technological specialization and the decline of diversified firms we document a strong decline in corporate diversification activity since the late 1970s and we develop a dynamic model that explains this pattern both qualitatively and quantitatively the key feature of the model is that synergies endogenously decline with technological specialization leading to fewer diversified firms in equilibrium the model further predicts that segments inside a conglomerate should become more related over time which is consistent with the data finally the calibrated model also matches other empirical magnitudes well output growth rate market to book ratios diversification discount frequency and returns of diversifying mergers and frequency of refocusing activity

targeting target shareholders we integrate heterogeneity and uncertainty in investor valuations into a model of takeovers investors have dispersed valuations holding shares in firms they value more highly and a successful offer must win approval from the median target shareholder we derive the consequences for an acquiring firm s takeover offer its size and cash equity structure and implications for takeover premia firm returns share price dynamics the probability that a takeover succeeds and shareholder welfare we characterize when the acquirer prefers cash offers and when equity offers are best our model collectively reconciles various empirical regularities that have proven elusive to explain in one unified framework and we derive new testable predictions this paper was accepted by neng wang finance

a model of housing and credit cycles with imperfect market knowledge abstract the paper presents a model of housing and credit cycles featuring distorted beliefs and comovement and mutual reinforcement between house price expectations and price developments via credit expansion contraction positive negative development in house prices fuels optimism pessimism and credit expansion contraction which in turn boost dampen housing demand and house prices and reinforce agents optimism pessimism bayesian learning about house prices can endogenously generate self reinforcing booms and busts in house prices and significantly strengthen the role of collateral constraints in aggregate fluctuations the model can quantitatively account for the 2001 2008 u s boom bust cycle in house prices and associated household debt and consumption dynamics it also demonstrates that allowing for imperfect knowledge of agents a higher leveraged economy is more prone to self reinforcing fluctuations

speculative prices and popular models t he rational expectations revolution in economics was born of the recognition that the expectations people hold for future economic variables are fundamental to their behavior thus our economists economic models require their those who make up the economy economic models models which they use to generate their expectations the key idea of rational expectations models is to collapse the two models into one to assume that people know or behave as if they know the true model that describes the economy this idea allows economists to construct simple and elegant models of the economy models that are appealing theoretically and that can be studied without collecting any data about the models in the minds of economic actors the problem with the rational expectations models is that collapsing the two kinds of models into one is a gross oversimplification obviously the popular models the models that are used by the broad masses of economic actors to form their expectations are not the same as those held by economists once one accepts the difference economic modelling cannot proceed without collecting data on the popular models themselves this paper reports on such a data collection effort on popular models using questionnaire survey methods with the purpose of understanding speculative markets i will report here on my research to understand the u s stock market crash of october 1987 research fumiko konya yoshiro tsutsui and i undertook to understand the japanese stock market crash of october 1987 research karl case and i undertook to understand recent real estate booms and research john pound and i undertook to understand the periodic hot markets for initial public offerings ipo s of common stock

when ownership structure matters a review of the effects of investor horizon on corporate policies this paper surveys the literature on the impact of investor horizon on corporate policies while the desire to encourage long term investor ownership is shared among managers boards and policy makers how greater long term investor ownership benefits corporate decisions and ultimately firm performance is still under academic investigation the contribution of this paper is twofold the paper s first contribution is providing an up to date review of theoretical and empirical findings this paper introduces the groups of long term and short term investors and the related classification methodologies and investor horizon proxies used to form them it further reviews the determinants of an investor s horizon then this paper organizes the literature on the impact of investor horizon on corporate policies around three main channels the short term pressure hypothesis the monitoring hypothesis and the catering hypothesis the paper s second contribution is identifying six major challenges ahead that need to be addressed to improve the understanding of the impact of long term short term investor ownership on corporates policies these challenges represent opportunities for further research

exit as governance an empirical analysis recent theory posits a new governance channel available to blockholders threat of exit threat of exit as opposed to actual exit is difficult to measure directly however a crucial property is that it is weaker when stock liquidity is lower and vice versa we use natural experiments of financial crises and decimalization as exogenous shocks to stock liquidity firms with larger blockholdings experience greater declines increases in firm value during the crises decimalization particularly if the manager s wealth is sensitive to the stock price and thus to exit threats additional tests suggest exit threats are distinct from blockholder intervention

