every little helps esg news and stock market reaction stories about corporate social responsibility have become very frequent over the past decade and managers can no longer ignore their impact on firm value in this paper we investigate the extent and the determinants of the stock market s reaction following ordinary news related to environmental social and governance issues the so called esg factors to that purpose we use an original database provided by covalence ethicalquote our empirical analysis is based on about 33 000 esg news positive or negative targeting one hundred listed companies over the period 2002 2010 on average firms facing negative events experience a drop in their market value of 0 1 whereas companies gain nothing on average from positive announcements we find also that market participants are responsive to the media but they do not react to firms press releases or to ngos disclosures moreover our results indicate that sector s reputation mitigates the loss the goodwill hypothesis and that cultural proximity and lexical contents of esg disclosures play a significant role in the magnitude of the impact

bounded price variation and rational expectations in endogenous switching model of the u s corn market a model that includes bounded price variation and rational expectations by producers is estimated for the u s corn market the resulting model specification is highly nonlinear though since the probability of market equilibrium must be determined endogenously unlike previous research the cross equation restrictions implied by the rational expectations hypothesis are incorporated in the bounded prices model by using fair and taylor s 1983 procedure for obtaining maximum likelihood estimates of nonlinear rational expectations models the resulting model is compared against a standard equilibrium model with naive expectations the results show the bounded prices model is a superior specification copyright 1989 by mit press

reputation effects in the market of certifiers evidence from the audit industry i introduction asymmetric information between seller and buyer can impede mutually beneficial transactions one of the solutions to this problem is to recruit an independent third party a certifier who verifies unobserved product characteristics for the buyer the certifier s independence is at the heart of the tripartite arrangement this independence however can be compromised when sellers pay for the certification for instance in the market of auditors and credit rating agencies cra it is not the investor i e the buyer of the security who pays for the certifier s services but the company which is to be impartially rated or audited in this business model companies can naturally manipulate their ratings audits furthermore investors only have a limited power to weed out dishonest certifiers simply because companies instead of investors choose auditors and cra ultimately these problems can pervert the certifier s mission to serve the investing community dranove and jin 2010 not surprisingly this conflict of interest has often been cited as a cause for accounting scandals and more recently for inflated credit ratings e g bis cfgs 2008 the economist 2004 2006 auditors and cra alike refute the criticism of their business model arguing that the threat of losing their reputation is a sufficient disciplinary device e g the economist 2005 1 however this claim has not yet been empirically substantiated a successful mechanism of reputation has three components in the presence of conflicts of interest consider the audit market 2 first investors have to punish companies which chose low quality auditors there is evidence that capital markets severely penalize companies whose audit reports are of dubious quality e g chaney philipich and kirk 2002 gao 2003a krishnamurthy zhou and zhou 2006 pacini and hillison 2003 second this negative capital market reaction should feed into companies auditor choice i e companies should choose high quality auditors third auditors then should have the incentive to provide high quality audits the second stage of this mechanism has not been empirically validated yet in particular it has not been analyzed whether the adverse capital market reaction to low audit quality feeds into companies auditor choice and if it does how a positive effect of adverse quality signals on audit demand means that firms prefer to engage lenient auditors in order to receive favorable reports suggesting that conflicts of interest overwhelm reputation concerns and clearly fail the disciplinary mechanism a negative effect on the other hand indicates that while investors do not pay for audit services they can exert discipline on auditors indirectly by forcing public companies to choose high quality auditors a success of reputation in this paper i exploit the natural experiment of arthur andersen s collapse and test the effects of audit quality signals on companies auditor choice in discrete choice models the quality signals in this study are auditors industry specific financial restatement histories i e the proportion of clients in an industry which restated financial statements in the past i find that auditors restatement histories are a crucial driving force in the subsequent auditor choice of deserting andersen clients there are compelling reasons why auditors financial restatement histories should forcibly feed into a company s auditor choice restatements are material corrections of published financial statements which cannot be relied upon anymore and have to be reissued since the very role of the independent auditor is to ensure that financial statements are fairly presented in all material respects it appears natural to think that the auditor has not done his job properly if a financial statement has to be restated later indeed there is ample evidence that capital markets receive restatements badly

does the bond market predict bankruptcy settlements this study shows the extent to which deviations from the absolute priority rule increase or decrease the bankruptcy emergence payoff to traded i e usually junior claimants bondholders the data indicate that on average bondholders benefit albeit slightly from absolute priority rule apr violations this paper also examines the degree to which the bond market in the bankruptcy filing month anticipates departures from the apr and other influences on the payoff to bondholders in other words we investigate the informational efficiency of the market for bankrupt bonds overall despite the complex and lengthy nature of bankruptcy proceedings the results support efficiency the finance literature has traditionally assumed that when a firm enters bankruptcy the creditors become the owners and the value of the firm is distributed according to the absolute priority rule apr the apr states that senior creditors should be fully compensated before junior creditors receive any portion of the bankrupt firm s value and junior creditors should receive full payment before shareholders receive any compensation in practice formal bankruptcy proceedings are complex processes that often violate the apr brown 1989 captures some of the intricacies of this process in a game theoretic model showing that the solution to the bargaining process in bankruptcy can involve deviations from the apr although the solution

