corporate conservatism and relative compensation this paper demonstrates that in a simple setting with managerial concern for reputation and asymmetric information on ability most managers may refrain from undertaking innovations that stochastically dominate an industry standard common components of uncertainty lead to market inferences of managerial ability based on relative performance managers who undertake the industry standard are consequently evaluated with a more accurate benchmark than those innovating discontinuities in compensation when performance is low because of firings lead managers to have differing valuations of an accurate benchmark depending on type in particular very high and very low ability managers are more likely to undertake superior innovations than those of average ability

why voluntary export restraints are voluntary the paper presents an analysis of the effect upon an oligopolistic equilibrium of introducing a voluntary export restraint ver upon an importing firm a ver set at the free trade level of imports is shown to raise the profits of all firms within the industry the result follows as the imposition of a ver upon a free trade nash price competition forces the domestic firm to become an industry price leader the ver raises industry prices by facilitating collusion and lowers consumer welfare pourquoi les restrictions volontaires d 1 exportation sont volontaires ce memoire presente une analyse des effets de l introduction de restrictions volontaires a l exportation rve sur une entreprise qui importe dans un monde en equilibre oligopolistique on montre que l introduction de rve approximant le niveau des importations en regime de libre echange devrait augmenter les profits de toutes les entreprises dans l industrie cela decoule du fait que l imposition de rve sur un univers de concurrence par les prix a la nash en regime de libre echange force l entreprise domestique a devenir le leader en prix l introduction de rve augmente le niveau des prix de l industrie en facilitant la collusion et de ce fait reduit le niveau de bien etre des consomrnateurs

evidence on corporate hedging policy this paper provides empirical evidence on the determinants of corporate hedging decisions the paper examines the evidence in light of currently mandated financial reporting require ments and in particular the constraints placed on anticipatory hedging data on hedging are obtained from 1992 annual reports for a sample of 3 022 firms out of the 771 firms classified as hedgers 543 firms disclose information in their annual reports on their hedging activities the remaining 228 firms report use of derivatives but no information on hedging activities based on the evidence i draw the following conclusions with respect to the models of hedging evidence is inconsistent with financial distress cost models evidence is mixed with respect to contracting cost capital market imperfections and tax based models and evidence uniformly supports the hypothesis that hedging activities exhibit economies of scale

quantitative restrictions and the welfare effects of capital inflows abstract this paper explores the welfare effects of capital inflows when some imports are subject to quantitative restrictions it is shown that in a heckscher ohlin model where all imports are restricted by quotas and some fraction of the initial domestic capital stock is foreign owned a capital inflow is welfare improving regardless of the ranking of sectoral factor intensities with sector specific capital stocks and both tariff ridden and quota restricted imports the consequences of direct foreign investment in any sector are uncertain and depend upon whether the two imports are compensated substitutes or complements as well as the characteristics of production

ceo risk preferences and hedging decisions a multiyear analysis abstract theory and previous empirical studies suggest that ceo risk preferences affect hedging we challenge this idea in a 5 year time series setting by using inside debt i e ceo pension and deferred compensation and the ceo vega and ceo delta as proxies of ceo risk preferences and document that neither risk averse i e debt like compensation nor risk seeking i e convex compensation inducing ceo compensation packages influence corporate hedging moreover we find ceos who have more previous work experience and high job tenure to be positively related to hedging

empirical evidence on the relation between stock option compensation and risk taking abstract we examine whether executive stock options esos provide managers with incentives to invest in risky projects for a sample of oil and gas producers we examine whether the coefficient of variation of future cash flows from exploration activity our proxy for exploration risk increases with the sensitivity of the value of the ceo s options to stock return volatility eso risk incentives both eso risk incentives and exploration risk are treated as endogenous variables by adopting a simultaneous equations approach we find evidence that eso risk incentives has a positive relation with future exploration risk taking additional tests indicate that eso risk incentives exhibits a negative relation with oil price hedging in a system of equations where eso risk incentives and hedging are allowed to be endogenously determined overall our results are consistent with esos providing managers with incentives to mitigate risk related incentive problems

