high water marks high risk appetites convex compensation long horizons and portfolio choice we study the portfolio choice of hedge fund managers who are compensated by high water mark contracts we find that even risk neutral managers do not place unbounded weights on risky assets despite option like contracts instead they place a constant fraction of funds in a mean variance efficient portfolio and the rest in the riskless asset acting as would constant relative risk aversion crra investors this result is a direct consequence of the in de finite horizon of the contract we show that the risk seeking incentives of option like contracts rely on combining finite horizons and convex compensation schemes rather than on convexity alone

the canadian border and the us dollar the impact of exchange rate changes on us retailers this paper provides a micro level investigation into the impact of changes in the uscanada nominal exchange rate on retailers in us regions lying close to the uscanada border using a large data set on product level retail prices and sales in the united states over a nine year period we explore the links between changes in exchange rates cross border travel and the price and quantity responses of us retailers this allows us to assess the importance of geography and distance in affecting the pass through of exchange rate changes into prices and quantities at the level of the consumer we develop a two stage theoretical model of cross border travel and industry equilibrium for retail sales at the border our empirical results accord well with the implications of the model

rewarding risk taking or skill the case of private equity fund managers abstract we examine whether typical private equity fund compensation contracts reward excessive risk taking rather than managerial skill our analysis is based on a novel model of investment value cash flows and fee dynamics of private equity funds given the embedded option like fee components our results demonstrate that fund managers indeed have an incentive for excessive risk taking when only fee income from the current fund is considered however when managers also consider potential compensation from follow on funds their risk taking incentives depend on their individual skill levels and skilled managers will have an incentive to reduce fund risk we also show that managers must generate substantial abnormal returns in order to compensate investors for the given fee components

what do entrepreneurs pay for venture capital affiliation this study empirically evaluates the certification and value added roles of reputable venture capitalists vcs using a novel sample of entrepreneurial start ups with multiple financing offers i analyze financing offers made by competing vcs at the first professional round of start up funding holding characteristics of the start up fixed offers made by vcs with a high reputation are three times more likely to be accepted and high reputation vcs acquire start up equity at a 10 14 discount the evidence suggests that vcs extra financial value may be more distinctive than their functionally equivalent financial capital these extra financial services can have financial consequences a central issue for early stage high tech entrepreneurs is obtaining external resources when the assets of their start up are intangible and knowledge based particularly for entrepreneurs without an established reputation convincing external resource providers such as venture capitalists vcs to provide financial capital may be challenging the literature contains two main lines of research for overcoming this problem one research stream has concentrated on designing institutional structures to permit financing early stage ventures this contractual and monitoring based approach is aimed at solving potential agency problems between investors and entrepreneurs e g admati and pfleiderer 1994 lerner 1995 hellmann 1998 and kaplan and str omberg 2001 2002 2003 a second research stream has suggested that when the quality of a start up cannot be directly observed external actors rely on the quality of the start up s affiliates as a signal of the start up s own quality

north american migration returns to skill border effects and mobility costs utilizing a utility maximizing roy type discrete choice model of worker location in canadian provinces and u s states that incorporates returns to skill amenities fixed costs distance langua

how debt markets have malfunctioned in the crisis the financial crisis that began in 2007 is especially a crisis in debt markets a full understanding of what happened in the financial crisis requires investigation into the plumbing of debt markets during a financial crisis when funds often cannot be raised easily or quickly the fundamental values for certain assets can become separated for a time from market prices with consequences that can echo into the real economy this article will explain in concrete ways how debt markets can malfunction with deleterious consequences for the real economy after a quick overview of debt markets i discuss three areas that are crucial in all debt markets decisions risk capital and risk aversion repo financing and haircuts and counterparty risk in each of these areas feedback effects can arise so that less liquidity and a higher cost for finance can reinforce each other in a contagious spiral i will document the remarkable rise in the premium that investors placed on liquidity during the crisis next i will show how these issues caused debt markets to break down indeed fundamental values and market values seemed to diverge across several markets and products that were far removed from the toxic subprime mortgage assets at the root of the crisis finally i will discuss briefly four steps that the federal reserve took to ease the crisis and how each was geared to a specific systemic fault that arose during the crisis

detecting earnings management a new approach this paper provides a new approach to test for accrual based earnings management our approach exploits the inherent property of accrual accounting that any accrual based earnings management in one period must reverse in another period if the researcher has priors concerning the timing of the reversal incorporating these priors can significantly improve the power and specification of tests for earnings management our results indicate that tests incorporating reversals increase test power by around 40 and provide a robust solution for mitigating model misspecification arising from correlated omitted variables

reassessing the relationships between private equity investors and their portfolio companies the scope and purpose of this special issue is to reassess the relationships between private equity pe investors and their portfolio companies in the light of the need for venture capital private equity vc pe firms to adapt their strategies for value creation in the light of the recent financial crisis we particularly focus upon vc pe characteristics that differently contribute to portfolio firm performance the papers presented in this special issue capture this aim in various ways reflecting the heterogeneity of vc pe investors and the firms in which they invest we begin this introductory paper by providing a brief overview of each paper s contribution we articulate themes for an agenda for future research relating to the heterogeneity of investor types and the contexts in which they invest

do state borders matter for u s intranational trade the role of history and internal migration empirical evidence of the impact of borders on international trade flows using the gravity equation approach abounds this paper examines the empirical relevance of state borders in u s interstate trade for various specifications of the gravity equation we find a large and economically significant subnational border effect for some specifications however two model specifications drastically reduce if not eliminate the border effect i dynamic panel specifications controlling for past levels of trade and ii models conditioning on internal migration les resultats empiriques de l analyse des impacts des frontieres sur les flux de commerce international en utilisant les modeles de gravite sont devenus monnaie courante ce texte examine l impact des frontieres entre etats a l aide de cette technique il s avere que les effets de frontieres infranationales sont grands et significatifs pour certaines specifications du modele cependant deux specifications du modele reduisent dramatiquement s ils n eliminent pas l effet de frontiere i des specifications qui prennent en compte les niveaux anterieurs de commerce et ii des specifications qui dependent de la migration interne

