to the model prediction our results suggest that principals boards of directors should consider underlying stock trading characteristics when structuring executive incentives

viable allocations of information in financial markets abstract we study in the context of a financial market allocations of information that are consistent with endogenous information acquisition we focus on whether information is concentrated within a fraction of the market or is diffuse the aggregation of information in prices tends to make signals more complementary than they would be if considered in isolation favoring concentration of information however the ability to use some signals together with prices to predict other signals may increase the degree of substitutability among signals we present conditions under which each of these effects is particularly strong

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

public trading and private incentives this article studies the link between public trading and the activity of a firm s large shareholder who can affect firm value public trading results in the formation of a stock price that is informative about the large shareholder s activity this increases the latter s incentives to engage in value increasing activities indeed if he has to liquidate part of his stake before the effect of his activity is publicly observed a more informative price rewards him for his activity implications are derived for the decision to go public capital structure and security design we consider a firm with a large shareholder and otherwise dispersed shares which are publicly traded the block holder is an insider in the sense that he can undertake actions that directly affect the firm s value moreover the insider might not take all value increasing actions as at least some of them involve a private cost for him in other words there is an incentive problem the article s main premise is that public trading as part of the price formation process generates information not only about exogenous factors affecting firm value but also about the insider s activity for instance as a result of public trading a firm s stock price will incorporate the market s evaluation of how a controlling shareholder allocates corporate resources we identify two sources of incentives for the insider to engage in activities that will increase firm value the first one is his stake in the firm since the insider participates in a value increase in proportion to his equity stake a larger stake increases the benefit to him from the firm value being high the view that large shareholders affect firm value is indeed widespread shleifer and vishny 1997 they alleviate the free rider problem pervasive in firms with passive dispersed investors unable or unwilling to affect the firm s operations that is outsiders

large shareholders monitoring and ownership dynamics toward pure managerial firms abstract we study ownership dynamics when the manager and the large shareholder both risk neutral simultaneously choose effort and monitoring level respectively to serve their non congruent interests we show that there is a wedge between the valuation of shares by atomistic shareholders and the large shareholder s valuation at the markov perfect equilibrium the large shareholder divests her shares if the incongruence of their interests is mild divestment is drastic all her shares are sold immediately if their interests diverge sharply the divestment is gradual in order to prevent a sharp fall in share price in the limit the firm becomes purely managerial

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

informed speculation with imperfect competition competitive rational expectations models have the unsatisfactory property dubbed the schizophrenia problem by hellwig that each trader takes the equilibrium price as given despite the fact that he influences that price an examination of information aggregation in a non competitive rational expectations model using a nash equilibrium in demand functions shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price given a distribution of private information across traders prices reveal less information than in the competition equilibrium and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral with small traders the model may become one of monopolistic competition not perfect competition in contrast to the competitive model a reasonable model of endogenous acquisition of costly private information is obtained even when traders are risk neutral

financial markets and investment externalities this address explores the link between financial market shocks investment choices and various externalities that can arise from these choices my analysis which emphasizes differences between shocks to debt and equity markets provides insights about some stylized facts from the macro finance literature these insights are illustrated with a discussion of the technology boom and bust in the late 1990s and early 2000s and the housing boom and bust in the mid 2000s

a reexamination of the conglomerate merger wave in the 1960s an internal capital markets view one possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less developed capital markets examining 392 bidder firms during the 1960s we find the highest bidder returns when financially unconstrained buyers acquire constrained targets this result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing we also find that bidders generally retain target management suggesting that management may have provided companyspecific operational information while the bidder provided capital budgeting expertise