protection and the harmful effects of endogenous capital flows abstract assume a country has in place a binding tariff and is a price taker on world markets in which capital is internationally mobile and unimpeded regardless of trade patterns possible specificity of capital or factor intensities an increase in the tariff harms the country if capital is frozen and harms the country even more when capital mobility brings rates of return into line among countries

the value of corporate risk management we model and estimate the value of corporate risk management we show how risk management can add value when revenues and costs are nonlinearly related to prices and estimate the model by regressing quarterly firm sales and costs on the second and higher moments of output and input prices for a sample of 34 oil refiners we find that hedging concave revenues and leaving concave costs exposed each represent between 2 and 3 of firm value we validate our approach by regressing tobin s q on the estimated value and level of risk management and find results consistent with the model

exploring the links between community based governance and sustainable energy use quantitative evidence from flanders community based energy organizations have been said to influence their members energy related behavior by activating social norms and by providing trustworthy information about sustainable energy investments and behaviors however little is known yet about members actual energy use and how it differs from that of individuals who do not participate in such projects in particular selection effects are likely to arise i e community based energy projects may attract people that are different from the underlying population in terms of energy use this article empirically addresses the question of the selection into community based energy projects in terms of energy use focusing on the case of renewable energy cooperatives based on quantitative data from an original survey conducted with one renewable energy cooperative in flanders and using probit regression analyses it contrasts a sample of cooperative members with an appropriate comparison group in terms of electricity usage the results show that electricity consumption is positively related with cooperative membership suggesting that high use consumers have greater incentives to join a community based organization which provides assistance and advice on the adoption of green technologies and energy efficiency measures these findings contribute to an understanding of the relationship between community based governance and sustainable energy practices

the effects of import quotas on national welfare does money matter recent evidence shows that there is an increasing use of non tariff barriers to trade ntbs and especially of quantitative restrictions such as import quotas in the world economy to protect import competing industries see table i 1 international trade theory however has traditionally focused on the welfare effects of tariffs as well as on the equivalence between tariffs and quotas with little attention paid to the welfare implications of quotas the latter have basically been restricted within the traditional heckscher ohlin trade model where for the case of a small open economy import quotas always reduce welfare a few recent studies have attempted to fill in this gap in the literature for instance young 19 compares optimal tariffs and quotas for a large country in a stochastic environment neary 14 on the other hand investigates the welfare implications of tariffs quotas and voluntary export restraints under different assumptions on capital mobility finally chao hwang and yu 3 4 examine the welfare effects of import quotas under variable returns to scale although the existing literature has generated important policy implications most of the analysis has been conducted within a barter exchange framework it is well known however that the introduction of money can alter results obtained within a non monetary environment 2 accordingly this paper attempts to re examine the welfare effects of import quotas for a small monetary economy we develop a two sector trade model in which money enters the economy

welfare gains from capital inflows under import quotas abstract the presence of tariffs was assumed in the literature which examined the effect of additional foreign investment on the welfare of the host country in the small country setting however this paper analyzes the case of import quotas and shows that additional inflows of foreign capital improve the host country s welfare when import quotas are kept constant

does executive portfolio structure affect risk management ceo risk taking incentives and corporate derivatives usage abstract this paper extends the investigation of the effect of managerial motives on hedging policy i utilize a proxy variable that incorporates ceo incentives to increase risk relative to incentives to increase stock price the variable is directly measured using observed characteristics of ceo portfolios of stock and option holdings furthermore ceo risk taking incentives are modeled as a choice variable to eliminate the simultaneity bias of modeling risk taking incentives as an exogenous variable if modeled as a simultaneous system of equations a strong negative link between ceo risk taking incentives and the amount of derivative holdings exists this result is consistent with the notion that derivatives are used for hedging purposes both the characteristics of stock and option holdings are important in determining cross sectional differences in corporate derivative holdings

