market definition market power abstract market definition and market power are central features of competition law and practice but pose serious challenges on one hand market definition suffers decisive logical infirmities that render it infeasible unnecessary and counterproductive and the practice of stating market power requirements as market share threshold tests is incoherent as a matter of empirics and policy on the other hand market power is often probative of the desirability of liability yet the typically assumed functional relationship is unexplored and often implausible these latter deficiencies are addressed through a ground up analysis of the channels by which market power can be relevant it is important to explicitly and simultaneously consider both anticompetitive and procompetitive explanations for challenged practices and to attend to the magnitudes of the social consequences of correct and mistaken imposition of liability in order to identify the various ways and senses in which market power bears on optimal decision making

short sales are almost instantaneously bad news evidence from the australian stock exchange this paper investigates the market reaction to short sales on an intraday basis in a market setting where short sales are transparent immediately following execution we find a mean reassessment of stock value following short sales of up to 0 20 percent with adverse information impounded within fifteen minutes or twenty trades short sales executed near the end of the financial year and those related to arbitrage and hedging activities are associated with a smaller price reaction trades near information events precipitate larger price reactions the evidence is generally weaker for short sales executed using limit orders relative to market orders this article analyzes the intraday price behavior surrounding short sales executed using market and limit orders within a transparent setting a number of recent studies have focused on daily or monthly stock price behavior surrounding short selling activity in u s markets e g senchack and starks 1993 figlewski and webb 1993 conrad 1994 hanley and seyhun 1994 asquith and meulbroek 1996 and dechow et al 1997 this research has been motivated by the continued interest of market regulators i n short selling activity and the controversy surrounding the desirability restrictions and disclosure requirements related to short selling see janvey 1992 and ramsay 1993 in particular several studies such as that by figlewski and webb 1993 have examined the relationship between short positions and subsequent abnormal returns without finding a strong relationship asquith and meulbroek 1996 in contrast focus on firms with large short positions and find a strong and consistent relationship dechow et al 1997 find a correlation between short selling strategies and strategies based on fundamental analysis these results are consistent with short sellers being able to identify

on the price of anarchy in a single server queue with heterogeneous service valuations induced by travel costs abstract this work presents a strategic observable model where customer heterogeneity is induced by the customers locations and travel costs the arrival of customers with distances less than x is assumed to be poisson with rate equal to the integral from 0 to x of a nonnegative intensity function h in a loss system m g 1 1 we define the threshold nash equilibrium strategy xe and the socially optimal threshold strategy x we investigate the dependence of the price of anarchy poa on the parameter xe and the intensity function for example if the potential arrival rate is bounded then poa is bounded and converges to 1 when xe goes to infinity on the other hand if the potential arrival rate is unbounded we prove that x xe always goes to 0 when xe goes to infinity and yet in some cases poa is bounded and even converges to 1 if h converges to a positive constant then poa converges to 2 if h increases then the limit of poa is at least 2 whereas if h decreases then poa is bounded and the limit of poa is at most 2 in a system with a queue we prove that poa may be unbounded already in the simplest case of uniform arrival

cost allocation revisited an optimality result the resource manager of a firm is faced with capacity and pricing decisions with regard to a congestion prone system such as computer communication facilities difficulties arise since the manager is uninformed of the system demand when the capacity decision is to be made a game theoretic model is developed to analyze the effects of different accounting rules on the elicitation of relevant information and ex post efficiency in acquisition and allocation decisions the key result is that the cost allocation method aided by an anonymous reporting scheme is indeed as asserted by zimmerman zimmerman j 1979 the costs and benefits of cost allocations accounting rev 54 july 504 521 a full information efficient rule achieving optimality both in acquisition and allocation decisions discussions of the main assumptions underlying this result are provided

