trade interdependence the international financial institutions and the recent evolution of sovereign debt renegotiations abstract this paper analyzes the effect of a debtor country s pattern of trade with commercial creditors home countries on the outcome of debt rescheduling negotiations the analysis reveals that a debtor country with more market power has greater leverage in a three way debt rescheduling negotiation that includes the debtor country its creditors and the international financial institutions ifis the paper also considers the effects of the ifi sovereign debt policy on the bargaining power of the parties in debt rescheduling negotiations two bargaining frameworks analyzed and compared in the paper represent the negotiation mechanism at different stages of the ifi sovereign debt policy evolution

private investment and sovereign debt negotiations the author studies models of sovereign debt bargaining of the kind proposed by j bulow and k rogoff all agents act rationally with perfect foresight and perfect information the main departure from previous studies is that the government of the debtor country acts on behalf of but is not identical to its representative citizen this seemingly minor change surprisingly implies that there is an indeterminacy of bargaining outcomes including some of the sunspots type agreement may be delayed for many periods and marginal debt may not be worthless copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

external liabilities and crises abstract we examine the determinants of external crises focusing on the role of foreign liabilities and their composition using a variety of statistical tools and comprehensive data spanning 1970 2011 we find that the ratio of net foreign liabilities to gdp is a significant crisis predictor this is primarily due to the net position in debt instruments the effect of net equity liabilities is weaker and net fdi liabilities seem if anything an offset factor we also find that i breaking down net external debt into its gross asset and liability counterparts does not add significant explanatory power to crisis prediction ii the current account is a powerful predictor iii foreign exchange reserves reduce the likelihood of crisis more than other foreign asset holdings and iv a parsimonious probit containing those and a handful of other variables has good predictive performance in and out of sample the latter result stems largely from our focus on external crises sensu stricto

a note on the optimal tariff retaliation and the welfare loss from tariff wars in a framework with intraindustry trade abstract this paper uses krugman s 1980 model of trade with product differentiation and monopolistic competition to examine the effects of a uniform ad valorem tariff the main results are there exists an optimal tariff even for a small economy and the optimal tariff rate is an increasing function of the size of the economy and the degree of production differentiation under reasonable parameter assumptions a tariff war between two countries of equal size in which each country retaliates by imposing its own optimal tariff causes a welfare loss equivalent to a drop in income of about 4 percent

a signaling model of foreign direct investment attraction abstract foreign direct investors face uncertainty about government s type of the host country in a two period game we allow the host country s government to mitigate such uncertainty by sending a signal through fiscal policy our main finding states that a populist government may mimic a conservative one in order to attract foreign direct investment fdi and this choice depends mainly on its impatience degree and the originally planned fdi stock we highlight the role of the government s reputation in attracting foreign capital and thus provide some policy implications moreover our model explains why some governments considered to be populist adopt conservative policies in the beginning of its terms of office

expropriation and direct investment abstract the paper considers a model in which private foreign investors make direct long lived capital investments in a small developing country that is subject to stochastic shocks to production depending upon the preferences of the host country we find that expropriation can occur because of either desperation or opportunism we show that under reasonable assumptions increased investment makes expropriation less likely to occur and that the level of investment chosen by atomistic foreign investors may be non optimal

executive incentives and the horizon problem an empirical investigation abstract this paper investigates the hypothesis that ceos in their final years of office manage discretionary investment expenditures to improve short term earnings performance we examine the behavior of r d expenditures for a sample of firms in industries that have significant ongoing r d activities the results suggest that ceos spend less on r d during their final years in office however we find the reductions in r d expenditures are mitigated through ceo stock ownership there is no evidence that the reduced r d expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes

debt buybacks signal sovereign countries creditworthiness theory and tests the authors show that debt buybacks could convey valuable information about indebted countries willingness to invest and increase debt repayment when creditors are less informed than debtors in an informational equilibrium unwilling countries do not repurchase a part of their debt but willing countries do and creditors increase debt repayments by offering reliefs only to those countries that repurchase data show that creditors systematically grant debt reliefs only to countries with buyback programs and a country s secondary market debt price is higher when it has a buyback program than if it does not copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

common trends and common cycles the existence of a serial correlation common feature among the first differences of a set of i 1 variables implies the existence of a common cycle in the beveridge nelson stock watson decomposition of those variables a test for the existence of common cycles among cointegrated variables is developed the test is used to examine the validity of the common trend common cycle structure implied by flavin s excess sensitivity hypothesis and campbell and mankiw s mixture of rational expectations and rule of thumb hypothesis for consumption and income linear independence between the cointegration and the cofeature vectors is exploited to decompose consumption and income into their trend and cycle components copyright 1993 by john wiley sons ltd