exchange rate hedging financial versus operational strategies exchange rate exposure is an important source of risk for multinational corporations to mitigate the impact of exchange rate fluctuations it has been claimed that multinational corporations can employ risk management strategies not only through financial derivatives but also through operational hedges for example schering plough in its 1995 annual report p 25 argues in support of exclusive use of operational hedges to date management has not deemed it cost effective to engage in a formula based program of hedging the profitability of these operations using derivative financial instruments some of the reasons for this conclusion are the company operates in a large number of foreign countries the currencies of these countries generally do not move in the same direction at the same time conversely many corporations with large worldwide networks such as ibm or coca cola make extensive use of derivative financial instruments this paper investigates both financial and operational exchange rate risk management strategies of multinational firms while several studies have examined either firms financial hedging or firms operational hedging activities no study thus far has examined financial and operational hedging simultaneously for a large cross section of firms to the extent that the decision to use financial hedging strategies is related to and affected by the operational strategies that a firm employs it is important to examine how each strategy contributes to the overall goal of mitigating risk and improving shareholder value using a sample of u s multinational nonfinancial firms during 1996 1998 we find that operational hedging is not an effective substitute for financial risk management however we find that the more geographically dispersed a firm is the more likely it is to use financial hedges the end result on firm value is that operational hedging strategies benefit shareholders only when used in combination with financial hedging strategies

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

the volatility and price sensitivities of managerial stock option portfolios and corporate hedging we use estimates of the black scholes sensitivity of managers stock option portfolios to stock return volatility and the sensitivity of managers stock and stock option portfolios to stock price to test the relationship between managers risk preferences and hedging activities we find that as the sensitivity of managers stock and stock option portfolios to stock price increases firms tend to hedge more however as the sensitivity of managers stock option portfolios to stock return volatility increases firms tend to hedge less one of the agency costs associated with the corporate form of ownership comes from the risk aversion of the firm s managers the typical corporate manager has a significant portion of his or her wealth invested in the corporation both through portfolio holdings and the value of firm specific human capital as a result managers have an incentive to reduce firm risk more than may be desirable from the perspective of an unaffiliated diversified shareholder one way to mitigate managerial risk aversion is to provide the manager with contracts that have a payoff structure that is a convex function of the firm s stock price smith and stulz 1985 guay 1999 finds that stock options are an important way in which convexity is added to managers portfolios however as recognized by carpenter 2000 and lambert larcker and verrecchia 1991 stock options create two opposing effects on managerial incentives the first effect is sensitivity to stock return volatility due to the convex payoff structure of options the value of a manager s stock option portfolio increases with the volatility of the firm s stock returns this sensitivity to stock return volatility should ceteris paribus give the manager an incentive to take more risk the second effect is sensitivity to stock price this effect comes from the direct link between the payoff of an option and

domestic distortions and international trade in this paper we develop techniques for measuring the trade policy equivalent of domestic distortions using a distance function approach our measure the trade restrictiveness index is shown to equal the uniform tariff which is welfare equivalent to a given pattern of domestic taxes and subsidies we extend the index to incorporate taxes in markets for nontraded goods and factors of production and illustrate its operationality with an application to liberalisation in mexican agriculture we conclude that our index has considerable potential in empirical work and as an aid to trade negotiators it is widely appreciated that government policies of a purely domestic nature can have major implications for a country s international trade to give just one example such implications were widely discussed in the context of the recent gatt round in which u s negotiators insisted that intra ec agricultural policy should be viewed as trade distorting however analysts and negotiators have not hitherto had access to a conceptual framework which would allow the trade effects of domestic policies to be measured in a consistent way in this paper we propose such a framework and show how it may be implemented empirically of course other attempts have been made to quantify the overall distortionary effects of domestic policies these have involved constructing empirically based indexes such as producer or consumer subsidy equivalents 2 however such measures have no theoretical foundation moreover since they use the shares of different sectors in production or consumption as weights they are likely to be systematically biased for example sectors whose output levels are reduced by high taxation are assigned low weights whereas their true weights should be higher by contrast we show below that our approach is based firmly on welfare economics and correctly uses marginal rather than average production and consumption shares as weights the approach we propose draws on recent work by two of the authors anderson and neary 1990 1992b which dealt with trade distortions only that work developed a scalar index the trade restrictiveness index or tri which equals the equiproportionate rate of trade restriction which is equivalent in welfare terms to

optimal incentive contracts in the presence of career concerns theory and evidence this paper studies optimal incentive contracts when workers have career concerns concerns about the effects of current performance on future compensation we show that the optimal compensation contract optimizes total incentives the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers we find empirical support for this prediction in the relation between chief executive compensation and stock market performance

