will business cycles in the euro area converge a critical survey of empirical research this survey of business cycle synchronization in the european monetary union focuses on two issues have business cycles become more similar and which factors drive business cycle synchronization we conclude that business cycles in the euro area have gone through periods of both convergence and divergence still there is quite some evidence that during the 1990s business cycle synchronization in the euro area has increased higher trade intensity is found to lead to more synchronization but the point estimates vary widely the evidence for other factors affecting business cycle synchronization is very mixed

output dynamics in real business cycles models the time series literature reports two stylized facts about output dynamics in the united states gnp growth is positively autocorrelated and gnp appears to have an important trend reverting component this paper investigates whether current real business cycle rbc models are consistent with these stylized facts many rbc models have weak internal propagation mechanisms and must rely on external sources of dynamics to replicate both facts models that incorporate labor adjustment costs are partially successful they endogenously generate positive autocorrelation in output growth but they need implausibly large transitory shocks to match the trend reverting component in output

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

monitoring liquidation and security design by identifying the possibility of imposing a credible threat of liquidation as the key role of informed bank finance in a moral hazard context we characterize the circumstances under which a mixture of informed and uninformed market finance is optimal and explain why bank debt is typically secured senior and tightly held we also show that the effectiveness of mixed finance may be impaired by the possibility of collusion between the firms and their informed lenders and that in the optimal renegotiation proof contract informed debt capacity will be exhausted before appealing to supplementary uninformed finance article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

financial integration and business cycles in a small open economy abstract the purpose of this study is to examine a dynamic stochastic general equilibrium framework with financial and informational frictions and foreign borrowing in the case of money growth and technology shocks for a small open economy and to analyze the implications of varying degrees of financial integration for aggregate fluctuations and propagation mechanisms in the economy the existence of informational asymmetries among the agents in the model necessitates financial intermediation in the economy moreover there is uncertainty involved in the production process which leads to collateralized borrowing by firms and therefore has to be taken into account in the design of the loan contracts between firms and financial intermediaries it is shown that increasing financial integration amplifies the effect of a positive temporary monetary shock on output consumption investment labor demand and loans whereas it has barely any implication for the impact of a positive temporary technology shock on the economy

why is bank debt senior a theory of asymmetry and claim priority based on influence costs this theory can explain why bank debt is universally senior consistent with the presence of conflict lawyers and absolute priority violations in financial distress better organized banks would more strongly contest priority in financial distress if they were junior because deterrence can reduce creditors total expenses in a priority contest the ex post stronger lobbyist litigant should be senior ex ante for equivalent reasons the theory can advise when public debt should be senior to trade credit and or implicit contracts and can even suggest one rationale for the absolute priority rule apr this article further shows that chapter hi creditor reimbursement procedures can lower overall costs article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

labour markets liquidity and monetary policy regimes dans leur etude les auteurs elaborent un modele d equilibre du mecanisme de transmission de la politique monetaire qui fait ressortir les elements de friction relatifs a l acquisition d information sur le marche de la monnaie et a la recherche d emploi

aggregate employment real business cycles and superior information abstract we test whether dynamic stochastic general equilibrium artificial economies associated with several labor market structures provide an adequate characterization of aggregate employment volatility and dynamics our test is robust to possible misspecifications about the information set used by economic agents to forecast future events accounting for agents superior information we find that the divisible labor indivisible labor labor adjustment costs and labor hoarding structures replicate employment volatility in contrast to the nominal wage contracts structure also the labor hoarding structure provides a substantially better account of employment dynamics

valuation of bankrupt firms this study compares the market value of firms that reorganize in bankruptcy with estimates of value based on management s published cash flow projections we estimate firm values using models that have been shown in other contexts to generate relatively precise estimates of value we find that these methods generally yield unbiased estimates of value but the dispersion of valuation errors is very widethe sample ratio of estimated value to market value varies from less than 20 to greater than 250 cross sectional analysis indicates that the variation in these errors is related to empirical proxies for claimholders incentives to overstate or understate the firm s value

an empirical investigation of u s firms in reorganization the purpose of this paper is to understand the institutional features of chapter 11 from an empirical examination of thirty firms that have emerged from reorganization we find the recontracting framework of chapter 11 to be complex lengthy and costly violations of absolute priority in favor of stockholders are frequently encountered these deviations may result from the bargaining process of chapter 11 or from a recontracting process between creditors and stockholders which recognizes the ability of stockholder oriented management to preserve firm value an example of such recontracting addresses myers underinvestment problem an investigation of the effects of chapter 11 on the pricing of risky debt is also provided the purpose of this paper is to understand the institutional features of chapter

non stationary hours in a dsge model the time series fit of dynamic stochastic general equilibrium dsge models often suffers from restrictions on the long run dynamics that are at odds with the data using bayesian methods we estimate a stochastic growth model in which hours worked are stationary and a modified version with permanent labor supply shocks if firms can freely adjust labor inputs the data support the latter specification once we introduce frictions in terms of labor adjustment costs the overall time series fit improves and the model specification in which labor supply shocks and hours worked are stationary is preferred