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

convertible bond underpricing renegotiable covenants seasoning and convergence we investigate the long standing puzzle on the underpricings of convertible bonds we hypothesize that the observed underpricing is induced by the possibility that a convertible bond might renegotiate on some of its covenants e g an imbedded put option in financial difficulties consistent with our hypothesis we find that the initial underpricing is larger for lower rated bonds the underpricing worsens if the issuer experiences subsequent financial difficulties however conditional on no rating downgrades our main empirical result shows that convertible bond prices do converge to their theoretical prices within two years this seasoning period is shorter for higher rated convertible bonds

delay cost and incentive schemes for multiple users this paper examines the role of cost application in the presence of delay and agency costs two risk neutral division managers share a common production facility and decide on a the demand usage rates and b productive action each division manager causes costly delays at the common production facility for the other division manager the expected delay depends on the demand rates chosen by the division managers an m g 1 queuing framework is used to characterize delay costs the unobservability of demand rates leads to stochastic choice hazard and the unobservability of productive actions leads to moral hazard problems the headquarters designs incentive schemes such that the use of the common facility is optimal for the firm we show that a franchise contract is necessary to implement the first best solution similar to harris and raviv 1979 but is not sufficient specifically when the action aversion of one division manager is small the use of a franchise contract leads to greedy behaviour by the that division manager the cost application required is greater than the expected marginal cost of delay to preclude the greedy behavior and ensure a stable equilibrium

legal uncertainty as a welfare enhancing screen consider legal uncertainty as uncertainty about the legality of a specific action in particular suppose that the threshold of legality is uncertain i show that this legal uncertainty raises welfare legal uncertainty changes deterrence in opposite directions the probability of conviction increases for firms below the threshold while the probability of conviction decreases for firms above the threshold hence legal uncertainty acts as a welfare enhancing screen and increases welfare legal uncertainty discourages some actions with low private benefits while it encourages other actions with high private benefits

optimal proof burdens deterrence and the chilling of desirable behavior determination of the stringency of the burden of proof is a central design question in any system of adjudication including in many private settings employee promotion and firing product launches prior work oriented towards ex ante behavior focuses on deterrence using models in which individuals decide whether or not to commit a harmful act versus abstention or perhaps instead commission of a less harmful act such as when greater precaution is taken 1 in this setting the optimal proof burden maximizes deterrence which involves maximizing the difference between the ex ante likelihoods of correct and incorrect imposition of sanctions section i briefly derives this result and shows how contrary to some suggestions it differs from the familiar preponderance of the evidence rule under which sanctions are applied if and only if it is more likely than not that the individual before the tribunal committed the harmful act such analysis however omits a central concern with the mistaken imposition of sanctions that the prospect of such error will chill desir able behavior in competition law efficient procompetitive behavior e g promotional pricing may be discouraged with securities regulation the cost of capital may be raised if honest ipos often lead to successful class action suits under tort law health care providers might avoid treatment of high risk patients for fear of erroneous malpractice liability this dimension of the problem seems widespread and is likely to be

the relationship between short interest and stock returns in the canadian market abstract this paper provides new insight into the relationship between short sales and stock market returns using a sample of stocks sold short in canada short interest is defined in relation to trading volume the results strongly support the assertion that short sales and excess returns are contemporaneously negatively correlated in canada the paper further finds that excess returns are more negative for small firms because the supply of shortable shares is constrained for these firms excess returns are less negative for stocks with associated options and convertible bonds importantly the evidence is consistent with the proposition that informed traders short sell canadian interlisted stocks in canada rather than the us to exploit lower execution costs together the results suggest that less restrictive regulation of short sales will improve the efficiency of markets

informative conversion ratios a signalling approach the paper uses a signalling equilibrium to explain the market s reaction to the announcement of a firm s financing decision in our model a firm can issue one of the following securities convertible debt with a different conversion ratio straight debt and stock we identify conditions under which the conversion ratio of a convertible debt issue serves as a credible signal of a firm s private information given the continuous distribution of attributes information across firms in this signalling equilibrium we find that the lower the expected future earnings the higher the conversion ratio of a convertible debt issue at the limit firms that expect the highest earnings will use straight debt financing and firms that expect the lowest earnings will use equity financing based on the signalling equilibrium we predict that at announcement of a convertible debt issue negative abnormal common stock return increases in absolute value with the conversion ratio