thick and thin borders in the european union how deep internal integration is within countries and how shallow between them the existence of large border effects is one of the main puzzles of international macroeconomics the seminal paper by mccallum found that trade between any two canadian provinces was on average 22 times greater than trade between any canadian province and any united state us although various authors have estimated internal and external border effects for the whole european union and some specific european countries none has done so in the manner that mccallum s seminal paper stymied by lack of data on region to region international trade flows this study uses a novel data set that captures intra and international truck shipments between spanish regions and regions in seven european countries during the period 2004 11 it computes internal and external border effects offering novel results for aggregate flows and the importing countries and estimates several specifications of the gravity equation so as to tackle such issues as the multilateral resistance term heteroskedasticity and zero flows and non linear relation between trade and distance the paper also adds a detailed analysis on the external border effect for each spanish exporting region and each of the seven european countries considered by means of this analysis we shed new light on the relative integration between regions of these seven countries and spanish exporting regions finally we conduct an extrapolation exercise computing the trade potentials that would be expected in a fully integrated europe and estimating how long full integration would take to achieve between each spanish exporting region and each european importing country to this regard two alternative scenarios are considered one using the growth rates of the spanish exports before the crisis 2001 08 and other considering the postcrisis growth rates 2011 13

internationalization of western venture capitalists into emerging markets risk assessment and information in india this paper provides the first analysis of the internationalization of venture capital firms through an examination of risk assessment and information usage by firms in india personal interviews were conducted with executives in 31 84 of the active venture capital firms the paper extends previous research by comparing perceptions of the behavior of domestic venture capital firms in india foreign primarily u s venture capital firms in india and u s venture capital firms in their domestic markets foreign firms in india place significantly greater emphasis on product market factors and accountants reports than domestic firms in india they place significantly less emphasis on financial contributions of management in assessing risk and own due diligence and information from entrepreneurs than do u s firms in their domestic market they make more use of information from trade publications and relating to production capacity and technology and information from accountants reports than do domestic venture capital firms in india the evidence is consistent with venture capital firms adapting to local market conditions rather than implementing recipes from their domestic markets

the economic significance of national border effects to address the economic significance of national border effects this paper provides evidence on two fundamental questions 1 do large border effects arise because of high perceived price wedges between foreign and domestic products or because imports and domestic goods are very close substitutes and 2 if price wedges are important do they reflect distortionary barriers to trade or do they arise from nondistortionary factors such as differences in transactions costs or product characteristics i conclude that while border effects may imply barriers welfare costs and a role for policy distortions are probably not as substantial as initial border results suggested jel f1

a bottom up approach to the risk adjusted performance of the buyout fund market we use the burgiss dataset to study private equity buyout fund performance our findings on performance before risk adjustments are consistent with those in the literature and indicate significant outperformance of buyout fund investments using a bottom up approach we identify the systematic risks of underlying companies in buyout funds to inform an appropriate risk adjusted benchmark which we determine to be a levered size and sector adjusted public index after making these risk adjustments we find no significant outperformance of buyout fund investments versus the public market equivalent on a dollar weighted basis we contend that even without significant risk adjusted outperformance buyout funds can play a valuable role in institutional investors portfolios

border effects and the availability of domestic products abroad trade between countries could fall short of trade within a country because 1 the volume of international trade is less than the volume of domestic trade for a given product the intensive margin or 2 some goods that are sold domestically are simply not exported the extensive margin my theoretical model illustrates that either of these two factors could explain a given aggregate border effect i examine the empirical relevance of this distinction by isolating the fraction of total domestic production attributable only to exporters finding that around one half of the border effect may be attributed to each explanation jel classification f1 les effets de frontieres et la disponibilite de produits domestiques a l etranger le commerce entre pays peut etre moindre que le commerce a l interieur d un pays parce que 1 le volume de commerce international est moindre que le volume du commerce interieur pour un produit donne la marge intensive ou 2 certains biens qui sont vendus a l interieur d un pays ne sont tout simplement pas exportes la marge extensive un modele theorique montre que l un et l autre de ces facteurs pourraient expliquer un certain effet de frontiere au niveau agrege on montre l importance empirique de cette distinction en isolant la fraction de la production interieure totale attribuable strictement aux exportateurs et il s avere qu a peu pres la moitie de l effet de frontiere est attribuable a chacune des deux explications

cross border venture capital investments the impact of foreignness on returns against the background of the growing internationalization of venture capital vc investing this is the first global comparison of the returns generated by individual domestic and cross border deals we examine investments worldwide during 1971 2009 and find that cross border investments significantly underperform compared with equivalent domestic investments returns are negatively affected by geographic distances cultural disparities and institutional differences between the home and host countries returns on cross border and domestic deals also decline after the late 1990s international portfolio diversification and the saturation of domestic markets may explain why vc investors make cross border investments despite poor expected returns

does it pay to pay performance fees empirical evidence from dutch pension funds abstract we analyze the relation between investment returns and performance fees for 218 dutch occupational pension funds with an average total of 1090 billion euro in assets under management from 2012 to 2017 our dataset is free from self reporting biases and includes total return excess return and performance fees for six major asset classes we find no statistical evidence that the returns of pension funds that pay performance fees to asset managers for active investing are significantly higher or lower than the returns of pension funds that do not pay performance fees this is true for most asset classes and robust if we correct for risk we also document that large and more specialized pension funds pay less performance fees for a given level of excess return in alternative asset classes such as hedge funds and private equity this is possibly the result of better negotiation power due to their larger scale or higher level of expertise

towards a new trade policy between the usa and middle east countries estimating trade resistance and export potential at the time of the conclusion of free trade areas ftas between the usa and middle east and north african mena countries there is a lack of literature concerning the measurement of the current us export position with regards to these countries and the us export potential in this area from recent developments of gravity models this paper derives an estimable equation which includes various trade resistance variables notably border effects multilateral resistance as well as specific bilateral effects the model is tested in order to scrutinise the impact of these variables on us exports to mena countries as well as the us export potential in this area to that end a selection of panel data specifications is proposed mainly hausman and taylor models as well as arellano and bond dynamic models results unambiguously indicate that as compared to the other oecd countries the usa suffers from a substantial trade integration deficit with mena countries this is reflected by the strongly negative values of the us mena bilateral fixed effects as well as the high bilateral border effects in addition the estimated actual potential us export ratio to these countries is only 0 76 therefore implementing an fta between the usa and mena countries may allow the former to progressively improve its export position in this area this would also help mena countries diversify their supplying sources

