stock returns before and after calls of convertible bonds ofer and natarajan 1987 report negative statistically significant cumulative average abnormal returns over five years following convertible bond calls we show that these results are obtained only if returns preceding the call dates are used for market model parameter estimation returns preceding calls tend to be positive and unusually large this means that predicted post call returns based on pre call parameter estimates are biased upward consequently the corresponding abnormal returns are biased downward we also discuss a corrected test statistic we conclude that the evidence does not indicate market inefficiency in the stock price reaction to convertible calls

investment and financing activity following calls of convertible bonds abstract the staged financing hypothesis of mayers mayers d 1998 why firms issue convertible bonds the matching of financial and real investment options journal of financial economics 47 83 102 predicts that investment and financing activity will increase following in the money convertible bond calls the prediction for out of the money convertible calls is different no increase is expected we study the rate of both corporate investment and external financing around forced conversions using benchmarks that are analogous to those recommended by barber and lyon barber b lyon j 1996 detecting abnormal operating performance the empirical power and specification of test statistics journal of financial economics 41 359 400 we also examine the cross section of changes in investment and financing activity conversion forcing firms exhibit an increase in both capital expenditures and debt financing around the year of the convertible bond call however the same result holds for the sample firms that conducted out of the money convertible calls further there is no relation between changes in investment activity and changes in debt issuance at the firm level the evidence is inconsistent with the notion that forced conversions serve as a catalyst for staged financing and investment

credible public policy abstract credible public policy is defined in a way that incorporates competitive equilibrium behavior for households and subgame perfect nash equilibrium behavior for the government it is shown that the set of all equilibrium outcome paths for credible policies can be constructed by using arguments analogous to those of abreu 1988 for repeated games the results are then extended to systems with state variables simple models of monetary policy and capital taxation are studied by way of example

optimal taxation in models of endogenous growth we study the problem of optimal taxation in three infinite horizon representative agent endogenous growth models the first model is a convex model in which physical and human capital are perfectly symmetric our second model incorporates elastic labor supply through a lucas style technology analysis of these two models points out the danger of assuming that government expenditures are exogenous in our third model we include government expenditures as a productive input in capital formation showing that the limiting tax rate on capital is no longer zero in numerical simulations we find similar effects on growth and welfare in all three models

ricardian equivalence for local government bonds a utility maximization approach abstract we show that ricardian equivalence holds for local public finance if and only if subnational units use property taxes however for other tax bases the unique equilibrium has the same economic outcome as in models where districts may not issue debt

bond and stock market response to unexpected earnings announcements this study examines whether earnings changes convey information in bond markets and finds a significant positive negative reaction to unexpected earnings increases decreases the results are consistent whether earnings announcements precede or follow dividend announcements thus earnings surprises convey information to bond markets and changes in firm value are split among bondholders and stockholders this is in contrast to evidence from studies examining unexpected dividend announcements where bond price reaction is asymmetric cross sectional analysis reveals that bond excess returns are positively related to earnings surprises i introduction stock market reaction to earnings announcements has received significant attention in the finance and accounting literature ball and brown 1968 brown 1978 watts 1978 aharony and swary 1980 and fried and givoly 1982 are some ofthe studies that observe a revision of stock prices associated with the release of earnings information lev 1989 provides a survey of research in this area the explanation for the above empirical findings is that unexpected earnings provide new information about future cash flows furthermore the classical discounted cash flow model predicts a revision in firm value that is the present value of expected future cash flows whether this increased firm value accrues to stockholders and bondholders is an empirical issue past research on the information content of earnings has focused solely on stock price behavior and finds at least part of the benefits accrue to stockholders in this study we examine the bond market reaction to unexpected quarterly earnings announcements the study is unique for several reasons first dividends repurchases and earnings are eonsidered primary mechanisms used by manage ment to convey information about future cash flows to securityholders recent

taxation and the tiebout model the differential effects of head taxes taxes on land rents and property taxes on the theory of state and local public finance is the seminal paper by charles tiebout 1956 tiebout constructed a multijurisdictional model in which independent local governments offer a wide variety of expenditure and tax policies and perfectly mobile consumers reveal their preferences for local public goods through their choice of residential community he argued that under such circumstances local public service provision would be efficient the tiebout model has formed the basis of a vast number of subsequent articles in the state and local public finance literature and has also been very influential in urban and regional economics the efficiency properties of various tiebout type models of local public good provision have been examined and the role of politics in these models has been debated at length in this literature of more direct relevance to this paper however is the fact that although tiebout had little to say directly about taxation simply assuming the existence of head taxes subsequent analyses have used adaptations of this model to examine the effects of local head taxes land taxes and property taxes it is the literature on the efficiency and distributional effects of alternative local taxes that is the subject of this survey 1