seniority and maturity of debt contracts abstract this paper provides a model of how borrowers with private information about their credit prospects choose seniority and maturity of debt increased short term debt leads lenders to liquidate too often it also increases the sensitivity of financing costs to new information although better than average borrowers desire information sensitivity the model implies that short term debt will be senior to long term debt and that long term debt will allow the issue of additional future senior debt the model also has implications on the structure of leveraged buyouts and on how various types of lenders respond to potential defaults

multidivisional vs metanational governance of the multinational enterprise the effective and efficient management of diversified business firms that supply multiple products and operate in multiple dynamic markets especially large multinational enterprises mnes builds upon a number of specific governance principles these governance principles allow the alignment of environmental characteristics strategy and organization given the rising need to learn from the world doz et al in their influential harvard business school press book entitled from global to metanational have proposed a new set of governance principles described under the metanational umbrella concept this paper revisits the metanational using a comparative institutional perspective here we contrast multidivisional and metanational governance principles a comparative institutional analysis suggests that the metanational s application potential in terms of actually improving the effectiveness and efficiency of mne governance may be subject to more qualification than suggested by doz et al senior mne management must therefore reflect carefully before substituting metanational governance principles for the more conventional multidivisional ones with established contributions to managerial effectiveness and efficiency

job matching and propagation in the u s labor market the vacancy unemployment ratio and employment react sluggishly to productivity shocks we show that the job matching model in its standard form cannot reproduce these patterns due to excessively rapid vacancy responses extending the model to incorporate sunk costs for vacancy creation yields highly realistic dynamics creation costs induce entrant firms to smooth the adjustment of new openings following a shock leading the stock of vacancies to react sluggishly

technology strategy governance structure and interdivisional coordination abstract this paper studies how various organizational forms compare in their capacities to solve coordination problems created by technological interdependence between firms divisions i contrast the organizational mechanisms used by two firms ibm and general motors to address these problems while it is widely recognized that centralization distorts incentives facing division managers this paper highlights its benefits when there are large potential gains from agreement on technological standards the examples show how a centralized governance structure supported by lower powered incentives facilitates interdivisional coordination this suggests a refinement of the theory of organizational form based on how firms resolve the tensions between strategic planning and the measurement of organizational units performances

covenants and collateral as incentives to monitor although monitoring borrowers is thought to be a major function of financial institutions the presence of other claimants reduces an institutional lender s incentives to do this thus loan contracts must be structured to enhance the lender s incentives to monitor covenants make a loan s effective maturity and the ability to collateralize makes a loan s effective priority contingent on monitoring by the lender thus both covenants and collateral can be motivated as contractual devices that increase a lender s incentive to monitor these results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending modern finance theory suggests that financial intermediaries such as commercial banks insurance companies and finance companies monitor and control their borrowers on behalf of other investors 1 this article investigates how the loans made by these institutions can be structured so as to best enhance the institutions role as delegated monitors covenants and collateral are common features of loans made by financial institutions but these features are somewhat difficult to justify consider loan covenants clauses in a loan contract that require the borrower to take or refrain from various actions berlin and mester 1992 magee and sridhar 1994 and park 1994 show that by giving institutions the right to renegotiate or call loans when covenants are violated covenants serve as tripwires that enhance the flexibility and efficiency of financial contracting also as documented in smith and warner 1979 control rights from covenants reduce borrower adverse selection or moral hazard nevertheless by allowing institutions to demand repayment based on any information contractible or not

conflicts in bankruptcy and the sequence of debt issues this paper investigates the optimal sequencing of debt issues our theoretical model suggests that once firms issue debt with one level of seniority they may have an incentive to alternate seniorities because of violations of the priced absolute priority rule apr when we introduce explicit costs of class conflict the model yields cases of alternating seniorities and other cases in which firms issue only one class of debt the implications of the model are consistent with the observed regularities in a large database of debt issues we test several other implications of our model as well

investing in capabilities the dynamics of resource allocation in this research we examine the dynamic capability of resource allocation to invest in operational capabilities using a computer simulation we model a process of firms competing in factor markets for opportunities to invest in existing capabilities and acquire new ones based on the simulation results we derive a set of propositions about the conditions under which there are and are not performance benefits from possessing a superior ability to search for new capabilities because the definition of what constitutes a new capability is based on a firm s preexisting capabilities we also incorporate differences in initial endowments into the analysis we find that endowment and search ability both matter and that in many circumstances the effects of possessing a superior endowment dominate the effects of superior search ability

real and nominal propagation of nominal shocks the role of real and nominal propagation mechanisms in generating persistent real effects of nominal shocks is analysed analytically in a fully specified intertemporal general equilibrium model while neither a real propagation mechanism capital acccumulation with one period nominal contracts nor nominal propagation staggered nominal contracts in the absence of any real propagation can generate plausible impulse responses with strong persistence it is shown that the two mechanisms interact so as to strengthen persistence possibly unit roots and generate more plausible impulse responses