bank loan portfolios and the monetary transmission mechanism abstract we study the portfolio behavior of bank loans following a monetary tightening and find that real estate and consumer loans sharply decrease while commercial and industrial c i loans increase these responses are compared with responses following non monetary shocks which also reduce output but keep interest rates roughly unchanged during such a non monetary downturn c i loans sharply decrease while real estate and consumer loans show no substantial response these responses together with the responses of relevant lending rates are hard to reconcile with a decline in the supply of c i bank loans during a monetary downturn as stressed by the bank lending channel several arguments are presented explaining why the supply of c i loans may actually increase after a monetary contraction

did state bank branching deregulation produce large growth effects abstract previous research claiming large growth effects of deregulation of state bank branching laws is biased by contemporaneous correlation between the regressors and the error term of the regression model robustness tests indicate that the growth effect of branching reform is much smaller than initially estimated

is the stock market sticker shocked a study of market response to recent cafe regulations in the us in response to increasing environmental concerns to improve energy security and to conserve energy use the us government has proposed a new round of corporate average fuel economy cafe standards many studies have focused on how the cafe standard can be met by various automakers that have sales in the us market and the costs and benefits of the companies meeting the standard however the stock markets view on the impact of the standard on automakers profitability is largely absent we study the more recent episode of the cafe regulation in an effort to try to detect the market response using the standard event study method our empirical findings suggest that while the stock market had some responses to the regulation the large scale and systematic reaction to the regulation is absent in addition the market response pattern to the regulation appears to be tied to the individual company s compliance condition if there is any significant response at all

in defense of base drift the federal reserve has been criticized for allowing the base from which it calculates its target growth paths for the monetary aggregatesto drift from year to year in response to past deviations from target drift in the base implies that target misses permanently affect the levels of the monetary aggregates using a simple theoretical model this paper shows that the optimal degree of base drift consistent withprice stability depends on the importance of permanent versus transitory income and velocity disturbances neither zero base drift nor complete base drift are likely to be compatible with price stability copyright 1986 by american economic association

a latent structure approach to measuring reputation the present study provides estimates of reputation as a dynamic latent variable that is determined by price premiums and market data further it analyzes the effect of extrinsic factors on reputation specifically this study seeks to i quantify the reputation of washington apples over time ii study the dynamic nature of reputation and iii analyze the effect of the label washington apple the model adopted in this study is the dynamic multiple indicator multiple cause dymimic modeling approach which is a special case of the general latent variable modeling scheme called state space models both dymimic and hedonic approaches are applied to the data on washington apples and results from the two approaches are compared reputation plays an important role in assuring product quality in markets where consumers can only imperfectly judge the product quality until after consumption if reputation effects are absent in these types of markets there is an incentive for producers to reduce quality and take short run gains before buyers catch on in order to avoid such quality cutting products with good reputations will sell for premium prices shapiro 1983 showed theoretically that price premiums are necessary for producers to invest in quality and reputation there is an extensive theoretical literature on reputation but empirical studies are limited empirical studies on the impact of firm reputation on shareholder wealth or product demand include jarrell and peltzman 1985 borenstein and zimmerman 1988 and karpoff and lott 1993 caves and green 1996 showed that factors that may affect a firm s reputation influence the relationship between price and quality gorton 1996 analyzed how a bank s reputation for default affects the discount rate on its debt the measurement of the value of reputation to producers in terms of price premiums and how a reputation can be built up and destroyed are important issues that have not been empirically analyzed the current study provides estimates of reputation as a dynamic latent variable that is determined by price premiums and market data further it analyzes the effect of extrinsic factors on reputation steenkamp 1990 points out that consumers observe at the moment of purchase the intrinsic and extrinsic product quality cues but not the quality attributes intrinsic cues are characteristics of the product such as color freshness texture and flavor while extrinsic

measuring the effects of regulation with stock price data this article examines the usefulness of stock returns in measuring the effects of regulation when the dates on which market expectations change are not known and standard sources e g the wall street journal are used to choose announcement dates twenty major changes in regulatory constraint since 1887 are considered tests using either monthly or daily data are found to have surprisingly little ability to detect the effects of regulation the evidence shows that formal regulatory announcements are generally anticipated in cases where it is unclear when expectations change

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

predisclosure information firm capitalization and security price behavior around earnings announcements several studies on the relationship between earnings reports and security price behavior provide evidence suggesting that a significant portion of the information revealed through earnings reports is reflected in security prices prior to the report month e g ball and brown 1968 and brown and kennelly 1972 this has been attributed at least partly to the existence of other more timely sources of information which allow market agents to forecast earnings prior to their release the evidence above reflects an average finding across all firms one question of interest is whether there are significant systematic crosssectional differences in the security price reactions to earnings announcements of firms which are associated with specific firm characteristics that lead to differential amounts of predisclosure information this study focuses on firm size capitalization as one such characteristic a firm

market incentives for safe commercial airline operation using a sample of nearly all fatal u s airline accidents between 1960 and 1985 this paper attempts to quantify the costs that airlines incur due to crashes the potential costs include those due to loss of life and equipment tort liability increased regulatory oversight and loss of demand as consumers turn away from products perceived to be unsafe examination of the deviations from expected demand following accidents reveals little or no effect prior to airline deregulation and weak indication of a response to recent crashes these results are consistent with the changes in an airline s equity value following an accident which are statistically significant but quite small relative to the total social cost of the accident

