labor protection laws and bank loan contracting abstractthis paper examines the impact of labor regulations that restrict firms flexibility to adjust labor resources on the cost of corporate bank loans using within country variation in employment protection legislation across 25 countries i find that increases in employment protection lead to higher loan spreads tighter nonprice loan contract terms and more diffuse loan ownership structure the effects of labor regulations are greater in industries with a higher rate of labor turnover and among borrowers with a higher probability of default these results suggest that rigidities imposed by labor regulations have a significant impact on firms cost of capital

taxes on tax exempt bonds implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates with implicit tax rates close to 100 using retail trades and above 70 for interdealer trades these implied tax rates can be identified because a portion of secondary market municipal bond trades involves income taxes after valuing the tax payments market discount bonds which carry income tax liabilities trade at yields around 25 basis points higher than com parable municipal bonds not subject to any taxes the high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions the issue of how taxes affect asset prices is an important issue in finance accounting and economics in theoretical models examining the effect of taxes

political uncertainty and public financing costs evidence from u s gubernatorial elections and municipal bond markets this research investigates how political uncertainty around u s gubernatorial elections in uences the borrowing costs of public debt measured by yields of municipal bonds our evidence from both the new issuance market and the secondary market shows that yields of municipal bonds increase sharply by 6 to 8 basis points before elections and then reverse afterward elections have more pronounced impact during economic downturns when outcomes are less predictable and when states have more outstanding debt several state institutions such as gaap budgeting spending limits and tax increase limits help to mitigate the adverse impact of political uncertainty

collateral loan quality and bank risk abstract most commercial loans are made on a secured basis yet little is known about the relationship between collateral and credit risk several theoretical studies find that when borrowers have private information about risk the lowest risk borrowers tend to pledge collateral in contrast conventional wisdom holds that when risk is observable the highest risk borrowers tend to pledge collateral an additional issue is whether secured loans as opposed to secured borrowers tend to be safer or riskier than unsecured loans empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers riskier loans and riskier banks

determinants of patent rights a cross national study abstract this paper presents an index of patent rights for 110 countries for the period 1960 1990 the index is used to examine what factors or characteristics of economies determine how strongly patent rights will be protected the evidence does indicate that more developed economies tend to provide stronger protection but the underlying factors which influence patent protection levels are the country s level of research and development r d activity market environment and international integration which are correlated with its level of development the results qualify however that r d activity influences patent protection levels after a nation s research sector reaches a critical size an implication of this is that to raise patent protection levels in weakly protecting countries it is important to foster a significant research base in those countries and thereby create incentives for protecting patent rights

taxes default risk and yield spreads this paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities the tax loss consequences of default are recognized traditionally tax free municipal bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk while our model supports the linearity assumption it implies that the slope and intercept are both functions of both the break even tax rate and the default probability ies clientele effects among both municipal and taxable bonds are demonstrated finally the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds students of financial markets cannot help but be impressed by the number of new financial instruments that have been introduced successfully in recent years the fixed income market has been particularly innovative as bonds carrying a whole host of specific features have been successfully marketed bonds with small or zero coupons variable coupon rates or detachable warrants are three examples from among an expanding list of such features not surprisingly there has developed a large and expanding literature attempting to explain the rate spreads between different fixed income securities this literature has evolved much as one would expect early empirical work was in general not well founded in theory and was not based on an underlying expected return price model later empirical research has tended to be more careful in its specification of factors affecting yield spreads and as a consequence better founded in valuation

information or regulation what drives the international activities of commercial banks information costs and regulatory barriers distinguish international financial markets from national ones using panel data on bilateral assets and liabilities of commercial banks i empirically determine the impact of information costs and regulations and i isolate intra eu financial linkages i confirm that information costs and regulations are important factors influencing international asset choices of banks but their relative importance differs among countries

the pricing of corporate debt a note to develop a theory of the risk structure of interest rates r c merton 2 defines the risk as the possible gains or losses to bond holders as a result of unanticipated changes in the probability of default p 449 he derives the pricing theory of a pure discount bond corporation debt along the line of blackscholes 1 comparative statics are used to develop graphs of the risk structure although his algebraic derivation is correct his graphical presentation is inadvertently wrong

do national patent laws stimulate domestic innovation in a global patenting environment a cross country analysis of pharmaceutical patent protection 1978 2002 this paper evaluates the effects of patent protection on phar maceutical innovations for 26 countries that established pharmaceutical patent laws during 1978 2002 controlling for country characteristics through matched sampling techniques to establish two proper comparison sets among 92 sampled countries and through country pair fixed effects regressions this study yields robust results national patent protection alone does not stimulate domestic innovation as estimated by changes in citation weighted u s patent awards domestic r d and pharmaceutical industry exports however domestic innovation accelerates in countries with higher levels of economic development educational attainment and economic freedom additionally there appears to be an optimal level of intellectual property rights regulation above which further enhancement reduces innovative activities