the effect of 12b 1 plans on mutual fund expense ratios a note in 1980 the securities and exchange commission approved rule 12b 1 which authorizes mutual funds to deduct a sum of money called a distribution fee from net assets with the money to be paid to selling agents proponents of the plan argue that it offers incentives for brokers to sell the funds the increase in the size of the fund then purportedly produces economies of scale opponents of the plan argue that it enables no load and low load funds to become de facto load funds while publicly proclaiming their no load or low load status 1 in addition some load funds use the plan and critics argue that their quoted sales charges understate the full impact of selling expenses the plans have stirred considerable controversy in the financial press 2 since 12b 1 plans are only sales incentives they would be expected to have no effect on the mangement of a fund thus gross returns and risk should be unaffected unless the plan produces an offsetting benefit through economies of scale the net effect on shareholders should be to lower net returns at the same level of risk this study examines the effect of 12b 1 plans on mutual fund expense ratios previous studies 1 2 3 4 5 6 7 have looked at risk adjusted mutual fund returns and have drawn some conclusions about the effect of expenses 3 but no study has attempted to explain how expense ratios differ in a cross sectional sample of funds by developing a model of factors influencing expense ratios the impact of the plan can be examined simultaneously with such other factors as economies of scale section i provides more detail about the issue of expense ratios identifies the model and describes the data section ii presents our results and section iii provides a summary and conclusions

costly search and mutual fund flows this paper studies the flows of funds into and out of equity mutual funds consumers base their fund purchase decisions on prior performance information but do so asymmetrically investing disproportionately more in funds that performed very well the prior period search costs seem to be an important determinant of fund flows high performance appears to be most salient for funds that exert higher marketing effort as measured by higher fees flows are directly related to the size of the fund s complex as well as the current media attention received by the fund which lower consumers search costs

disclosure venture capital and entrepreneurial spawning venture capital vc funds have been facing increasing regulatory scrutiny since the 2007 financial crisis particularly with respect to calls for increased disclosure requirements in this paper we examine the effect of more stringent securities regulation on the supply and performance of vc as well as on new business creation i e entrepreneurial spawning using country level and investment level data from 34 countries over the years 2000 2008 we find that more stringent securities regulation is positively associated with the supply and performance of vc around the world more stringent securities regulation is also positively associated with entrepreneurial spawning induced by vc among different forms of securities regulation disclosure stands out as having the most economically meaningful impact which casts doubt on the oft repeated objections to disclosure in vc that it would stifle the vc industry because secrets would have to be revealed to competitors and the public these findings are robust to numerous robustness checks for endogeneity the policy implications are clear however regardless of endogeneity concerns vc and entrepreneurship markets are enabled not curtailed in countries with better disclosure standards when one compares the existing differences in disclosure around the world and changes thereto over the 2000 2008 period

subnational home market bias in vietnam evidence from enterprise level data this paper contributes to the home market bias literature where administrative or political borders limit trade across borders home bias is well documented at the national and subnational level to sort out macro e g location characteristics and micro e g enterprise characteristics factors behind home bias we use small and medium sized enterprise sme data from vietnam using the fractional multinomial logit model we find that the proportion of sme sales outside of their home markets is positively associated with enterprise size age number of business association memberships and the distance of smes most important supplier in contrast the proportion of sme sales to neighbouring provinces is negatively associated with the share of sme production for final consumption besides enterprise level frictions market characteristics matter too the proportion of sme sales to customers in their home markets is negatively associated with home or neighbouring provinces governance quality while the proportion of sales to customers in neighbouring provinces is positively associated with these areas governance quality these suggest that good governance frees sme resources for use in selling to less familiar markets

an analysis of compensation in the u s venture capital partnership abstract venture capital limited partnerships are an attractive arena to study cross sectional and time series variations in compensation schemes we empirically examine 419 partnerships the compensation of new and smaller funds displays considerably less sensitivity to performance and less variation than that of other funds the fixed base component of compensation is higher for younger and smaller firms we observe no relation between incentive compensation and performance our evidence is consistent with a learning model in which the pay of new venture capitalists is less sensitive to performance because reputational concerns induce them to work hard

the law of one price intranational evidence for canada this study investigates the behaviour of intranational prices for 45 specific consumer goods across 25 canadian cities it finds positive roles for distance and provincial borders in intercity price disparities while sizable the provincial border effect is an order of magnitude smaller than the estimates for the canada u s border a majority of the intercity relative price series are stationary around small mean values indicating that long run price differences are close to zero the intercity prices converge at rates considerably faster than the consensus estimates for international prices in fact half lives for intercity price deviations average well under a year jel classification f15 f31 la loi d un seul prix resultats intra nationaux pour le canada ce memoire examine le comportement des prix intra nationaux de 45 biens de consommation specifiques dans 25 villes canadiennes il semble que la distance et les frontieres inter provinciales ont un impact sur les differentiels de prix entre villes meme si l impact des frontieres inter provinciales est important il est beaucoupplus petit que l impact de la frontiere canada u s une majorite des series de prix relatifs entre villes sont stationnaires autour de petites valeurs moyennes ce qui suggere que les differences de prix a long terme s approchent de zero il est clair que les prix entre villes convergent a des taux considerablement plus rapides que ce qu on observe au niveau international en fait les deviations de prix entre villes ont une esperance de vie qui en moyenne est de moins d un an

entrepreneurial finance and innovation an introduction and agenda for future research the increasingly large role played by financial intermediaries such as venture capitalists and angels in nurturing entrepreneurial firms and in promoting product market innovation has led to great research interest in the area of entrepreneurial finance and innovation this paper introduces the special issue of the review of financial studies dedicated to entrepreneurial finance and innovation and highlights some of the promising topics for future research in this area the special issue combines papers presented at the june 2010 entrepreneurial finance and innovation efic conference which was jointly sponsored by the kauffman foundation and the review of financial studies with other related papers

long run industry equilibrium with uncertainty abstract in this paper we consider the effects of uncertainty on industry equilibrium when firms must commit themselves to production before prices are revealed we show that a an increase in demand uncertainty will i not affect the equilibrium number and size of firms if they are risk neutral ii reduce the equilibrium number of firms if they are risk averse but will have an ambiguous effect on their size b in equilibrium firms operate at capacity if they are risk neutral but at excess capacity if they are risk averse