disequilibrium market analysis an application to the u s fed beef sector comment in a recent journal article ziemer and white zw hypothesized that the u s market for fed beef has been in disequilibrium on a quarterly basis to test this hypothesis ziemer and white specified a supply demand system for fed beef at the slaughter level and presented two sets of results two stage least squares estimates before incorporation of the disequilibrium mechanism and maximum likelihood estimates incorporating disequilibrium they indicated that the structural model was theoretically consistent with the market s operation and that the disequilibrium hypothesis was supported by the empirical results first we show that their supply demand model is misspecified second we show that their empirical test of market disequilibrium is inappropriate in particular we focus attention on their formulation of the supply equation and show why the estimated parameters of the fed beef price and placements variables are unreasonable next estimates of their model are compared to a better alternative model then a statistically appropriate test of the disequilibrium hypothesis is presented and contrasted to the zw findings

the objectives and priorities of monetary policy under different federal reserve chairmen this paper utilizes a monetary policy reaction function that relates policy intentions to forecasts of policy objectives estimates of this reaction function over the post accord period suggest that the burns period was unique while the martin and volcker periods were extremely similar the burns period was structurally distinct from both the martin and volcker periods further model specifications that allow for an independent influence on monetary policy from different presidential administrations also imply that there are significant differences in monetary policy under different fed chairmen copyright 1990 by ohio state university press

airline passenger fatality and the demand for air travel after the 11 september tragedy 20 of the scheduled us airline flights were cancelled and the passenger load factor was down to 56 from 66 6 a year ago was the high death toll or the nature of the attack itself responsible for this dramatic decline using the us data we find that the demand for air travel did fall in years of relatively high fatality rate but the demand is not sensitive to whether the high fatality rate is due to any terrorist activities our estimation results suggest that even after controlling for the sharp increase in the fatality rate because of the 11 september tragedy a considerable proportion of the decline in demand for air travel that year is still unexplained this evidence could suggest that there has been a fundamental shift in consumers perception of air travel safety in the aftermath of the tragedy

what does reputation really assure the relationship of trademarks to expectations and legal remedies i introduction klein and leffler 1981 and shapiro 1982 1983 have shown that a firm that engages in repeat transactions has an incentive to use the market as distinct from formal legal processes to assure the quality of its product the firm charges a price above salvageable costs of production and invests the premium in reputation trademark capital that it forfeits wholly or in part if it allows quality to fall below the standards it represents to its customers 1 the quality assurance hypothesis seems to be supported by stock market event studies such as those by jarrell and peltzman 1985 and karpoff and lott 1993 which show that product recalls airline crashes deceptive advertising and fraud result in trademark losses the quality assurance hypothesis however does not explain the massive size of these losses which typically are many times the outlays incurred by the firm as a result of the event the law and economics literature on contracts offers an answer to this and related puzzles suggesting that trademark capital does more than assure quality it assures specific performance that is fulfillment of the precise terms of the contract 2 after developing the specific performance hypothesis section ii we show that it is supported by the evidence from event studies furthermore it explains other phenomena not covered by the quality assurance hypothesis including why competitors of firms whose products are recalled lose wealth why some damages such as those in airline crashes intentionally fail to provide full compensation and why firms who sell to other firms also invest in trademark capital section iii we conclude with a summary and a few remarks on the issue of market versus legal forces section iv ii the specific performance hypothesis the quality assurance hypothesis focuses on the problems that arise when the physical characteristics of a commodity are costly to determine even after purchase and sellers warranties and quality representations are costly to enforce because higher quality usually costs more to produce and can be sold at a higher price producers have an incentive to represent their goods as being of higher quality than they really are or having established a reputation to cut quality and costs when consumers observe that the quality of the goods they purchase is lower than they had been led to believe they shift to lower cost lower quality goods whose quality is easier to determine higher quality goods seemingly are driven off the market klein and leffler 1981 hypothesize that a firm that engages in repeat transactions can gain by producing higher quality goods charging a price above salvageable costs of production and investing the premium in firm specific trademark capital the value of this trademark also described as reputation or goodwill is the present value of the expected stream of price premiums misrepresentation causes a reduction in this income stream and a corresponding loss in trademark capital 3 thus trademarks assure quality without a third party to enforce the contract 4 a buyer however is concerned about other characteristics of a transaction besides the physical attributes of the product the expected harm if the seller breaches the contract for example by misrepresenting the product failing to deliver it on time or failing to provide future service and the ability of the legal system to assure full compensation also matter accordingly a seller who engages in repeat transactions has an incentive to provide a bond that assures specific performance rather than just product quality when a breach results in damages that are hard to measure and the legal system does not enforce contracts costlessly the next task therefore is to examine the limitations of the legal system in enforcing contracts and providing compensation in case of breach specific performance and penalty clauses the courts could require contracting parties to provide specific performance

gradual incorporation of information pharmaceutical stocks and the evolution of president clinton s health care reform abstract we examine the effect of the evolution of president clinton s health care reform proposal over january 1992 october 1993 on pharmaceutical stock prices we identify a 52 3 percent decline in market adjusted prices which we then associate with health care reform applying a new technique isotonic regression we find most of the decline occurred gradually much of the decline occurred as the clinton plan adopted strategies to contain health care costs including managed competition and implicit regulation indirect evidence suggests that the wealth lost by pharmaceutical companies may have been largely an anticipated transfer our results are relevant to understanding the likely effects of the clinton plan and more recent proposals many other policy changes are marked by gradual public revelation of information which may not be completely observable by a researcher our approach may uncover information about the anticipated effects of policies unavailable from a traditional event study