explaining top management turnover in private corporations the role of cross country legal institutions and capital market forces we investigate private firms ability to identify and replace poorly performing managers across countries we document three main findings first private firms are more likely to retain poorly performing managers in countries where legal institutions that protect minority investors are weak second private firms are more likely to retain poorly performing managers than public firms only in countries where governance mechanisms inherent in public equity markets limit managerial entrenchment in public firms third private firm managers are less likely to be replaced even when poor performance continues for relatively long horizons overall our findings provide new evidence on the potential vulnerability of minority shareholders in private firms

the costs of shareholder activism evidence from a sequential decision model abstract this paper provides benchmarks for monitoring costs and evaluates the net returns to shareholder activism i model activism as a sequential decision process consisting of demand negotiations board representation and proxy contest and estimate the costs of each activism stage a campaign ending in a proxy fight has average costs of 10 71 million i find that the estimated monitoring costs reduce activist returns by more than two thirds the mean net activist return is close to zero but the top quartile of activists earns higher returns on their activist holdings than on their non activist investments the large sample evidence presented in this paper aids in understanding the nature and evolution of activist engagements

the real effects of uncertainty on merger activity firm values can substantially change between the time deal terms are set and the actual deal closing risking renegotiation or termination we find increases in market volatility decrease subsequent deal activity but only for public targets subject to an interim period the effect is strongest when volatility is highest for deals taking longer to close and for larger targets merging parties attempt to shorten the interim window as risk increases firm and industry level uncertainty measures reveal similar findings ruling out an unobserved macro variable we conclude interim uncertainty contributes to understanding the timing and intensity of public firms merger activity received february 12 2015 accepted may 23 2016 by editor david denis

an empirical analysis of the unionization of foreign manufacturing firms in the u s the ability of american labor unions to organize workers in majority and wholly foreign owned manufacturing plants in the u s is examined by analyzing union representation election results the principal conclusions are that the nationality of a firm is not a significant factor influencing election outcomes and that foreign firms are as difficult to unionize as domestic american firms several reasons are offered to explain these findings

foreign ownership effects on nlrb representation elections foreign investment in the united states has been expanding at a rapid rate during recent years for a variety of reasons it is probable that such investment will play an increasingly important role in the u s economy in the future the purpose of this study is to determine the impact of such foreign ownership on an important aspect of labor relations specifically nlrb representation elections tests of whether foreign majority ownership is associated with decreased union success are conducted through multiple discriminant and regression analysis of election results both analyses control for foreign ownership right to work legislation industry effects and size of election unit the results indicate a moderately inverse association between foreign majority ownership and union success in elections

ownership structure limits to arbitrage and stock returns evidence from equity lending markets we examine how institutional ownership structure gives rise to limits to arbitrage through its impact on short sale constraints stocks with lower more concentrated short term and less passive ownership exhibit lower lending supply higher costs of shorting and higher arbitrage risk these constraints limit the ability of arbitrageurs to take short positions and delay the correction of mispricing stocks with more concentrated ownership exhibit smaller announcement day reactions larger post earnings announcement drift and an additional negative abnormal return of 0 47 in the week following a positive shorting demand shock received june 16 2014 accepted june 8 2016 by editor laura starks

the real effects of financial markets the impact of prices on takeovers using mutual fund redemptions as an instrument for price changes we identify a strong effect of market prices on takeover activity the trigger effect an interquartile decrease in valuation leads to a seven percentage point increase in acquisition likelihood relative to a 6 unconditional takeover probability instrumentation addresses the fact that prices are endogenous and increase in anticipation of a takeover the anticipation effect our results overturn prior literature that finds a weak relation between prices and takeovers without instrumentation these findings imply that financial markets have real effects they impose discipline on managers by triggering takeover threats does a low market valuation make a firm a takeover target in theory if acquisition prices are related to market prices acquirers can profit from taking over a firm whose market value is low relative to its peers due either to mispricing or mismanagement and restore it to its potential indeed in practice acquirers and other investors appear to track a firm s valuation multiples for indications on the potential for acquisition and managers strive to maintain high market valuations to prevent a hostile takeover understanding whether such a link exists is important because if so this would suggest that the market is not a sideshow but rather exerts a powerful disciplinary effect on firm management as suggested by marris 1964 manne 1965 a ndjensen 1993 despite the above logic existing empirical studies on takeovers fail to systematically uncover a meaningful relationship between market valuations