post listing performance and private sector regulation the experience of london s alternative investment market abstract we investigate the experience of companies listing and raising capital on the aim which is privately regulated and relies on nominated advisors who compete for listings and provide regulatory oversight aim firms underperform newly listed firms on traditionally regulated exchanges based on post listing returns and failure rates comparable to firms listing on the unregulated us pink sheets and exhibit abnormally high pre listing accruals and post listing reversals high quality auditors and nomads partially mitigate underperformance suggesting that aim firms have limited ability to bond through more stringent oversight underperformance is particularly pronounced for firms with higher proportions of retail investors

the role of corruption culture and law in investment fund manager fees this article considers an international sample of venture capital and private equity funds to assess the role of law corruption and culture in setting fund manager fees with better legal conditions fixed fees are lower carried interest fees are higher clawbacks are less likely and share distributions are more likely countries with lower levels of corruption have lower fixed fees and higher performance fees and are less likely to have clawbacks and cash only distributions hofstede s measure of power distance is negatively related to fixed fees and the use of cash only distributions but positively related to performance fees and clawbacks overall the data strongly indicate that corruption culture and legal settings are much more significant in determining fees than fund manager characteristics and or market conditions

industry equilibrium uncertainty and futures markets abstract this paper studies competitive long run industry equilibrium with uncertainty and futures trading we also provide a long run analysis of futures trading instead of the conventional short run analysis it is shown without using a general equilibrium model that given uncertain demand and risk aversion a bias backwardation or contango arises in long run industry equilibrium given risk neutrality such a bias however disappears we find that the occurrence of the bias depends not only on the existence of a risk premium but also on the length of the period considered each risk averse firm operates at a less efficient scale and moreover an expected spot price never accords with marginal cost when the expected spot price is less than marginal cost the risk averse firm can secure profit by selling futures contracts more than the amount of its output in the presence of production supply uncertainty a risk neutral firm operates with excess capacity under additive risk while the firm operates with proper capacity under multiplicative risk the key lies in whether its average cost curve is shifted by production risk

the border effect in spain this paper analyses the border effect in spain using a unique dataset on intranational trade flows over the period 1995 98 the results indicate that after controlling for market size and distance spanish regions trade around 22 times more with the rest of spain than they do with oecd countries moreover the size of the spanish bias is lower in the case of the spanish regions exports than in the case of imports although the difference is not statistically significant in most cases finally the border effect is not uniform across spanish regions

the online shadow of offline signals which sellers get contacted in online b2b marketplaces this article extends the understanding of what impels buyers to contact particular sellers in online business to business b2b marketplaces which are typically characterized by sparse social structures and concomitant limitations in observing social cues integrating an institutional perspective with signaling theory our core argument is that offline seller characteristics that are visible online in particular geographic location and legal status convey credible signals of seller behavior because they provide buyers with information on sellers local institutional quality and the institutionally induced obligations and controls acting on sellers using unique data from a large italian online b2b marketplace between the fourth quarter of 1999 and july 2001 we find that both sellers local institutional quality and their legal statuses affect a buyer s likelihood of contacting a seller moreover consistent with the idea that a buyer s own local institutional quality generates a relevant reference point against which sellers are evaluated we find that a buyer is progressively more likely to contact sellers the higher their local institutional quality relative to the buyer jointly our findings imply that in online b2b marketplaces signals conveyed by sellers geographic locations and legal statuses may constitute substantive sources of competitive heterogeneity and market segmentation

north south and distance in the gravity model abstract it is generally assumed that distance in the gravity model strictly reflects frictions impeding bilateral trade however distances north south could also reflect differences in factor endowment that provide opportunities for profitable trade this paper investigates the hypothesis that if we control for distance in the ordinary sense differences north south promote international trade the hypothesis receives ample support moreover the significance of differences north south survives a battery of robustness tests concerning period distinctions between differences in latitude north north north south and south south and controls for other measures of differences in factor endowment such as differences in per capita output and differences in average temperature rainfall and seasonal range in temperature the impact of differences north south on bilateral trade has also been falling this decline in turn might be partly responsible for the weakening of the influence of distance that has been occurring since world war ii this last hypothesis receives confirmation as well finally the paper examines the impact of internal distance and remoteness on trade since both variables are country specific this is done by studying their impact on the country fixed effects themselves in the earlier estimates internal distance turns out to have a far greater impact than remoteness by an order of 10

dynamic resource allocation with hidden volatility abstract we study a firm s internal resource allocation using a dynamic principal agent model with endogenous cash flow volatility the principal supplies the agent with resources for productive use but the agent has private control over both project volatility and resource intensity and may misallocate resources to obtain private benefits the optimal contract can yield either overly risky or overly prudent project selection it can be implemented with a constant pricing schedule i e a static decentralized linear mechanism giving the agent control over the resource quantities project risk and agent s equity share the implementation rationalizes the use of hurdle rates above a firm s cost of capital and transfer prices above marginal cost while showing that hurdle rates or transfer prices may not vary with the agent s risk choice

the reverse lbo decision and firm performance theory and evidence we investigate the transition from private to public ownership of companies that had previously been subject to leveraged buyouts lbos we show that the information asymmetry problem firms face when they go to public markets for equity as well as behavioral and debt overhang effects will produce a pattern in which superior performance before an offering should be expected with disappointing performance subsequently we find empirical evidence of this phenomenon by studying 62 reverse lbos that went public between 1983 and 1987 the market appears to anticipate this pattern in 1991 56 leveraged buyouts lbos returned to the public equity markets part of a broader phenomenon in which a large fraction of lbos go public again hence becoming reverse lbos kaplan 1991 reports that 45 percent of a sample of large lbos completed between 1979 and 1986 later returned to public ownership moreover reverse lbos tend to be larger than the average initial public offering ipo 1 in sum transitions from the lbo form to public ownership have become a widespread and economically significant phenomenon we find strong evidence that the return to public ownership of reverse lbos coincides with a peak in their operating performance their operating income as a percentage of total assets grew by about seven percentage points in the preoffering year comparison firms in the same industries show a slight decline in the same performance measure moreover in the preoffering year reverse lbos outperform continuing lbos in the year after the

