strategic analysis of the competitive exercise of certain financial options abstract warrants and convertible bonds are claims on the firm which change the outstanding number of common stock shares when exercised or converted exercise of such claims in competitive circumstances is modeled here as a noncooperative game played by a continuum of players first equilibria of the game are shown to exist by applying results of schmeidler second the game s equilibria are compared to outcomes that come about when one individual controls the exercise of all the claims but is constrained to exercise them in one block the results are analogues of earlier results by one of the authors on the competitive pricing of such claims

the cyclical behavior of the department of justice s antitrust enforcement activity abstract we study the cyclical behavior of antitrust enforcement as measured by the number of cases initiated by the us department of justice the key result is that antitrust case activity is countercyclical this finding is robust across alternate indicators of economic activity which include stock prices corporate profits and business cycles and across different types of cases the finding of countercyclical case activity does not appear to lend support to interest group theories that predict greater regulatory protection towards producers during economic contractions one interpretation of our result would be that antitrust violations tend to increase during economic downturns leading to an increase in the number of cases initiated the broad implication being that the antitrust division primarily acts as an antitrust law enforcement agency our results show that politics as measured by the party of the president and the republican versus democrat composition of the house and senate does not have a clear impact on case activity finally the number of cases initiated are significantly affected by the extent of funding

emigration and wages in source countries evidence from mexico abstract this paper examines empirically the effect of mexican emigration to the united states on wages in mexico using data from the mexican and us censuses from 1970 to 2000 the main result in the paper is that emigration has a strong and positive effect on mexican wages there is also evidence for increasing wage inequality in mexico due to emigration simple welfare calculations based on a labor demand supply framework suggest that the aggregate welfare loss to mexico due to emigration is small however there is a significant distributional impact between labor and other factors

international migration and real wages is there any neo classical ambiguity abstract recent research has shown that while labor emigration increases the nominal wage rate the impact on the real wage rate remains quite ambiguous the present paper reexamines the issue under the standard two factor two commodity international trade model normally employed for this purpose the principal finding of this paper is that once the problem is correctly formulated and analyzed introducing utility maximizing consumers no such ambiguity exists indeed labor emigration always leads to an increase in the welfare real wage of labor in the source country

note on international differences in service prices and some related empirical phenomena abstract this paper provides an alternative explanation of some important stylized facts of development including the phenomenon of international differences in service prices in terms of differences in factor endowments between countries in so doing this paper advances a general equilibrium model of a small open economy which features non traded goods as well as demand factors thereby incorporating important economic aspects which were neglected by many others an interesting finding which emerges from this exercise is that many puzzles in development can be explained simply in terms of differences in factor endowments between countries

warrant valuation and exercise strategy abstract this paper demonstrates that warrant valuation and exercise strategy differ fundamentally from call option valuation simultaneous exercise of warrants is shown to be suboptimal and a monopolist owning all warrants can achieve a higher value unless warrants are perfectly divisible no satisfactory equilibrium exists for the valuation and exercise of widely held warrants the problems encountered appear to be quite general and stem from necessary assumptions about future corporate dividend policy and capital structure such assumptions are necessary for any model of corporate security valuation

warrant exercise and bond conversion in competitive markets abstract we develop a theory of warrants held by competitive warrantholders not constrained to exercise their warrants as one block the theory also applies to convertible bonds held by competitive bondholders not constrained to convert their bonds as one block we prove that the warrant bond price in each of the competitive equilibria is less than or equal to the price in an economy with the block constraint and for at least one competitive equilibrium the warrant bond price equals the warrant bond price in the block constrained economy we illustrate the paths of competitive warrant exercise and bond conversion and conclude that under realistic assumptions they can be long

international migration non traded goods and economic welfare in the source country abstract this paper examines the economic effects of emigration in a source country producing both traded and non traded commodities it is shown that even if the economy faces fixed terms of trade emigration can still affect the welfare of the non migrants and the direction of the effect in this context will always be negative