the real effects of short selling constraints we use a regulatory experiment regulation sho that relaxes short selling constraints on a random sample of u s stocks to test whether capital market frictions have an effect on stock prices and corporate decisions we find that an increase in short selling activity causes prices to fall and that small firms react to these lower prices by reducing equity issues and investment these results not only provide evidence that short selling constraints affect asset prices but also confirm that short selling activity has a causal impact on financing and investment decisions

unions collective relations laws and r d investment in emerging and developing countries abstract many scholars argue that workforce unionization leads to a reduction in r d investment because unions appropriate a share of the returns to successful inventive efforts on the other hand it is widely acknowledged that unions may encourage investment in r d because of increased cooperation between workers and management our empirical analysis on cross country firm level data from 23 emerging and developing countries reveals a negative association between workforce unionization and firms r d investment this association is particularly pronounced when unions are protected by strong collective relations laws supporting the notion that strong unions tax the returns to successful inventions our findings have implications for policy makers who seek to improve emerging countries chances of catching up to the technological frontier and for firm leaders concerned about the appropriation of returns to their r d investments

facts and challenges from the great recession for forecasting and macroeconomic modeling this paper provides a survey of business cycle facts updated to take account of recent data emphasis is given to the great recession which was unlike most other postwar recessions in the united states in being driven by deleveraging and financial market factors we document how recessions with financial market origins are different from those driven by supply or monetary policy shocks this helps explain why economic models and predictors that work well at some times do poorly at other times we discuss challenges for forecasters and empirical researchers in light of the updated business cycle facts

mutual fund herding and stock price crashes abstract we investigate the impact of mutual fund herding behaviours on stock price crashes there are competing hypotheses with respect to how investors herding behaviours are associated with information processing our empirical evidence shows that mutual fund herding is associated with a poor information environment and low disclosure quality more importantly mutual fund herding amplifies stock price crash risk afterwards the main finding is concentrated on buy herding rather than sell herding to mitigate the endogeneity concern we use the 2004 sec mutual fund disclosure regulation change as an exogenous shock and the results hold we further use propensity score matching to alleviate the impact of information asymmetry finally additional analysis reveals that our results are not driven by the price impact hypothesis

learning to forecast the exchange rate two competing approaches this paper compares two competing approaches to model foreign exchange market participants behavior statistical learning and fitness learning these learning mechanisms are applied to a set of predictors chartist and fundamentalist rules we examine which of the learning approaches is best in terms of replicating the exchange rate dynamics within the framework of a standard asset pricing model we find that both learning methods reveal the fundamental value of the exchange rate in the equilibrium but only fitness learning creates the disconnection phenomenon and only statistical learning replicates volatility clustering none of the mechanisms is able to produce a unit root process but both of them generate non normally distributed returns

testing for deliberate underpricing in the ipo premarket a stochastic frontier approach we re evaluate the ipo underpricing phenomenon using the stochastic frontier methodology the advantage of the stochastic frontier is that it can be used to measure the level of deliberate underpricing in the premarket without using after market information this is accomplished through the estimation of a systematic one sided error term that measures inefficiency or the difference between the maximum predicted offer price and the actual offer price data for the analysis are comprised of 1 035 ipos of common stock issued by firm commitment between 1975 and 1984 ipos appear to be deliberately underpriced in the premarket in both hot market and nonhot market periods moreover the determinants of the maximum ipo price have different effects in the two time periods article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

us stock prices and recency biased learning in the run up to the global financial crisis and its aftermath abstract this paper presents a consumption based asset pricing model in which fluctuations in stock prices are driven by investors time varying subjective expectations about the dividend process in line with the empirical literature investors display recency bias when revising their beliefs about the actual dividend process and recursively discount the precision of past observations recency biased learning significantly improves the ability of the standard model to replicate the boom and bust episode on the us s p 500 stock market in the run up to the global financial crisis and its aftermath along with features of subjective expectations of stock returns documented in survey data