robust financial contracting and the role of venture capitalists we derive a role for inside investors such as venture capitalists in resolving various agency problems that arise in a multistage financial contracting problem absent an inside investor the choice of securities is unlikely to reveal all private information and overinvestment may occur an inside investor however always makes optimal investment decisions if and only if he holds a fixed fraction contract where he always receives a fixed fraction of the project s payoff and finances that same fraction of future investments this contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds in this article we develop a model of financial contracting with multiple investment decisions and show how conflicts of interest and informational asymmetries can be effectively resolved by an inside investor i e an investor who not only provides capital but also works closely with the firm monitors it frequently and is generally very well informed about the firm s prospects and investment opportunities venture capitalists are obvious examples of inside investors and their function has been an important motivation for this article banks especially in japan and germany are also involved in monitoring and can be viewed as playing the role of inside investors in this article we examine the potential benefits of inside investors in a context where there are no restrictions beyond limited liability on the type of financial contracts that can be written we address a basic financial contracting problem involving an entrepreneur who has an idea for a project but does not have sufficient capital to fund it an important assumption is that there are several stages in the project s development and that a decision must be made at each stage whether the project should be continued or abandoned if the project is continued the amount of additional capital to be invested must also be determined we assume that the entrepreneur as an insider observes private information about the project s profitability at each stage this information is not

private equity performance what do we know we study the performance of nearly 1400 u s buyout and venture capital funds using a new dataset from burgiss we find better buyout fund performance than has previously been documented performance consistently has exceeded that of public markets outperformance versus the s p 500 averages 20 to 27 over a fund s life and more than 3 annually venture capital funds outperformed public equities in the 1990s but underperformed in the 2000s our conclusions are robust to various indices and risk controls performance in cambridge associates and preqin is qualitatively similar to that in burgiss but is lower in thomson venture economics

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

financial innovation in microcap public offerings abstract this paper examines external financing of small and growth firms using a regulatory experiment in the us microcap market the paper focuses on a new financing method for entrepreneurial firms small public offerings under regulation a which was significantly expanded by 2015 amendments regulation a offerings serve as a financing alternative for issuers that seek public capital but are unable to conduct a traditional registered public offering compared to small registered public offerings regulation a involves fewer requirements and draws smaller younger companies often raising capital without intermediaries or on a best efforts basis regulation a companies raise less capital on average after accounting for their historical financials the use of regulation a increased significantly following the 2015 shock particularly in market segments that had more private placements and traditional public offerings different types of issuers are pursuing regulation a and registered offerings and regulation a does not appear to draw issuers away from traditional public offerings

do expert informational intermediaries add value evidence from auditors in microcap initial public offerings do expert informational intermediaries add value we address this question by examining the informativeness of the audit report contained in the prospectus associated with a firm s initial public offering ipo at the time of the ipo there is a relative lack of information to facilitate the establishment of equity values suggesting that the information provided by outside experts e g auditors underwriters is particularly important in this article we study small non venture backed ipos a segment of the market with the poorest long run performance and where the prestigious audit firm is often the sole if any expert present we find that the pre ipo opinions of larger auditors are more predictive of post ipo negative stock delistings of particular note the opinions of the national tiered firms are comparably predictive to those of the big 6 though this finding emerges only after we consider the selectivity based differences in the clients that hire these national firms our findings also indicate that for larger auditors the presence of a pre ipo going concern opinion is more strongly associated with first year stock returns and that larger auditors are more likely to give such opinions to their distressed clients overall we address a deficiency in the literature relating to the paucity of evidence on the value of auditor opinions to investors healy and palepu 2001 p 415

the trade creating effects of business and social networks evidence from france using theory grounded estimations of trade flow equations this paper investigates the role that business and social networks play in shaping trade between french regions the bilateral intensity of networks is quantified using the financial structure and location of french firms and bilateral stocks of migrants compared to a situation without networks migrants are shown to double bilateral trade flows while networks of firms multiply trade flows by as much as four in some specifications finally taking network effects into account divides the estimation of the impact of transport costs and of the effect of administrative borders by around three

do private equity returns result from wealth transfers and short termism evidence from a comprehensive sample of large buyouts we test whether the well documented high returns of private equity sponsors result from wealth transfers from other financial claimants and counterparties and from a focus on short term profits at the expense of long term value debt investors who finance buyouts as well as buyers of private equity portfolio companies represent the two potential sources of wealth transfers however we find that on average public companies benefit when they buy financial sponsors portfolio companies experiencing positive abnormal returns upon the announcement of the acquisition and long run posttransaction abnormal returns indistinguishable from zero we further find that large portfolio company payouts to private equity on average have no relation to future portfolio company distress suggesting that debt investors are not suffering systematic wealth losses either however we find some evidence of wealth transfers from both strategic buyers and debt investors in some special situations finally we find that portf

the effect of the 1933 securities act on investor information and the performance of new issues this paper examines the effects of changes in financial disclosure attributed to the securities act of 1933 on the distribution of returns earned by investors the regulation s effects should be most pronounced where private information costs were the greatest empirical tests control for prior stock market issues experience and the existence of third party appraisal findings suggest that prior to regulation investors held rational price expectations in markets characterized by low information costs the dispersion of abnormal returns investors forecast errors is significantly lower following the securities act copyright 1989 by american economic association

trade in the triad how easy is the access to large markets in this paper we measure market access between the united states the eu and japan the triad using the effect of national borders on trade patterns we investigate overall and industry level trends of bilateral trade openness and provide explanations for those using proxies for bilateral observed protection tariffs and ntbs home bias of consumers product differentiation and levels of fdi the explanations related to actual protection home bias and substitutability of goods put together explain a large part of the border effect between blocs of the triad although they do not explain the whole of the border effect puzzle jel classification f12 f15 commerce dans la triade jusqu a quel point l acces aux grands marches est il facile cet article mesure le niveau d integration commerciale entre les pays de l ue le japon et les etats unis la triade en utilisant l effet des frontieres nationales sur le commerce international nous etudions le niveau et l evolution du degre d ouverture bilateral ainsi que les differentes explications possibles des effets frontiere estimes qui sont testees a l aide de variables capturant la protection tarifs et bnts le biais domestique des consommateurs le degre de differenciation des produits et les niveaux d ide bilateraux les explications liees a la protection au biais domestique et a la substituabilite entre produits considerees ensemble expliquent une bonne partie de l effet frontiere entre pays de la triade meme si elles n expliquent pas la totalite de l enigme

the stampede toward hofstede s framework avoiding the sample design pit in cross cultural research we propose a method to design better multi country samples for international business studies using hofstede s framework and aimed at determining the effects of national culture on various business phenomena we describe typical research scenarios then develop sets of algorithms that calculate indexes reflecting the power of different samples for hypotheses testing the indexes were computed from hofstede s data then rank ordered the top multi country samples are presented in tables for selection when designing studies