labor market search endogenous disasters and the equity premium puzzle abstract the present paper investigates i the endogenous disaster mechanism in a textbook search and matching model when calibrated with a constant flow value of unemployment that is close to average labor productivity and ii its contribution to solve the equity premium puzzle i offer a simple explanation for the core of the disaster mechanism the lower bound say xkink on the annuitized costs the firm incurs from investing in a match lies sufficiently close to the body of productivity s distribution if labor productivity drops close to or even below xkink for consecutive periods the firm s annuitized share in expected future productivity of a worker can either only barely or even no longer at all break even the annuitized lower bound of the costs the firm faces vacancies become unprofitable and the economy quickly enters a downward spiral the core of the mechanism relies critically on an unreasonably high and constant flow value of unemployment disasters disappear entirely for slightly smaller or procyclical values and the effects cannot be compensated by empirically plausible adjustments of the model s remaining parameters while the model can generate a sizeable equity premium combined with a small risk free rate if the flow value of unemployment is large and constant and if the coefficient of relative risk aversion and the elasticity of intertemporal substitution are both high premia again collapse by an order of magnitude in the versions of the model without disasters

search for a monetary propagation mechanism abstract this paper examines a monetary propagation mechanism in an economy where exchanges in goods and labor markets involve costly search it is shown that an increase in the money growth rate increases steady state employment and output when the money growth rate is low but reduces steady state employment and output when the money growth rate is already high the model produces persistent hump shaped responses in employment and output to money growth shocks even when the shocks have no persistence the model also generates desirable features in job vacancy sales inventory and the velocity of money all these features emerge here in an economy with perfectly flexible prices and wages journal of economic literatureclassification numbers e40 e30

persistency in sticky price models abstract nominal rigidities imply that nominal shocks have an impact effect which may be propagated by standard mechanisms however the nominal adjustment process may in itself be a propagation mechanism causing persistent effects of nominal shocks this may be caused by inertia in nominal wage and price adjustment arising due to input output networks or multiperiod nominal contracting as captured in models with staggered price wage decisions it has recently been contested whether staggering can account for persistency of any quantitative importance this paper reviews the theory and empirical evidence on this issue and it is concluded that staggering may be a quantitative important propagation mechanism

asset pricing and the propagation of macroeconomic shocks this paper considers the implications of habit formation and financial frictions for the propagation of macroeconomic shocks in a model that is capable of matching asset pricing moments a short lived shock that destroys a small fraction of the economy s stock of pledgeable collateral generates a persistent recession a stock market crash and a flight to safety effect this novel mechanism creates a tight link between the asset pricing implications of macroeconomic models and their ability to propagate and amplify the effects of macroeconomic shocks

a sunspot paradox abstract this paper shows that the local stability properties of dynamic general equilibrium macroeconomic models may depend on the length of a period in the model economy this leads to the following paradoxical situation the economy may be driven by sunspots for some decision frequencies while sunspots can have no impact at other decision frequencies

aggregation and irrelevance in multi sector models abstract this paper studies the ability of input output relationships to generate fluctuations in aggregate output in several multi sector models including that of long and plosser 1983 in these models the manufacture of each sector s output depends on other sectors for materials these interconnections provide a mechanism for transmission of shocks across sectors and over time we ask how aggregates from these multi sector models behave relative to single sector models we provide conditions under which the second moment properties of aggregates in these models are the same as their single sector counterparts we further demonstrate that a broad class of input output structures generate aggregates with identical second moment properties and that the input output structures in this class provide a poor amplification mechanism for sector shocks

refinements on macroeconomic modeling the role of non separability and heterogeneous labor supply abstract this paper proposes a dynamic stochastic general equilibrium model characterized by heterogenous labor schedules and non separability between consumption and labor in the utility function the model successfully describes output consumption investment and interest rates after a monetary expansion the proposed formulation improves on standard models by using preferences favored by the data and by requiring investment adjustment costs and habit formation parameters more in line with the micro based evidence

the spirit of capitalism and expectation driven business cycles abstract while news shocks are believed to be instrumental in explaining business cycles many existing models fail to predict a boom in consumption investment employment output and asset prices in response to good news about future productivity a model with the intrinsic desire for wealth is shown to generate the aforementioned responses a news driven boom is explained predominantly by an expansion of labor supply and is characterized by the falling real wage the simulated model not only captures well conventional business cycle statistics but also reproduces countercyclical real returns and hump shaped responses of hours and output to an unexpected technology shock

the evolution of buyout pricing and financial structure in the 1980s we examine changes in the pricing and financial structure of large management buyouts in the 1980s over time 1 buyout price to cash flow ratios rose in absolute terms particularly in deals financed using public junk bonds 2 required bank principal repayments accelerated leading to sharply lower ratios of cash flow to total debt obligations 3 private subordinated and bank debt were replaced by public junk debt and 4 management teams and dealmakers took more money out of transactions up front these patterns are consistent with an overheating phenomenon in the buyout market preliminary post buyout evidence lends some support to this interpretation