effects of restraining steel exports from the republic of korea and other countries to the united states and the european economic community in this article a model is developed to evaluate the impact on an exporting country of a restraint imposed on its export by an importing economy in the context of a three region model of world trade in a single product the welfare changes in any of the three regions in the model and in the global economy can be evaluated the model is applied to the restraints imposed on steel exports from the republic of korea to the united states and the european economic community eec the united states and the eec are found to have incurred significant losses as a result of the restraints the largest part of these losses are quota rents transferred to korea and the rest of the world under reasonable parameter assumptions korea and the rest of the world obtain net gains from the quotas because the resource misallocation costs are smaller than the quota rents the model is modified to analyze a tariff barrier rather than a quantitative restraint it is found that an equivalent tariff on steel transforms korea and the rest of the world from net gainers to net losers as a result of a restraint

corporate financial hedging with proprietary information abstract if a firm has information pertinent to its own dividend stream that is not made available to its shareholders it may be in the interests of the firm and its shareholders to adopt a financial hedging policy this is in contrast with the modigliani miller theorem which implies that with informational symmetry such financial hedging is irrelevant in certain cases hedging policies are identified that are unanimously supported by shareholders

ec members fighting about surplus vers fdi and japanese cars the distribution of consumer and producer surplus among ec members of three different trade regimes free trade a voluntary export restraint ver and a ver in conjunction with foreign direct inv

the sensitivity of ceo wealth to equity risk an analysis of the magnitude and determinants abstract to control risk related incentive problems equity holders are expected to manage both the convexity and slope of the relation between firm performance and managers wealth i find stock options but not common stockholdings significantly increase the sensitivity of ceos wealth to equity risk cross sectionally this sensitivity is positively related to firms investment opportunities this result is consistent with managers receiving incentives to invest in risky projects when the potential loss from underinvestment in valuable risk increasing projects is greatest firms stock return volatility is positively related to the convexity provided to managers suggesting convex incentive schemes influence investing and financing decisions

sleeping quotas pre emptive quota bidding and monopoly power abstract we rationalize the puzzling existence of binding quotas that are not fully utilized our model has its roots in bhagwati 1965 in r baldwin et al eds trade growth and the balance of payments essays in honor of g haberler mit press new york on tariffs quotas equivalence and is related to the io literature on preemption we study the conditions that lead a monopolist facing a quota restricted market to buy the quota licenses itself and the conditions under which they may remain unused the divisibility of the quota is crucial for the monopolist to pre emptively buy the quota furthermore we study the implications of use it orlose it clauses commonly imposed on auctioned quotas

export share requirements trade balances and welfare a two period analysis abstract this paper provides a two period three sector general equilibrium model for examining the effects of a temporary increase in export share requirements to foreign owned firms on the trade balance and national welfare the analysis suggests that the policy of a temporary rise in export requirements results in increases in the non tradable prices for both periods as well as intertemporal welfare the policy also leads to an improvement in the first period trade balance

a note on the nonequivalence of import barriers and voluntary export restraints abstract this paper uses a general equilibrium approach to analyze the consequences of import barriers and voluntary export restraints with respect to international prices and domestic prices under the assumption of perfect competition in all markets it shows that the final outcome with respect to domestic prices depends on the way in which governments allocate the revenue arising from the restrictions the equivalence result obtained by using partial equilibrium is only one of the possible outcomes

risk aversion and optimal trade restrictions if the representative consumer of a country is risk averse then the choice of trade controls must take account of their effects on the fluctuations of domestic real income if the world price of the importable is uncertain and risk aversion is high then the optimal policy for achieving a ceiling on expected imports involves a reduction in imports and a rise in the domestic price as the world price falls moreover a quota is superior to a tariff in achieving the ceiling under domestic uncertainty a tariff is superior to a quota but it could be optimal to reduce the domestic price as imports increase economists have long recognized the equivalence of price and quantity controls under certainty the comparison of these control modes and the characterization of the optimal form of control under uncertainty has been undertaken by two groups of authors weitzman 1974 1978 considered a planning authority which faces uncertainty about the costs and benefits of producing a good he showed that the ranking of price and quantity controls depends on the curvature of the cost and benefit functions and that an optimal policy can be considered as a mixture of price and quantity controls his work was developed by laffont 1977 ireland 1977 malcomson 1978 and yohe 1978 in the context of international trade the comparison of tariffs and quotas under uncertainty has been undertaken by fishelson and flatters 1975 pelcovits 1976 dasgupta and stiglitz 1977 young 1979 1980a b and helpman and razin 1980 recently young and anderson 1980 showed that the policy maximizing expected consumer s surplus given a constraint on expected imports expected import expenditure is a specific tariff an ad valorem tariff in contrast to weitzman s planning model the price instrument is superior to the quantity instrument whatever the curvature of the benefits function 2 the conclusion of young and anderson appears to provide a strong argument against using quantity instruments to restrict trade however the expected surplus criterion is a valid welfare measure only if the marginal utility of income is constant in this paper we characterize the optimal form of trade restriction if the representative consumer of the importing country exhibits risk aversion toward income fluctuations the optimal policy can have surprising properties properties which with high risk aversion are better approximated by a quota rather than a tariff hence the second best justification for using quantity controls to restrict trade turns out to depend on