a strategic analysis of sinking fund bonds abstract unlike most securities the pricing of sinking fund bonds is influenced by the distribution of ownership which summarizes the extent to which the market is cornered the effect of the distribution of ownership on the pricing of sinking fund bonds is examined by an explicit game in which the price obtained for bonds sold can depend upon the size of the investor s position this framework is used to contrast the valuation of sinking fund bonds with the valuation of amortizing bonds and straight debt we show that it is generally incorrect to view sinking fund bonds as being equivalent to serial bonds

illegal immigration a supply side analysis abstract this paper analyzes the supply side determinants of illegal immigration using a three sector general equilibrium model of the source country agricultural liberalization raises illegal immigration while liberalization of the high tech sector reduces it in contrast capital mobility in the source country renders trade policy ineffective for controlling illegal immigration paradoxically increased enforcement by the host country may raise source country unskilled wages although illegal immigration falls finally under capital mobility a rise in the source country restrictions on capital inflow raises the level of illegal immigration and reduces the effectiveness of border enforcement efforts by the host country

pricing warrants an empirical study of the black scholes model and its alternatives this paper uses a sample of over 25 000 daily warrant prices to empirically investigate potential problems with the commonly used warrant pricing model proposed by black and scholes as an extension of their call option model one problem seems to be especially important the constant variance assumption of the dilution adjusted blackscholes model appears to cause biases in model prices for almost all warrants and over the entire sample period we show that more accurate price forecasts are obtained with a specific form of the constant elasticity of variance model since the derivation of the black scholes model financial economists have speculated on its usefulness for warrant valuation in their pathbreaking paper black and scholes 1973 claim that in many cases their model can be used as an approximation to give an estimate of the warrant value however black and scholes 1973 warn that

information revelation through option exercise in many real world situations agents must formulate option exercise strategies with imperfect information in such a setting agents may infer the private signals of other agents through their observed exercise strategies the building of an office building the drilling of an exploratory oil well and the commitment of a pharmaceutical company toward the research of a new drug all convey private information to other market participants this article develops an equilibrium framework for option exercise games with asymmetric private information many interesting aspects of the patterns of equilibrium exercise are analyzed in particular informational cascades where agents ignore their private information and jump on the exercise bandwagon may arise endogenously article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the impact of international migration on real wages another look abstract this paper examines the issue of how emigration alters real wages in the source country the analysis is carried out first using the two class framework developed by rivera batiz 1984 and then by means of a simple model of scale economies and imperfect competition our results indicate that within these contexts real wages are likely to decline in response to emigration if 1 the migrants possess a large fraction of physical or human capital that they take with them when migration occurs or 2 emigration reduces the scale of operation of domestic firms our conclusions are compared to those of quibria 1989

convertible debt valuation and conversion in complex capital structures abstract the impact of conversion strategies on the value of convertible debt is examined it is shown that for capital structures comprised of multiple classes of convertible debt the optimal conversion policy for a given bond class is affected by the decisions of other bond classes using this optimal conversion strategy closed form solutions for bond prices are derived

international migration and real wages a resolution note the authors examine the impact of international labor migration on wages in country of origin two types of emigration are distinguished bundled emigration which can result in a reduction of real wages and pure labor emigration which results in an increase in real wages annotation

competition economics and antitrust in europe this paper aims to assess the influence that economic analysis has had on competition policy in the european union over the last twenty years economists are increasingly used in antitrust cases the annual turnover of the main economic consultancy firms has increased by a factor of 20 since the early 1990s and currently exceeds 20 million this is about 15 of the aggregate fees earned on antitrust cases a proportion close to that in the us the economic resources mobilized by the eu commission are however an order of magnitude smaller and this imbalance is a source of concern the legal framework and the case decisions have also been influenced by economic analysis in important ways for instance the analysis of agreements between firms has increasingly focused on effects the analysis of the factors that determine effective competition has become more sophisticated the concept of collective dominance has been progressively developed in terms of the theory of collusion in repeated interactions and quantitative methods have become more important however enforcement has sometimes appealed to economic reasoning in flawed or speculative ways the paper discusses procedural reasons why this may have occurred this paper assesses the system of evidence gathering implemented by the commission in the light of the law and economics literature it is concluded that while the reforms recently implemented by the commission do address the main weaknesses of this system they may still not allow for the most effective development of economic theory and evidence in actual cases damien j neven