welfare losses in disequilibrium markets an empirical illustration measures of partial welfare losses are derived for markets where the price may fail to equate demand and supply the welfare loss is measured as the difference between the sum of consumer surplus and producer surplus when going from a disequilibrium regime to an equilibrium regime a complication and special feature of the analysis is an assumption that the price is determined ex ante by the intersection of expected supply and demand ex post however both demand and supply are exposed to stochastic shocks this means that since the price is fixed ex ante the expected loss depends not only on deterministic demand and supply shifts but also on the distribution of the stochastic elements the swedish timber market is used as an empirical illustration

does the fed beat the foreign exchange market abstract this paper s estimates and tests of fed intervention profits are the first that explicitly adjust for foreign exchange risk premia failure to adjust may grossly affect estimated profits profits appear economically and statistically significant whether risk premia are modeled as time constant or as appreciation s market beta depending on fed intervention the estimates are sensitive to the method of risk adjustment and to the periods used because a key variable cumulative intervention is i 1 test statistics may have non standard distributions a problem affecting past tests this paper s tests account for non standard distributions possible explanations of these profits have mixed empirical support in the literature

do international acquisitions by emerging economy firms create shareholder value the case of indian firms while overseas acquisitions by emerging economy firms are gaining increased attention from the business press our understanding of whether and why this inorganic mode of international expansion creates value to acquirer firms is limited we argue that international acquisitions facilitate internalization of tangible and intangible resources that are both difficult to trade through market transactions and take time to develop internally thus constituting an important strategic lever of value creation for emerging economy firms furthermore the magnitude of value created will be higher when the target firms are located in advanced economic and institutional environments country markets that carry the promise of higher quality of resources and therefore stronger complementarity to the existing capabilities of emerging economy firms an event study of 425 cross border acquisitions by indian firms during 2000 2007 supports our predictions

the effect of changes in the federal funds rate target on market interest rates in the 1970s abstract this paper examines the influence of monetary policy on interest rates by estimating the effect of changes in the federal funds rate target the federal reserve s policy instrument on market interest rates in the 1970s we find that changes in the target caused large movements in short term rates and smaller but significant movements in intermediate and long term rates we hypothesize that the similarity of the reactions of three six and twelve month rates to changes in the target offers a possible explanation for the lack of support for the expectations theory from studies that have tested the theory using these rates

an empirical analysis of stock returns around dividend changes this paper documents significant drift in stock returns following announcements of changes in cash dividends the magnitude is i smaller for increases than for decreases ii inversely related to firm size and positively to dividend yield change and iii concentrated in the first quarter beta changes do not explain the drift and it is robust in various subperiods next it is shown that dividend increases are positively autocorrelated especially every fourth quarter the prices keep reacting to future announcements as if the market ignores these autocorrelations dividend decreases exhibit weak autocorrelation and the returns are negative for the following three announcements

does the federal reserve care about the rest of the world many economists are accustomed to thinking about federal reserve policy any economists are accustomed to thinking about federal reserve policy in terms of the institution s dual mandate which refers to price stability in terms of the institution s dual mandate which refers to price stability and high employment and in which the exchange rate and other interand high employment and in which the exchange rate and other international variables matter only insofar as they infl uence infl ation and the output national variables matter only insofar as they infl uence infl ation and the output gap which is to say not very much gap which is to say not very much in fact this conventional view is heavily shaped by the distinctive and pecuin fact this conventional view is heavily shaped by the distinctive and peculiar circumstances of the last three decades when the infl uence of international liar circumstances of the last three decades when the infl uence of international considerations on fed policy has been limited in this paper i will discuss how the considerations on fed policy has been limited in this paper i will discuss how the federal reserve paid signifi cant attention to international considerations in its fi rst federal reserve paid signifi cant attention to international considerations in its fi rst two decades followed by relative inattention to such factors in the two plus decades two decades followed by relative inattention to such factors in the two plus decades that followed then back to renewed attention to international aspects of monetary that followed then back to renewed attention to international aspects of monetary policy in the 1960s before the recent period of benign neglect of the international policy in the 1960s before the recent period of benign neglect of the international dimension this longer perspective is a reminder that just because the fed has not dimension this longer perspective is a reminder that just because the fed has not attached priority to international aspects of monetary policy in the recent past we attached priority to international aspects of monetary policy in the recent past we have no guarantee that it will not do so in the future indeed i will argue in the have no guarantee that it will not do so in the future indeed i will argue in the conclusion that in the next few decades international aspects are likely to play a conclusion that in the next few decades international aspects are likely to play a larger role in federal reserve policy making larger role in federal reserve policy making 1

asset returns discount rate changes and market efficiency the primary purpose of this paper is to reconcile the previous findings of discount rate endogeneity with the presence of discount rate announcement effects in securities markets the crux of this reconciliation is the distinction between technical discount rate changes that are endogenous and nontechnical changes which contain some informative policy implications in essence we attempt to separate expected discount rate changes from unexpected changes or equivalently the expected component of discount rate changes from the unexpected component if markets are efficient the former should have no announcement effects while the latter may be associated with an announcement effect accordingly the focus of the empirical analysis is on the interaction between discount rate exogeneity the specific monetary policy regime and accouncement effects in addition we examine whether the behavior of these markets in the postannouncement period is consistent with the rapid price adjustment implied by market efficiency