measuring internal trade distances a new method applied to estimate provincial border effects in canada in this paper we suggest an improved methodology for comparing the intensity of trade across and within national and provincial boundaries earlier efforts to assess border effects for provinces or for countries without internal trade statistics made fairly arbitrary assumptions about average distances for internal trade flows we improve on earlier efforts by taking more complete account of the distribution of population within each province or country internal distance is estimated as a population weighted average of intra city and intercity distances as well as distances to and within rural areas we find higher estimates of internal distances and hence border effects than found in previous studies

the economics of private equity funds this article analyzes the economics of the private equity industry using a novel model and dataset we obtain data from a large investor in private equity funds with detailed records on 238 funds raised between 1993 and 2006 we build a model to estimate the expected revenue to managers as a function of their investor contracts and we test how this estimated revenue varies across the characteristics of our sample funds among our sample funds about two thirds of expected revenue comes from fixed revenue components that are not sensitive to performance we find sharp differences between venture capital vc and buyout bo funds bo managers build on their prior experience by increasing the size of their funds faster than vc managers do this leads to significantly higher revenue per partner and per professional in later bo funds the results suggest that the bo business is more scalable than the vc business and that past success has a differential impact on the terms of their future funds jel g10 g20 g24

what lures cross border venture capital inflows the change in the business model of venture capitalists from investing locally towards investing across borders started to intensify in the late 1990s according to a dataset of european and north american countries we find that countries with higher expected growth and higher lagged stock market returns receive larger net cross border venture capital inflows thus portfolio companies located in high growth and high return countries receive more venture capital from foreign venture capitalists than these countries venture capitalists invest in foreign portfolio companies also countries with lower stock market capitalizations as well as those with poor tax and legal environments for venture capital intermediation exhibit larger net cross border inflows these findings offer important insights for policy makers since cross border venture capital inflows partly compensate for potential limits in the domestic venture capital supply

demand curves and the pricing of money management one reason why funds charge different prices to their investors is that they face different demand curves one source of differentiation is asset retention performance sensitive investors migrate from worse to better prospects taking their performance sensitivity with them in the cross section we show that past attrition significantly influences the current pricing of retail but not institutional funds in time series we show that the repricing of retail funds after merging in new shareholders is predicted by the estimated effect on its demand curve this result is robust to other influences on repricing including asset and account size changes copyright 2002 oxford university press

industry equilibrium with uncertainty and labor managed firms abstract this paper characterizes long run industry equilibrium composed of labor managed firms under demand uncertainty moreover it is demonstrated how the number and size of firms in the industry respond to a change in uncertainty

equilibrium prices in the presence of delegated portfolio management abstract this paper analyzes the asset pricing implications of commonly used portfolio management contracts linking the compensation of fund managers to the excess return of the managed portfolio over a benchmark portfolio the contract parameters the extent of delegation and equilibrium prices are all determined endogenously within the model we consider symmetric fulcrum performance fees distort the allocation of managed portfolios in a way that induces a significant and unambiguous positive effect on the prices of the assets included in the benchmark and a negative effect on the sharpe ratios asymmetric performance fees have more complex effects on equilibrium prices and sharpe ratios with the signs of these effects fluctuating stochastically over time in response to variations in the funds excess performance

the bright and dark side of staging investment performance and the varying motivations of private equity firms previous papers that examined investment decisions by private equity funds are divided on whether staging has a positive or negative effect on returns we believe these opposing views can be reconciled by studying when staging is used during the life of the investment relationship we find that staging has a positive effect on investment returns in the beginning of the investment relationship consistent with the notion that staging helps mitigate information asymmetry however staging appears to be negatively associated with returns when used prior to the exit decision our unique dataset allows us to measure these intertemporal effects precisely

has new york become less competitive than london in global markets evaluating foreign listing choices over time abstract we study the determinants and consequences of cross listings on the new york and london stock exchanges from 1990 to 2005 this investigation enables us to evaluate the relative benefits of new york and london exchange listings and to assess whether these relative benefits have changed over time perhaps as a result of the passage of the sarbanes oxley act in 2002 we find that cross listings have been falling on us exchanges as well as on the main market in london this decline in cross listings is explained by changes in firm characteristics instead of by changes in the benefits of cross listing we show that after controlling for firm characteristics there is no deficit in cross listing counts on us exchanges related to sox investigating the valuation differential between listed and non listed firms the cross listing premium from 1990 to 2005 we find that there is a significant premium for us exchange listings every year that the premium has not fallen significantly in recent years and that it persists when allowing for time invariant unobservable firm characteristics in contrast no premium exists for listings on london s main market in any year firms increase their capital raising activities at home and abroad following a cross listing on a major us exchange but not following a cross listing in london our evidence is consistent with the theory that an exchange listing in new york has unique governance benefits for foreign firms

assessing the impact of management buyouts on economic efficiency plant level evidence from the united kingdom we assess the total factor productivity of 35 752 manufacturing establishments before and after management buyouts mbos mbo plants are less productive than comparable plants before the transfer of ownership they experience a substantial increase in productivity after a buyout which appears to be due to measures undertaken by new owners to reduce the labor intensity of production via outsourcing of intermediate goods and materials these findings which are pervasive across industries imply that mbos reduce agency costs and enhance economic efficiency our evidence is consistent with jovanovic and rousseau 2002 who suggest that ownership changes shift resources to more efficient uses and to better managers

venture capital exits in domestic and cross border investments abstract we compare and contrast the performance of cross border and domestic venture capital vc investments in terms of the time it takes vc backers to exit portfolio companies through initial public offering ipo trade sale m a or other routes initial analysis suggests that cross border investments are exited more quickly than domestic investments and this difference is driven by the cross border investments in north america we explore whether the difference between domestic and cross border exits can be explained by regional variations in economic market activity and legal systems we find it is important to allow for the impact of these macro variables on the time to vc exit to vary across regions this is crucial not just to capture the full impact of the macro factors but also to explain the differences in time to exit between domestic and cross border investments

cross border private equity syndication institutional context and learning abstract private equity pe has become an increasingly international phenomenon but there is a lack of research that looks at the process by which pe firms invest across borders we aim to fill this gap in the literature by examining the role of institutional context and organizational learning as determinants of cross border pe syndication we examine these issues by studying the international expansion by later stage uk pe investors into continental europe over the period 1990 to 2006 our results indicate that institutional context in terms of the number of pe firms in the local environment and the presence of investment bankers in the local market and organizational learning in terms of the pe firm s experience in the host country the pe firm s multinational experience and the number of investment managers per portfolio company but not the presence of local offices are significantly related to the use of cross border syndicates implications for theory and practice are suggested

