learning to believe in sunspots a number of authors have shown that competitive economies may possess sunspot equilibria that is rational expectations equilibria in which purely extrinsic uncertainty affects equilibrium prices and allocations 2 such results demonstrate that it does not require a lack of faith in the rationality of market participants to believe that competitive markets may be subject to purely speculative fluctuations driven solely by expectations 3 the mere existence of sunspot equilibria as solutions to a system of marketclearing conditions however might not be judged sufficient to indicate that competitive markets with rational participants could ever be subject to speculative instability the sunspot equilibria represent states of affairs in which agents act differently in the case of different realizations of the sunspot variable and it is rational for each agent to do so but it might be thought unlikely that the beliefs of all the participants in the market could ever come to be coordinated so as to bring about an equilibrium of that kind it is rational to believe that sunspots convey information about future states of affairs once the economy is in a sunspot equilibrium but why would rational agents ever begin to believe in such a thing so as to create the conditions under which the belief is rational in order to address such a question one must go beyond the mere statement of the conditions for equilibrium and discussion of what states of affairs satisfy them one must specify an explicit dynamic process according to which the beliefs of agents adjust when out of equilibrium any exercise of this kind is necessarily unsatisfactory as there is no univocal meaning for the postulate of rational behavior outside of an equilibrium it may well be the case that

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

dynamic predictor selection in a new keynesian model with heterogeneous expectations abstract this paper introduces dynamic predictor selection into a new keynesian model with heterogeneous expectations and examines its implications for monetary policy we extend branch and mcgough 2009 by incorporating endogenous time varying predictor proportions along the lines of brock and hommes 1997 we find that periodic orbits and complex dynamics may arise even if the model under rational expectations has a unique stationary solution the qualitative nature of the non linear dynamics turns on the interaction between hawkishness of the government s policy and the extrapolative behavior of non rational agents

business ethics and the decision to adopt golden parachute contracts empirical evidence of concern for all stakeholders golden parachutes are often viewed as a form of excessive compensation because they provide senior management with substantial payouts following an acquisition while other stakeholders are subjected to layoffs disrupted business relationships and other negative externalities using a sample of s p 500 firms an economic and ethical justification for this type of contract is given golden parachutes ensure effective corporate governance that in turn preserve the firm s value for all stakeholders boards of directors enter into parachute agreements to protect recently hired ceos human capital during periods of financial uncertainty and thus potential takeover activity from an ethics viewpoint golden parachutes are valuable to all stakeholders because they encourage merger or acquisition in lieu of bankruptcy

golden parachutes shark repellents and hostile tender offers a common view of golden parachutes and shark repellents is that they are designed by management to insulate itself from the discipline imposed by the market for corporate control and so are harmful to shareholders this paper offers an alternative view that these devicesare beneficial to shareholders because they allow better contracting between manager and shareholders evidence on the incidence of goldenparachutes and on the compensation tenure relationship for managers of golden parachute firms supports the alternative view copyright 1986 by american economic association

antitakeover charter amendments and stockholder wealth abstract many large corporations have recently adopted antitakeover charter amendments which make the transfer of corporate control more difficult this paper develops and tests competing theoretical explanations for the passage of these amendments in one view antitakeover provisions are adopted because incumbent management seeks job protection at stockholders expense the alternative hypothesis is that antitakeover provisions benefit stockholders perhaps by extracting greater payment in exchange for corporate control although inconclusive the evidence provides weak preliminary support for the hypothesis that antitakeover amendments are best explained as a device for managerial entrenchment

default premiums in commodity markets theory and evidence we model the effect of nonperformance risk on forward and futures pricing and look for evidence of nonperformance risk in precious metals futures prices from the hunt brothers episode changes in default premiums are measured and related to the sequence of events in the metals markets during this period results suggest first that ex ante costs of nonperformance can be a significant priced factor in commodity markets and second that the arrival of new information is often associated with changes in these costs the evidence has implications for both theoretical and empirical research on commodity markets organized commodity markets offer traders an efficient medium in which to execute their hedging and speculative strategies in particular the markets have developed mechanisms that reduce the costs of nonperformance which would be substantial in the absence of an organized exchange devices such as margin requirements position limits daily marking to market price limit moves and the clearinghouse reduce the expected costs of distress and default in commodity markets while organized exchanges greatly reduce expected costs of nonperformance they do not eliminate such costs throughout the history of organized futures trading there have been many instances of markets collapsing or coming to the brink of collapse after a period of unusual trading activity the most prominent example in recent times is the near collapse of the new

stability properties for learning with heterogeneous expectations and multiple equilibria the bounded rationality literature has studied heterogeneous learning rules under models with a single equilibrium this paper examines learning with heterogeneous expectations in a simple macroeconomic model with multiple equilibria stability properties of this model are determined by the distribution of heterogeneity these results differ greatly from those which impose homogenous expectations a priori when the level of heterogeneity is allowed to vary stability conditions become more restrictive due to the stationarity requirements of the simpler more parsimonious updating rule finally i find that the two equilibria exchange stability when the mse of using this simpler updating rule is minimized