congestion and network externalities in the short run pricing of information system services transfer pricing provides management with an efficient tool for coordinating the use of information system services in practice these services if they are charged out to end users are priced via an allocation of historical costs based on individual usage or are assigned a price based on the fair market value of outside alternatives both approaches encourage suboptimal usage of information systems resources they ignore three constituents of optimal transfer prices 1 the reaction of other users to any change in a given user s consumption of service 2 the technical response to additional use of an information system service in the form of congestion and network externalities and 3 end user preferences for the information system service together these influences on demand contribute to an externality two types of externalities are significant in information systems congestion externalities decrease and network externalities increase the utility of services this research provides a complete model for computing optimal transfer price which corrects several existing problems in information system service valuation when full absorption cost allocations contain significant fixed precommitted or sunk cost components it is not possible to balance the budget direct costing improves on full absorption costing but misspecifies costs when demand is nonlinear to balance the budget with a minimum of disutility to end users management must resort to second best pricing inefficiency arises from two sources when externalities are ignored in transfer pricing end users cannot plan service usage and thus encounter unanticipated congestion which lowers morale and efficiency and increases costly expediting where congestion effects are highly nonlinear congestion may effectively shut down the system on the other hand incorrect transfer prices can motivate usage too low to take advantage of network benefits end users may confuse externality effects and intrinsic value of an information system service in these cases the price and performance of outside alternatives exert a complex and subtle influence on use and pricing of services where there exist identical outside and inside processing alternatives and transfer pricing does not reflect this there is a significant tendency to overprice and underutilize internal services in this case there may be a tendency to outsource when processing should be kept in house future markets for information systems will favor technologies which exhibit strong network externalities and pricing of these technologies will become increasingly complex because of the interrelationship of hardware software and data originated externalities the models provided in this research will allow management to take advantage of these opportunities

are convertible bonds underpriced an analysis of the french market we investigate the pricing of convertible bonds on the french convertible bond market using daily market prices for a period of 18 months instead of a firm value model as used in previous studies we use a stock based binomial tree model with exogenous credit risk that accounts for all important convertible bond specifications and is therefore well suited for pricing convertible bonds the empirical analysis shows that the theoretical values for the analyzed convertible bonds are on average more than 3 higher than the observed market prices this result applies to both the standard convertibles and the exchangeable bonds in our sample the difference between market and model prices is greater for out of the money convertibles than for at or in the money convertibles a partition of the sample according to maturity indicates that there is a positive relationship between underpricing and maturity with decreasing mispricing for bonds with shorter time to maturity

user delay costs and internal pricing for a service facility this paper studies optimal pricing and capacity decisions for a service facility in an environment where users delay cost is important the model assumes a general nonlinear delay cost structure and incorporates the tradeoff between the delay cost and capacity cost we find necessary and sufficient conditions for the optimality of a pricing rule that charges out service resources at their marginal capacity cost we examine the issue of budgetary balance and find that net value maximization entails a budget deficit for the service facility that is the service facility should be evaluated as a deficit center the results provide guidelines under which the optimal magnitude of the deficit can be determined

the rise and demise of the convertible arbitrage strategy this article analyzes convertible arbitrage one of the most successful hedge fund strategies the aim of the strategy is to exploit underpricing of convertible bonds by taking a long position in a convertible and a short position in the underlying asset the authors find that convertible bonds are underpriced at the issuance dates at the same time short sales of underlying equity increase significantly both effects are stronger and more persistent for equity like convertibles than for debtlike convertibles furthermore short sale pressures negatively affect stock returns around the announcement and issuance dates of convertibles all these factors have likely contributed to the shift toward issuing more debtlike convertibles in recent years which in turn has substantially lowered the returns from convertible arbitrage