what really accounts for the fall in hours after a technology shock abstract the paper asks how state of the art dsge models that account for the conditional response of hours following a positive neutral technology shock compare in a marginal likelihood race to that end we construct and estimate several competing small scale dsge models that extend the standard real business cycle model in particular we identify from the literature six different hypotheses that generate the empirically observed decline in hours worked after a positive technology shock these models alternatively exhibit i sticky prices ii firm entry and exit with time to build iii habit in consumption and costly adjustment of investment iv persistence in the permanent technology shocks v labor market friction with procyclical hiring costs and vi leontief production function with labor saving technology shocks in terms of model posterior probabilities impulse responses and autocorrelations the model favored is the one that exhibits habit formation in consumption and investment adjustment costs a robustness test shows that the sticky price model becomes as competitive as the habit formation and costly adjustment of investment model when sticky wages are included

optimal bankruptcy law and firm specific investments in this paper we characterize an optimal bankruptcy law that takes into consideration the incentives of managers to invest in firm specific human capital we show that the optimal bankruptcy law is biased towards the management team and may be implemented by the use of a restricted auction mechanism in which creditors have the right to refuse bankruptcy but are not allowed to bid for the firm the bankruptcy law is needed as a commitment device to implement the optimal outcome

human capital formation and business cycle persistence abstract in this paper we examine the role of the formation of human capital in propagating shocks over the business cycle we show that a two sector equilibrium business cycle model with human capital is able to generate persistence in the growth of output and other aggregate variables comparable to that observed in the post war us data a key feature is the relatively low elasticity of substitution between skilled and unskilled labor in the production of human capital

opportunistic underinvestment in debt renegotiation and capital structure abstract this paper models debt renegotiation as a bargaining game between debtholders and shareholder oriented management in which management credibly threatens to run down firm assets to force concessions from the creditors creditors anticipate this opportunistic behavior by management creating an upper bound on debt capacity that is less than the value of the firm if an advantage to debt is introduced such as favorable tax treatment an interior optimal capital structure obtains even in the absence of realized bankruptcy costs our model also explains variations in debt equity ratios and the use of certain puzzling debt covenants

the entrepreneurial m form strategic integration in global media firms many researchers believe that bounded rationality prevents ceos in large complex multidivisional m form corporations from personally formulating division level strategies instead ceos are seen as guiding a bottom up process whereby division managers propose strategies for review and approval by the corporate office contrary to this view we argue that ceos in global media firms frequently drive strategy in a top down manner especially when their firms seek to expand by integrating the activities of two or more existing divisions we refer to such firms as entrepreneurial m forms and maintain that their reliance on an activist ceo offers benefits 1 in turbulent environments when the use of slow bottom up planning processes risks forfeiting first mover advantages and 2 when expansion entails major capital commitments and division managers may be reluctant to accept the career risks associated with sponsorship of bet the company projects

the design of bankruptcy law a case for management bias in bankruptcy reorganizations in an incomplete contracting environment bankruptcy is considered to be a renegotiation of the firm s financial contracts an optimal bankruptcy law is derived as optimal restric tions on the environment within which the claimants to a distressed firm bargain the law is used as a commitment device to ensure actions that are ex ante optimal but not subgame perfect we show that the bankruptcy court can use two types of mechanisms to implement the optimal bankruptcy outcome direct restrictions on the bargaining game between the claimants and the use of a restricted auction in both cases the restrictions prevent the strategic use of bankruptcy by firms not in financial distress provide for truthful revelation of information so that distress results in an ex post efficient allocation of resources and es tablish a bias toward the manager in reorganizations that provides correct ex ante decision making incentives

the costs of bankruptcy chapter 7 liquidation versus chapter 11 reorganization our paper explores a comprehensive sample of small and large corporate bankruptcies in arizona and new york from 1995 to 2001 bankruptcy costs are very heterogeneous and sensitive to the measurement method used we find that chapter 7 liquidations appear to be no faster or cheaper in terms of direct expense than chapter 11 reorganizations however chapter 11 seems to preserve assets better thereby allowing creditors to recover relatively more our paper also provides a large number of further empirical regularities our paper analyzes the largest sample of corporate bankruptcies to date we research approximately 300 cases from the arizona and new york federal bankruptcy courts from 1995 to 2001 these cases consist of 1 both publicly traded and privately held corporations and 2 both chapter 7 liquidations and chapter 11 reorganizations this sample is practically the entire population of unique corporate bankruptcies in these courts our paper s primary objective is to measure how the two available bankruptcy procedures differ especially but not only in terms of cost we explore four variables namely the change in the estate s value during bankruptcy a measure of indirect costs the time spent in bankruptcy another and more common measure of indirect costs the expenses submitted to and approved by the bankruptcy court a measure of direct costs and the recovery rates for creditors and apr violations our most important findings are that chapter 7 liquidations are not cheaper than chapter 11 reorganizations particularly after we control for endogenous self selection of firms into bankruptcy procedure bankruptcy professionals attorneys accountants trustees regularly end up with most of the post bankruptcy firm s value in chapter 7 arturo bris is at imd yale school of management and ecgi ivo welch is at brown uni

