the cost of market versus regulatory discipline in banking1 abstract we present evidence that insured deposit financing shields banks from the full costs of market discipline moody s downgrades indicators of increasing risk are associated with negative abnormal equity returns that are increasing in the bank s reliance on insured deposits moreover banks raise their use of insured deposits following increases in risk these findings cast doubt on the ability of capital market participants to effectively discipline bank behavior within the current regulatory environment more generally our findings highlight the potential for regulation to undermine market discipline in regulated industries

the effect of preferred stock rating changes on preferred and common stock prices abstract daily returns are used to investigate the effect of preferred stock rating change announcements on preferred and common stock prices announcements that are free of confounding events clean announcements significantly affect preferred stock prices however the effect occurs after the day of announcement mostly on event day 1 conversely there is no evidence clean announcements affect common stock prices larger preferred stock abnormal returns are associated with announcements that are contaminated by confounding events but the abnormal returns appear to be the result of the confounding events more than the rating change

stock price reactions as surrogates for the net cash flow effects of corporate policy decisions abstract this paper adopts a rational market structure to examine the link between the cash flow effects of management policy decisions and the resulting stock price reactions the focus is on testing cross sectional associations between cash flow effects and the underlying characteristics of affected firms we find that it is not possible to infer the sign of association between the stock price reaction and any characteristics of the firm that are observable before management announces its decision our methodological suggestions involve exploiting either a priori assumptions or sample information about the probability distribution of unobservable decision variables underlying the management decision process

rethinking the brain drain abstract when productivity is fostered by both the individual s human capital and by the average level of human capital in the economy individuals underinvest in human capital a strictly positive probability of migration to a richer country by raising both the level of human capital formed by optimizing individuals in the home country and the average level of human capital of nonmigrants in the country can enhance welfare and nudge the economy toward the social optimum under a well controlled restrictive migration policy the welfare of all workers is higher than in the absence of this policy

inducing human capital formation migration as a substitute for subsidies abstract when productivity is fostered by an individual s own human capital as well as by the economy wide average level of human capital individuals under invest in human capital the provision of subsidies for the formation of human capital conditional on the subsidy being self financed by tax revenues can bring the economy to its socially optimal level of human capital yet a strictly positive probability of migration to a richer country by raising both the level of human capital formed by optimizing individuals in the home country and the average level of human capital of non migrants in the country can enhance welfare and nudge the economy toward the social optimum indeed under a well controlled restrictive migration policy the welfare of all workers is higher than in the absence of this policy

changes in the probability of bankruptcy and equity value abstract work in finance suggests that changes in the probability of bankruptcy likely affect firm value by affecting perceptions of the cost of transacting with the firm in this paper accounting information from the balance sheet as well as the income statement is used in conjunction with ohlson s 1980 bankruptcy prediction model to calculate unexpected changes in the probability of bankruptcy for a sample of firms with a large estimated probability of bankruptcy sometime during the ten year study period unexpected changes in the probability of bankruptcy are useful in explaining security returns even after controlling for unexpected earnings

information effects and stock market response to signs of firm deterioration a recent issue of the journal of financial economics june september 1978 is devoted to reporting anomalous evidence regarding market efficiency this study may qualify under the same heading here we examine the market response to information about firms whose future is assessed as being extremely problematic

common stock returns and rating changes a methodological comparison this paper examines the adjustments in a firm s common stock price during the eleven months before and during the month of announcement of a bond rating change based on several different measures of abnormal security return the findings are consistent with the proposition that bond downgradings convey information to common stockholders for bond upgradings the price adjustments were statistically insignificant in the month of announcement although in the eleven preceding months upgraded firms exhibited positive abnormal returns while the results do not fully support earlier research we stress that the main contribution of this article lies in the scrutiny it gives to issues of methodology in assessing the possible price effects of bond reclassifications several recent studies have investigated the effects of changes in company debt classifications by the major bond rating agencies 1 these include four studies of the impact of a rating change on bond prices katz 19 hettenhouse and sartoris 14 grier and katz 12 and weinstein 25 and one study of the impact on common stock prices pinches and singleton 22 the findings of the bond price studies differ widely thus while katz and grier and katz suggest that trading rules based on the announced downgradings of industrial bonds may be moderately profitable hettenhouse and sartoris and weinstein analyzing bond yields and returns respectively find that there is no apparent opportunity to profit abnormally subsequent to the announcement of the change weinstein attributes these differences in results largely to issues of methodology and proceeds to investigate the effects of rating changes on bond prices using more refined risk adjustment techniques and portfolio estimation procedures

changes in the value relevance of earnings and book values over the past forty years this paper investigates systematic changes in the value relevance of earnings and book values over time we report three primary findings first contrary to claims in the professional literature the combined value relevance of earnings and book values has not declined over the past forty years and in fact appears to have increased slightly second while the incremental value relevance of bottom line earnings has declined it has been replaced by increasing value relevance of book values finally much of the shift in value relevance fiom earnings to book values can be explained by the increasing frequency and magnitude of one time items the increasing frequency of negative earnings and changes in average firm size and intangible intensity across time

patenting in the shadow of competitors this article empirically examines the patenting behavior of new biotechnology firms that have different litigation costs i show that firms with high litigation costs are less likely to patent in subclasses with many other awards particularly those of firms with low litigation costs this pattern is consistent with the literature on costly litigation which suggests that firms that have high litigation costs will take greater precautions to avoid litigation these results are robust to a variety of control variables and modifications that seek to test alternative explanations

tilting the table the use of preliminary injunctions abstract this paper examines the economic role of preliminary injunctions in legal disputes we present a model in which differences in financing costs drive the use of preliminary injunction and explore the implications of this legal remedy for ex post efficiency and ex ante incentives controlling for the nature of the dispute we examine the relationships between the financial status of litigating parties and whether a preliminary injunction is requested the empirical analysis uses detailed data compiled for a sample of 252 patent suits and reveals patterns generally consistent with those suggested by the model