pricing and capacity decisions for a service facility stability and multiple local optima we consider a model for optimal pricing and capacity for a service facility the problem is formulated as one of optimal design of a single server queueing system in which the design variables are the service rate and the arrival rate equivalently the price charged for admission the model is a variant of one introduced by dewan and mendelson we allow for an upper bound on the arrival rate and consider slightly more general user value functions we show that an optimal solution may not lie in the interior of the feasible region and thus may not be characterized by the first order differential conditions moreover the first order conditions typically have several solutions some of which may be relative minima and produce a negative value of the objective function customer value minus the sum of expected delay cost and capacity cost per unit time we also examine the stability of the equilibrium arrival rate and the convergence of a dynamic adaptive algorithm for finding the optimal service rate in the context of a model in which the distribution of customers value of service is uniform we show that the equilibrium arrival rate is stable if and only if the service rate is above a threshold value which depends on the price charged for admission and the parameters of the uniform distribution of value of service the dynamic adaptive algorithm always converges to a relative maximum of the objective function if the service rate can be adjusted every time the arrival rate changes otherwise the algorithm will start to diverge if and when the service rate ever falls below the threshold value associated with stability of the equilibrium arrival rate

product line selection production decisions and allocation of common fixed costs abstract product costs are determined in practice for the purpose of pricing make buy and product line decisions while many costs are directly assignable to individual products common costs have historically presented a difficult conundrum a variety of cost allocation methods are used in practice or have been suggested in the literature to attach these costs to individual products while such procedures are theoretically unsupported they may be able to mimic the correct decisions adequately in this paper we investigate the efficacy of certain cost allocation schemes in a competitive environment the schemes are evaluated with reference to a scenario in which there is a single fixed cost incurred in manufacturing any subset of a set of products under idealized conditions a cournot nash model is developed that describes the number of entering firms and the equilibrium price and production levels using this as a point of reference it is shown that by using gross contribution as an allocation basis optimal product line decisions are achieved without distorting the selection of production levels moreover competitive pressure sufficient to drive total net profits close to zero is sufficient to require that any allocation rule supporting optimal product line decisions yields allocations nearly proportional to gross contributions an analogy is drawn with the allocation of joint costs to coproducts in a competitive environment and the corresponding allocation in proportion to net realizable value

cost of congestion operational efficiency and management accounting abstract in this paper we examine the conflicts that arise when multiple users share a common facility the conflicts could arise at three levels a between the individual users and the division manager b among the divisions or different classes that use the facility and c between the divisions and the headquarters in the presence of private information we analyze these conflicts and outline the role of cost allocation mechanisms and thereby account for congestion in each of these situations the results of this paper demonstrate the usefulness of resolving these conflicts in an organization and hence has direct managerial accounting implications

comparison of accounting systems and heuristics in selecting economic optima in this paper we demonstrate how certain institutional characteristics of real accounting settings namely incomplete information on costs biases in accounting measurements of costs and information processing limitations of accounting users can be rigorously combined to contrast different accounting techniques variable versus absorption costing given an economic setting in which an optimal output exists our analysis involves determining the extent to which a reasonable informationprocessing rule when employed in conjunction with different accounting conventions yields an output level that approximates that optimal output

cost allocation and opportunity costs one explanation for the widespread use of allocated fixed costs is that they can serve as a proxy for difficult to calculate opportunity costs this explanation is pursued by modeling a service department as an m m s s queueing system two main results are that the expected value of opportunity costs equals both the incremental productivity of capacity and the optimal transfer price when the cost of capacity is of the form cs as and is close to one we show that allocated fixed costs are a good proxy for average opportunity costs however if there are great economies of scale is close to zero then a method which charges users only for the variable costs of the service department is recommended finally the economic efficiency of transfer prices based on either variable cost or full cost is compared with optimal transfer pricing policies