fleshing out the monetary transmission mechanism output composition and the role of financial frictions financial frictions affect the way in which different macroeconomic series respond to a monetary policy shock we embed the financial accelerator of bernanke gertler and gilchrist 1999 into a medium scale dsge model and evaluate the relative importance of financial frictions in explaining monetary transmission specifically we apply minimum distance estimation based on impulse responses for the volcker greenspan period apart from providing estimates for structural parameters our procedure lends itself for specification tests that can be used to assess the relative fit of various restricted models financial frictions turn out to be of lesser importance for the descriptive success of our model

can a real business cycle model pass the watson test abstract watson 1993 measures of fit for calibrated models journal of political economy 101 6 1011 1041 proposes a procedure for evaluating the fit of a dynamic equilibrium business cycle model under watson s criterion the standard real business cycle rbc model fails dramatically in reconciling the dynamics of the model with the data this inability to account for the dynamics of us aggregate data remains a major challenge to rbc theory this paper demonstrates that reasonable modifications can bring rbc theory into closer conformity with the data the empirical results indicate that when habit formation on leisure choice and employment externality are incorporated into the analysis the striking spectral density differentials documented by watson virtually vanish at business cycle frequencies

balancing the tensions between rationalization and creativity in the video games industry this paper investigates the forces that influence creativity in the video games industry we adopt a qualitative approach to guide the development of grounded theory across multiple levels of analysis including the industry consisting of multiple actors organizational and individual creator levels our study shows that business and production interests currently drive the rationalization of video game production there is a maturing trend with product designs becoming well established as genres and consumers and publishers desiring incrementally innovative games this leads publishers to focus on acquiring intellectual property and publishers and studios alike to make incrementally innovative sequels the increasing complexity of products leads to further rationalization in their development however the need to satisfy consumers continually evolving tastes and game developers inclinations to be creative also creates tensions with these rational forces different actors balance these tensions differently studios may seek to balance these by shifting between more and less innovative products by creating original intellectual property to increase their bargaining power with publishers and by iterating and repositioning products during development to adapt them to the market publishers may enhance their portfolio by hiring highly creative designers into their stable new products are created through combinative creativity that is the recombination of existing ideas from different sources into new products the connection of combinative mechanisms with the balancing behavior at the firm level provides a means for understanding the evolution of innovative products and therefore industries

monitoring and structure of debt contracts this paper presents a theory of optimal debt structure when the moral hazard problem is severe the main idea is that the optimal debt contract delegates monitoring to a single senior lender and that seniority allows the monitoring senior lender to appropriate the full return from his monitoring activities the theory explains i why debt contracts are prioritized ii why short term debt is senior to long term debt and iii why financial intermediaries usually hold short term senior debt whereas long term junior debt is widely held another implication of the theory is that covenant and maturity structures will be set to conform to the seniority structure

endogenous markups intensity of competition and persistence of business cycles in order to study the propagation mechanism of business cycles in particular to investigate how the intensity of competition affects market structure and output persistence over business cycles this paper presents a real business cycle model with imperfect competition and increasing returns to scale this analysis considers the markups of price over cost to be endogenous with endogenous markups two standard forms of oligopolistic competition bertrand and cournot are considered results show that 1 the propagation mechanism in the sense of output persistence is greater under cournot 2 the propagation mechanism is unequivocally greater with imperfect competition regardless of whether markups are endogenous or not and 3 under imperfect competition the propagation mechanism is greater with endogenous markups than with exogenous markups overall these results suggest that more intense competition produces lower persistence in output growth and thus a weaker propagation mechanism in a calibration exercise these differences were also found to be quantitatively important

optimal priority structure capital structure and investment we study the interaction between financing and investment decisions in a dynamic model where the firm has multiple debt issues and equityholders choose the timing of investment jointly optimal capital and priority structures can virtually eliminate investment distortions because debt priority serves as a dynamically optimal contract examining the relative efficiency of priority rules observed in practice we develop several predictions about how firms adjust their priority structure in response to changes in leverage credit conditions and firm fundamentals notably financially unconstrained firms with few growth opportunities prefer senior debt while financially constrained firms with or without growth opportunities prefer junior debt moreover lower rated firms are predicted to spread priority across debt classes finally our analysis has a number of important implications for empirical capital structure research including the relations between market leverage book leverage and credit spreads and tobin s q the influence of firm fundamentals on the agency cost of debt and the conservative debt policy puzzle the author 2011 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

on the dynamics of international inflation abstract we investigate the dynamic properties of inflation in 20 oecd countries with a novel approach based on the autocorrelation function we find evidence in favor of long memory and nonlinearity linear autoregressive models are shown to be misspecified

executive compensation and the maturity structure of corporate debt executive compensation influences managerial risk preferences through executives portfolio sensitivities to changes in stock prices delta and stock return volatility vega large deltas discourage managerial risk taking while large vegas encourage risk taking theory suggests that short maturity debt mitigates agency costs of debt by constraining managerial risk preferences we posit and find evidence of a negative positive relation between ceo portfolio deltas vegas and short maturity debt we also find that short maturity debt mitigates the influence of vega and delta related incentives on bond yields overall our empirical evidence shows that short term debt mitigates agency costs of debt arising from compensation risk