international factor mobility minimum wage rates and factor price equalization a synthesis this paper examines the behavior of a small open economy facing perfectly elastic supply curves for some of its productive factors in particular the paper derives some comparative statics properties of such economies compares them with the properties of otherwise identical economies in which all factor prices are determined endogenously and investigates the relationship between factor price rigidities factor price equalization and the pattern of specialization among the new results which are proved it is shown that as more and more factor price rigidities are imposed on an economy it comes closer to a state of factor price equalization

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

tax incentives to hedge for corporations facing tax function convexity hedging lowers expected tax liabilities thereby providing an incentive to hedge we use simulation methods to investigate convexity induced by tax code provisions on average the tax function is convex although in approximately 25 percent of cases it is concave carrybacks and carryforwards increase the range of income with incentives to hedge other tax code provisions have minor impacts among firms facing convex tax functions average tax savings from a five percent reduction in the volatility of taxable income are about 5 4 percent of expected tax liabilities in extreme cases these savings exceed 40 percent if a firm faces a convex tax function then hedging that reduces the volatility of taxable income reduces the firm s expected tax liability for a firm facing some form of tax progressivity when taxable income is low its effective marginal tax rate will be low but when income is high its tax rate will be high if such a firm hedges the tax increase in circumstances where income would have been low is smaller than the tax reduction in circumstances where income would have been high thus lowering expected taxes in examining the importance of various motives to hedge researchers have employed two general methods survey and regression analysis there are potential problems with each for example some managers might view the information requested in a survey as proprietary or might hesitate to admit that they employ derivatives to speculate rather than hedge to employ regression methods researchers must generate proxies for tax status in addition to other firm characteristics to the extent that a tax variable e g whether the firm has a net operating loss carryforward proxies for factors such as financial distress as well as tax circumstances analysts face an identification problem in interpreting the results

foreign capital inflows and welfare in an economy with imperfect competition abstract this paper examines the resource allocational and welfare effects of exogenous inflows of foreign capital in a general equilibrium model with oligopolistic competition and unemployment although the welfare impact for the short run is ambiguous and dependent upon the strength of excess profits and scale economies relative to unemployment in manufacturing in the long run additional inflows of foreign capital always improve national welfare with capital mobility hence attracting foreign capital remains a sound policy for economies characterized by imperfect competition scale economies and regional unemployment

tariffs quotas and voluntary export restraints with and without internationally mobile capital this paper presents a general framework for comparing the effects of tariffs quotas and vers voluntary export restraints both with and without international capital mobility expressions for the shadow price of foreign exchange and the shadow price of capital under each type of trade restriction are derived and it is shown that although international capital mobility raises the welfare cost of tariff protection it lowers the welfare cost of quantitative restrictions in most cases the effects of exogenous shocks in the presence of quotas are intermediate between those in the presence of tariffs and those in the presence of vers tarifs douaniers contingentements et restrictions volontaires d l exportation quand le capital est ou n est pas mobile internationalement l auteur presente un cadre general d analyse qu il utilise pour comparer les effets de tarifs douaniers de contingentements et de restrictions volontaires a l exportation dans des contextes ofu le capital est ou n est pas mobile internationalement l auteur derive le prix fictif du change etranger et le prix fictif du capital sous l un et l autre types de restrictions au commerce et montre que meme si la mobilite internationale du capital augmente le cofut en terme de bien etre de la protection tarifaire elle reduit le cofut en terme de bien etre des restrictions sur les quantites echangees dans tous les cas les effets de chocs exogenes quand des contingentements existent sont toujours dans la fourchette entre ceux qu on observe quand des tarifs douaniers existent et ceux qui prevalent quand des restrictions volontaires i l exportation existent