default settlement and signalling lending resumption in a reputational model of sovereign debt this paper develops a simple model of sovereign debt in which defaulting nations are excluded from capital markets and regain access by making partial repayments this implication of the model is consistent with the historical evidence that defaulting countries return to international loan markets soon after a settlement but after varying periods of exclusion copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

bargaining in legislatures bargaining in legislatures is conducted according to formal rules specifying who may make proposals and how they will be decided legislative outcomes depend on those rules and on the structure of the legislature although the social choice literature provides theories about voting equilibria it does not endogenize the formation of the agenda on which the voting is based and rarely takes into account the institutional structure found in legislatures in our theory members of the legislature act noncooperatively in choosing strategies to serve their own districts explicitly taking into account the strategies members adopt in response to the sequential nature of proposal making and voting the model permits the characterization of a legislative equilibrium reflecting the structure of the legislature and also allows consideration of the choice of elements of that structure in a context in which the standard institution free model of social choice theory yields no equilibrium

bubbles and self enforcing debt we characterize equilibria with endogenous debt constraints for a general equilibrium economy with limited commitment in which the only consequence of default is losing the ability to borrow in future periods first we show that equilibrium debt limits must satisfy a simple condition that allows agents to exactly roll over existing debt period by period second we provide an equivalence result whereby the resulting set of equilibrium allocations with self enforcing private debt is equivalent to the allocations that are sustained with unbacked public debt or rational bubbles in contrast to the classic result by bulow and rogoff 1989a positive levels of debt are sustainable in our environment because the interest rate is sufficiently low to provide repayment incentives

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

private capital flows capital controls and default risk abstract what has been the effect of the shift in emerging market capital flows toward private sector borrowers are emerging market capital flows more efficient if not can controls on capital flows improve welfare this paper shows that the answers depend on the form of default risk when private loans are enforceable but there is the risk that the government will default on behalf of all residents private lending is inefficient and capital controls are potentially pareto improving however when private agents may individually default capital flow subsidies are potentially pareto improving

analysts use of managerial bonus incentives in forecasting earnings abstract this study presents evidence on whether analysts earnings forecasts anticipate management s discretionary accruals choices if analysts anticipate discretionary accruals earnings forecast errors are composed of at least two parts cash flow and discretionary accruals forecast errors management s bonus maximizing incentives allow for identification of circumstances in which discretionary accruals forecast errors are expected to offset cash flow forecast errors and circumstances in which they are expected to exacerbate cash flow errors controlling for the unexpected cash flow variability the empirical results are consistent with these predictions

basic analytics of multilateral lending and surveillance abstract i analyse the role of multilateral financial institutions in a world of global capital markets assuming that they have an informational advantage over private lenders in the market for sovereign debt i show that the adverse selection problem in this market may be solved through certification if the multilateral agency does not care too much about borrower country welfare however with lending the private information of the agency will be revealed whatever its weighting of borrower welfare vs private lenders profits multilateral lending on concessional terms also alleviates the moral hazard problem that investment in creditworthy borrowers is reduced as private lenders seek to avoid ex post default by constraining credit

statistical arbitrage and securities prices this article introduces the concept of a statistical arbitrage opportunity sao in a finite horizon economy a sao is a zero cost trading strategy for which i the expected payoff is positive and ii the conditional expected payoff in each final state of the economy is nonnegative unlike a pure arbitrage opportunity a sao can have negative payoffs provided that the average payoff in each final state is nonnegative if the pricing kernel in the economy is path independent then no saos can exist furthermore ruling out saos imposes a novel martingale type restriction on the dynamics of securities prices the important properties of the restriction are that it 1 is model free in the sense that it requires no parametric assumptions about the true equilibrium model 2 can be tested in samples affected by selection biases such as the peso problem and 3 continues to hold when investors beliefs are mistaken the article argues that one can use the new restriction to empirically resolve the joint hypothesis problem present in the traditional tests of the efficient market hypothesis in a fairly general environment this article proposes a novel martingaletype restriction on the dynamics of securities prices this restriction has a number of important properties most notably the restriction may be viewed as model free because it requires no parametric assumptions about the true equilibrium model to derive the restriction we rely on the concept of statistical arbitrage a generalization of pure arbitrage a pure arbitrage opportunity pao is a zero cost trading strategy that offers the possibility of a gain with no possibility of a loss as is well known the existence of paos is incompatible with a competitive equilibrium in asset markets the fundamental theorem of the financial theory establishes a link between the absence of paos and the existence of a positive pricing kernel which supports securities prices while the absence of paos is a necessary condition for any equilibrium model this condition alone often yields pricing implications that are too weak to be practically useful for example when valuing options in incomplete markets the no arbitrage bounds on option prices are typically very wide to strengthen pricing implications several recent articles