the credit channel of monetary policy transmission evidence from stock returns christophre georges this paper offers a novel test of the credit view of the monetary policy transmission mechanism using stock market returns we identify fed policy shocks using newspaper accounts and track daily stock prices immediately following the shocks if the credit channel is important then firms that are dependent on bank credit and internal funds should receive a relatively greater benefit loss from a fed easing tightening than firms with access to nonbank credit at favorable terms we identify ten policy shocks during the expansion of 1993 94 and the credit crunch period of the 1990 91 recession and find little evidence supportive of an operative credit channel jel e5 i introduction recently there has been renewed interest in the mechanism by which monetary policy innovations are transmitted into changes in aggregate output according to the traditional money view monetary policy influences market interest rates inducing changes in interest sensitive spending and consequently changes in output by assumption there is no distinction between financial assets and thus bank loans and internal funds are of no special interest in contrast the credit view e g bernanke and blinder 1988 assumes that bank loans are special due to information asymmetries some businesses are dependent on banks for loanable funds a withdrawal of reserves by the fed causes the supply of bank loans to fall and bank dependent businesses consequently reduce their spending a broader version of this view e g gertler and gilchrist 1993 bernanke and gertler 1995 claims that credit market imperfections contribute to the propagation of monetary policy shocks without working exclusively through the su pply of bank loans tight monetary policy may for example cause a deterioration of borrowers net worth thereby increasing external finance premia in either case this transmission mechanism operates through firms that are credit constrained in the sense that nonbank credit is an imperfect substitute for internal funds and bank loans empirical evidence on the transmission mechanism has been mixed see bernanke and blinder 1992 ramey 1993 kashyap et al 1993 gertler and gilchrist 1993 1994 christiano et al 1996 oliner and rudebusch 1995 1996 kashyap and stein 2000 two fundamental problems make direct tests of the credit view difficult the difficulty of identifying exogenous monetary policy shocks and the difficulty of identifying the relationship between these shocks and subsequent real activity this article offers a novel empirical test of the credit view using stock market returns if the credit channel is important then firms that are credit constrained should receive a relatively greater benefit loss from a fed easing tightening than firms with access to nonbank credit at favorable terms this relative benefit loss should be reflected in the behavior of stock prices immediately following news of the fed policy change we therefore identify changes in market expectations of fed policy calculate abnormal returns the deviations of the actual returns from the returns predicted by an asset pricing model for individual securities immediately following these innovations and test for systematic relationships between these abnormal returns and indicators of credit constraints at the firm level this approach is more indirect than others in the literature but has the advantage of mitigating the two identification problems noted above first the policy shocks that we use are changes in stock market expectations of fed policy we can identify these closely using daily accounts in the business press 1 second because the stock market reacts quickly to changes in expectations of future profitability we observe near contemporaneous responses of stock prices to policy shocks regardless of when in the future profits are expected to be altered

the economic side effects of dangerous drug announcements immediately prior to the passage of the 1962 food and drug administration amendments there were a number of drugs recalled from markets worldwide announcements about the dangerous side effects of these drugs were associated with lower share prices for their manufacturers and the industry as a whole we perform several analyses to sort out alternative explanations for the observed declines we find that dangerous drug announcements had no effect on the sales of other drugs and did not affect the share values of european drug makers doing little business in the united states we also find that share price reductions associated with recalls in the 1970s and 1980s were confined to the manufacturers of the recalled drugs these patterns are consistent with the hypothesis that drug company shareholders viewed the recalls in the early 1960s as signals of an increase in the cost of compliance with new and more stringent drug testing requirements

the wealth effect of merger activity and the objective functions of merging firms abstract this paper studies the net effects of the long run sequence of events leading to merger and of merger per se on shareholder wealth the appropriate measure of the wealth effect is shown to be the abnormal dollar return cumulated over time using this measure the long run wealth effect of the event sequence culminating in merger is significantly negative for acquiring firms for acquired firms the effect is negative but not significant the immediate impact of merger per se is positive and highly significant for acquired firms but larger in absolute value and negative for acquiring firms the evidence also reveals that measured abnormal rates of return to acquiring firms are sensitive to a slight variation in model specification and dependent on firm size with smaller firms earning significantly negative post merger returns

the use of expert opinion quality and reputation indicators by consumers evidence from the french vaulting stallion semen market we build a model inspired by the standard hedonic approach developed by rosen 1974 and completed by landon and smith 1997 1998 to analyse the price of french vaulting stallion semen in 2004 we show that reputation modelled as an endogenous factor plays a less important role than information on true quality for the explanation of price dispersion this result is explained by the fact that information on studhorses is not only available but also reliable insofar as the quality of a stallion is stable over time contrary to nondurable products like wine or cigars this explains also why consumers on this market do not use expert opinions to make their choices