the interaction between the financial and investment decisions of the firm the case of issuing warrants in a levered firm abstract in this paper we analyze the value of warrants and stock in a firm that has both equity and debt in its capital structure and assume that the proceeds from exercising the warrants are reinvested in the firm the effect of potential future scale investment on the firm s stock debt and warrants are investigated the warrants in our analysis are european in this framework there are two sources for the nonstationarity of the rate of return on any kind of financial claim the first stems from changes in the firm s capital structure and the second is due to the potential scale increase in the value of the firm should the warrants be exercised the effect of a potential transfer of wealth from equity holders to debt holders at time of exercise is analyzed when warrants are exercised and the proceeds are reinvested in a scale expansion project the probability of default may decrease it follows therefore that ceteris paribus debt is likely to appreciate in value at the expense of equity the method of pricing by arbitrage as proposed by harrison and kreps is used to derive values for claims on the firm problems associated with measuring the volatility of equity are discussed

the consequences of the us doj s antitrust activities a macroeconomic perspective do the antitrust law enforcement activities of the us department of justice act as exogenous technology shocks or as markup shocks limiting market power and promoting economic growth we analyze annual time series data from 1947 to 2003 on three measures of federal antitrust intervention the ratio of the antitrust division s budgetary expenditures to gdp as well as the numbers of civil and criminal antitrust cases instituted we find that changes in the levels of these policy variables act like negative technology shocks and that the negative effects are transitory antitrust policy generates no subsequent offsetting increases in productivity

option exercise games an application to the equilibrium investment strategies of firms under the standard real options approach to investment under uncertainty agents formulate optimal exercise strategies in isolation and ignore competitive interactions however in many real world asset markets exercise strategies cannot be determined separately but must be formed as part of a strategic equilibrium this article provides a tractable approach for deriving equilibrium investment strategies in a continuous time cournot nash framework the impact of competition on exercise strategies is dramatic for example while standard real options models emphasize that a valuable option to wait leads firms to invest only at large positive net present values the impact of competition drastically erodes the value of the option to wait and leads to investment at very near the zero net present value threshold copyright 2002 oxford university press

equilibrium and options on real assets in aggregate options on real and financial assets can have very different properties typically the good or service produced by a real asset has a finite elasticity of demand and developers have finite capacities also the supply of options can be limited and developers can be less than perfectly competitive in a subgame perfect nash equilibrium with these properties the optimal exercise policy and resulting values of developed and undeveloped assets are calculated explicitly the novel comparative statics are discussed in detail article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

on the structure of take over models and insider outsider conflicts in negotiated take overs abstract we model a takeover game where the players can bid or bargain without the traditional exogenous constraints on the order length and number of alternating stages in our european setting dominant shareholders can appoint and dismiss management implying that we have an insider outsider conflict rather than a management shareholder agency problem and that the distribution of sizeable private benefits is a crucial issue the bargaining solution determines the price even if no explicit negotiations are observed while bargaining strength and scope for exclusion determine the type of takeover pre negotiated or not discriminatory or not

robustness of option like warrant valuation abstract this paper presents a methodology for arriving at the unobserved asset value and its volatility of a firm with outstanding warrants this enables us to price warrants correctly and to examine the robustness of option like warrant valuation where the dilution that occurs when warrants are exercised is ignored our analysis helps to justify the frequent simplifying option like warrant valuation furthermore we examine 50 960 daily prices for 37 american type warrants written on 16 german stocks over the period 1979 1990 the empirical results confirm our theoretical analysis there is virtually no dilution related pricing bias of the american constant variance diffusion model with the stock price as the state variable