employee stock ownership and corporate control an empirical study abstract this study reexamines the wealth and corporate control effects of employee stock ownership plans esops and finds that the adoption of an esop is in general associated with positive wealth effects however the polaroid court ruling significantly changed the market s perception by enhancing the antitakeover role of esops a significant negative market response is found only after the court ruling analysis of speculation and bid activity initiated after an esop adoption shows a significant decline in takeover related activity following the court decision regression analysis corroborates this evidence consistent with stulz journal of financial economics 20 1988 25 54 and harris and raviv journal of financial economics 20 1988 55 86 the results also suggests a non monotonic relationship between firm value and managerial ownership the results support the scholes and wolfson financial management 49 1990 12 28 hypothesis that esops are not primarily implemented for tax advantages

replicator dynamics in a cobweb model with rationally heterogeneous expectations abstract this paper extends the adaptively rational equilibrium dynamics of brock and hommes brock w a hommes c h 1997 a rational route to randomness econometrica 65 1059 1160 by introducing a generalized version of the replicator dynamic the replicator equilibrium dynamics red couples the price dynamics of a cobweb model with predictor selection governed by an evolutionary replicator dynamic we show that the red supports the conclusion of sethi and franke sethi r franke r 1995 behavioural heterogeneity under evolutionary pressure macroeconomic implications of costly optimisation the economic journal 105 583 600 that costly rational beliefs persist though unlike them these results obtain in the deterministic case numerical evidence shows that complex dynamics exist as in brock and hommes even though no weight is placed on strictly dominated predictors in an red steady state

the collapse of first executive corporation junk bonds adverse publicity and the run on the bank phenomenon abstract in april 1991 regulators seized the major subsidiaries of first executive corporation fe an insurer that invested heavily in junk bonds during the junk bond market turmoil of 1989 1990 adverse publicity fueled a bank run at fe forcing a 4 billion portfolio liquidation before the market rose 50 60 in 1991 1992 more traditional insurers did not receive commensurate press coverage despite their substantial exposure to real estate declines which were roughly 2 5 times the junk bond decline seizure of fe s subsidiaries was defensible although fe would have become solvent within a year given average junk bond market appreciation

boom and bust patterns in the adoption of financial innovations we develop a dynamic model of the adoption of financial innovations each period firms decide whether or not to adopt an innovation of uncertain value and the profitability of each period s adoptions reveals information about the innovation s value we show that characteristics of financial innovation waves cited by critics as evidence of irrational excess are in fact consistent with fully rational behavior we also show that social welfare is enhanced when more firms adopt innovations of questionable value and that financial intermediaries base an incentive to encourage such adoption article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

learning in a misspecified multivariate self referential linear stochastic model this paper introduces a general method to study stability under learning of equilibria resulting from agents with misspeci ed perceptions of the law of motion of the economy this is done by transforming the actual and perceived laws of motion into the form of seemingly unrelated regressions and then linearly projecting the actual law of motion into the same class as the perceived law of motion i study the new keynesian is lm model with inertia under all possible classes of restricted perceptions it turns out that the results found in bullard and mitra 2002 2003 are robust under misspeci ed expectations

framing controversial actions regulatory focus source credibility and stock market reaction to poison pill adoption we contribute to the research on organizational accounts by examining the role of different framing languages and the credibility of the frame articulator on justifying controversial organizational actions drawing on regulatory focus theory and the literature on source credibility we develop novel arguments as to how a gains versus nonlosses framing and the perceived credibility of the speaker influence stakeholder responses as well as how the effectiveness of these aspects is influenced by context we test our arguments using data on the framing of the adoption of poison pills by u s firms between 1983 and 2008 using content analysis and an event study we find that a gains framing aligned with the dominant institutional logic leads to a positive stock market reaction while statements emanating from speakers with potentially self serving interests negatively affect the stock market reaction our findings further show that the effectiveness of framing and source credibility are dependent on contextual attributes such as speaker visibility prior performance and practice prevalence

how golden parachutes unfolded diffusion and variation of a controversial practice we contribute to a growing focus on variation in diffusion processes by examining the ways in which contested practices are modified as they spread among adopters expanding on prior diffusion accounts we argue that the extensiveness and similarity of a practice will vary in response to both population and organization level mechanisms to examine these issues we study variation in golden parachute contracts a controversial corporate governance practice that emerged and spread widely during the hostile takeover wave of the 1980s using a concept network approach to analyze the composition of parachute plans we find evidence of mechanisms that both increase and decrease extensiveness and variation of golden parachutes our findings hold implications for accounts of practice diffusion over contested terrain by revealing substantial variation in the course of diffusion

the behavior of intra daily exchange rates abstract the behavior of exchange rates is examined as they evolve continuously over time the data consist of swiss franc u s dollar rates for nine days during the years 1978 1980 as quoted by a major swiss dealer operating on the interbank market since this market is highly organized the observations are market prices at the same time the distributions of relative changes in exchange rates measured over one minute are highly leptokurtic the normal distribution is rather rapidly approached when the measurement interval is lengthened from one up to ten minutes time series analysis reveals that the natural logarithms of exchange rates are adequately described by a random walk the same stochastic process as has been found for daily weekly monthly and quarterly observations for short time intervals significant autocorrelations sometimes occur at the first few lags which are however not stable enough over time to form a basis for reliable forecasts