real business cycle models and the forecastable movements in output hours and consumption the authors study the movements in output consumption and hours that are forecastable from a vector autoregression and analyze how they differ from those predicted by standard real business cycle models they show that actual forecastable movements in output have a variance about one hundred times larger than those predicted by the model the authors also find that forecastable changes in the three series are strongly positively correlated with each other on the other hand for parameters whose implications are plausible in other respects the model implies that output consumption and hours should not all be expected to move in the same direction copyright 1996 by american economic association

an estimated canadian dsge model with nominal and real rigidities this paper develops a dynamic stochastic general equilibrium dgse model for the canadian economy and evaluates the real effects of monetary policy shocks to generate high and persistent real effects the model combines nominal frictions in the form of costly price adjustment with real rigidities modelled as convex costs of adjusting capital and employment

on measuring the welfare cost of business cycles lucas 1987 argues that the gain from eliminating aggregate fluctuations is trivial following lucas a number of researchers have altered assumptions on preferences and found that the gain from eliminating business cycles are potentially very large however in these exercises little discipline is placed on preference parameters this paper estimates the welfare cost of business cycles allowing for potential time non separabilities in preferences where discipline is placed on the choice of preference parameters by requiring that the preferences be consistent with observed fluctuations in a model of business cycles that is a theoretical real business cycle world is constructed and the representative agent is then placed in this world the agent responds optimally to exogenous shocks given the frictions in the economy the agent s preference parameters along with other structural parameters are estimated using a bayesian procedure involving markov chain monte carlo methods two main results emerge from the paper first the form for the time non separability estimated in this paper is very different than the forms suggested and used elsewhere in the literature second the welfare cost of business cycles is close to lucas s estimate

technology shocks and aggregate fluctuations in an estimated hybrid rbc model this paper contributes to the on going empirical debate regarding the role of the rbc model and in particular of technology shocks in explaining aggregate fluctuations to this end we estimate the model s posterior density using markov chain monte carlo mcmc methods within this framework we extend ireland s 2001 2004 hybrid estimation approach to allow for a vector autoregressive moving average varma process to describe the movements and co movements of the model s errors not explained by the basic rbc model the results of marginal likelihood ratio tests reveal that the more general model of the errors significantly improves the model s fit relative to the var and ar alternatives moreover despite setting the rbc model a more difficult task under the varma specification our analysis based on forecast error and spectral decompositions suggests that the rbc model is still capable of explaining a significant fraction of the observed variation in macroeconomic aggregates in the post war u s economy

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

credit cycles redux theoretical studies have shown that under unorthodox assumptions on preferences and production technologies collateral constraints can act as a powerful amplification and propagation mechanism of exogenous shocks we investigate whether or not this result holds under more standard assumptions we find that collateral constraints typically generate small output amplification large amplification is obtained as a knife edge type of result

estimation of dsge models when the data are persistent dynamic stochastic general equilibrium dsge models are often solved and estimated under specific assumptions as to whether the exogenous variables are difference or trend stationary however even mild departures of the data generating process from these assumptions can severely bias the estimates of the model parameters this paper proposes new estimators that do not require researchers to take a stand on whether shocks have permanent or transitory effects these procedures have two key features first the same filter is applied to both the data and the model variables second the filtered variables are stationary when evaluated at the true parameter vector the estimators are approximately normally distributed not only when the shocks are mildly persistent but also when they have near or exact unit roots simulations show that these robust estimators perform well especially when the shocks are highly persistent yet stationary in such cases linear detrending and first differencing are shown to yield biased or imprecise estimates

ex ante efficiency of bankruptcy procedures abstract this paper suggests a framework to analyze the efficiency properties of bankruptcy procedures distinguishing between ex ante and ex post efficiency ex post efficiency consists in maximizing the ex post value of the insolvent firm whereas ex ante efficiency consists in maximizing the proceeds to creditors from the reorganization of the firm and providing incentives for the creditors to monitor the firm we show that the definition of creditors ownership rights over the company and the protection of the creditors seniority are crucial to asses the ex ante efficiency of a bankruptcy procedure

security pricing and deviations from the absolute priority rule in bankruptcy proceedings claims ultimately awarded to shareholders of firms in reorganization were examined for a sample of 30 filings under the 1978 bankruptcy reform act we measured the amount paid to shareholders in excess of that which they would have received under the absolute priority rule and found that this amount represents on average 7 6 of the total awarded to all claimants evidence is also reported that common share values reflect a significant proportion of value ultimately received in violation of absolute priority suggesting that deviations from the rule were expected by the equity markets the absolute priority rule hereafter apr states that a bankrupt firm s value is to be distributed to suppliers of capital such that senior creditors are fully satisfied before any distributions are made to junior creditors and junior creditors are paid in full before common shareholders bankruptcy reorganization proceedings however are leaving shareholders and junior creditors with valuable assets even when senior claimants receive only partial settlements as barrett and sullivan 1988 noted traditionally shareholders have been last in line their claims on a troubled company s assets have had the lowest priority and their impact on the course of bankruptcy code proceedings generally has been next to nil but lately the balance of power has been shifting warner 1977 provided one of the early discussions of the implications of deviations from the apr baldwin and mason 1983 pp 510 511 examined the resolution of claims in the massey ferguson reorganization and provided no support for the hypothesis that the market believes absolute priority rules will be enforced if the firm defaults on its financial obligations franks and torous 1989 analyzed a sample of bankruptcies that occurred during the period 1970 through 1984 and found that 21 of 27 sample cases exhibited departures from the apr more recently weiss 1990 examined 37 firms that filed for bankruptcy between 1980 and 1986 and reported that 27 of the cases involved apr violations