tax shields sample selection bias and the information content of conversion forcing bond calls the information content of conversion forcing bond calls depends on the after tax cash flow to bondholders if the dividend after conversion exceeds the after tax coupon but is less than the before tax coupon the call reveals unanticipated decreases in dividends and or earnings that reduce the tax shield from interest payments in contrast a call when the dividend is less than the after tax coupon reveals the timing of an anticipated shift from exceptional firm specific positive growth to the industry norm efforts to document properties of convertible calls are subject to sample selection bias because calls are disproportionately associated with positive pre call firm specific growth brennan and schwartz 1977 1980 and ingersoll 1977a show that if capital markets are perfect the optimal policy is to call and force conversion the first time the bond s conversion value exceeds its cash redemption value however ingersoll 1977b 1 and constantinides and grundy 1987 provide evidence that firms delay calling convertible debt and mikkelson 1980 1981 ofer and natarajan 1987 and singh cowan and nayar 1990 document a statistically significant negative return to equity at the call announcement to explain these results which are inconsistent with the optimal call policy and its predicted effect on equity value in a perfect capital market several asymmetric information hypotheses have been put forth mikkelson 1981 1985 hypothesizes that the negative market reaction results from the market inferring that management expects a decline in the present value of the debt s tax shield possibly due to a decline in future earnings this suggests that managers refrain from calling due to the tax shields provided by the debt harris and raviv 1985 present a signaling model in which a

ricardian equivalence for local government bonds abstract it is shown that if consumers own land the free rider problem does not occur because a change in local government financing is completely reflected in the price of land this means that the ricardian equivalence theorem holds not only for national government bonds but also for local government bonds

new evidence on the valuation effects of convertible bond calls this study examines the wealth effects of convertible bond call announcements on stock holders straight bondholders and called and non called convertible debtholders we docu ment that forced conversions are associated with a significant loss in firm value the results suggest that convertible call announcements can trigger both negative signal and wealth transfer effects we show that at least part ofthe negative effect on stock prices results from wealth transfer to straight bondholders our analysis also lends empirical validity to the common contention that called convertible bondholders suffer wealth expropriation due to the elimination ofthe premium the wealth effect on non called convertible debtholders is insignificant cross sectional analysis reveals that the negative signal effect is important in explaining bond stock and firm excess returns finally we present evidence that refutes the notion that bonds are called to relieve the firm from restrictive debt covenants

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

on the optimal taxation of capital income abstract we show that in models in which labor services are supplied jointly with human capital the chamley and judd result on zero capital income taxation in the limit extends to labor taxes as long as accumulation technologies are constant returns to scale moreover for a class of widely used preferences consumption taxes are zero in the limit as well however we show by the construction of two examples that these results no longer hold for certains types of restrictions on tax rates or if there are profits generated journal of economic literatureclassification numbers e62 h21

the effect of dividend changes on stock and bond prices this study examines stock and bond price reactions to dividend changes the positive stock market response to dividend increases has several potential explanations two of the more commonly discussed being information content and wealth redistribution between stockholders and bondholders the evidence presented supports the wealth redistribution hypothesis but does not rule out the information content hypothesis typically we find that the bond price reaction to announcements of large dividend changes is opposite to the stock price reaction our results differ from those of handjinicolaou and kalay this paper examines the impact of dividend changes on both the stock and bond markets this topic is interesting because of the possibility of distinguishing between two important hypotheses the information content hypothesis and the wealth redistribution hypothesis although each of these hypotheses is consistent with a positive stock price reaction to a dividend increase the predicted bond price reactions are different information content implies bond prices should increase when dividend increases are announced and wealth redistribution implies bond prices should fall although these two hypotheses have different implications for the bond price reaction to dividend changes they are not mutually exclusive handjinicolaou and kalay 1984 analyze bond returns around dividend changes and report that bond prices are not affected by dividend increases but react negatively to dividend reductions p 59 they argue their data support the information content hypothesis woolridge 1983 gets similar results but since he includes multiple bonds for the same firm the t statistics may be overstated inasmuch as returns will not be independent across bonds jayaraman and shastri 1988 find insignificantly negative bond price

note on ricardian equivalence abstract discussions of the ricardian equivalence concept have generally centered on the notion of a dynastic extended family in which the utility of each generation depends on its own consumption and on the utilities of its descendants this paper shows that there are other reasons why we could observe the ricardian result either exactly or approximately one reason is the capitalization of property taxes into property values the other reason is that the bequest itself could be a variable in parents utility functions