recent experience with commercial bank debt reduction has the menu outdone the market abstract debt reduction at market terms has been criticized as too expensive from the point of view of the debtor the recent reduction agreements following the menu approach are partially concerted but they also possess some elements of voluntariness this raises two issues a what is the conceptual justification for such financial arrangements and b based on recent evidence to what extent have these arrangements reduced the cost of debt reduction in a review of six recent menu driven debt reduction agreements we find that the debtors achieved a far better financial result than would have been feasible with simple market buybacks

comparative statics of the optimal dynamic incentive contract abstract each period a firm must carry out an indivisible project the cost of which depends on the firm s constant efficiency and its variable level of effort only the cost is observed by the regulator who has to choose the incentive scheme the optimal dynamic mechanism is derived under possible commitment of the regulator over time then under non commitment it is shown that there are four types of continuation equilibria also the profile of effort levels is compared to the commitment case finally some numerical comparative statics is performed and it is shown that all types of equilibria can be optimal

solving the feldstein horioka puzzle with financial frictions unlike the prediction of a frictionless open economy model long term average savings and investment rates are highly correlated across countries a puzzle first identified by feldstein and horioka 1980 we quantitatively investigate the impact of two types of financial frictions on this correlation one is limited enforcement w here contracts are enforced by the threat of default penalties the other is limited spanning where the only asset available is noncontingent bonds we find that the calibrated model with both frictions produces a savings investment correlation and a volume of capital flows close to the data to solve the puzzle the limited enforcement friction needs low default penalties under which capital flows are much lower than those in the data and the limited spanning friction needs to exogenously restrict capital flows to the observed level when combined the two frictions interact to endogenously restrict capital flows and thereby solve the feldstein horioka puzzle

asymmetric sensitivity of ceo cash compensation to stock returns a discussion abstract leone wu and zimmerman leone a wu j zimmerman j 2005 asymmetric sensitivity of ceo cash compensation to stock returns journal of accounting and economics forthcoming find that cash compensation salary and bonus is more sensitive to price decreases than to price increases the authors interpret this result as consistent with boards of directors exercising discretion to reduce costly ex post settling up in cash compensation i discuss potential alternative explanations specifically the design of bonus contracts and the placement of the upper bound and the effect of the internal revenue code section 162 m that limits the deductibility of cash compensation over one million dollars i also link their results to the managerial power and rent extraction perspective

debt write downs and debt equity swaps in the two sector model abstract debt overhang models have motivated the possibility of pareto improving market based debt reduction schemes through the assumption that creditors can seize debtor output under default these models usually reach the conclusion that both debtor financed debt repurchases and debt equity swaps are not in the interest of debtor nations this paper re examines these conclusions for a debtor nation that also has a safe sector which is unexposed to seizure debt overhangs are then shown to distort the composition of investment in the debtor nation nominal debt reductions mitigate these distortions enhancing the potential for pareto improving debt equity swaps

two sided expropriation and international equity contracts abstract the paper considers a model in which investors in two symmetrical countries can trade equity claims on their endowments the governments of the two countries expropriate the foreign owned securities if doing so raises domestic welfare in spite of the possibility of expropriation agents may still choose to hold completely pooled portfolios depending on preferences in the two countries increases in the level of domestic output can increase or decrease the probability of expropriation in the equilibria we consider agents hold too much foreign equity a reduction in foreign investment raises welfare by reducing the probability of expropriation

globalization and risk sharing we study the effects of globalization on risk sharing and welfare like the previous literature we assume that governments cannot commit to enforce the repayment of debts owed by their citizens unlike the previous literature we assume that governments cannot discriminate between domestic and foreign creditors when enforcing debt payments this creates novel interactions between domestic and international trade in assets i increases in domestic trade raise the benefits of enforcement and facilitate international trade in fact in our set up countries can obtain international risk sharing even in the absence of default penalties ii increases in foreign trade raise the costs of enforcement and hamper domestic trade as a result globalization may worsen domestic risk sharing and lower welfare we show how these effects depend on various characteristics of tradable goods and explore the roles of borrowing limits debt renegotiations and trade policy