flexible prices and the business cycle business cycles models with flexible prices face two major empirical challenges one regards observed output dynamics the positive short run autocorrelation in gnp growth and the hump shaped trend reverting output response to transitory shocks cogley and nason 1995 the other regards the alleged persistent decline in employment following a positive technology shock gali 1999 no determinate model with flexible prices has so far been able to address all of the cogley nason gali challenges we show that the standard rbc model can do so if it contains a signal extraction problem involving permanent and temporary supply shocks

financial contracting and leverage induced over and under investment incentives this paper investigates the effects of seniority rules and restrictive dividend convenants on the over and under investment incentives associated with risky debt we show that increasing seniority of new debt decreases the incidence of under investment but increases over investment and vice versa under symmetric information the optimal seniority rule is to give new debtholders first claim on a new project without recourse to existing assets i e project financing under asymmetric information the optimal debt contract requires equating the expected return to new debtholders in the default state to the new project s cash flow in the same rate if this is not possible the optimal seniority rule calls for strict subordination of new debt if the expected cash flow in default is small and full seniority if it is large with regard to dividend convenants we show that their effect depends on whether or not dividend payments are conditioned on future investments when they are unconditioned allowing more dividends increases the under investment incentive in contrast conditional dividends decrease the underinvestment incentive and increase the over investment incentive

internal capital market controls and financial performance in multidivisional firms it is proposed that within the population of m form firms the control systems necessary to realize economic benefits from interrelationships between subunits o f a firm are incompatible with the systems necessary to realize benef its from an m form type internal capital market this hypothesis is t ested on 156 large u k firms questionnaire data are used to classif y the firms according to their internal control characteristics the findings provide tentative support for the hypothesis copyright 1988 by blackwell publishing ltd

claimholder incentive conflicts in reorganization the role of bankruptcy law when a firm is financial distress in most cases a set of mutually advantageous reorganization plans exist this article shows that the bankruptcy code by providing rules governing the negotiation process yields a unique solution to the reorganization process in addition the structure imposed by the code mitigates the holdout problem created by the individual claimant s divergent incentives article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

let s take a break trends and cycles in us real gdp abstract trend cycle decompositions for us real gdp such as the unobserved components models the beveridge nelson decomposition the hodrick prescott filter and others yield very different cycles which bear little resemblance to the nber chronology ascribes much movements to the trend leaving little to the cycle and some imply a negative correlation between the noise to the cycle and the trend we argue that these features are artifacts created by the neglect of a change in the slope of the trend function once this is accounted for all methods yield the same cycle with a trend that is non stochastic except for a few periods around 1973 the cycle is more important in magnitude than previously reported and it accords well with the nber chronology our results are corroborated using an alternative trend cycle decomposition based on a generalized unobserved components models with errors having a mixture of normals distribution for both the slope of the trend function and the cyclical component

is the political business cycle for real abstract this paper constructs and examines a macroeconomic model which combines features from both real and political business cycle models we augment a standard real business cycle tax model by allowing for varying levels of government partisanship and competence in order to replicate two important empirical regularities first that on average the economy expands early under democratic presidents and contracts early under republican presidents second that presidents whose parties successfully retain the presidency have stronger than average growth in the second half of their terms the model generates both of these features that conform to u s post world war ii data

testing the implications of long run neutrality for monetary business cycle models this paper compares sample fluctuations of the us business cycle with those predicted by a class of equilibrium monetary business cycle models the predictions of the models are generated using the longrun neutrality restrictions implicit in the models by imposing these restrictions on sample data tests of the ability of the models to replicate the dynamics of the us business cycle are constructed although the predictions of the models for real side variables are rejected there is evidence that the nominal side predictions of the models are not rejected

firm dynamics and markup variations implications for sunspot equilibria and endogenous economic fluctuations this paper analyzes how the interaction between firms entry and exit decisions and variations in competition gives rise to self fulfilling expectation driven fluctuations in aggregate economic activity and in measured total factor productivity tfp the analysis is based on a dynamic general equilibrium model in which net business formation is endogenously procyclical and leads to endogenous countercyclical variations in markups this interaction leads to indeterminacy in which economic fluctuations occur as a result of self fulfilling shifts in the beliefs of rational forward looking agents when calibrated with empirically plausible parameter values and driven solely by self fulfilling shocks to expectations the model can quantitatively account for the main empirical regularities characterizing postwar u s business cycles and for 65 of the fluctuations in measured tfp