was the tax exempt bond market inefficient or were future expected tax rates negative this paper shows that the sharp narrowing with maturity of the spread between taxable and tax exempt yields leaves room for tax arbitrage at times tax exempt forward rates have exceeded taxable forward rates at such times only expectations of higher taxes on treasury than on municipal bonds would eliminate profit opportunities the authors develop the idea of forward tax rates and compute forward tax rates for 1955 through 1984 they also outline tax arbitrage mechanisms involving private forward sale of long municipal bonds or the use of the municipal bond futures contract and show the potential profits the municipal yield curve has been upward sloping for the entire postwar period even at times when taxable yield curves were humped or downward sloping thus the spread in yields between taxable and tax free bonds narrows dramatically with increasing maturity this paper focuses on the term structure of the spread in yields between taxable and tax exempt bonds we show that the sharp narrowing of the spread with maturity leaves room for some apparently unexploited tax arbitrage at times the narrowing has been so dramatic that taxexempt forward rates have exceeded taxable forward rates in other words only expectations of negative future tax rates on treasury interest or the expectations of a reversal in the relative taxability of treasury and municipal bonds would eliminate profit opportunities this situation makes little sense if the markets are well arbitraged three theories of the relationship between the yields on taxable and taxexempt bonds have attracted attention 2 miller 8 asserts that the corporate tax rate determines the yield spread between taxable and tax exempt debt in the

patents and cumulative innovation causal evidence from the courts cumulative innovation is central to economic growth do patent rights facilitate or impede such follow on innovation this paper studies the effect of removing patent protection through court invalidation on the subsequent research related to the focal patent as measured by later citations we exploit random allocation of judges at the u s court of appeal for the federal circuit to control for the endogeneity of patent invalidation we find that patent invalidation leads to a 50 percent increase in subsequent citations to the focal patent on average but the impact is highly heterogeneous patent rights appear to block follow on innovation only in the technology fields of computers electronics and medical instruments moreover the effect is entirely driven by invalidation of patents owned by large patentees that triggers entry of small innovators suggesting that patents may impede the democratization of innovation

international patent protection 1960 2005 abstract this note provides an update to the index of patent protection published in this journal in 1997 the original paper presented the index for 1960 1990 for 110 countries the index has now been updated to 2005 and extended to 122 countries the adoption of stronger patent laws and the composition of patent rights vary across countries by level of economic development

auction failures and the market for auction rate securities abstract the market for auction rate securities ars made headlines during the second week of february 2008 when auctions at which the bonds interest rates reset experienced a wave of failures contrary to headlines that attribute the failures to a frozen market or investors irrationality we find that 1 even at their height less than 50 of ars experienced auction failures 2 the likelihood of auction failure was directly related to the level of the bonds maximum auction rates 3 the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates and 4 ars yields were generally higher than yields of various cash equivalent investment alternatives we infer that investors priced the possibility of auctions failures into ars yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates

intellectual property rights reform and the cost of corporate debt abstract this paper investigates the role of intellectual property rights ipr protection on the cost of bank loans for firms in 48 countries using substantial reforms of patent rights as a source of identifying variation the paper provides strong evidence that borrowers from countries that underwent ipr reform experience significant reductions in the cost of bank debt importantly the effects of ipr reform on loan rates are significantly larger in industries that are more ip intensive additional analysis shows that in the wake of reforms borrowers obtain larger size loans which indicates that improvements in ipr are associated with greater credit availability ipr reform also increases foreign lenders participation in loan syndicates overall these findings suggest that legal protection afforded to intellectual property has a significant impact on the cost of corporate borrowing and the ability of innovative firms to raise debt capital

the tax rate induced bond substitution hypothesis and the traditional textbook treatment of the relationship between tax free and taxable bond yields abstractthis empirical study posits and tests the tax rate induced bond substitution hypothesis wherein the propensity for bond buyers to substitute tax exempt municipal bonds for taxable bonds

foreign banks trends and impact over the past two decades foreign banks have become much more important in domestic financial intermediation heightening the need to understand their behavior we introduce a new comprehensive database made publicly available on bank ownership including the home country of foreign banks for 5 324 banks in 137 countries over the period 1995 2009 we document large increases in foreign bank presence in many countries but with substantial heterogeneity in terms of host and banks home countries bilateral investment patterns and bank characteristics in terms of impact we document that the relation between private credit and foreign bank presence importantly depends on host country and banks characteristics specifically foreign banks only seem to have a negative impact on credit in low income countries in countries where they have a limited market share where enforcing contracts is costly and where credit information is limited available and when they come from distant home countries this shows that accounting for heterogeneity including bilateral ownership is crucial to better understand the implications of foreign bank ownership

patent rights and innovative activity evidence from national and firm level data global standards of patent protection have been strengthened and harmonized in recent years despite the heated policy debates and theoretical controversies empirical studies of the consequences for innovative activity are scant this paper contributes to the debate by providing an empirical analysis of the effects of patent strength on different aspects of innovative activity namely firm level research and development r d domestic patenting and foreign patenting the analysis employs an updated index of patent rights the results show the complexity of evaluating the effects of patent reform on innovative activity since the effects vary nonlinearly depending on the initial level of patent strength and vary by a country s level of economic development overall for developing economies patent strength negatively affects domestic patent filings and insignificantly affects r d and foreign patent filings for developed economies patent strength positively affects r d and domestic patent filings and negatively affects foreign patent filings after some critical level of patent protection is reached journal of international business studies 2007 38 878 900 doi 10 1057 palgrave jibs 8400306

are individual investors tax savvy evidence from retail and discount brokerage accounts using brokerage account data we analyze the tax awareness of individual investors we find strong evidence that taxes matter investors prefer to locate bonds and mutual funds in retirement accounts and in december harvest stock losses in their taxable accounts however investors also trade actively in their taxable accounts realize gains more frequently than losses and locate a material portion of their bonds in taxable accounts though taxes leave clear footprints in the data we analyze many investors could improve their after tax performance by fully capitalizing on the tax avoidance strategies available to equities while optimally locating their assets