venture capital funds flow performance relationship and performance persistence this paper finds that venture capital funds that are expected to be backed by more skilled investors show no performance persistence but a significant flow performance relationship in contrast funds that are expected to be backed by less skilled investors show performance predictability and have a non significant flow performance relationship these results suggest that only skilled investors use all available information to adjust their capital allocation and as a result eliminate performance predictability as argued theoretically by berk and green 2004 results also show that kaplan and schoar 2005 overstate the persistence in fund performance by not using an ex ante measure of the performance of earlier funds whether or not an ex ante measure is used however the persistence is largely due to unsophisticated investors when investors are sophisticated the performance of earlier funds sequence and fund size do not help predict the performance of the focal fund

the public market equivalent and private equity performance the authors show that the public market equivalent approach is equivalent to assessing the performance of private equity pe investments using rubinstein s dynamic version of the capm they developed two insights 1 one need not compute betas of pe investments and any changes in pe cash flow betas due to changes in financial leverage operating leverage or the nature of the business are automatically taken into account 2 the public market index used in evaluations should be the one that best approximates the wealth portfolio of the investor considering the pe investment opportunity

portfolio choice with illiquid assets we present a model of optimal allocation to liquid and illiquid assets where illiquidity risk results from the restriction that an asset cannot be traded for intervals of uncertain duration illiquidity risk leads to increased and state dependent risk aversion and reduces the allocation to both liquid and illiquid risky assets uncertainty about the length of the illiquidity interval as opposed to a deterministic nontrading interval is a primary determinant of the cost of illiquidity we allow market liquidity to vary from normal periods when all assets are fully liquid to illiquidity crises when some assets can only be traded infrequently the possibility of a liquidity crisis leads to limited arbitrage in normal times investors are willing to forgo 2 of their wealth to hedge against illiquidity crises occurring once every 10 years this paper was accepted by itay goldstein finance

domestic market integration and regional economic growth china s recent experience from 1995 2011 summary this paper constructs an enhanced indicator for trade barrier and examines the endogenous relationship between market integration and regional economies across china from 1995 to 2011 beyond the current literature this study shows the endogenous relationship is significant reflecting a virtuous cycle domestic openness contributes to the economies in the central region more than in the other regions the feedback effect is stronger in the eastern and central regions than in the western and northeastern domestic openness and regional economies are adversely affected by state owned enterprises and government non productive expenditure several policy implications relevant to chinese economy are drawn from the findings

market in financial instruments directive mifid stock price informativeness and liquidity abstract the paper examines the impact of mifid on stock price informativeness and liquidity in 28 eu countries we find that post mifid the stock prices reflect greater firm specific information and the market becomes more liquid consistent with the catch up hypothesis our evidence shows that the impact of mifid in terms of price informativeness is greater for countries that have weaker quality of regulation we find that regulation with enforcement improves market efficiency our results are robust with respect to the choice of price informativeness and liquidity proxies as well as the control sample

national borders and international trade evidence from the european union in this paper the impact of national borders on international trade within the european union is considered using a gravity model i find that averaged over all eu countries intranational trade is about ten times as high as international trade with an eu partner country of similar size and distance this relatively strong home bias suggests that even within the european union national borders still have a decisive impact on trade patterns jel classification f02 f14 f15 o52 ce memoire examine l impact des frontieres nationales sur le commerce international a l interieur de l union europeenne on montre que en moyenne pour tous les pays de l union europeenne le commerce intranational est a peu pres dix fois plus important que le commerce international avec un pays partenaire de l union europeenne de meme taille et a meme distance ce degre relativement important de preference nationale suggere que meme dans le cadre de l union europeenne les frontieres nationales ont encore un impact determinant sur les patterns de commerce

legal framework quality and success of different types of venture capital investments abstract drawing on an analysis of 8 270 companies from 41 countries i explore the relationship between success of venture capital investments and legal frameworks in the investment countries legal framework quality is related to success but the effect varies with the deal type first the significant and positive relationship between legal framework quality and success is more pronounced for domestic deals than for international deals further investigations suggest that international venture capitalists often exit their portfolio companies abroad particularly when these companies are located in countries with inefficient legal frameworks in addition the results lend support to the view that international venture capitalists have a greater experience and reputation second legal framework quality seems to be more important for success in syndicated than in standalone deals this finding supports the view that a sound legal framework may improve the benefit cost balance of syndication while an inefficient legal framework may tend to increase costs in syndicated deals

skill and luck in private equity performance we evaluate the performance of private equity pe funds using a variance decomposition model to separate skill from luck we find a large amount of long term persistence and skilled pe firms outperform by 7 to 8 annually but this performance is noisy with a large amount of luck so top quartile performance does not necessarily imply top quartile skills making it difficult for investors lps to identify skilled pe firms buyout bo firms show the largest skill differences implying the greatest long term persistence venture capital vc performance is the most noisy making good vc firms hardest to identify and implying the smallest amount of investable persistence

compensation incentives and the duality of risk aversion and riskiness the common folklore that giving options to agents will make them more willing to take risks is false in fact no incentive schedule will make all expected utility maximizers more or less risk averse this paper finds simple intuitive necessary and sufficient conditions under which incentive schedules make agents more or less risk averse the paper uses these to examine the incentive effects of some common structures such as puts and calls and it briefly explores the duality between a fee schedule that makes an agent more or less risk averse and gambles that increase or decrease risk with the growing interest in executive compensation and agency problems