a brain gain with a brain drain abstract we study human capital depletion and formation in an economy open to out migration as opposed to an economy which is closed under the assumption of asymmetric information the enlarged opportunities and the associated different structure of incentives can give rise to a brain gain in conjunction with a brain drain migration by high skill members of its workforce notwithstanding the home country can end up with a higher average level of human capital per worker

the resolution of financial distress most models of financial structure embody an assumption about financial distress that causes debt to be costly to the issuing firm this approach has been criticized on the grounds that the assumed costs could be avoided by a costless financial reorganization in this article we show that despite the possibility of costless reorganization it may be rational for firms to incur significant costs in the resolution of financial distress the main assumptions that give rise to our results are the existence of asymmetric courts to impose a reorganization on the claimants of a firm article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

market based empirical research in accounting a review interpretation and extension a decade and a half of the most concerted and ambitious research effort in accounting history is evaluated here it is the search into the relationship between publicly disclosed accounting information and the consequences of the use of this information by the major group of usersequity investors as such consequences are reflected in characteristics of common stocks traded in major exchanges this research effort known as market based accounting research mbar obtained its impetus from major developments in finance theory during the late 1950s and early 1960s these were the portfolio selection theory and its offspring the capital asset pricing model capm and the concept of informationally efficient capital markets ecm subsequent developments in information economics agency theory and optimal incentive signaling models were quickly incorporated into mbar while the impetus to this line of research came from other disciplines accounting was not only a beneficiary but also to a modest extent a benefactor mbar is relevant to the study of capital market efficiency the capm information economics and regulation this contribution distinguishes mbar from most accounting areas whose contributions to other disciplines are negligible in

the effect of bond rating changes on common stock prices abstract the evidence in this paper suggests that downgrades by both moody s and standard and poor s are associated with negative abnormal stock returns in the two day window beginning the day of the press release by the rating agency significant negative abnormal performance can still be detected after eliminating observations containing obvious concurrent potentially contaminating news releases there is little evidence of abnormal performance on announcement of an upgrade significant abnormal returns are associated with announcements of additions to the standard and poor s credit watch list if either a potential downgrade or a potential upgrade is indicated

human capital depletion human capital formation and migration a blessing or a curse abstract we specify conditions under which a strictly positive probability of employment in a foreign country raises the level of human capital formed by optimizing workers in the home country while some workers migrate taking along more human capital than if they had migrated without factoring in the possibility of migration a form of brain drain other workers stay at home with more human capital than they would have formed in the absence of the possibility of migration a form of brain gain

a nonlinear approach to us gnp a univariate nonlinear model is estimated for us gnp that on many criteria outperforms standard linear models the estimated model is of the threshold autoregressive type and contains evidence of asymmetric effects of shocks over the business cycle in particular the nonlinear model suggests that the post 1945 us economy is significantly more stable than the pre 1945 us economy

accounting measurement price earnings ratio and the information content of security prices a number of papers for example beaver lambert and morse 1980 beaver lambert and ryan 1987 collins kothari and rayburn 1987 and freeman 1987 have documented that stock prices lead accounting earnings these investigations have led to the conclusions that prices provide information about earnings ahead of time and that earnings capture events that affect security prices with a lag the study of p e ratios has supported those conclusions and also produced additional insights beaver and morse 1978 have shown that pie ratios not only predict future earnings changes but they also identify transitory aspects of current earnings investors utilize other information in setting prices which provides both a prediction of future earnings and an indication of whether current earnings are representative of future earnings thus a comparison of price to earnings in a p e calculation can indicate the extent to which current earnings are transitory 1 in this paper we show that information in prices that leads future earnings is contained in financial statements while accrual accounting

modeling nonlinearity of business cycles choosing between the cdr and star models nonlinear modeling has become popular in applied macroeconomics successful attempts include beaudry and koop s cdr current depth of the recession model of real gnp and various star smooth transition autoregression models of industrial production however these models have not been directly compared we compare cdr and star models of u s real gnp and industrial production we find i within sample the cdr model fits slightly better than the star model ii out of sample the cdr model forecasts better than the star model and iii the cdr model generates very different dynamics than the star model

disclosure policy a discussion of leuz triantis and wang 2008 on going dark abstract ltw 2008 examine firms withdrawing from the sec reporting system but continuing to trade on pink sheets the paper finds that sarbanes oxley increased the propensity of firms to go dark but counter to conventional wisdom had no significant effect on the rate of going private transactions agency costs as well as poor growth opportunities proximity to financial distress and increased compliance costs arising from sox increase the propensity to go dark suggestions to improve the empirical implementation and interpretation involve including additional control and more suitable explanatory variables and more attention to causation issues and to the quantification of economic significance

the impact and the spillover effect of a sovereign rating announcement on the euro area cds market abstract this paper analyzes the impact and the spillover effect of a sovereign rating announcement on the euro area cds market through the event study technique we demonstrate that downgrades and upgrades considerably affect financial markets the relevance of the impact is due to the introduction of new information after a rating change announcement information discovery effect and to the role of rating in the current financial regulation certification effect conversely the cds market does not seem to react significantly to rating warning outlook and review announcements furthermore we find evidence of a spillover effect only after a downgrade announcement our results show that the size of the spillover effect is influenced by economic and financial conditions of analyzed countries and that international bank flows between emu members represent an important transmission channel of the spillover effect

the market valuation implications of net periodic pension cost components abstract this paper examines whether market participants implicitly assign different coefficients to pension cost components when determining security prices the major findings are 1 the pension cost components coefficients generally differ from one another as predicted the transition asset amortization coefficient is lower than other pension coefficients and is insignificantly different from zero 2 consistent with the market viewing pension related income streams as less risky the pension coefficients are generally larger than the nonpension coefficients additional specification tests permitting nonpension coefficients to vary with risk tax payer status and industry membership generally support the basic findings although the significance levels are generally higher