welfare implications of growth under quotas abstract using the standard trade model it is shown that growth under quotas always improves welfare this result is contrary to johnson s 1967 result on the possibilities of immeserizing growth in the presence of tariffs

external increasing returns and the shadow price of foreign exchange abstract this paper shows that under external increasing returns to scale and a strictly concave production possibilities frontier the shadow price of foreign exchange in the presence of a tariff is the same as that in an economy with purely constant returns to scale however with a quota or a voluntary export restraint this shadow price is in general quite different from that in a purely constant returns to scale economy

do firms hedge in response to tax incentives there are two tax incentives for corporations to hedge to increase debt capacity and interest tax deductions and to reduce expected tax liability if the tax function is convex we test whether these incentives affect the extent of corporate hedging with derivatives using an explicit measure of tax function convexity we find no evidence that firms hedge in response to tax convexity our analysis does however indicate that firms hedge to increase debt capacity with increased tax benefits averaging 1 1 percent of firm value our results also indicate that firms hedge because of expected financial distress costs and firm size an increasing number of corporations use financial derivatives each year the international swaps and derivatives association reports that the notional value of outstanding otc swap contracts increased from 11 3 trillion in 1994 to more than 60 trillion by mid 2000 http 00www isda org this is interesting because financial theory tells us that corporate risk management enhances value only in the presence of costly market imperfections a number of empirical studies examine derivative holdings to identify which of the proposed theoretical incentives and imperfections lead to corporate hedging our paper adds to the hedging literature by testing whether corporations respond to two tax related incentives to hedge the incentive to reduce volatility thereby increasing debt capacity and the tax benefits of debt and the incentive to reduce expected tax liabilities by reducing the volatility of taxable income we also use a refined dependent variable to measure net

financial decision making are women really more risk averse 40 males 33 females gain gambling gain domain loss gambling loss domain a contextual frames b abstract gambling frames studies the application of experimental methods provided stronger control of the economic environment in which decisions were made we elicited data which call into question the prevalence of stereotypic risk attitudes in financial decision making first we find that the comparative risk propensity of male and female subjects is strongly dependent on the financial decision setting second and more important we observe no gender differences in risk propensity when subjects face contextual decisions since in practice financial decisions are always contextual our results suggest that the above gender stereotype may not reflect true male and female attitudes toward financial risks i gender specific risk behavior an experimental design our experiment was designed to examine gender specific risk propensity in decisions relevant for investors and managers table 1 gives an overview of the experimental design in the main treatment we implemented risky choices in the form of investment and insurance decisions choice behavior in this treatment henceforth called the context treatment directly measures the risk behavior of male and female subjects in contextual financial decisions we also ran a control treatment in which the same risky choices were presented as abstract gambling decisions this control treatment henceforth called the abstract treatment allows us to validate the risk behavior induced by our experimental procedure in the light of the above mentioned gambling evidence in the context treatment subjects were confronted with risky choices in two different decision contexts subjects first had to complete a series of investment decisions they were then presented with a series of identical choices this time however framed as insur1 wealth effects from income differences outside the laboratory may still affect risk behavior in our experiment they are controlled for in our model 2 experimental instructions are available in german from the authors or in english from our web page www wif ethz ch publikationen htm ance decisions each investment and insurance decision incorporated a choice between a risky lottery and a certain payoff with the series of choices implemented in the two frames we elicited our subjects certainty equivalents for the same four risky lotteries l1 l2 l3 l4 in both contexts we implemented two frames in the context treatment in order to measure the risk propensity of subjects toward both perceived gains and perceived losses in both frames all possible payoffs for each decision were positive in the investment frame these payoffs were also presented as gains while in the insurance frame the same payoffs were presented as losses relative to an initial endowment therefore elicited certainty equivalents in the investment frame measure subjects risk propensities in the gain domain while certainty equivalents in the insurance frame measure risk propensity in the loss domain if in contextual financial decisions female subjects are generally more risk averse than men our results should display ceteris paribus lower female certainty equivalents in both the investment and insurance frames 3 the four lotteries l1 l2 l3 and l4 each had two possible outcomes payoffs in swiss francs 1 sfr a 0 60 and their probabilities were 30 sfr 6 10 sfr 6 30 sfr 2 10 sfr 2 30 sfr 6 10 sfr 6 and 50 sfr 2 20 sfr 2 respectively 4 experimental evidence suggests that individual risk propensity will vary systematically between the gain and loss domain daniel kahneman and amos tversky 1979 383 vol 89 no 2 gender and economic transactions 3y16 my68 mp 383 friday dec 10 08 20 am lp aer my68 figure 1 differences in mean certainty equivalents ce between male and female subjects by frame note certainty equivalents and male female differences are measured in swiss francs in the abstract treatment we confronted a different group of subjects with exactly the same risky decisions as those in the main treatment however as mentioned before all choices in this control treatment were framed as abstract gambling decisions again two frames were implemented in the gaingambling and loss gambling frames we measured the risk attitudes of subjects toward gambles in the gain and loss domain respectively subjects in both treatments were told in advance that one of their choices would determine their experimental earnings further all subjects completed a post experimental questionnaire which yielded information on each subject s disposable income this information is necessary to exclude wealth effects due to income differences outside the laboratory as an explanation of gender specific choice behavior