the going public decision and the development of financial markets this paper explores the linkages between stock price efficiency the choice between private and public financing and the development of capital markets in emerging economies generally the advantage of public financing is high if costly information is diverse and cheap to acquire and if investors receive valuable information without cost the value of public firms generally depends on public market size which implies that there can be a positive externality associated with going public so that an inferior equilibrium can exist where too few firms go public the model is consistent with empirical observations on financial market development

the supply of corporate directors and board independence empirical evidence on the relations between board independence and board decisions and firm performance is generally confounded by serious endogeneity issues we circumvent these endogeneity problems by demonstrating the strong impact of the local director labor market on board composition specifically we show that proximity to larger pools of local director talent leads to more independent boards for all but the largest quartile of s p 1500 using local director pools as an instrument for board independence we document that board independence has a positive effect on firm value operating performance fraction of ceo incentive based pay and ceo turnover the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

the source of information in prices and investment price sensitivity abstract this paper shows that real decisions depend not only on the total amount of information in prices but the source of this information a manager learns from prices when they contain information not possessed by him we use the staggered enforcement of insider trading laws across 27 countries as a shock to the source of information that leaves total information unchanged enforcement reduces increases managers outsiders contribution to the stock price consistent with the predictions of our theoretical model enforcement increases investment q sensitivity even when controlling for total price informativeness the effect is larger in industries where learning is likely to be stronger and in emerging countries where outsider information acquisition rises most post enforcement enforcement does not increase the sensitivity of investment to cash flow a non price measure of investment opportunities these findings suggest that extant measures of price efficiency should be rethought when evaluating real efficiency more broadly our paper provides causal evidence that managers learn from prices by using a shock to price informativeness

merger negotiations with stock market feedback do preoffer target stock price runups increase bidder takeover costs we present model based tests of this issue assuming runups are caused by signals that inform investors about potential takeover synergies rational deal anticipation implies a relation between target runups and markups offer value minus runup that is greater than minus one for one and inherently nonlinear if merger negotiations force bidders to raise the offer with the runup a costly feedback loop where bidders pay twice for anticipated target synergies markups become strictly increasing in runups large sample tests support rational deal anticipation in runups while rejecting the costly feedback loop

good disclosure bad disclosure we study the implications of public information in a model where market prices convey information to relevant decision makers and the uctuation of market prices is driven by multiple factors disclosure has a positive direct eect of providing new information and an indirect eect of changing the price informativeness if disclosure is about a variable of which real decision makers are well informed then the indirect eect is also positive so that the direct eect is ampli ed leading to a positive overall eect on real e ciency if disclosure is about a variable that real decision markers care to learn much then the indirect eect is negative and the direct eect is attenuated moreover in markets which aggregate private information eectively the negative indirect eect can dominate so that disclosure can harm real e ciency

capital accumulation in a politically unstable region we investigate the different channels by which political instability impacts capital accumulation using a unique data of firms from the middle east and north africa mena a region that has long suffered from political unrest and a novel empirical method we find that political stability shapes firm investment mainly via its influence on credit conditions political instability tightens borrowing constraints and impedes capital accumulation thereby adversely affecting economic growth

market based corrective actions many economic agents take corrective actions based on information inferred from market prices of firms securities examples include directors and activists intervening in the management of firms and bank supervisors taking actions to improve the health of financial institutions we provide an equilibrium analysis of such situations in light of a key problem if agents use market prices when deciding on corrective actions prices adjust to reflect this use and potentially become less revealing we show that market information and agents information are complementary and discuss measures that can increase agents ability to learn from market prices the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

manipulation and the allocational role of prices it is commonly believed that prices in secondary financial markets play an important allocational role because they contain information that facilitates the efficient allocation of resources this paper identifies a limitation inherent in this role of prices it shows that the presence of a feedback effect from the financial market to the real value of a firm creates an incentive for an uninformed trader to sell the firm s stock when this happens the informativeness of the stock price decreases and the beneficial allocational role of the financial market weakens the trader profits from this trading strategy partly because his trading distorts the firm s investment we therefore refer to this strategy as manipulation we show that trading without information is profitable only with sell orders driving a wedge between the allocational implications of buyer and seller initiated speculation and providing justification for restrictions on short sales