optimal fiscal policy public capital and the productivity slowdown abstract this paper develops a quantitative theoretical model for the optimal provision of public capital we show that the ratio of public to private capital in the us economy since 1925 evolves in a manner that is broadly consistent with an optimal transition path derived from a simple growth model the model is used to quantify the conditions under which an increase in the stock of public capital is desirable and to investigate the degree to which nonoptimal fiscal policies can account for the us productivity slowdown

optimal taxes and the structure of preferences if optimal tax theory is to be the basis for calculating tax rates a close understanding is required of the relationship between the structure of preferences and the configuration of optimal tax rates otherwise hypotheses chosen by the econometrician for practical convenience may completely determine the results independently of measurement this paper explores the relationship between various types of separability particularly weak and implicit separability and optimal tax rates in the various models discussed in the literature the use of distance functions and the antonelli matrix provides a significant unification of previously disparate results in the final analysis optimal tax theory should be the basis for actual calculation of tax rates although recently there have been great advances in theoretical results and in our understanding of their meaning we are still some way from a working knowledge of whether uniform commodity taxes are in practice optimal or if not which commodities should be discriminated against present theoretical formulae do not yield clear cut results except in special cases and it has recently become clear that optimal rates depend crucially on the detailed structure of consumer preferences for example atkinson and stiglitz 3 show that with an optimal nonlinear income tax discriminatory commodity taxes are only necessary to the extent that individual commodities are not weakly separable from leisure more recently deaton 6 has shown that a similar result holds for what is perhaps the most interesting of the standard models that where there are many consumers and only a linear income tax and proportional commodity taxes are allowed in this case separability between goods and leisure together with linear engel curves for goods removes the need for differential commodity taxation in consequence nothing can be learned about commodity taxes from consumer demand studies in which commodity demands are explained conditionally on total expenditure and commodity prices and which assume linear engel curves all such studies require separability from leisure as a maintained hypothesis and so are consistent with uniform commodity taxation these results suggest that the prospects for meaningful empirical calculations of tax rates are bleak econometricians estimating commodity demand and labor supply equations make generous use of separability assumptions to enable estimation at all in consequence it is likely that empirically calculated tax rates based on econometric estimates of parameters will be determined in structure not by the measurements actually made but by arbitrary untested and even unconscious hypotheses chosen by the econometrician for practical convenience to remedy this situation and as a prelude to fruitful empirical work it is necessary to have a more explicit understanding of how preference structure affects optimal tax rates such is the object of this paper three different

an empirical investigation of the role of indenture provisions in determining bond ratings abstract this paper documents the occurrence of indenture provisions of newly issued bonds and the relevance of these provisions to a bond s rating a chronicle of the various combinations of restrictive covenants reveals that four covenant combinations account for over 90 of the issues the evidence also suggests that convertibility of an issue vitiates stockholder bondholder conflict because these issues have few if any restrictive covenants also the indenture provisions of low rated subordinated issues appear to reflect a concern about the underinvestment problem while the opposite holds for high rated nonsubordinated issues the addition of indenture provisions to a bond rating model is shown to create a model superior to previous rating models this finding highlights the complex nature of the corporate financial contracting process consistent with past evidence moody s ratings are predicted more accurately than s p s ratings and split rated issues are predicted less accurately than commonly rated issues

should fiscal policy be different in a non competitive framework abstract this paper studies if imperfections in the labor market justify a different fiscal policy we present a dynamic general equilibrium model with a ramsey planner deciding about public spending labor taxes and debt two different labor market setups are considered first we assume a competitive labor market and then we introduce a union with monopoly power both models reach the same conclusion as regards to the cyclical properties of the optimal policy it is not optimal to implement a countercyclical fiscal policy we also find that government spending should be larger under perfect competition these main results arise both under complete and incomplete markets for the debt

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

the welfare cost of factor taxation in a perfect foresight model this paper examines the marginal efficiency cost of various factor taxes in a dynamic general equilibrium model the au thor solves for the excess burden of anticipated and unanticipated t emporary and permanent tax policies using a range of estimates for taste and technology parameters he finds excess burdens larger than those indicated by previous studies that use static models these exc ess burdens are sensitive to parameter values and timing however th e rankings of alternative tax policies turn out to be insensitive to structural parameter values copyright 1987 by university of chicago press

intertemporal distortions in the second best we consider a very general class of public nance problems that encompasses ramsey models of optimal taxation as well as economies with limited commitment private information and political economy frictions we identify a su cient condition to rule out permanent intertemporal distortions at the optimum if there exists an admissible allocation that converges to the rst best steady state then all intertemporal distortions are temporary in the second best we analyze a series of applications to illustrate the signi cance of this result