the informational structure of migration decision and migrants self selection abstract we analyze the pattern of migrants self selection in unobservables when there is uncertainty about foreign wages negative selection becomes more likely and a greater dispersion of wages at destination no longer suffices to predict that immigrants will outperform natives

brain drain and economic growth theory and evidence we focus on the impact of migration prospects on human capital formation and growth in a small open developing economy we assume that agents are heterogeneous in skills and take their educational decisions in a context of uncertainty regarding future migrations we distinguish two growth effects an ex ante brain effect migration prospects foster investments in education because of higher returns abroad and an ex post drain effect because of actual migration flows the case for a beneficial brain drain bbd emerges when the first effect dominates i e when the average level of human capital is higher in the economy opened to migrations than in the closed economy we derive the theoretical conditions required for such a possibility to be observed using cross section data for 37 developing countries we find that the possibility of a bbd could be more than a theoretical curiosity

the information content of losses abstract this study hypothesizes that because shareholders have a liquidation option losses are not expected to perpetuate they are thus less informative than profits about the firm s future prospects the results are consistent with the hypothesis they also show that the documented increase in the earnings response coefficent as the cumulation period increases appears to be due exclusively to the effect of losses the liquidation option effect extends to profitable cases where earnings are low enough to make the option attractive alternating explanations for the low informativeness of losses such as mean reversal of earnings are not supported by the tests

implications of the mobility of skilled labor for local public funding of higher education inter jurisdictional labor mobility reduces the incentive for local public funding of education this can be rectified by dividing the financial burden between the federal and local level subsidizing local expenditures by inter jurisdictional payments based on net migration flows c 1997 elsevier science s a

bargaining and the role of expert agents an empirical study of final offer arbitration abstract expert agents such as lawyers play a prominent role in conflict resolution yet little is known about how they affect outcomes we construct a model that permits us to estimate the influence of agents and test whether the parties in a dispute face prisoner s dilemma incentives using eighteen years of final offer arbitration data from new jersey we find the parties do significantly better when they retain agents and that the parties learn about this benefit over time however we also find that the gain to using an agent is fully offset when the opposing party also hires an agent since agents are costly this noncooperative equilibrium is pareto inferior

nonlinear autoregressive leading indicator models of output in g 7 countries this paper studies linear and nonlinear autoregressive leading indicator models of business cycles in g 7 countries our models use the spread between short term and long term interest rates as leading indicators for gdp we examine data admissibility by determining whether these models have the ability to produce time series with classical cycles that resemble the observed classical cycles in the data and then we ask whether this data admissibility lends itself to better predictions of the probability of recession copyright 2007 john wiley sons ltd

stock price reactions to the wall street journal s securities recommendations this paper examines the impact of the heard on the street hots column of the wall street journal on common stock prices the results of the study indicate that the hots column appears to have an impact on stock prices on the publication day however we also find a smaller but statistically significant impact on two days preceding the pub lication the significant abnormal returns on these days are associated with higher trading volume the reaction of stock prices is symmetric with respect to the buy and sell recom mendations and the impact of single company recommendations is greater than the im pact of the multi company recommendations i introduction the efficient market hypothesis assumes that security prices fully and instantaneously reflect all available information considerable evidence has been accumulated during the past decades in support of the hypothesis the acceptance of the hypothesis has raised questions about the economic value of professional investment advice if the market is efficient then the management of port folios based on these recommendations should not consistently outperform the market why then are investors still willing to pay for this information examples of the advice include low cost financial publications brokerage house rec ommendations and subscription financial newsletters that sell for hundreds of dollars recent studies argue that investment advisors can provide information to investors at a lower cost than the investors cost of information production millon and thakor 1985 develop a model that explains the existence of investment advisory agencies they argue that if the information of investment advisory agencies permits security analysts to share information about common uncertainties that affect the value of firms as a whole such as the return on the market portfolio then investment advisory agencies can produce information more cheaply than individual investors this model is consistent with the study of

the relation between sovereign credit rating revisions and economic growth abstract a country s economic growth exhibits a significant response to sovereign rating changes a one notch upgrade downgrade causes an increase decline of about 0 6 0 3 in re rated countries five year average annual growth rates the results hold after accounting for other determinants of economic growth and potential endogeneity problems and are robust to the use of quarterly data changes in country rating affect economic growth via the interest rate and capital flow channels narrower sovereign bond yield spreads and increased capital inflows are associated with upgrades which stimulate re rated countries economic performance and the converse holds for downgrades

the costs of inefficient bargaining and financial distress abstract this study provides the first large sample analysis of the stock market reactions to interfirm litigation when a suit is filed the common stock of the typical defendant declines by about 1 while the plaintiff experiences no significant gains for the average pair of firms the combined drop in value upon filing is 21 million much of the loss is regained if the suit is settled the findings suggest that bargaining among firm claimants sometimes leads to very inefficient outcomes part of the leakage is explained by the costs of increased financial distress imposed on the defendant

the effect of lender identity on a borrowing firm s equity return previous research demonstrates that a firm s common stock price tends to fall when it issues new public securities by contrast commercial bank loans elicit significantly positive borrower returns this article investigates whether the lender s identity influences the market s reaction to a loan announcement although we find no significant difference between the market s response to bank and nonbank loans we do find that lenders with a higher credit rating are associated with larger abnormal borrower returns this evidence complements earlier findings that an auditor s or investment banker s perceived quality signals valuable information about firm value to uninformed market investors previous studies show that certain types of loan announcements generate significantly positive abnormal returns to the average borrower s equity 1 this finding contrasts with the negative equity returns generally associated with a corporation s issuance of public securities smith 1986 this difference in market reactions indicates that private and public securities are not perfect substitutes for the average firm in this sense lender identity defined as public versus private lender significantly impacts the borrower s abnormal equity return the standard theoretical explanation for this difference is that private lenders either obtain private information about the firm s value or they have the incentive and ability to monitor firm behavior more effectively than other outside monitors can although the empirical literature on private lending has evaluated primarily commercial bank loans and lines of credit these theoretical arguments apply equally to any type of private