real business cycles a new keynesian perspective the debate over the source and propagation of economic fluctuations rages as fiercely today as it did 50 years ago in the aftermath of keynes s the general theory and in the midst of the great depression today as then there are two schools of thought the classical school emphasizes the optimization of private economic actors the adjustment of relative prices to equate supply and demand and the efficiency of unfettered markets the keynesian school believes that understanding economic fluctuations requires not just studying the intricacies of general equilibrium but also appreciating the possibility of market failure on a grand scale

employee stock options equity valuation and the valuation of option grants using a warrant pricing model we investigate the use of a warrant pricing approach to incorporate employee stock options esos into equity valuation and to account for the dilutive effect of esos in the valuation of option grants for financial reporting purposes our valuation approach accounts for the jointly determined nature of eso and shareholder values the empirical results show that our stock price estimate exhibits lower prediction errors and higher explanatory powers for actual share price than does the traditional stock price estimate we use our valuation approach to assess the implications of dilution on the fair value estimates of eso grants we find that the fair value is overstated by 6 if we ignore the dilutive feature of esos furthermore this bias is larger for firms that are heavy users of esos small and r d intensive and for firms that have a broad based eso compensation plan

on the consistency of merger policy this paper presents a way to get around the information problem facing outside analysts who want to scrutinize competition authorities decisions a formal model of how decisions are taken is applied to infer information that is available to the authorities but not to the outside analyst if the information thus inferred from several decisions is incompatible it is claimed that the policy executed by the competition authorities is inconsistent a case study is presented of two recent decisions by the norwegian competition authority on proposed mergers in the norwegian insurance industry indicating they most likely were mutually inconsistent

voluntary conversion of convertible securities and the optimal call strategy abstract we provide an explanation of why convertibles are called long after the conversion value exceeds the call price delaying the call benefits the firm if enough investors are expected to delay their voluntary conversions consistent with this theory we document that a substantial number of investors do not voluntarily convert when the common dividend exceeds the convertible s dividend plus its premium over conversion value we find that firms would not have increased common stock returns by switching to the strategy of calling to force conversion as soon as possible surprisingly we find that convertible preferreds frequently sell below conversion value

warrant exercise dividends and reinvestment policy in this paper we examine sequential exercise strategies by warrantholders and the gain from hoarding warrants we analyze several obstacles to acquiring large blocks in order to exploit sequential strategies first we identify several reinvestment policies for which sequential exercise is not advantageous thereby eliminating the gain from hoarding however sequential exercise strategies may be advantageous for monopoly or oligopoly warrantholders even absent dividends because using exercise proceeds to repurchase stock or to expand the firm s scale increases the riskiness of an equity share second oligopoly warrantholders can receive a smaller warrant value than perfectly competitive warrantholders suggesting a potential cost to unsuccessful hoarding

warrant pricing jump diffusion vs black scholes this paper investigates the warrant pricing abilities of dilution adjusted versions of the black scholes and jump diffusion option pricing models because of the typically long lives of warrants their pricing is hypothesized to benefit from use of the jump diffusion model which relaxes the black scholes restriction against stock price jumps empirical results indicate that while the black scholes model almost uniformly provides more efficient estimates the jump diffusion model generally provides less biased estimates of market value particularly for the valuation of out of the money warrants and warrants on stocks with a history of large and or frequent jumps the jump diffusion model may be preferred

pricing options with extendible maturities analysis and applications many common types of financial contracts incorporate options with extendible maturities this paper derives closed form expressions for options that can be extended by the optionholder and presents a number of applications including the valuation of american options with stochastic dividends junk bonds and shared equity mortgages we also derive closed form expressions for writer extendible options and discuss the writer s economic incentives for extending an out of the money option we apply these results to show that corporate debtholders have a strong incentive to extend the maturity of defaulting debt if there are liquidation costs we model and solve the debtholders optimal extension problem and show that the possibility of an extension can induce shareholders in highly levered firms to accept negative npv projects many common types of financial contracts and contingent claims incorporate options with extendible maturities for example a growing number of firms in many cases firms involved in leveraged buyouts are issuing bonds with maturities that can be extended at the firm s option options on real estate often allow the optionholder to extend the expiration date by paying an additional fixed amount to the option writer corporate warrants frequently give the issuing firm the right to unilaterally extend the life of the warrants a right that is often exercised in general any financial contract that could involve a rescheduling of payments a renegotiation of terms an early call or exercise provision or some similar type of flexibility over the timing of cash flows could be viewed as including an option with an extendible maturity this paper derives valuation expressions for extendible options examines the analytical properties of these prices and presents a wide variety of applications and examples in this analysis we distinguish between options that can be extended by the optionholder and options that are extended by the option writer since they differ fundamentally in their pricing implications focusing on the