the sherman antitrust act and the railroad cartels a lthough it is ninety years since the railroad cartels were ruled in violation of the sherman antitrust act of 1890 in the trans missouri 1897 and joint traffic 1898 decisions there is no agreement concerning the effect of these cases on collusion by the railroads 2 gabriel kolko and paul macavoy conclude that the supreme court decisions caused a permanent breakdown of the railroad cartels 3 other observers however argue that the effect on railroad collusion was negligible 4 this article uses stock price revaluations since trans missouri was largely unanticipated and estimates of railroad rates to measure the ef

the relation between narrative and money market indicators of monetary policy this paper studies the relation between narrative based indicators of monetary policy and widely used money market indicators of monetary policy three principal findings emerge first changes in monetary policy as measured by the narrative based policy indices are associated with persistent changes in the levels of m2 and the monetary base in contrast changes in the narrative policy indicators lead to transitory changes in short term interest rates nonborrowed reserves and the spread between the six month commercial paper rate and the three month treasury bill rate third these findings are generally robust across different narrative based policy indices

on the efficiency of least squares regression with security abnormal returns as the dependent variable monte carlo procedures are used to compare the finite sample performance of several estimators that may be used in cross sectional regressions with security abnormal returns as the dependent variable alternative models of event induced increases in stock return variance are examined for the event clustering scenario event clustering implies crosssectional correlation and heteroskedasticity in market model prediction errors violating one of the fundamental ordinary least squares ols assumptions i i d disturbances nonetheless provided that the conditions for asymptotic validity derived by greenwald 1983 are met the ols estimator is well specified in finite samples further for sufficiently large cross sections there is no advantage to several other more complex estimators

information spillovers incumbency and conservatism abstract this paper studies the relationship between the existing ventures of a firm and its incentives to undertake new ventures we argue that whenever a firm undertakes a new venture it does so with the risk that information associated with that venture will reflect on all of the firm s products if the costs of bad news exceed the benefits of good news the firm will be less likely to undertake the venture this is the case in our model in which an incumbent risks losing monopoly status in an established market should its new venture fail thus incumbency can breed conservatism

disequilibrium market analysis an application to the u s fed beef sector in this paper current theory and estimation procedures are applied in an analysis of disequilibrium price behavior in the u s fed beef sector although tests of equilibrium versus disequilibrium hypotheses are not well developed results indicate the possible presence of disequilibrium prices in the market for fed beef at least the hypothesis of significant disequilibrium could not be rejected

modeling winegrape prices in disequilibrium this article presents an econometric model of winegrape prices which recognizes the existence of demand and supply imbalances in the australian market a markets in disequilibrium framework is employed to motivate modeling price changes as responding to variations in excess demand solidus supply the disequilibrium price equation provides estimates of regional and varietal price discounts solidus premiums and a measure of the speed of disequilibrium price adjustment the equilibrium assumption is rejected for the market and substantial differences between equilibrium and disequilibrium estimates point to the inaccuracies of assuming market clearing disequilibrium estimates point to significant differences between warm and cool regions and changing speed of disequilibrium adjustment over time

macroeconomic cycles and the stock market s reaction to monetary policy abstract this paper examines cyclical variation in the effect of fed policy on the stock market we find a much stronger response of stock returns to unexpected changes in the federal funds target rate in recession and in tight credit market conditions using firm level data we also show that firms that face financial constraints are more affected by monetary shocks in tight credit conditions than the relatively unconstrained firms overall the results are consistent with the credit channel of monetary policy transmission

tariff jumping fdi and domestic firms profits studies of the welfare implications of trade policy often do not take account of the potential for tariff jumping fdi to mitigate positive gains to domestic producers we use event study methodology to examine the market effects for u s domestic firms that petitioned for antidumping ad relief as well as the effect of announcements of fdi by their foreign rivals in the u s market on these u s petitioning firms on average affirmative u s ad decisions are associated with 3 abnormal gains to a petitioning firm when there is no tariff jumping fdi but no abnormal gains if there is tariff jumping fdi the evidence for this mitigating effect is strongest when announcements of the intended tariff jumping fdi have already occurred before an ad decision takes place which happened in fair number of cases we also find evidence that the announcements of plant expansions and to some extent new plants have significantly larger negative effects on u s domestic firms profits than other types of fdi including acquisitions and joint ventures

further evidence on estimation of a disequilibrium aggregate labor market that final demand of 55 units for commodity one generates 45 29 units of pollution and final demand of 30 units for commodity two generates 18 44 units of pollution from the appropriate elements in the last row of the inverse we can calculate the coefficients of pollution generated per unit of final demand these coefficients are 0 823 for commodity one and 0 615 for commodity two it should be pointed out that the allocation of total pollution in 12 differs from that given by leontief because he subdivides the total according to gross output figures rather than by final demand references

shifting mandates the federal reserve s first centennial the federal reserve s mandate has evolved considerably over the organization s hundred year history it was changed from an initial focus in 1913 on financial stability to fiscal financing in world war ii and its aftermath to a strong anti inflation focus from the late 1970s and then back to greater emphasis on financial stability since the great contraction yet as the fed s mandate has expanded in recent years its range of instruments has narrowed partly based on a misguided belief in the inherent stability of financial markets we argue for a return to multiple instruments including a more active role for reserve requirements