moody s and s p ratings are they equivalent conservative ratings and split rated bond yields we examine the relative impact of moody s and s p ratings on bond yields and find that at issuance yields on split rated bonds with superior moody s ratings are about 8 basis points lower than yields on split rated bonds with superior s p ratings this suggests that investors differentiate between the two ratings and assign more weight to the ratings from moody s the more conservative rating agency moody s becomes more conservative after 1998 and the impact of a superior moody s rating becomes stronger furthermore the differential impact of the two ratings is more pronounced for the more opaque rule 144a issues

can a brain drain be good for growth in the source economy this paper analyzes the interaction between income distribution human capital accumulation and migration it shows that when migration is not a certainty a brain drain may increase average productivity and equality in the source economy even though average productivity is a positive function of past average levels of human capital in an economy it is also shown how the temporary possibility of emigration may permanently increase the average level of productivity of an economy

the impact of bond rating changes on corporate bond prices new evidence from the over the counter market abstract i study the information content of bond ratings changes using daily corporate bond data from trace abnormal bond returns over a two day event window that includes the downgrade upgrade are negative positive and statistically significant although the reaction to upgrades is economically small monthly abnormal bond returns around downgrades and upgrades are statistically significant but overstate the magnitude of the reaction relative to two day abnormal returns unlike the bond market the stock market reaction to upgrades is statistically insignificant evidence suggests that the differing inferences on the effect of upgrades in the two markets can be attributed to wealth transfer effects rather than relative market inefficiencies in the cross section the bond market response is stronger for rating changes that appear more surprising rating changes of lower rated firms and upgrades that move the firm from speculative grade to investment grade

earnings as an explanatory variable for returns in this paper we investigate whether the level of earnings divided by price at the beginning of the stock return period is relevant for evaluating earnings returns associations the primary model motivating this research relies on the idea that book value owners equity and market value are both stock variables indicating the wealth of the firm s equity holders the related flow variables after adjusting for dividends are respectively earnings divided by price at the beginning of the return period a p 1 and market returns it then follows that earnings divided by beginning of period price should be associated with stock returns although models based on a relation between market value and book value are used occasionally in the accounting research literature see for example landsman 1986 harris and ohlson 1987 and barth

can selective immigration policies reduce migrants quality destination countries can adopt selective immigration policies to improve migrants quality screening potential migrants on the basis of observable characteristics also influences their self selection on unobservables we propose a model that analyzes the effects of selective immigration policies on migrants quality measured by their wages at destination we show that the prevailing pattern of selection on unobservables influences the effect of an increase in selectivity which can reduce migrants quality when migrants are positively self selected on unobservables we also demonstrate that in this case the quality maximizing share of educated migrants declines with the scale of migration

on corporate governance a study of proxy contests abstract this paper examines a sample of firms experiencing proxy contests for seats on their board of directors dissident shareholders usually fail to obtain a majority of board seats nevertheless they capture some seats via mechanisms such as cumulative voting in over half of the sample contests regardless of proxy contest outcome positive and statistically significant share price performance is associated with the contest that finding is predicted by the standard economic analysis of proxy contests in which the challenges benefit shareholders by improving corporate performance the finding runs counter to the claim of berle 1962 that the economists view of proxy contests is a wholly imaginary picture a portion of the positive share price changes taking place in the early stages of some proxy contests is not permanent however and as suggested by manne 1962 is at least partially attributable to temporary increases in the market value of the vote attached to corporate shares

the information value of failure predictions in credit assessment abstract this paper is concerned with the information value of failure prediction in the context of bank lending decisions it argues that earlier concerns about the methodology and robustness of classificatory models are given the volume of confirmatory studies no longer of practical significance instead the problem is whether reported classificatory performance provides information of value new information in a plausible ex ante decision situation in interpreting ex post evidence it appears that claimed information value is directly dependent on assumptions about factors which are neither specified nor testable within the conventional ex post experiment past claims for information value have used extreme values for these assumptions but it is argued that with plausible alternative assumptions the ex post evidence is also consistent with negative information value

fair value disclosures by bank holding companies abstract this paper examines the value relevance of fair value data disclosed under sfas 107 by banks for 1992 and 1993 collectively the evidence suggests differences between fair and book values of financial instruments are associated with market to book ratios however fair value disclosures for financial instruments other than securities are value relevant only in limited settings in addition only in 1992 are fair value variables associated with market to book ratios after incorporating existing historical cost information further analysis suggests the weaker 1993 results are not necessarily due to increased measurement error in fair value numbers

characterizing nonlinearities in business cycles using smooth transition autoregressive models during the past few years investigators have found evidence indicating that various time series representing business cycles such as production and unemployment may be nonlinear in this paper it is assumed that if the time series is nonlinear then it can be adequately described by a smooth transition autoregressive star model the paper describes the application of these models to quarterly logarithmic production indices for 13 countries and europe tests reject linearity for most of these series and estimated star models indicate that the nonlinearity is needed mainly to describe the responses of production to large negative shocks such as oil price shocks

do recessions permanently change output abstract this paper examines whether negative innovations to gnp are more or less persistent than positive innovations we find that once we allow for the impulse response of gnp to be asymmetric negative innovations to gnp are observed to be much less persistent than positive ones in particular the effect of a recession on the forecast of output is found to be negligible after only eight to twelve quarters while the effect of a positive shock is estimated to be persistent and amplified over time our results may therefore help reconcile two antagonistic views about the nature of business cycle fluctuations