warrant pricing is dilution a delusion the textbook treatment of warrants takes as a state variable the total equity value of the firm and makes explicit allowance for the effects of equity dilution when warrants are exercised warrant pricing however could just as well be based on the process the stock price follows this approach leads to a much simpler pricing model into which dilution does not enter and in fact a warrant has a value identical to that of the corresponding option moreover valuations based on stock prices are fully consistent with those obtained using the standard equity value approach in fact when the comparison is made in a consistent fashion the warrant prices obtained using the stock price method are identical to the results arising from the textbook method

international migration non traded goods and economic welfare in the source country a comment abstract labor emigration redistributes income in a two factor two good economy where one good is internationally non traded labor s nominal wage rises as nominal capital payments fall recent research has shown that the prices of non traded goods rise causing society s welfare to decline here the induced change in the real income of each factor is considered separately there is an ambiguity with regard to the real income of non emigrating labor if labor spends a relatively small fraction of income on the non traded good its real income may rise even though society suffers the loss of welfare

investment incentives debt and warrants abstract this paper models and characterizes investment incentive problems associated with debt financing the decision problem of residual claimants is explicity formulated and their investment policies are characterized the paper also analyzes the use of conversion features and warrants to control distortionary incentives these claims reverse the convex shape of levered equity over the upper range of the firm s earnings and this mitigates the incentive to take risk it is shown that under certain conditions such claims can be constructed to restore net present value maximizing incentives and simultaneously meet the financing requirements of the firm

antitrust public choice s antitrust legislation and enforcement has over the last few decades been increasingly informed by ever more sophisticated analysis while at the same time evidence has continued to mount that the results of antitrust remedies fall far short of the promises held out under still prevalent nirvana fallacy demsetz in journal of law and economics 12 1 1 22 1969 expectations i draw upon a recent supreme court decision as well as the results of young and shughart s public choice 2010 doi 10 1007 s11127 009 9531 y novel approach to the analysis of antitrust enforcement activities to discuss the extent to which public choice theory is vital in solving the puzzle regarding the unintended effects of antitrust public choices

the great mexican emigration abstract in this paper we examine net emigration from mexico over the period 1960 to 2000 the data are consistent with labor supply shocks having made a substantial contribution to mexican emigration accounting for two fifths of mexican labor flows to the united states over the last two decades of the twentieth century net emigration rates by mexican state birth year cohort display a strong positive correlation with the initial size of the mexican cohort relative to the corresponding u s cohort in states with long histories of emigration the effects of cohort size on emigration are relatively strong consistent with the existence of preexisting networks

international migration non traded goods and economic welfare in a two class economy a reply abstract this paper sketches a formal model of an economy producing traded and non traded goods in which two classes of individuals are differentiated each owning different endowments of capital and labor and allocating different proportions of their income to the consumption of each commudity the effects of emigration on prices income distribution and the real income of each class is then examined

derivative pricing 60 years before black scholes evidence from the johannesburg stock exchange we obtain daily data for warrants traded on the johannesburg stock exchange between 1909 and 1922 and for a broker s call option quotes on stocks from 1908 to 1911 we use this new data set to test how close derivative prices are to black scholes 1973 prices and to compute profits for investors using a simple trading rule for call options we examine whether investors exercised warrants optimally and how they reacted to extensions of the warrants durations we show that long before the development of the formal theory investors had an intuitive grasp of the determinants of derivative pricing