value event studies this paper discusses appropriate methodology for measuring the effect of an event on the value of a firm s equity th e key points are 1 cumulative abnormal returns do not measure the effect of an event on firm value if there are dividends during the event window 2 it is generally appropriate to use pre event parameters of the return generating process even if the event alters the parameters during the event window and 3 controlling for fact ors other than the return on the market portfolio improves the power of the estimation the formula for the effect of an event on the value of a firm when there are dividends during the event window is developed a nd applied to a study of the effect of the bhopal disaster on the value of union carbide copyright 1992 by mit press

bond returns liquidity and missing data this paper examines holding period returns to constant duration portfolios of u s govern ment notes and bonds and measures the return premium generated by liquidity differences in bonds the approach compares constant duration portfolios constructed in two distinct ways one using only bonds issued in the most recent treasury auction one using all other bonds comparisons of the resulting series are made meaningful by choosing narrow du ration ranges in the portfolio formation procedure this in turn induces a missing data problem in the created time series parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data it is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments

monetary shocks equity returns and volatility a firm level panel data analysis abstractthis article studies the impact of monetary policy shocks on equity returns and their volatility among nine industries and their affiliated firms in the united states we use an extension of the traditional capm as the analytical framework and approximate policy shocks with the unexpected component of the federal funds rate data on the characteristics of firms and industries are obtained from compustat and the center for research in security prices covering a sample period from 1987 to 2009 our results clearly show that responses to policy shocks vary by industry and across firms furthermore credit availability matters in certain industries and small financially constrained and bank dependent firms are found to be more vulnerable to unexpected federal funds rate shocks

predictable patterns after large stock price changes on the tokyo stock exchange this paper extends to japanese stocks recent research on short term stock price adjustment to new information using standard methodologies we find that stock returns of firms included in the nikkei 300 tend to be significantly positive after large price decreases this is similar to the pattern observed for american stocks in other research the pattern remains when returns are adjusted for market movements and exists independently of the october 1987 market break we find little evidence of significant patterns following large stock price increases we also find little evidence that non transaction prices explain the persistent significant returns observed following large price decreases on the tokyo stock exchange we conjecture that broker dealers and tse member firms respond to large price decreases not by trading for their own profit but rather by selectively supplying liquidity to their preferred retail customers we conclude that ordinary investors probably cannot earn economic profits from these statistically significant patterns

the dartboard column second hand information and price pressure this study analyzes the effect of second hand information on the behavior of security prices and volume using analysts recommendations published in the monthly dartboard column of the wall street journal for the two days following the publication of the recommendations average positive abnormal returns of 4 percent nearly twice the level of abnormal returns documented in previous research on analyst recommendations and average volume double normal volume levels on the two days following publication of the recommendations are documented the positive abnormal return on announcement is partially reversed within 25 trading days the authors conclude that the positive abnormal return on announcement of the recommendations is a result of naive buying pressure as well as the information content of the analysts recommendations

strategic responses to regulatory threat in the credit card market abstract models of endogenous regulatory threat suggest that firms may cut prices in order to ease a threat of regulation i test the implications of these models using stock market data from an episode of regulatory threat in the credit card market the data show that the initial threat led to negative abnormal returns for a portfolio of credit card issuers consistent with the regulatory threat hypothesis price cuts announced after the threat led to abnormal returns that are significantly more positive than those following similar cuts outside the period of regulatory threat this pattern exists not only for those issuers announcing cuts but also for their rivals which suggests that the cuts reduced an industry wide threat of regulation factors that proxy for issuers exposure to and influence on the probability of regulation affect the size of these returns which provides corroborative evidence in favor of the regulatory threat hypothesis

monetary policy and the u s stock market does the federal reserve system consider the level of the stock market when setting monetary policy this paper examines empirically if monetary policy since the october 19 1987 stock market crash has been influenced by the stock market we conclude that the fed considers the stock market only to the extent that it influences inflation and the output gap as a consequence the federal reserve policy accommodated the high valuations in the 1990s of the stock market as measured by the s p500 p e ratio

the competitive impact of air crashes stock market evidence abstract we examine stock market reactions to commercial air crashes to test the hypothesis that consumers respond by switching to rival airlines and or flying less we focus on the stock price reactions of airlines not involved in the crash if switching occurs noncrash airlines should benefit to the extent that they are direct competitors of the crash airline we develop a measure of market overlap and regress individual non crash airline abnormal returns on this measure allowing the constant term to capture any negative spillovers the evidence supports both a switching effect and a spillover

standard errors in event studies even if true abnormal returns are uncorrelated estimated abnormal returns are not this paper presents a simple formula for the variance of estimated cumulative abnormal re turns both returns and dummy variable procedures for estimating the standard error correctly taking account of both intertemporal and contemporaneous correlation of esti mated residuals are discussed they are then applied to an event study of post merger performance it is shown that ignoring either the intertemporal or contemporaneous correlation of residuals can result in significant underestimates of standard errors

evidence on the role of cash flow for investment abstract recent work in macroeconomics argues that imperfections in capital markets may lead to business cycle fluctuations by propagating relatively modest shocks evidence for such a mechanism also known as the financial accelerator consists largely of firm level studies showing that cash flow is an important predictor of investment but this evidence is often viewed with skepticism because cash flow is also a good indicator of investment opportunities in this paper we develop a framework for estimating the extent to which the predictive power of cash flow can be attributed to its role as a fundamental versus its role in alleviating credit frictions for firms with access to commercial paper and bond markets we find that the perfect capital markets model of investment can fully account for the role of cash flow for firms with only limited access to capital markets as indicated by lack of participation in public debt markets however investment appears to be excessively sensitive to fluctuations in cash flow these results thus clarify the role of cash flow in investment equations and provide support for the existence of a financial accelerator