150 years of patent protection this paper examines three sets of explanations for variations in the strength of patent protection across sixty countries and a 150 year period wealthier nations are more likely to have patent systems to allow patentees a longer time to put their patents into practice and to ratify treaties assuring equal treatment of other nations but they are also likely to charge higher fees and limit patent protection in some important ways countries with democratic political institutions are consistently more likely to have patent protection appear to be determined by historical factors the origin of a country s commercial law appears particularly important in explaining the presence of restrictions on patentees privileges and discriminatory provisions against foreign patentees this abstract was borrowed from another version of this item

enjoying the quiet life corporate governance and managerial preferences much of our understanding of corporations builds on the idea that managers when they are not closely monitored will pursue goals that are not in shareholders interests but what goals would managers pursue this paper uses variation in corporate governance generated by state adoption of antitakeover laws to empirically map out managerial preferences we use plant level data and exploit a unique feature of corporate law that allows us to deal with possible biases associated with the timing of the laws we find that when managers are insulated from takeovers worker wages especially those of white collar workers rise the destruction of old plants falls but the creation of new plants also falls finally overall productivity and profitability decline in response to these laws our results suggest that active empire building may not be the norm and that managers may instead prefer to enjoy the quiet life

default risk cannot explain the muni puzzle evidence from municipal bonds that are secured by u s treasury obligations fama 1977 and miller 1977 predict that one minus the corporate tax rate will equate after tax yields from comparable taxable and tax exempt bonds empirical evidence shows that long term tax exempt yields are higher than theory predicts two popular explanations for this empirical puzzle are that relative to taxable bonds municipal bonds bear more default risk and include costly call options i study u s government secured municipal bond yields which are effectively default free and nonmalleable these municipal yields display the same tendency to be too high i conclude that differential default risk and call options do not explain the municipal bond puzzle article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the benefits of lending relationships evidence from small business data this paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm we analyze data collected in a survey of small firms by the small business administration the primary benefit of building close ties with an institutional creditor is that the availability of financing increases we find smaller effects on the price of credit attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit in sum relationships are valuable and appear to operate more through quantities rather than prices

tax subsidized underpricing the market for build america bonds build america bonds babs were issued by municipalities for 20 months as a part of the 2009 fiscal package unlike traditional tax exempt municipals babs are taxable to the holder but the treasury rebates 35 of the coupon to the issuer the stated purpose was to provide municipalities access to a more liquid market including foreign tax exempt and tax deferred investors we find babs do not exhibit greater liquidity than traditional municipals babs are more underpriced initially particularly for interdealer trades babs also show a substitution from underwriter fees toward more underpricing suggesting that the underpricing is a strategic response to the tax subsidy

a simple model of the taxable and tax exempt yield curves i examine the anomalous behavior of the taxable and tax exempt yield curves long municipal yields appear too high relative to the equivalent after tax yield that can be earned in treasury or corporate bonds i discuss existing explanations of the problem and propose a simple model that relates the yields of taxable bonds to the yield curve for par tax exempts the ratio of the tax exempt yield to the taxable yield increases with maturity in the model so it is consistent with observed phenomena such as inverted yield curves for taxables and contemporaneous rising yield curves for tax exempts statistical and descriptive comparisons between the yields predicted by the model and observed yields on par bonds that the model has some promise in explaining the apparent anomalies in the behaviors of the two yield curves article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the term structure of interest rates in real and monetary economies abstract this paper modifies standard asset pricing models by introducing capital a variable labor supply and money a surprising but very positive result is that in a real production economy the interest rate is close to a random walk this result is found to be true even if there is no persistence in the driving process of the model in this paper we generalize the standard cash in advance constraint by using a shopping time technology this generalization makes it possible to match observed variability for the velocity of money this type of monetary model however is not successful in matching observed behavior of bond prices

petroleum exploration in the non opec ldcs the effects of recent world developments abstract the recent decline in world petroleum prices and the uncertainty with respect to future oil prices is having an adverse effect on exploration in non opec ldcs particularly in the oil importing developing countries the fiscal regimes of ldcs as applied to petroleum investment have tended to limit incentives for foreign investment especially in countries without high reserve potential recent developments have exacerbated these fiscal deterrents to petroleum investment particularly in countries where there is little likelihood of discovering large oil fields in addition the external debt crisis in a number of ldcs where petroleum operations are largely in the hands of government oil enterprises is likely to reduce the availability of external financing for oil exploration and development