claim efficiencies or offer remedies an analysis of litigation strategies in ec mergers efficiency defence and merger remedies are key components in most merger control regimes although in many jurisdictions both the provision of efficiency related evidence and remedy offers are at the merging firms discretion most previous works have only analysed them separately this paper is an attempt to empirically model the system of decisions that firms face in merger litigation where they are allowed to choose what combination of efficiency claims and settlement offers to make the main novelty of this work is the use of data from company reports on the merger generated synergy expectations signalled to shareholders which allows the direct empirical testing of some of the assumptions and findings from previous works evidence is presented that the current ec merger control regime is incapable of extracting information from firms on their efficiency expectations and the identity and experience of the legal advisor plays a key role in this that pre merger synergy expectations enhance the willingness to offer remedies and finally that the cost of delay plays a central role in designing firms litigation strategy especially when these costs exceed the cost of the remedy

costly information transmission in continuous time with implications for credit rating announcements abstract this paper formulates a continuous time information transmission model in which an altruistic sender privately observes a stochastic state variable and incurs a communication cost when she broadcasts a message we characterize the sender s optimal announcement strategy using an ordinary differential equation we prove the optimality of the sender s strategies using a martingale verification argument and show that the sender s optimal strategy involves sending discrete messages furthermore we apply the model to the timing decision of credit rating announcements and provide a framework to study various aspects of rating announcements such as the probability of rating reversals and the expected time before a rating change

the effect of a rating downgrade on outstanding commercial paper diamond 1991 argues that a firm s reputation determines whether it borrows directly or through an intermediary we test the diamond model by examining the quantity response of commercial paper issued by bank holding companies to a rating downgrade from 1986 to 1991 cumulative abnormal declines averaged 6 69 percent in the first two weeks after the downgrade and 11 05 percent in the subsequent 12 weeks in contrast to commercial paper issued by bank holding companies large cds issued by affiliated banks did not change significantly in the period around a downgrade suggesting that deposit insurance may have removed market discipline from the cd market the objective of this study is to test diamond s 1991 theory of corporate capital structure in which a firm s reputation determines whether it borrows directly or through an intermediary in diamond s model a firm without an established reputation will borrow through and be monitored by an intermediary by building a good reputation a firm may gain access to the nonintermediated markets such as the commercial paper market and consequently avoid the cost of monitoring in the process of maintaining its reputation a firm may eliminate the conflict of interest between borrowers and lenders about the choice of risk in investment decisions such firms have an incentive to maintain their reputation because the reputation itself has become a valuable asset that reduces borrowing costs in the model a firm that loses its reputation will find the cost of placing debt directly prohibitively expensive using event study methodology we test the diamond model by examining the quantity response of commercial paper cp to a rating downgrade of the issuing company we focus on ratings because firms that borrow in the cp market usually have high ratings in part these ratings reflect the firms reputation for selecting safe investments in the diamond framework if credit ratings proxy for reputation then a rating downgrade may be associated with a decline in the amount of outstanding cp this change in capital structure may occur relatively rapidly because outstanding cp typically has a

bankruptcy costs and the new bankruptcy code bankruptcy costs are the deadweight economic costs of firms going bankrupt they include both ex post bankruptcy costs incurred after a firm s bankruptcy filing such as transactions costs and ex ante bankruptcy costs incurred before the filing such as those resulting from creditors attempts to reduce their losses if bankruptcy occurs and or managers attempts to raise the expected return to equity by increasing the firm s risk 1 this paper has two purposes first it proposes a model of bankruptcy costs which focuses on the costs of inefficient decision making before the firm s actual bankruptcy filing the model implies upper bound expressions for total bankruptcy costs second the new u s bankruptcy code2 went into effect late in 1979 and made important changes in bankruptcy reorganization procedures the paper poses the question of whether the changes made under the new code tend to raise or lower aggregate u s bankruptcy costs we approach this question by calculating the upper bound expressions suggested by the model using parameter values from both before and after the new code took effect from an economic standpoint the most important changes instituted under the new bankruptcy code had the effect of making it more difficult to reorganize firms in bankruptcy previously it was common for failing firms to file for bankruptcy but for prior management to continue to operate the firm in much the same form as before the bankruptcy filing prevented unpaid creditors from suing the firm while a reorganization plan was arranged which cut back most debts from an economic standpoint such a procedure was anomalous since we learn in basic economics that competition in the long run should cause inefficient firms to go out of business as long as failing firms are more likely to be inefficient than firms in general it would seem to be rewarding inefficiency and offsetting

the informational role of bond analysts this study uses a large sample of sell side bond analysts reports to examine the properties of recommendations provided by bond analysts and the impact of these recommendations on bond securities first we document that the distribution of bond analysts buy hold and sell recommendations is skewed positively but less so than the distribution of equity analysts recommendations the positive skewness in bond analysts recommendations is greater for

litigation and settlement under two sided incomplete information this paper deals with a simple game of litigation and settlement with incomplete information parties are assumed to have the choice between settling their dispute out of court or resorting to costly litigation the set of sequential equilibria is characterized and conditions are given under which an efficient equilibrium does exist efficient equilibria however will be ruled out by various tests of refinement a comparative statics analysis is carried out with respect to the quality of private information which parties are assumed to receive before any moves have to be made

migration of skilled workers policy interaction between host and source countries abstract we examine the interaction between policies of the host and source countries in the context of a model of skilled worker migration the host country aims to provide low cost labor for its employers while also taking into consideration the fiscal burden of providing social services to immigrants it optimizes by setting a time limit on the duration of a guest worker s permit the source country maximizes its net output by optimally choosing the amount of training provided to its citizens some of whom may migrate we solve for the nash and cooperative equilibrium values of the policy instruments