investment incentives new money debt relief and the critical role of conditionality in the debt crisis external debt depresses investment and lowers economic growth below its potential through its negative effect on liquidity and expected profitability these effects can pull a country into a downward spiral in which both the debtor country and creditors lose this article considers the possibilities for revising contracts between a debtor and its creditors once a debt crisis has erupted the framework that we develop shows how various combinations of new money and cuts in debt and debt service affect a debtor country s welfare its debt repayments and the earnings of its creditors the analysis distinguishes between debtor countries that are willing and able to precommit credibly to an adjustment program and those that are not this distinction provides the basis for a discussion of conditional lending by the international financial institutions to provide incentives and sanctions that make credible a debtor s promises to invest copyright 1990 by oxford university press

migration and sovereign default risk abstract during sovereign debt crises countries experience persistent economic declines spiking spreads and outflows of capital and workers to account for these salient features we develop a sovereign default model with migration and capital accumulation the model has a two way feedback default risk lowers workers welfare and induces emigration which in turn intensifies default risk by lowering tax base and investment compared with a no migration model our model produces higher default risk lower investment and a more profound and prolonged recession we find that migration accounts for almost all of the lack of recovery in gdp during the recent spanish debt crisis

linking trade and external debt strategies abstract despite the productive inefficiencies generated by policies of export promotion and of import substitution such development strategies can improve welfare when used in conjunction with a debt strategy export promotion can increase the availability of foreign finance and import substitution can reduce debt service when the latter strategy is optimal partial debt forgiveness increases the creditor group s payoff import substitution is more profitable with a large inherited debt high world interest rate low terms of trade and when creditors fail to reduce inherited debt

trade dependency bargaining and external debt abstract this paper analyzes the welfare effects of a conditional debt relief in the presence of partial defaults even for an economy in a state of partial default external finance for investment in highly trade dependent sectors may be warranted a marginal relief of the present debt service conditional on an equivalent increase in investment in the trade dependent sectors will benefit the debtor and will increase the future repayment investment targeted towards highly productive trade dependent sectors will benefit both creditors and debtors the investment can be implemented by a marginal relief of the present debt service or through direct investment

measuring the intensity of competition in export markets abstract this paper develops an approach to measuring the intensity of competition in international markets using readily available data on destination specific values and quantities of exports at the seven digit industry level the intensity of competition a group of exporters faces in a particular export market is measured by the residual demand elasticity the group faces this elasticity is identified by exchange rate shocks which rotate the supply relation of the source country export group relative to competitors located in other countries we apply this method to german exports of beer and us exports of linerboard paper the resulting estimates of market power appear to be plausible and consistent with other indicators of competition e g market shares the number of competitors providing support for the applicability of our framework in measuring competition in international markets

sovereign debt repurchases no cure for overhang troubled debtor countries do not gain by repurchasing external bank debt at market discount even if a buyback would stimulate investment by relieving debt overhang the reason is that buybacks allow creditors to reap more than 100 percent of any efficiency gains that might result from increased investment we show that open market buybacks provide a benchmark for evaluating more complex negotiated buyback deals by comparing any given deal with a hypothetical market buyback of the same size one can derive upper and lower bounds on the gain to the country we apply our model to the 1990 mexican debt deal

rescheduling of sovereign debt forgiveness precommitment and new money to meet contractual obligations on their external debt lenders generally responded by rescheduling these debts rather than declaring them to be in default but further commercial lending to these sovereigns has virtually ceased these borrowers now face an enormous debt overhang while their lenders face substantial losses on their international loan portfolios among the many proposals for addressing this crisis the relative desirability of debt forgiveness and new lending has been the focus of considerable debate the baker plan of 1985 emphasized additional funding coupled with growth oriented domestic policies rather than debt reduction lenders were encouraged to provide additional funds new money to help the impaired and indebted economies grow their way back to creditworthiness however lenders were reluctant to offer new funds that would increase the sovereign s debt burden without some assurance that future repayment would be likely with debt generally recognized as providing borrowers with a disincentive for investment 1 the emphasis has now shifted to the need for debt forgiveness on the part of the lenders and a commitment to internal adjustment by the borrowers both parties are viewed as benefitting by a reduction of the inherited debt and possibly the provision of additional funds if the sovereign borrower can commit itself to adopting policies that reduce internal consumption and