asymmetric information incentives and intrafirm resource allocation this paper considers the question how should a firm allocate a resource among divisions when the productivity of the resource in each division is known only to the division manager obviously if the divisions as represented by their managers are indifferent among various allocations of the resource the headquarters can simply request the division managers to reveal their private information on productivity knowing that the managers have no incentive to lie the resource allocation problem can then be solved under complete or at least symmetric information this aspect is a flaw in much of the recent literature on this topic i e there is nothing in the models considered which makes divisions prefer one allocation over another thus although in some cases elaborate allocation schemes are proposed and analyzed they are really unnecessary in the model we develop a division can produce the same output with less managerial effort if it is allocated more resources and effort is costly to the manager we further assume that this effort is unobservable by the headquarters so that it cannot infer divisional productivity from data on divisional output and managerial effort given these assumptions we seek an optimal resource allocation process our results show that certain types of transfer pricing schemes are optimal in particular if there are no potentially binding capacity constraints on production of the resource then an optimal process is for each division to choose a transfer price from a schedule announced by the headquarters division managers receive a fixed compensation minus the cost of the resource allocated to them at the chosen transfer price resources are allocated on the basis of the chosen transfer prices if there is a potentially binding constraint on resource production a somewhat more complicated but similar scheme is required

pricing derivatives on financial securities subject to credit risk this article provides a new methodology for pricing and hedging derivative securities involving credit risk two types of credit risks are considered the first is where the asset underlying the derivative security may default the second is where the writer of the derivative security may default we apply the foreign currency analogy of jarrow and turnbull 1991 to decompose the dollar payoff from a risky security into a certain payoff and a spot exchange rate arbitrage free valuation techniques are then employed this methodology can be applied to corporate debt and over the counter derivatives such as swaps and caps the purpose of this article is to provide a new theory for pricing and hedging derivative securities involving credit risk two sources of credit risk are identified and analyzed the first is where the asset underlying the derivative security may default paying off less than promised this is the case for example with imbedded options on corporate debt the second is the credit risk introduced by the writer of the derivative security who may also default examples include over the counter writers of options on eurodollar futures swaps and swaptions for pricing derivative securities involving credit risk there are currently two approaches the first views these derivatives as contingent claims not on the financial securities themselves but as compound options on the assets underlying the financial securities this is the case for example with the pricing of imbedded options on corporate debt see merton 1974 1977 black and cox 1976 ho and singer 1982 chance 1990 and kim ramaswamy and sundaresan 1993 or the pricing of vulnerable options see johnson and stulz 1987 in practice however this valuation methodology is difficult to use first the assets underlying the financial security are often not tradeable and therefore their values are not observable this makes application of the theory and estimation of the relevant parameters problematic second as in the case of corporate debt all of the other liabilities of the firm senior to the corporate debt must first and simultaneously be valued this generates significant computational difficulties as a result this approach has not

the pricing of convertible debt offerings abstract we present the first empirical evidence on the pricing of convertible debt offerings using a sample of 91 convertible debt offerings from the period 1988 1992 we show a significant mean initial excess return of 1 11 our underpricing result is invariant to zero nonzero coupons maturity issue size or bond ratings further analysis reveals that various types of risk inherent in the new convertible issues are useful in explaining the cross sectional variation in the initial excess returns we offer an explanation for our results based on the arguments of the differential information model

profit maximizing cost allocation for firms using cost based pricing this work develops a profit maximizing cost allocation scheme for firms that allocate all costs to their various outputs and then use these costs to set prices a process known as fully distributed cost based pricing if the costs incurred by the firm are not easily traced to a particular output for example the electric bill for a shared manufacturing plant the costs must be allocated the demand for a given output is assumed to be a function of the price hence the cost allocation scheme that is selected will affect both the price and the demand for the output the allocation of common costs that maximizes the firm s overall profit under these conditions is identified frequently the profit maximizing allocation allocates none of the untraceable common costs to one or more of the outputs this allocation scheme stands in contrast to common practices of sharing costs equally or proportionally across outputs examples explore the implications of such a profit maximizing cost allocation on prices and demand in four scenarios i no constraints ii constraints on maximum allowable prices iii a change in market size and iv cost containment incentives