sources and propagation of international output cycles common shocks or transmission abstract this paper studies the generation and transmission of international cycles in a multi country model with production and consumption interdependencies two sources of disturbance are considered and three channels of propagation are compared technology disturbances which are mildly correlated across countries are more successful than government expenditure disturbances in reproducing actual data the presence of a common component to the shocks and of production interdependencies appear to be crucial in quantitatively matching the properties of the data

long run growth uncertainty observed macroeconomic forecasts display a positive correlation between expectations of long run growth of endogenous variables e g output and cyclical activity existing business cycle models appear inconsistent with the evidence this paper presents a model of the business cycle in which households have imperfect knowledge of long run growth rate of endogenous variables and continually learn about these growth rates the model features comovement and mutual influence between households growth expectations and market outcomes it can replicate the evidence on growth forecasts and suggests that optimism and pessimism about long run growth rates is a crucial ingredient in understanding business cycle fluctuations

pigou and modern business cycle theory it is contended that a c pigou s scientific vision in industrial fluctuations 1927 has much in common with that of modern business cycle theory both stressed though to different degrees the centrality of competition and rationality however pigou gave much more emphasis than does modern theory to multiplicity of causes psychology amplitude interaction among impulses nonperfect competition labor market institutions and externalities thus his work may have some lessons for modern economists in terms of the scope and method of business cycle theory copyright 1996 by royal economic society

the is curve and the transmission of monetary policy is there a puzzle in this paper the performance of the new keynesian is curve for the g7 countries is assessed it is found that there is an is puzzle for both the purely backward looking as well as for the forward looking is curve the real interest rate does not have a significantly negative effect on the output gap based on an extended specification of the is curve also including asset prices and monetary aggregates a significantly negative interest rate effect on aggregate demand is found for all countries this finding suggests that a richer specification of the is curve in empirical work may be necessary in order to obtain an unbiased estimate of the effect of monetary policy on aggregate demand

endogenous vs exogenously driven fluctuations in vintage capital models in this paper we present a particular case of the creative destruction model of caballero and hammour quart j econ 111 1996 805 851 in which both exogenous and endogenous fluctuation sources are present we show that job creation follows a delayed differential equation with periodic coefficients the delay is equal to the optimal age of capital goods the period of the coefficients is equal to the period of an exogenous profitability cycle we mathematically show that job creation is asymptotically periodic with the same period as the profitability cycle furthermore using an explicit numerical method we find that replacement echoes generally dominate the short run dynamics finally we find that the combination of the two fluctuations sources favors the appearance of asymmetries in job creation and job destruction patterns

debt and seniority an analysis of the role of hard claims in constraining management we argue that long term debt has a role in controlling management s ability to finance future investments a company with high widely held debt will find it hard to raise capital since new security holders will have low priority relative to existing creditors conversely for a company with low debt we show there is an optimal debt equity ratio and mix of senior and junior debt if management undertakes unprofitable as well as profitable investments we derive conditions under which equity and a single class of senior long term debt work as well as more complex contracts for controlling investment behavior

effects of classifying equity or debt on the value of the firm under tax asymmetry this paper examines the effect of classifying a firm s equity or debt into subclasses of unequal seniority on the total expected tax burden of the firm and its security holders in a world with no agency and no bankruptcy costs it is shown that when positive income is taxed at a higher rate than that allowed on realized capital losses expected taxes are min imized and the value of the firm is maximized if the firm has only one class of equity and at most one class of debt this result helps to explain the common practice of issuing corporate bonds under open indentures in fact our empirical results indicate that before the advent of a differentiated capital gains tax in 1921 a great majority of publicly traded long term industrial bonds were issued under closed indentures by 1951 nearly all such debt was issued under single indentures i e there was only one class of creditor

ex ante costs of violating absolute priority in bankruptcy a basic question for the design of bankruptcy law concerns whether value should be divided in accordance with absolute priority research done in the past decade has suggested that deviations from absolute priority have beneficial ex ante effects in contrast this paper shows that ex post deviations from absolute priority also have negative effects on ex ante decisions taken by shareholders such deviations aggravate the moral hazard problem with respect to project choice increasing the equityholders incentive to favor risky projects as well as with respect to borrowing and dividend decisions

financing constraints and inventories abstract this paper investigates the impact of financing constraints on firms inventory and cash management in particular it examines the extent to which the presence of such constraints may account for certain empirical regularities these include e g the excess variance of production vis a vis that of sales as well as the counter cyclicality and persistence of the inventory sales ratio we model the intertemporal decision making on production cash retention and dividends of a firm that is exposed to stochastic demand shocks in every period and faces constrained access to external sources of finance it is found that the presence of financing constraints can explain the excess variance of production in a model which otherwise would not deliver this result moreover as long as demand is positively serially correlated they also contribute to the counter cyclicality and persistence of the inventory sales ratio the paper suggests that financing constraints should not be discarded as a factor driving the cyclical behaviour of inventories