on the relation between reschedulings and bank value the effect of developing country loan reschedulings on large u s banks is investigated using an event study methodology the major finding concerns the evolving nature of the impact of loan reschedulings during 1978 80 reschedulings had a positive effect on bank returns in contrast to the negative impact found for the 1981 83 period an explanation for these results is provided by a model of the rescheduling process that recognizes the noncompetitive aspects of rescheduling negotiation copyright 1989 by american economic association

pairs trading performance of a relative value arbitrage rule we test a wall street investment strategy pairs trading with daily data over 1962 2002 stocks are matched into pairs with minimum distance between normalized historical prices a simple trading rule yields average annualized excess returns of up to 11 for self financing portfolios of pairs the profits typically exceed conservative transaction cost estimates bootstrap results suggest that the pairs effect differs from previously documented reversal profits robustness of the excess returns indicates that pairs trading profits from temporary mispricing of close substitutes we link the profitability to the presence of a common factor in the returns different from conventional risk measures wall street has long been interested in quantitative methods of speculation one popular short term speculation strategy is known as pairs trading the strategy has at least a 20 year history on wall street and is among the proprietary statistical arbitrage tools currently used by hedge funds as well as investment banks the concept of pairs trading is disarmingly simple find two stocks whose prices have moved together historically when the spread between them widens short the winner and buy the loser if history repeats itself prices will converge and the arbi

nominal sovereign debt i show that reputation alone can sustain nominal sovereign debt which is subject to both the risks of default and opportunistic devaluations nominal debt combined with a countercyclical exchange rate policy allows more hedging against shocks than real savings if markets are incomplete thus the loss of either repayment or monetary reputation severely affects the government s ability to smooth consumption the model offers a simple explanation for the bulow and rogoff critique while simultaneously helping explain the issuance of nominal sovereign bonds by emerging economies the model also helps explain why many governments borrow and save at the same time

tolerance of arrearages how imf loan policy can effect debt reduction a model of bargaining with asymmetric information is applied to the case of sovereign debt and imf intervention debtors and creditors are assumed to bargain over the price to be paid by the debtors for their outstanding debt and the ability of the debtors to delay an agreement is private information it is shown that an imf policy of no lending in arrears increases the price of the debt increases any delay to agreement and increases the likelihood that the creditor will demand the highest price an imf policy of lending in arrears in contrast decreases the price of the debt decreases the delay time to agreement and my increase the likelihood that the creditor accepts the lowest price as it shifts the locus of bargaining power predictions of the model are consistent with results from recent debt agreements and implications for current debate on debt reduction strategies are discussed

sanctions some simple analytics governments often seek influence beyond their borders one way is through what thomas schelling 1960 1966 calls brute force taking direct physical control less extreme methods are to promise rewards for taking desired actions or to threaten punishments for not carrying them out sanctions sanctions involve two parties the sender and the target to help identify pronouns antecedents we consider a feminine sender and masculine target the sender s objective is to influence the target by threatening to impose some measure against him for acting contrary to her interest sanctions have long been important in international relations athens imposed a trade embargo against megara ultimately setting off the peloponnesian war 431 404 bc sanctions are central to such international agreements as the united nations charter the world trade organization and the montreal protocol governing chlorofluorocarbons u s law prescribes the use of sanctions in circumstances related for example to national security human rights intellectual property and international trade do sanctions actually achieve senders objectives a common claim is that they usually fail and are costly to senders recent u s legislation proposes to limit unilateral u s sanctions except trade related ones on the grounds that they cost more than they are worth history provides examples of sanctions that were costly and ineffectual such as the league of nations sanctions against the italian occupation of abyssinia or u s sanctions against cuba united nations sanctions against iraq remain in place having achieved less than full success to say the least see gary hufbauer et al 1990 more systematic studies suggest that sanctions often do succeed particularly when objectives are modest hufbauer et al 1990 examine 116 episodes of sanctions with military or political objectives deeming about one third successful sanctions imposed under u s trade law have worked even better about three fourths of the time see e g sykes 1992 thomas bayard and kimberly a elliott 1994 elliott and j david richardson 1997 here we develop a simple framework to explain how sanctions can worl and what is required for them to succeed our framework exploits advances in the theory of repeated games and bargaining under incomplete information while a game theorist would recognize the flavor of our results the setting here is a fresh one 2 we find success more likely when the threatened measure costs the sender little relative to the gain from modifying the target s behavior while the damage to the target is large relative to his cost of complying with the sender s will results consistent with both intuition and empirical evidence as well as with adam smith 1776 book iv ch i moreover a more patient sender is more likely to succeed while the target s patience can work to the sender s disadvantage 3