presidential address asset price dynamics with slow moving capital i describe asset price dynamics caused by the slow movement of investment capital to trading opportunities the pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended reversal the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect institutional impediments to immediate trade such as search costs for trading counterparties or time to raise capital by intermediaries i discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions which subsided afterward after presenting examples of price reactions to supply shocks in normal market settings i offer a simple illustrative model of price dynamics associated with slow moving capital due to the presence of inattentive investors i address the implications for asset price dynamics of the apparent slow movement of investment capital to trading opportunities the arrival of new capital to an investment opportunity can be delayed by fractions of a second in some markets for example an electronic limit order book market for equities or by months in other markets such as that for catastrophe risk insurance accordingly prices respond to supply or demand shocks with a sharp reaction because of the relatively small subset of capital and thus risk bearing capacity that is immediately available to absorb a shock on short notice such a price impact is substantially reversed over time as additional capital becomes available the amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of attention costs to trade as well as institutional impediments to capital movement such as search costs for trading

posturing and holdup in innovation we show that the need to posture can help solve the holdup problem inherent in many multistage relationships including those between entrepreneurs and venture capitalists posturing arises when an informed party needs to send a strong signal to induce skeptical third parties like employees suppliers customers or competitors to develop maintain relationships with the firm or take other actions that increase firm value in the venture capital context this can be credibly achieved if the vc publicly invests at high prices in later rounds this tempers holdup by shifting ex post bargaining power toward the entrepreneur inducing him to exert greater effort

determinants of the outcomes of union certification elections this study analyzes determinants of union election outcomes at the level of the work unit within a theoretical framework of utility maximization voting behavior is modeled as a function of the social psychology of groups the economic and sociopolitical environment nlrb procedures and the extent of union organization of the industry utilizing nlrb certification election records for 1979 the author finds a negative relationship between unit size and union victories in units of fewer than 65 workers but no relationship in larger units also negatively related to union victories are delays between petition and election dates elections held in southern states having right to work laws and elections involving the teamsters in contrast workers are more likely to vote for representation as unemployment levels and the proportion of consent elections rise and as the rate of unionization in their industry rises to 35 percent

time varying risk aversion abstract exploiting portfolio data and repeated surveys of an italian bank s clients we test whether investors risk aversion increases following the 2008 crisis we find that after the crisis both qualitative and quantitative measures of risk aversion increase substantially and that affected individuals divest more stock we investigate four explanations changes in wealth expected income perceived probabilities and emotion based changes of the utility function our data are inconsistent with the first two channels while they suggest that fear is a potential mechanism underlying financial decisions whether by increasing the curvature of the utility function or the salience of negative outcomes

markup pricing in mergers and acquisitions this paper studies the relation between the premiums in takeover bids involving exchange listed target firms from 1975 91 and the pre announcement stock price runups the evidence shows that the pre bid runup and the postannouncement increase in the target s stock price the markup are generally uncorrelated with little substitution between the runup and the markup the runup is an added cost to the bidder this finding has important implications for assessing the costs of insider trading it also raises interesting questions about the role of information from public capital markets in private takeover negotiations

tests of the rational expectations hypothesis this paper reviews evidence on the structure of anticipation from a number of empirical studies jack muth s rational expectations hypothesis is compared with a variety of alternative models including ferber s law the implicit expectations model of edwin mills and muth s new errors in the variables model the cumulative evidence is of such strength as to compel the suspension of belief in the concept of rational expectations this implies that it is a mistake to proceed under the maintained hypothesis that expectations are rational instead it is necessary to test the sensitivity of empirical and theoretical results to alternative assumptions about the structure by which anticipations are generated copyright 1986 by american economic association

changes in institutional ownership and stock returns assessment and methodology although the relation between quarterly changes in institutional investor ownership and contemporaneous stock returns is well documented the source of the relation remains unclear because institutional ownership data are unavailable at higher frequencies in this study we develop a method to generate estimates of higher frequency covariances when one variable is observed at lower frequencies e g quarterly changes in institutional ownership and monthly stock returns our method provides evidence that institutional trading has both temporary and permanent price effects and that the latter is associated with information effects