some hypotheses about risk in venture capital investing abstract venture capital investing differs in important respects from investment decisions involving the securities of fortune 500 companies or decisions to purchase established companies which are generally made in accord with widely recognized financial models investing in new ventures involves a high level of uncertainty as well as a high risk of failure venture capital investing is characterized by high variability in the outcomes of new ventures and in the performance of venture capital portfolios venture capital investing decisions are complicated by a general lack of quantifiable financial and market data for early stage ventures and investment decisions remain hostage to unanticipated competitors market shifts and financial cycles some observers have suggested that venture capital investment decisions are primarily subjective assessments while the question of risk in venture capital investing has been addressed on an ad hoc basis in several empirical studies there has been little effort to develop a theoretical framework of risk perceptions and risk reduction strategies despite differences in investor experience investment preferences and tolerance for risk venture capital managers share many common perceptions of the risks involved in investing in new ventures and the distribution of those risks over the venture capital funded phase of development venture capital managers also utilize many common behaviors and strategies in adapting to these risks these perceptions and reactions to risk in investing and strategies for controlling risk can in theory be used to construct a behavioral framework that can predict how venture capital managers will behave in choosing between various investment opportunities in order to minimize risk and to maximize potential returns in an attempt to begin to identify various elements of such a behavioral framework of venture capital reactions to risk the authors have drawn upon psychological risk theory of decision making under uncertainty including classic expected utility theory later modifications to that theory by kahneman and tversky 1979 and coombs and huang s 1970 portfolio approach to risk that are applicable to venture capital investing these expected behaviors to risk have been used in conjunction with empirical studies of venture capital investment and portfolio outcomes distributions of investments within portfolios and venture capitalist perceptions of risk to propose nine hypotheses about how venture capital managers behave in making investment decisions these hypotheses include differences in variation and magnitude of returns for early stage versus later stage ventures explanations of how risk distributions change over the stagewise development of new ventures differences in the behavior of aggressive versus conservative investors in screening investment prospects and strategies utilizing a lower ideal level of risk to reduce the chances of achieving negative or sub normal final portfolio returns

intra national home bias some explanations wolf demonstrates that trade within the united states appears substantially impeded by state borders we revisit this finding with improved data we show that much intranational home bias can be explained by wholesaling activity shipments by wholesalers are much more localized within states than shipments from manufacturing establishments controlling for relative prices and the use of actual rather than imputed shipment distances also reduces home bias estimates

trade in polarized america the border effect between red states and blue states political and cultural polarization in the united states is widely discussed but does it relate to any economic disconnection among states we estimate the border effect between red and blue states using the gravity equation with a nonlinear generalized method of moments estimator to simultaneously overcome the problems associated with endogeneity cross state price differences and zero trade flow the border effect is robustly confirmed for the 2000s while not so robustly detected for the 1990s notably in 2007 the border reduces trade between red and blue states to approximately 75 of the trade within each set of states this estimated border effect is much smaller than the united states canada national border effect estimated by anderson and van wincoop 2003 and by feenstra 2002 yet is comparable to the border effect that nitsch and wolf 2009 find for the former west and east germanies approximately loyears after reunification while the border effect in germany after reunification is decreasing the border effect between the red and blue states is emerging we also find the border effect is more significant for consumption rather than intermediate goods the border effect is an important indicator for a potential dismantling of the economic connectivity in the united states jel d72 f10 fi5 r1 i introduction recent u s presidential elections have raised concern about polarization in u s politics and culture namely the united states is divided into two nations the red states we call it the red nation preserving the term state for an individual state and the blue states the blue nation in the red nation culturally and religiously conservative republicans are dominant while in the blue nation liberal democrats are the majority so far the focus of the discussion is the extent of the polarization abramowitz and saunders 2008 fiorina et al 2008 its determinants gelman et al 2010 and its implications on federal policy making glaeser et al 2005 mellow and trubowitz 2005 economic implications have not been largely discussed however the polarization may suggest economic divisions because it is a sign of geographic sorting of people and their preferences this article provides evidence that economic disconnectivity between the red and blue nations emerged in the 2000s we explore 1 whether there is a border effect on interstate trade 2 if the effect exists how large it is and 3 what types of goods are most affected in the context of existing literature and recent u s political and cultural events we then provide possible explanations for our findings this study uses a gravity equation of international trade to examine the effect of the fictional national border between the red and blue nations the methodology was originally applied by mccallum 1995 to estimate the degree of impact of the national border on trade between the united states and canada he finds that intercountry trade is less than 5 of the intracountry trade of canada controlling for other factors following mccallum s 1995 work several studies have proposed methodological improvements we apply an updated estimation method nonlinear generalized method of moments gmm estimator of a gravity equation to examine the border effect between the red and blue nations our analysis finds a statistically and economically significant border effect between the red and blue nations especially in years 2002 and 2007 we examine the border effect in 1993 1997 2002 and 2007 the years in which trade flow data are available from the federal commodity flow survey cfs the border effect is not robustly found in 1993 and 1997 however it is robustly detected in 2002 and 2007 even with additional controls or alternative specifications at the industry level analysis we find that the border effect is significant for consumption goods such as food tobacco and printed products but not for intermediate products i

investment risk allocation and the venture capital exit market evidence from early stage investing abstract this study provides evidence on how venture capitalists vcs allocations of capital to riskier investments as measured by the proportion of early versus late stage investment in an industry are linked to exit market conditions prior research has primarily focused on how vcs adjust aggregate investment to public equity market conditions we develop a more inclusive measure of exit market conditions that accounts for recent secular changes that have affected the industry return structure specifically the sharp rise in the number of failures and m a relative to ipo exits we show that the dollars gained relative to dollars lost in recent exits and failures are significantly positively related to vcs allocations to early stage companies over the period 1990 2008 the changes in allocations are large enough to have an effect on the availability of funding for early stage companies in sum our evidence shows that exit market conditions have a significant and economically meaningful influence on vcs allocations to riskier investments

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

it s the market the broad based rise in the return to top talent abstract one explanation that has been proposed for rising inequality is that technical change allows highly talented individuals or superstars to manage or perform on a larger scale applying their talent to greater pools of resources and reaching larger numbers of people thus becoming more productive and higher paid others argue that managerial power has increased in a way that allows those at the top to receive higher pay that social norms against higher pay levels have broken down or that tax policy affects the distribution of surpluses between employers and employees we offer evidence bearing on the different theories explaining the rise in inequality in the united states over recent decades first we look the increase in pay at the highest income levels across occupations we consider the income share of the top 1 percent over time and we turn to evidence on inequality of wealth at the top in looking at the wealthiest americans we find that those in the forbes 400 are less likely to have

the disappearance of the border barrier in some european union countries bilateral trade this paper estimates the tariff equivalent of the border barrier in each bilateral trade among european union countries the results show that there are large differences in the border barrier across european union countries bilateral trade in some bilateral trade flows the border barrier has almost disappeared whereas in other cases it is still equivalent to a 75 per cent tariff the results also show that some countries have low border barriers in most of their bilateral trade flows with other eu members whereas other countries persistently present large border barriers