a market based evaluation of the election versus appointment of regulatory commissioners this paper examines the elected versus appointed commissioner dichotomy from a market value perspective previous empirical analysis tends to concentrate on rates rather than examining the impact on shareholders wealth we examine life insurance industry data during the period surrounding the passage of california s proposition 103 the primary impact of the referendum on life insurers is to change the method of commissioner selection from appointment to popular vote we find that this change significantly reduced the value of life insurers doing business in california this result is consistent with the recent findings of boyes and mcdowell 1989 and smartt 1994 using alternative evaluation procedures for firms in other regulated industries this implies that the change to a popular election of commissioners either increases the level of risk and or decreases the expected cash flows of regulated firms

studying firm specific effects of regulation with stock market data an application to oil price regulation regulations are often introduced and reformed in response to unanticipated changes in market forces in late 1973 for example opec quadrupled the world price of oil and u s policy makers responded by imposing oil price regulation such events pose a fundamental problem of interpretation for studies that use stock prices to identify the economic effects of regulation what portion of the capital gains or losses experienced by investors in regulated firms is due to regulation and what portion is due to unanticipated economic events to answer these questions we use microeconomic theory to derive hypotheses about how the capital gains and losses created by opec pricing and u s regulatory policies are related to the underlying characteristics of petroleum firms we test the hypotheses by including a model of firm specific abnormal returns in the standard market models of common stock returns earned by investors in petroleum firms the results indicate the u s oil production and refiner access to price controlled crude oil were sources of capital gains and that u s and foreign refining were sources of capital losses

the impact of market clearing assumptions and dynamics on demand elasticities abstract this paper establishes support for the empirical regularity that model specifications which assume market clearing produce more elastic impact demand price elasticities than their disequilibrium counterparts specification error analysis helps explain this regularity the regularity is shown to be only a short run phenomenon

the incidence of regulatory rents in the motor carrier industry this article focuses on two questions in the debate over motor carrier regulation first did regulation create eliminate or have no effect on monopoly rents in the trucking industry second ifthere were rents what was their incidence were they received by owners oftrucking firms dissipated through higher costs or captured by the teamsters union data on share price responses to deregulation announcements reveal declines in expected profits of 8 19 of totalfirm value this suggests that regulation created monopoly profits and indicates that at least some of these rents accrued to owners of trucking firms firms responses to regulatory change are modelled as functions of company s operating characteristics and measures of unionization operating efficiency and service characteristics are shown to affect the impact of deregulation on share values

touched by tragedy capital market lessons from the crash of valujet flight 592 abstract this study presents an event time analysis of the effects of the crash of valuejet flight 592 the mandated f a a shutdown of valujet and the subsequent restart of the airline on valujet shareholders and two portfolios composed of the stocks of major and low cost competitors the results of the study document immense losses for valujet s shareholders as well as large contagion losses for the holders of other low cost airlines but statistically significant gains for the owners of major airline stocks a cross sectional analysis of the abnormal returns registered at the time of the crash and shutdown suggests that fleet age and low cost status but not an airline s public safety record were significant of the determinants changes in share prices for competitor firms

liquidity provision interest rates and unemployment abstract the effective liquidity supply of the economy the weighted sum of all assets that serve as media of exchange matters for interest rates and unemployment we formalize this idea by adding an over the counter market with collateralized trades to the mortensen pissarides model an increase in public liquidity through a higher supply of real government bonds raises the real interest rate crowding out private liquidity and increasing unemployment if unemployment is inefficiently high keeping liquidity scarce can be socially optimal a liquidity crisis affecting the acceptability of private assets as collateral widens the rate of return difference between private and public liquidity also increasing unemployment

the liability of good reputation a study of product recalls in the u s automobile industry in this paper we explore opposing theoretical claims about how organizational reputation affects market reactions to product defects on the one hand good reputation could be a disadvantage because expectations about product quality are more likely to be violated by defects in highly reputed products on the other hand a good reputation could be an advantage because of strong inertial effects on reputation orderings we empirically test these competing hypotheses using data on product recalls in the u s automobile industry from 1975 to 1999 our results support for the idea that reputation can be an organizational liability in that highly reputed firms suffer more market penalty as a result of their product recalls we also propose that the reputational effects are moderated by two important factors substitutability and generalism specialism our results show that having few substitutes with an equivalent level of reputation or a focused product identity stemming from specialism buffers the negative market reactions to product recalls we conclude with a discussion on the implications of these results for institutional reputation and status theories

in search of a signaling effect the wealth effects of corporate name changes abstract we find that evidence of a positive stock price reaction to the announcement of a name change is very weak and is sensitive to sample selection we interpret the evidence as a caution against the popular opinion that corporate name changes have significant valuation effects we also find little evidence that corporate name changes correspond to changes in a firm s stock return covariability with its industry index or changes in the firm s earnings growth rate these results cast doubt on two purported motives for name changes that they convey information to the market about changes in the firm s line of business or that they signal management s private information about the firm s future performance corporate name changes may serve useful purposes but such purposes have small valuation effects or tend to be anticipated by investors