secondary market prices and mexico s brady deal analyzes wether or not the use of official funds in debt reduction packages as in mexico s 1989 brady deal is tantamount to a creditor bailout review of events option pricing approach to sovereign debt valuation market valuation of the brady debt package positive impact of brady plan on debt relief

interest rates official lending and the debt crisis a reassessment the authors document and try to explain the sizable cross country differences in interest rates on external debt paid by a group of highly indebted developing countries in 1973 89 they find that indonesia and turkey which are often praised for not rescheduling in the 1980s paid interest rates substantially below libor and avoided the interest rate shock of the early 1980s differences in the default risk premium explain some of the variation among countries but different degrees of access to official loans carrying highly subsidized interest rates played the major role in the sample they studied they found no evidence that debt at floating interest rates was more expensive than debt at fixed rates for the period 1981 89 it is possible to control for differences in the currency composition of debt and the results are essentially unchanged these results suggest that studies of economic performance among the highly indebted countries during the debt crisis should control for cross country differences in the burden of interest payments

financial integration and international risk sharing abstract conventional wisdom suggests that financial liberalization can help countries insure against idiosyncratic risk there is little evidence however that countries have increased risk sharing despite widespread financial liberalization we show that the key to understanding this puzzling observation is that conventional wisdom assumes frictionless international financial markets while actual markets are far from frictionless financial contracts are incomplete and contract enforceability is limited when countries remove official capital controls default risk is still present as an implicit barrier to capital flows if default risk were eliminated capital flows would be six times greater and international risk sharing would increase substantially

decentralized borrowing and centralized default abstract in the past foreign borrowing by developing countries was comprised almost entirely of government borrowing however private firms and individuals in developing countries now borrow substantially from foreign lenders it is often asserted that this surge in private sector borrowing generates excessive borrowing and frequent sovereign defaults in developing countries this paper analyzes the impact of decentralized borrowing using a quantitative model in which private agents decide how much to borrow and the government decides whether to default relative to a model in which the government determines both the level of borrowing and whether to default decentralized borrowing drives up aggregate credit costs and sovereign default risk and reduces aggregate welfare interestingly decentralized borrowing may lead to either too much or too little debt in equilibrium depending on the severity of default penalties

annual bonus schemes and the manipulation of earnings abstract using confidential data of executive specific short term bonus plans we investigate the extent to which executives manipulate earnings to maximize the present value of bonus plan payments as such this paper extends the work of healy 1985 like healy we find evidence consistent with the hypothesis that managers manipulate earnings downwards when their bonuses are at their maximum unlike healy we find no evidence that managers manipulate earnings downwards when earnings are below the minimum necessary to receive any bonus we demonstrate that healy s results at the lower bound are likely to be induced by his methodology

non economic engagement and international exchange the case of environmental treaties we examine the role of non economic partnerships in promoting international economic exchange since far sighted countries are more willing to join costly international partnerships such as environmental treaties environmental engagement tends to encourage international lending countries with such non economic partnerships also find it easier to engage in economic exchanges since they face the possibility that debt default might also spill over to hinder their non economic relationships we present a theoretical model of these ideas and then verify their empirical importance using a bilateral cross section of data on international crossholdings of assets and environmental treaties our results support the notion that international environmental cooperation facilitates economic exchange

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

optimal time consistent macroprudential policy collateral constraints widely used in models of financial crises feature a pecuniary externality agents do not internalize how borrowing decisions made in good times affect collateral prices during a crisis we show that under commitment the optimal financial regulator s plans are time inconsistent and study time consistent policy quantitatively this policy reduces sharply the frequency and magnitude of crises removes fat tails from the distribution of asset returns and increases social welfare in contrast constant debt taxes are ineffective and can be welfare reducing while an optimized macroprudential taylor rule is effective but less so than the optimal time consistent policy

asymmetric sensitivity of ceo cash compensation to stock returns abstract we document that ceo cash compensation is twice as sensitive to negative stock returns as it is to positive stock returns since stock returns include both unrealized gains and unrealized losses we expect cash compensation to be less sensitive to stock returns when returns contain unrealized gains positive returns than when returns contain unrealized losses negative returns this is consistent with boards of directors exercising discretion to reduce costly ex post settling up in cash compensation paid to ceos