tariffs quotas and domestic content protection some political economy considerations in this paper we have focused our attention on the relation between the configuration of protection seeking and of rent seeking interests and the choice of the protection instruments in doing so we have abstracted from the problem of nonequivalence of tariffs and quotas recent writings on product differentiation rodriguez 1979 donnenfeld 1984 have thrown new light on this old issue it may well be that the discussion is of key importance to the understanding of industry s predilection for quantitative restraints we also failed to deal with the question on nonequivalence of restrictive measures under conditions of uncertainty finally we touched only peripherally on the interaction among state it is perhaps more realistic to regard trade barrier formation as a game among nations as in baldwin and clarke 1985 every player seeks at once to protect its import substituting industries and to promote its exports by putting up barriers and by demanding that others lower theirs this approach is more suited however to explain the severity of restraints than it is to explain the nature of restraints which is the problem at hand trade restrictions have a protective and a revenue effect in less developed countries with ineffectual internal revenue collecting systems revenue seeking governments may ally themselves with protection seeking emergent industries and institute high tariffs tariffs and quotas may coexist if the trade restriction seeking alliance includes traders voluntary export restraints the newest of the protective devices may be popular because they circumvent international treaties and short circuit cumbersome procedures associated with changes in tariffs or quotas but they also have the virtue of inviting foreign exporters to act like price setters the harm to the foreign exporters is thereby mitigated in fact exporters may be gainers hence the danger of retaliatory action on the part of foreign governments is lessened domestic content legislation is a unique device in that the same domestic factor benefits from protection and also collects the protection created revenue we show the formal identity between the south african situation in which the maximum black white worker ratio is a binding constraint and regulations requiring that a given percentage of the value of the product be domestically produced we also derive formally the maximum permissible foreign content ratio which is optimal from the point of view of the protected interests in our analysis we have said virtually nothing about the victims of protectionism a discussion of the impact of the various measures on those who bear the cost of protection would doubtless deepen our understanding of the problem we should thus consider the magnitude of the deadweight loss and of the income transfer and the concentration or dispersion of the losers last but not least we should consider the question of awareness thus the cost impact of a tariff is easier to perceive than that of a quota with the cost of a ver or of domestic import content rule the most difficult to calculate of all it may be that the principle of the hiding hand is as important to the new political economy as the benthamite principles were to the old

import quotas and vers a comparative analysis in a three country framework abstract because a ver is inherently discriminatory the traditional two country analysis comparing it to a quota is inadequate this paper adopts a general equilibrium three country approach to compare tariffs quotas and vers a quota equivalent ver is defined alternatively in terms of quantity or price the welfare of the importing country is higher under a quota and that of the non restricted exporter is higher under a ver the welfare comparison for the ver restricted country is ambiguous a result which is at variance with conventional wisdom