the information content of non earnings accounting numbers as earnings predictors this paper provides empirical evidence on the predictive ability and information content of nonearnings annual report numbers beyond that contained in earnings i take an earnings prediction approach to address the incremental information content issue 2 under this approach nonearnings accounting numbers jointly play the role of predictors of future earnings changes specifically i investigate whether nonearnings accounting numbers convey information about future earnings that is not reflected in current earnings and if they do whether this incremental predictive content is reflected in stock prices

an empirical investigation of the role of indenture provisions in determining bond ratings abstract this paper documents the occurrence of indenture provisions of newly issued bonds and the relevance of these provisions to a bond s rating a chronicle of the various combinations of restrictive covenants reveals that four covenant combinations account for over 90 of the issues the evidence also suggests that convertibility of an issue vitiates stockholder bondholder conflict because these issues have few if any restrictive covenants also the indenture provisions of low rated subordinated issues appear to reflect a concern about the underinvestment problem while the opposite holds for high rated nonsubordinated issues the addition of indenture provisions to a bond rating model is shown to create a model superior to previous rating models this finding highlights the complex nature of the corporate financial contracting process consistent with past evidence moody s ratings are predicted more accurately than s p s ratings and split rated issues are predicted less accurately than commonly rated issues

the information content of municipal bond rating changes a note municipal bond rating changes have positive social value if they signal previously unavailable information on changes in municipal financial soundness weinstein 11 has found that rating changes for corporate bonds do not appear to contain relevant new information his finding is consistent with that of pinches and singleton 7 that stock price adjustments occurred several months prior to a corporate bond rating change rating agencies apparently respond to changes in corporate financial and operating conditions several months after the information is impounded in bond and stock prices 1 however as a result of institutional differences between corporate and municipal bond markets it is possible that rating changes for municipal bonds do convey new information this note examines the information content of municipal bond rating changes by evaluating municipal bond price adjustments during the period surrounding a rating change the joint hypothesis tested is that municipal bond rating changes convey information to investors which is relevant for assessing equilibrium values of the securities and that the municipal bond market is efficient so that valuation changes occur simultaneously with rating changes the following section examines the institutional setting of the municipal bond market in order to specify why information content of bond rating changes might be anticipated remaining sections of the paper describe sample selection derivation of test data findings and discussion

the effects of political connections and state ownership on corporate litigation in china abstractwe examine the effects of corporate lawsuits in china and find that litigation announcements depress the stock prices of both defendant and plaintiff firms financially distressed defendants suffer lower stock returns we find that politically connected defendants are favored in the judicial process they have higher stock returns and are more likely to appeal against adverse outcomes and to obtain a favorable appeal result state controlled defendants fare better than privately controlled defendants when it comes to appeals but do not have higher stock returns the evidence suggests that there is bias in the judicial process

discretionary behavior with respect to allowances for loan losses and the behavior of security prices abstract the study examines the capital market pricing of discretionary and nondiscretionary components of a major accrual in the banking industry the allowance for loan losses the analysis employs a two stage approach in which the allowance account is first decomposed into estimates of its nondiscretionary and discretionary components the second stage evaluates the market s valuation of the estimates of the components evidence suggests that the capital market perceives the allowance to be comprised of two components a nondiscretionary component which is negatively priced and a discretionary component whose incremental pricing coefficient is positive

selective immigration policies migrants education and welfare at origin abstract destination countries are increasingly adopting selective immigration policies these can effectively increase migrants average education even if one allows for endogenous schooling decisions and education policies at origin still more selective immigration policies can reduce social welfare at origin

corporate bond ratings changes and economic instability evidence from the korean financial crisis abstract this study presents the first empirical analysis of the impact of bond ratings changes during periods of significant economic instability using the korean financial crisis as the experimental stimulus the study documents that changes in korean bond ratings during the financial crisis resulted in dramatically stronger changes in stock prices than ratings changes of identical magnitude announced either before or after the crisis

output spillovers from changes in sovereign credit ratings this research examines how a sovereign rating revision of one country influences the economic growth rates of other countries rating revisions have significant output spillover effects a one notch upgrade downgrade prompts on average a significant downward revision of about 0 03 0 07 in the consensus forecast of annual economic growth rates of other countries in the two month period after the event the spillovers are transmitted through direct and indirect trade and financial linkages between event and non event countries the evidence indicates that a predominance of differential common spillovers leads upgrades downgrades to produce adverse output effects for other countries

the administrative costs of corporate bankruptcy a note in this paper we present evidence on the direct administrative costs of corporate bankruptcy the investigation is directed toward providing evidence that may be helpful in answering questions about the role of bankruptcy costs as a determinant of corporate capital structures the importance of bankruptcy costs as a determinant of corporate financing policy has been extensively debated in the finance literature the origins of the debate can be traced to modigliani and miller 8 and robichek and myers 9 under the assumption that debt is default free and interest payments are taxdeductible modigliani and miller demonstrated that firms will maximize their market values by maximizing their use of debt financing robichek and myers demonstrated that this conclusion also holds when debt is not default free but bankruptcy is costless to explain observed corporate debt to total value ratios which typically fall in the range of 20 percent to 30 percent robichek and myers 9 and baxter 1 appealed to the existence of bankruptcy costs as a possible counterweight to the tax deductibility of interest payments subsequently kraus and litzenberger 5 scott 10 lee and barker 6 kim 4 and turnbull 13 developed formal models in which firms maximize value by increasing their use of debt financing to the point where the marginal present value of future tax shields equals the marginal present value of future bankruptcy costs the bankruptcy cost literature has identified three types of costs as potentially relevant to the determination of a firm s optimal mix of debt and equity financing 1 the direct administrative expenses paid to various third parties involved in the bankruptcy proceedings 2 the shortfall in realized value when assets are sold in liquidation or the indirect costs of reorganization and 3 the loss of tax credits which the firm would have received had it not gone bankrupt contrarily haugen and senbet 3 and to a lesser extent miller 7 and warner 14 have argued that the only bankruptcy costs relevant to the determination of a firm s optimal capital structure are the direct administrative costs of bankruptcy the crux of their argument is that the shortfall costs of liquidation the indirect costs of reorganization and the loss of tax credits which occurs upon dissolution of the firm are in fact relevant to the liquidation investment decisions of the firm these costs would be borne by the security holders of a failing firm