why are convertible bond announcements associated with increasingly negative issuer stock returns an arbitrage based explanation while convertible offerings announced between 1984 and 1999 induce average abnormal stock returns of 1 69 convertible announcement effects over the period 2000 2008 are more than twice as negative 4 59 we hypothesize that this evolution is attributable to a shift in the convertible bond investor base from long only investors towards convertible arbitrage funds these funds buy convertibles and short the underlying stocks causing downward price pressure consistent with this hypothesis we find that the differences in announcement returns between the traditional investor period 1984 1999 and the arbitrage period 2000 september 2008 disappear when controlling for arbitrage induced short selling associated with a range of hedging strategies post issuance stock returns are also in line with the arbitrage explanation average announcement effects of convertibles issued during the global financial crisis are even more negative 9 12 due to a combination of short selling price pressure and issuer issue and macroeconomic characteristics associated with these offerings

relevant costs congestion and stochasticity in production environments abstract conventional management accounting principles used to evaluate relevant costs have been developed under the assumption of deterministic manufacturing settings manufacturing operations however are complex and stochastic in this paper we examine the impact of stochasticity in the production process on relevant costs based on a dynamic assessment of capacity constraints we develop a model to analyze the behavior of relevant costs with respect to changes in the expected duration and variability in set ups and processing an implication of this analysis is that for profit maximization capacity will exceed expected demand if production rates or demand are stochastic

externalities average and marginal costs and tolls on congested networks with time varying flows for congested networks on which flows vary over time we derive system marginal costs user perceived costs and user externality costs for each arc and path we also obtain a set of optimal congestion tolls and flow controls which may be used to shift the user determined flows toward a socially preferred pattern an important way in which our results differ from the usual static analysis is that the social cost externality depends not only on the level of congestion but also on the rate of increase or decrease of congestion this is intuitively explicable as follows consider users delayed on an arc their delays will be further compounded or multiplied if congestion has increased during the time they are delayed on the other hand their delays will be reduced if congestion has declined during the time they are delayed this multiplier effect is such that the resultant dynamic externalities can easily be a few times larger or smaller than the externalities derived in the usual static analysis as a r

convertible bond arbitrage liquidity externalities and stock prices abstract in the context of convertible bond issuance we examine the impact of arbitrage activity on underlying equity markets in particular we use changes in equity short interest following convertible bond issuance to identify convertible bond arbitrage activity and analyze its impact on stock market liquidity and prices for the period 1993 to 2006 there is considerable evidence of arbitrage induced short selling resulting from issuance moreover we find strong evidence that this activity is systematically related to liquidity improvements in the stock these results are robust to controlling for the potential endogeneity of arbitrage activity

capital rationing and organizational slack in capital budgeting this paper reconciles three stylized facts about capital budgeting in firms and shows that they are tied to the presence of asymmetric information among the several members of the firm each with his or her own objectives and decisions the facts of interest are 1 the existence of organizational slack 2 the rationing of resources within organizations 3 the stated cut off rate for accepting capital projects in firms is often greater than the market rate of interest organizational slack is defined as the excess of resources allocated over the minimum necessary to accomplish the tasks assigned resource rationing is defined as the under allocation of resources i e an increase in the amount allocated would generate revenues in excess of its costs rationing and slack are both manifestations of ex post inefficiencies an lp model is used to show that these inefficiencies can occur in ex ante efficient organizational designs when asymmetric information is present the optimal allocation policy involves a hurdle rate criterion in which the hurdle rate is strictly in excess of the cost of capital thus inducing rationing in some states of the world typically resources are optimally allocated such that slack exists in other states the optimal allocation policy trades off these two inefficiencies