a new approach to statistical arbitrage strategies based on dynamic factor models of prices and their performance statistical arbitrage strategies are typically based on models of returns we introduce a new statistical arbitrage strategy based on dynamic factor models of prices our objective in this paper is to exploit the mean reverting properties of prices reported in the literature we do so because to capture the same information using a return based factor model a much larger number of lags would be needed leading to inaccurate parameter estimation to empirically test the relative performance of return based and price based models we construct portfolios long short long only and equally weighted based on the forecasts generated by two dynamic factor models using the stock of companies included in the s p 500 index for constructing portfolios the empirical analysis statistically tests the relative forecasting performance using the diebold mariano framework and performing the test for statistical arbitrage proposed by hogan et al 2004 our results show that prices allow for significantly more accurate forecasts than returns and pass the test for statistical arbitrage we attribute this finding to the mean reverting properties of stock prices the high level of forecasting accuracy using price based factor models has important theoretical and practical implications

unique equilibrium in the eaton gersovitz model of sovereign debt abstract a common view of sovereign debt markets is that they are prone to multiple equilibria we prove that to the contrary markov perfect equilibrium is unique in the widely studied model of eaton and gersovitz 1981 and we discuss multiple extensions and limitations of this finding our results show that no improvement in a borrower s reputation for repayment can be self sustaining thereby strengthening the bulow and rogoff 1989 argument that debt cannot be sustained by reputation alone

a stochastic volatility model with markov switching this article presents a new way of modeling time varying volatility we generalize the usual stochastic volatility models to encompass regime switching properties the unobserved state variables are governed by a first order markov process bayesian estimators are constructed by gibbs sampling high medium and low volatility states are identified for the standard and poor s 500 weekly return data persistence in volatility is explained by the persistence in the low and the medium volatility states the high volatility regime is able to capture the 1987 crash and overlap considerably with four u s economic recession periods

official credits to developing countries implicit transfers to the banks this paper investigates the impact on the wealth of bank share holders on the transfer of official resources to the debtor countries the main aim was to derive actual estimates of increases in shareholder wealth following important news concerning future transfers from the multilaterals to the debtor nations the main result is that stock market expects virtually all additional resources provided to debtor countries to be used for debt service to commercial banks while the estimated magnitude of these effects are informative the emphasis should be on the direction of these effects as they are robust to overestimation problems clearly official resources provided to debtor countries do devolve to creditor banks however the debtor countries should at least gain in so far as the reduction of a debt overhang eliminates investment distortions the results stem from the fact that some of the monies provided by the multilaterals are specifically earmarked for debt service or are in the form of general balance of payments support that the developing countries can use for private debt service official creditor resources that are specially provided to finance development projects are less likely to be allocated to bank debt service

debt buybacks debt reduction and debt rescheduling under asymmetric information in the early nineties there was a significant recovery of many debtridden economies after the shift in debt policy implicit in the socalled brady plan yet the use of scarce resources from debtor countries to buy back part of their debts remains a controversial feature of this plan we use a multiperiod model of debt overhang to show that under asymmetric information this transfer of resources emerges naturally as part of the shift from a strategy of debt rescheduling to one of debt reduction after nearly a decade of suffering from debt ridden economies in the early nineties many countries with large external debts finally reduced their debt service ratios regained access to spontaneous private financing and achieved higher growth and lower inflation imf 1993 many analysts have since attributed at least part of this success to the shift in the international debt strategy in 1989 which took a new direction with the so called brady initiative l a rather controversial feature of this initiative was the use of scarce resources from the debtor countries to buy back part of their debt there are two reasons why this use of a country s resources seems unwise first capital has more value in the debtor country than abroad thus transferring additional current resources from the country to its creditors at fair prices would appear to be welfare reducing second contrary to the idea that by repurchasing its debt in the open market a debtor country benefits from the discount price bulow and rogoff 1988 1991 prove under assumptions that include symmetric information that these buybacks hurt the country since the purchase price2 incorporates and transfers to the seller all the benefits caused by a reduced debt 3

the effect of accounting procedure changes on ceos cash salary and bonus compensation abstract this paper examines the effect of accounting procedure changes on cash salary and bonus compensation to ceos we estimate whether there is an adjustment to the statistical relation between compensation and corporate earnings following changes that lower earnings fifo to lifo inventory valuation and that raise earnings accelerated to straight line depreciation the results indicate that 1 subsequent to these changes salary and bonus payments are based on reported earnings rather than earnings under the original accounting method and 2 the potential compensation effect of the changes is small compared to the effect of economy or industry wide changes in compensation