some evidence on the uniqueness of initial public debt offerings debt initial public offerings ipos represent a major shift in a firm s financing policy by both extending debt maturity and altering the public private debt mix in contrast to findings for seasoned debt offerings we document a significantly negative stock price response to debt ipo announcements this result is consistent with debt maturity and debt ownership structure theories the equity wealth effect is negatively related to the offer s maturity and positively related to the degree of bank monitoring we find that firms with less information asymmetry and firms with higher growth opportunities experience a less adverse stock price response the decision to access the public debt market for the first time represents a major change in a firm s financing policy an initial public debt offer alters the firm s debt structure in two significant ways not only does this policy choice affect the firm s debt ownership structure by altering its mix of public relative to private debt but it also extends the average debt maturity of the firm substantially this study provides empirical evidence on the validity of some important debt structure theories by focusing on the information content of initial public debt offers debt ipos two major strands of theories have evolved in the literature the debt ownership choice theories model corporate choice of private and public debt mix see e g fama 1985 diamond 1991a and rajan 1992 while the other set of theories models corporate debt maturity choice easterbrook 1984 flannery 1986 and kale and noe 1990 a number of recent studies empirically test some of the predictions of these models barclay and smith 1995 guedes and opler 1996 houston and james 1996 johnson 1997 and stohs and mauer 1996

on capital income tax policies under uncertainty this paper investigates corporate income and dividend taxation in a multi country world where production is subject to country specific productivity shocks singlecountry non cooperative tax policy is shown to imply a tax on foreign source dividends and a subsidy to domestic source dividends the optimal corporate tax may be negative if international portfolios are little diversified at the outset finally each country in a coordinating region should subsidize rather than tax domestic citizen s investment in equity in partner countries 1998 elsevier science b v all rights reserved

convertible call policies an empirical analysis of an information signaling hypothesis abstract this paper tests an information signaling hypothesis as a potential explanation for corporate convertible bond call policies and for the negative share price reaction to the announcement of the calls we test this hypothesis by trying to ascertain whether the information signaled is realized our results show an unexpected decline in the firm s performance subsequent to the call we also find significant negative cumulative returns during a sixty month period following the calls

optimal taxation in a limited commitment economy this paper studies optimal ramsey taxation when risk sharing in private insurance markets is imperfect due to limited enforcement in a limited commitment economy there are externalities associated with capital and labor because individuals do not take into account that their labor and saving decisions aect aggregate supply wages

taxation and uncertainty while taxes may be certain u s tax policy has certainly not been furthermore intrinsic economic risk makes investment decisions risky therefore a serious examination of the effects of tax policy on dynamic economic behavior should consider both sources of uncertainty this paper presents a simple theoretical and computational model that can analyze both intrinsic risk and uncertain taxation furthermore it will be clear that these techniques will be useful for examining general problems of taxation and risk when studying the impact of past and or proposed tax changes one of two extreme assumptions are usually made either agents are perfectly aware of future tax policy a perfect foresight assumption or they always believe that no change will ever occur a myopic foresight assumption these two assumptions yield substantially different views of recent tax experience as alan auerbach and james hines 1987 demonstrate in a partial equilibrium context both are clearly wrong the myopic specification assumes that individuals believe at each point in time that the current tax law will surely continue forever even after they have been hit repeatedly with tax changes on the other hand it is absurd to think that in say 1977 a significant number of individuals perfectly knew the various tax changes that would occur during the following decade this paper analyzes a dynamic general equilibrium model wherein taxpayers understand the uncertainty in tax policy when making their deci

optimal fiscal policy in a stochastic growth model although most neoclassical growth models focus on competitive equilibria which are pareto optimal and ignore the role of government recent works by romer 28 29 judd 20 baxter and king s and bizer and judd 7 have shown that government can be introduced into and suboptimal equilibria can be studied in these models as well their studies however are positive analyses of the effects of fiscal policy in competitive equilibria the purpose of this paper is to apply ramsey s 27 theory of optimal taxation to the normative study of fiscal policy in a stocastic growth model ramsey studied a static representative consumer economy with many goods in his formulation a government consumes a fixed amount of these goods which it purchases at market prices and finances by levying flat rate excise taxes prices and quantities are determined in a competitive equilibrium the government is benevolent and its objective is to choose the optimal tax rates to maximize the representative consumer s utility a number of economists among them kydland and prescott 23 barro 3 turnovsky and brock 31 and lucas and stockey 26 have noted that ramsey s formulation can be applied to dynamic economies with uncertainty if one reinterprets the goods in static problems as dated state contingent goods in this framework a fiscal policy is a rule which specifies state contingent tax rates and the amount of public debt issue in each date the optimal fiscal policy is defined as the one which leads to a quantity