bond rating agencies and stock analysts who knows what when both bond rating agencies and stock analysts evaluate publicly traded companies and com municate their opinions to investors comparing the timeliness of each we find that granger causality flows both ways while most bond downgrades are preceded by declines in actual and forecast earnings both actual earnings and forecasts of future earnings tend to fall following downgrades although part of this post downgrade forecast revision can be attributed to negative news regarding actual earnings most appears to be reaction to the downgrade itself we find little change in actual earnings following upgrades analysts however tend to increase their forecasts of future earnings

an empirical analysis of strategic competition and firm values the case of r d competition abstract we operationalize a firm s competitive strategy through a new empirical measure and develop a framework for empirical analysis of the market value of strategic behavior using this framework we study announcement effects of r d spending the announcing firm s stock prices are positively influenced by a change in spending and negatively by our competitive strategy measure csm competitors stock prices are positively influenced by the interaction between the market s reaction to the announcing firm and the csm our results are consistent with positive effects of accommodating competition with strategic substitutes and nonpositive effects of tough competition with strategic complements

information effects in financial distress the case of seabrook station abstract in 1972 a group of electric utilities announced plans to construct seabrook station a nuclear generating facility in 1988 the lead partner in the venture public service company of new hampshire psnh filed for bankruptcy examination of the stock price effects of a variety of financial events preceding the bankruptcy filing shows that information about cash flows paid to psnh security holders affected the common stock prices of psnh and its seabrook partners whereas information about investment and operating cash flows had little or no effect

heaven s swing door endogenous skills migration networks and the effectiveness of quality selective immigration policies a growing number of oecd countries are leaning toward the adoption of selective immigration policies which are expected to raise the quality or education level of migrants this view neglects two important dynamic effects the role of migration networks which could reduce the quality of migrants and the responsiveness of education decisions to the prospect of migration we propose a model of self selection into migration with endogenous education choices which predicts that migration networks and the quality of migrants can be positively associated when destination countries adopt sufficiently selective immigration policies empirical evidence presented as background motivation suggests that this is indeed the case

an analysis of value destruction in at t s acquisition of ncr abstract at t s 7 5 billion acquisition of ncr decreased the wealth of at t shareholders by between 3 9 billion and 6 5 billion and resulted in negative synergies of 1 3 to 3 0 billion we find that at t paid a documented 50 million and possibly as much as 500 million to satisfy pooling accounting thus boosting eps by roughly 17 but leaving cash flows unchanged we conclude that at t s decision to acquire ncr in what the market perceived as a value destroying transaction was related at least in part to the 1984 consent decree with the department of justice that led to the break up of at t

why put all your eggs in one basket a competition based view of how technological uncertainty affects a firm s technological specialization conventional wisdom suggests that when a firm faces technological uncertainty it responds by becoming less technologically specialized so as to remain adaptable to subsequent resolution of this uncertainty we adopt a competition based view of technological uncertainty to identify an opposite effect in competitive settings the firm may instead become more specialized when faced with greater technological uncertainty so as to focus on advancing its technologies against competition and influence the resolution of uncertainty in its favor over rivals we propose that this effect is accentuated when the firm expects that it cannot easily adapt to rivals technologies subsequently specifically when rivals are a greater deterrent through being litigious or innovative using u s government funding for fuel cell research as a policy shock with stock option implied volatilities to measure expected uncertainty we find empirical support for our propositions among firms active in research and development in the u s communications equipment industry through these findings we demonstrate that a competition based view of uncertainty identifies an alternative path for the firm s resource accumulation under uncertainty and we stress that the resolution of uncertainty can be something the firm attempts to influence rather than adapt to

the fiscal impact of high skilled emigration flows of indians to the u s abstract what are the fiscal consequences of high skilled emigration for source countries this paper develops methodologies for inferring these consequences and applies them to the recent sizable emigration of high skilled workers from india to the u s this wave of emigration from india to the u s is shown to be unusually concentrated amongst the prime age work force the highly educated and high earners in order to calculate the fiscal losses associated with these emigrants estimates of their counterfactual earnings distributions are generated using two distinct methods and integrated with a model of the indian fiscal system to calculate fiscal consequences conservative estimates indicate that the annual net fiscal impact to india of high skilled emigration to the u s is one half of 1 of gross national income or 2 5 of total fiscal revenues the sensitivity of these results to the method of predicting counterfactual incomes and the implications of these estimates for other developing countries is discussed in detail

the effect of recessions on the relationship between output variability and growth this paper investigates the relationship between output volatility and growth using post war real gdp data for the united states we expand on recent research by beaudry and koop 1993 documenting the asymmetric effect of recessions on output growth the results presented in this paper suggest that output volatility is highest when the economy is contracting while we find that the economy expands most rapidly following a recession this expansion is offset by the negative impact of output uncertainty

relative valuation roles of equity book value and net income as a function of financial health abstract this study tests predictions that pricing multiples on and incremental explanatory power of equity book value net income increase decrease as financial health decreases tests using a sample of 396 bankrupt firms and tests using a larger pooled sample both yield inferences consistent with predictions findings are robust to inclusion of controls for industry size return on equity and volatility of equity returns equity book value and net income multiples and incremental explanatory power vary predictably across three illustrative industries selected based on the likely extent of unrecognized intangible assets