a noncooperative theory of coalitional bargaining the authors explore a sequential offers model of n person coalitional bargaining with transferable utility and with time discounting their focus is on the efficiency properties of stationary equilibria of strictly superadditive games when the discount factor delta is sufficiently large it is shown that delay and the formation of inefficient subcoalitions can occur in equilibrium the latter for some or all orders of proposer however efficient stationary equilibrium payoffs converge to a point in the core as delta approaches one strict convexity is a sufficient condition for there to exist an efficient stationary equilibrium payoff vector for sufficiently high delta

strategic models of sovereign debt renegotiations the sovereign debt literature has often implicitly assumed that all the power in the bargaining game between debtor and creditor lies with the latter this paper explores that assumption by analyzing three game theoretic models of debt renegotiations in two of the models both of which are built on the traditional one sector growth model all the subgame perfect equilibria have an extreme form in which the game s surplus is captured by the creditor the third game has many subgame perfect equilibria that do not have this feature however the roles of various assumptions in all three games are examined

sovereign risk and secondary markets conventional wisdom says that in the absence of default penalties sovereign risk destroys all foreign asset trade we show that this conventional wisdom rests on one implicit assumption that assets cannot be retraded in secondary markets without this assumption foreign asset trade is possible even in the absence of default penalties this result suggests a broader perspective regarding the origins of sovereign risk and its remedies sovereign risk affects foreign asset trade only if default penalties are insufficient and secondary markets work imperfectly to reduce its effects one can either increase default penalties or improve the working of secondary markets jel f34 g12 g15

sovereign debt as intertemporal barter author s kletzer kenneth m wright brian d abstract borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk averse party subject to endowment shocks the surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties including any other competitive agents who are potential lenders to the sovereign the sole punishments consist of renegotiation proof changes in the path of future payments we show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever that is borrowing and lending are possible under anarchy and are supported by punishments that consist of cheating any cheater long term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short term loans the analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved

common nonstationary components of asset prices abstract portfolio separation in a multi period general equilibrium context implies that asset prices are collinear in economies that do not exhibit separation but that move close to separation approximate collinearity or cointegration emerges as a statistical model of actual data a new test for cointegration is proposed it is based on time series canonical correlation analysis and solves the problem of unidentified parameters under the null hypothesis and of identification of the cointegrating vectors when more than two time series are investigated an empirical analysis of prices of five size based portfolios and five industry based portfolios of common stock reveals substantial evidence of cointegration

country solidarity in sovereign crises when will solidarity which emerges spontaneously from the fear of spillovers be reinforced through contracting the optimal pact between countries that differ substantially in their probability of distress is a simple debt contract with market financing a borrowing cap but no joint liability while joint liability augments total surplus the borrowing country cannot compensate the deep pocket guarantor by contrast the optimal pact between two countries symmetrically exposed to shocks with an arbitrary correlation is a simple debt contract with joint liability provided that shocks are sufficiently independent spillovers sufficiently large liquidity needs moderate and available sanctions sufficiently tough

the role of multilateral institutions in the market for sovereign debt creditor country governments have an interest in avoiding defaults by sovereign debtors because default sanctions may be costly to their citizens as a result a standard bargaining model predicts that debtors do not repay in equilibrium even if the threat of sanctions is credible on the part of the banks by contracting with a third party such as a multilateral institution with some degree of independence creditor country governments can precommit not to intervene in equilibrium when debt renegotiation occurs the sovereign receives a subsidy from the multilateral agency the model is used to interpret recent debt reduction operations

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

the optimal shape of compensation contracts with earnings management the research question of why earnings management occurs is decomposed into two questions in this article which component of executive compensation generates incentives for earnings management and why is the compensation structured that way in the first place we first use as a dynamic stochastic equilibrium model to show that big bath and earning overstatement can co exist as equilibrium financial reporting strategies when thresholds are used in compensation contracts in order to understand the use of performance thresholds as a prevailing compensation strategy in practice we then derive the optimal compensation contract when the manager is privately informed about economic earnings and his expertise in managing earnings equilibria exist in which the inactive region below a threshold in compensation should be economically significant

burden sharing in sovereign debt reduction abstract we examine a concerted debt reduction deal between a sovereign debtor a private creditor and an official creditor who insures the deposits of the commercial bank our results show that a weakening of the financial position of the commercial bank reduces the contribution of the commercial bank and increases that of the official creditor without affecting the net terms faced by the debtor this result is robust to changes in seniority moreover leaving both creditor values unchanged requires that commercial banks retire debt at unfairly high prices while official creditors make a net contribution