enjoying the quiet life corporate governance and managerial preferences much of our understanding of corporations builds on the idea that managers when they are not closely monitored will pursue goals that are not in shareholders interests but what goals would managers pursue this paper uses variation in corporate governance generated by state adoption of antitakeover laws to empirically map out managerial preferences we use plant level data and exploit a unique feature of corporate law that allows us to deal with possible biases associated with the timing of the laws we find that when managers are insulated from takeovers worker wages especially those of white collar workers rise the destruction of old plants falls but the creation of new plants also falls finally overall productivity and profitability decline in response to these laws our results suggest that active empire building may not be the norm and that managers may instead prefer to enjoy the quiet life

general equilibrium effects of import constraints under variable labour supply public goods and income taxation we consider a general equilibrium trade model of a small open economy with a representative consumer where labour supply is variable where imports are restricted by a small tariff a quota or a voluntary export restraint ver and where alongside the production of two traded goods one imported and one exported a pure public good is produced and funded through an income tax within this framework we demonstrate among other things that under certain conditions while a small tariff or quota reduces employment and welfare a ver may increase them thus in the context of a small open economy contrary to standard results in certain cases vers may become the welfare and employment dominant instrument over the alternative import restrictions

introducing convexity into optimal compensation contracts abstract we study when it is appropriate to add a convex component such as stock options to an optimal managerial compensation contract we show that convexity is introduced when managers have moderate levels of relative risk aversion and decreasing absolute risk aversion in addition we study how convexity is affected as the distribution of outcomes becomes more skewed toward low outcomes here we show that while convexity increases when skewness is increased without regard to the effect on mean stock price the opposite effect results when increases in skewness leave the mean stock price unchanged

exchange rate exposure hedging and the use of foreign currency derivatives abstract we examine whether firms use foreign currency derivatives for hedging or for speculative purposes using a sample of s p 500 nonfinancial firms for 1993 we find evidence that firms use currency derivatives for hedging as their use significantly reduces the exchange rate exposure firms face we also find that while the decision to use derivatives depends on exposure factors i e foreign sales and foreign trade and on variables largely associated with theories of optimal hedging i e size and r d expenditures the level of derivatives used depends only on a firm s exposure through foreign sales and trade

does option compensation increase managerial risk appetite this paper solves the dynamic investment problem of a risk averse manager compensated with a call option on the assets he controls under the manager s optimal policy the option ends up either deep in or deep out of the money as the asset value goes to zero volatility goes to infinity however the option compensation does not strictly lead to greater risk seeking sometimes the manager s optimal volatility is less with the option than it would be if he were trading his own account furthermore giving the manager more options causes him to reduce volatility managers with convex compensation schemes play an important role in financial markets this paper solves for the optimal dynamic investment policy for a risk averse manager paid with a call option on the assets he controls the paper focuses on how the option compensation impacts the manager s appetite for risk when he cannot hedge the option position on one hand the convexity of the option makes the manager shun payoffs that are likely to be near the money under the optimal policy the manager either significantly outperforms his benchmark or else incurs severe losses furthermore in examples of optimal trading strategies asset volatility goes to infinity as asset value goes to zero yet option compensation does not strictly lead to greater risk seeking as asset value grows large or if the evaluation date is far away the manager moderates asset risk for example if the manager has constant relative risk aversion crra asset volatility converges to the merton constant as asset value goes to infinity in some situations the manager actually chooses a lower asset volatility than he would if he were investing on his own because the leverage inherent in his option magnifies his exposure to the asset volatility in addition with all constant or decreasing absolute risk averse utility functions from the hyperbolic absolute risk averse hara class giving the manager more options causes him to reduce asset volatility in the crra case for example the manager targets a fixed volatility for his personal

on the determinants of corporate hedging finance theory indicates that hedging increases firm value by reducing expected taxes expected costs of financial distress or other agency costs this paper provides evidence on these hypotheses using survey data on firm s use of forwards futures swaps and options combined with computstat data on firm characteristics of 169 firms in the sample 104 firms use hedging instruments in 1986 the data suggest that firms which hedge face more convex tax functions have less coverage of fixed claims are larger have more growth options in their investment opportunity set and employ fewer hedging substitutes