nonlinear business cycle dynamics cross country evidence on the persistence of aggregate shocks i introduction economists have long been interested in the dynamics of business cycles particularly regarding the symmetry of expansions and contractions more recently the specification of stochastic trends in economic growth has generated concerns about the relative persistence of positive and negative shocks to the economy several papers have looked at the persistence of business cycles including nelson and plosser 1982 campbell and mankiw 1987 cochrane 1988 diebold and rudebusch 1989 balke and fomby 1990 zelhorst and de haan 1994 and bradley and jansen 1995 while results vary especially on the issue of a unit root in output the overarching result is that output fluctuations are highly persistent one question not asked by the above authors is whether business cycle dynamics are asymmetric this issue has been investigated by neftci 1984 falk 1986 delong and summers 1986 hamilton 1989 diebold and rudebusch 1990 and terasvirta and anderson 1991 these authors take a variety of approaches but they reach a general conclusion that there is some evidence of asymmetric business cycle dynamics however most of these studies ask if contractions are shorter and steeper than expansions except hamilton 1989 they do not ask if there is a difference in persistence due to the asymmetries in a recent paper beaudry and koop 1993 propose a set of methods for simultaneously examining these two questions specifically beaudry and koop bk recommend the augmentation of the standard arma representation of real output growth through the inclusion of a nonlinear term that captures the relative state of the economy this augmentation provides for nonlinear dynamics and the possibility of asymmetric dynamic responses to positive and negative shocks in addition calculation of the implied impulse responses permits detection of the relative persistence implied by the combination of asymmetric cycle dynamics and stochastic trend based upon their analysis of u s data bk conclude that the response of the economy to positive and negative shocks is indeed asymmetric and the imposition of symmetry on impulse responses has likely led to misleading measures of persistence bk p 162 as a result bk conclude we find that the effects of negative shocks to be mainly temporary and the effects of positive shocks to be very persistent bk p 162 if bk s results are correct they have strong implications for the way macro economists view economic fluctuations and will in their words contribute to a reappraisal of some macroeconomic theories that is bk s results suggest that macroeconomic models must be revised to provide for temporary effects of negative shocks but permanent effects of positive shocks because of the potential importance of bk s results we examine the robustness of those results by modifying and extending bk s proposed methods of testing not only do we extend the analysis to the other six g7 countries besides the united states but also we redefine in a sensible way the nature of the nonlinear dynamics overall our results from other economies provide only mixed support for the asymmetry of cyclical dynamics and the lack of persistence of negative shocks ii the model to be estimated in the bk framework the estimated model includes an asymmetric response term the asymmetry is generated by a variable that measures the strength of a recession the variable is calculated as the distance between current real gdp and the previous peak level of real gdp that is bk define a measure they call current depth of the recession cdr where 1 cdr sub t max y sub t j sub j greater than or equal to 0 y sub t with this definition in place bk recommend augmenting an autoregressive model of real gdp growth as 2 phi l delta y sub t delta omega l 1 cdr sub

is migration a good substitute for education subsidies assuming a given educational policy the recent brain drain literature reveals that skilled migration can boost the average level of schooling in developing countries this paper introduces educational subsidies determined by governments concerned by the number of skilled workers remaining in the country the theoretical analysis shows that developing countries can benefit from skilled emigration when educational subsidies entail high fiscal distortions however when taxes are not too distortionary it is desirable to impede emigration and subsidize education the authors investigate the empirical relationship between educational subsidies and migration prospects obtaining a negative relationship for 105 countries based on this result the analysis revisits the country specific effects of skilled migration upon human capital the findings show that the endogeneity of public subsidies reduces the number of winners and increases the magnitude of the losses

ratings hardwiring and asset prices this paper discusses the asset pricing implications of ratings hardwiring the latter is defined as the mechanical response of trading decisions to changes in ratings this issue is studied within a noisy rational expectations framework of asset pricing under asymmetric information in which traders specialize in different driving factors of asset payoffs and interact with others who mechanically link their asset supply to ratings we show that ratings hardwiring leads to predictable supply shocks and induces informed traders to overreact to new information thus creating a channel through which shocks are amplified and prices become less informative and more volatile

have financial statements lost their relevance the authors explore the concern that financial statements no longer have the same relevance to investors that they had in the past they test for value relevance by measuring the total return that could have been earned from prior knowledge of financial statement information and by examining the explanatory power of accounting information on market values and annual market adjusted returns both analyses are applied to a broad sample of exchange listed and nasdaq firms for the 1952 94 period the authors find mixed evidence on value relevance of financial statement reporting during the test period

book rate of return and prediction of earnings changes an empirical investigation over the years there has developed a fairly substantial body of research on the time series of earnings as a whole this literature concludes that changes in annual accounting earnings are unpredictable that is earnings follow a random walk 1 based on this result some inferences of economic substance policy have been claimed 2 in this paper we reconsider empirical issues which at least to some extent have been obscured by this conclusion we argue that the above result is only true in a limited sense since a modest enlargement of the predictive information set should allow for a rejection of the hypothesis that earnings changes are

international migration self selection and the distribution of wages evidence from mexico and the united states we use the 1990 and 2000 mexican and u s population censuses to test borjas s negative selection hypothesis that the less skilled are those most likely to migrate from countries with high skill premia earnings inequality to countries with low skill premia earnings inequality we find that mexican immigrants in the united states are more educated than nonmigrants in mexico and were mexican immigrants to be paid according to current skill prices in mexico they would be concentrated in the middle of mexico s wage distribution these results are inconsistent with the negative selection hypothesis and instead suggest that there is intermediate selection of immigrants from mexico

credit rating and debt crises we develop an equilibrium theory of credit rating in the presence of rollover risk by influencing rational creditors ratings affect sovereigns probability of default which in turn affects ratings our analysis reveals a pro cyclical impact of credit rating in equilibrium the presence of a rating agency increases default risk when it is high and decreases default risk when it is low