optimal ceo compensation some equivalence results i study optimal managerial contracts in two contracting environments when the investment return is contractible an optimal contract combines a base salary golden parachute and bonus when the return is not contractible two types of optimal contracts are studied a contract with restricted stock and a contract with stock options these three types of contracts are equivalent they implement the same outcome and lead to the same expected payoff for the manager implying that the choice of contractual form is irrelevant in the environment i study i suggest directions of research for the relevance of different contractual forms

are hyperinflation paths learnable abstract earlier studies of the seigniorage inflation model have found that the high inflation steady state is not stable under learning we reconsider this issue and analyze the full set of solutions for the linearized model our main focus is on stationary hyperinflationary paths near the high inflation steady state these paths are shown to be stable under least squares learning if agents can utilize contemporaneous data in an economy with a mixture of agents some of whom only have access to lagged data stable hyperinflationary paths emerge only if the proportion of agents with access to contemporaneous data is sufficiently high

ceo replacement under private information this article examines the optimal ceo compensation and replacement policy when the ceo is privately informed about the firm s continuation value under his leadership ex ante moral hazard implies that the ceo must receive ex post quasi rents which endogenously biases him toward continuation our model shows that to induce bad ceos to quit it may be best to make continuation costly through steep incentive pay rather than simply rewarding quitting through severance pay incentive pay makes continuation attractive for good ceos who can expect high future on the job pay but unattractive for bad ceos who may instead prefer to take their outside option payoff our model generates novel empirical implications that jointly relate ceo compensation and turnover to corporate governance firm size cash flow risk and the informativeness of performance measurement jel g34

capital and ownership structures and the market for corporate control the author analyzes optimal capital and ownership structures as resulting from anticipated future control contests he focuses on leverage as a device that enables the incumbent management to extract the maximum value from the rival he shows that firm value depends on both capital and ownership structures the analysis leads to the following predictions 1 more efficient managers use less debt 2 firms facing better rivals for control issue more debt and 3 firms with supermajority rules issue less debt several predictions are consistent with known empirical regularities article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

international portfolio diversification with estimation risk international portfolio diversification has long been advocated as a way of enhancing average returns while reducing portfolio risk for the investor who considers diversifying into foreign securities this proposition however relies on the assumption that the required inputs to the classical mean variance analysis are known with certainty typically expected returns variances and covariances are simply replaced by their ex post sample values and the optimal portfolio is derived without mentioning the uncertainty inherent in these parameter values but the rational investor should take this uncertainty into account when forming expectations and probably will consider estimators that are less subject to estimation error than the classical sample mean this paper investigates alternative estimators of expected returns and their implications for the alleged gains from diversification an important observation is the crucial influence that errors in estimating expected returns have on portfolio analysis a closer examiprevious studies of international portfolio diversification have relied on ex post meanvariance analysis without considering the problem of estimation risk typically past averages are substituted for expected returns and no allowance is made for the uncertainty inherent in these parameter values first i demonstrate the shortcomings of such an approach and second i investigate another method of estimating expected returns initially proposed by stein by shrinking the sample averages toward a common mean i find that the out of sample performance of the optimal portfolio is substantially increased one of the implications of this method is that the classical conclusions vastly overestimate the possible gains in average returns instead benefits from diversification are more likely to accrue from a reduction in risk this paper draws on part of my dissertation at the university of chicago i am grateful to arnold zellner michael mussa george constantinides and especially john bilson for useful discussions and comments numerous improvements were also suggested by the referee this research received the generous financial support of the college interuniversitaire d etudes doctorales dans les sciences du management

breach of trust in takeovers and the optimal corporate charter this paper analyzes how takeovers various takeover defenses and golden parachutes affect the value of target companies using an incomplete contracts framework the author considers a raider who can improve the efficiency of production and appropriate rents of stakeholders of the company anticipating the expropriation of his rents the manager s relationship specific investments will be too small which may offset the value increase through the takeover the simultaneous use of poison pills and golden parachutes can solve the underinvestment problem without forgoing profitable takeovers however the privately optimal level and composition of takeover defenses need not be socially efficient copyright 1995 by blackwell publishing ltd

the structure of ownership and the theory of the firm the separation of ownership from control produces a condition where the interests of owner and of ultimate manager may and often do diverge and where many of the checks which formerly operated to limit the use of power disappear in creating these new relationships the quasi public corporation may fairly be said to work a revolution it has divided ownership into nominal ownership and the power formerly joined to it thereby the corporation has changed the nature of profit seeking enterprise 1

the mode of acquisition in takeovers taxes and asymmetric information we develop a model in which the mode of acquisition conveys information concerning the value of the bidder the model incorporates the possibility that offers containing both cash and stock can be made in a setting consistent with the u s tax code we demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers the model yields a number of unique predictions about the construction of acquisition offers we present evidence consistent with the model when one firm acquires another it can pay for the acquisition with cash stock or a combination of the two recent studies find that announcement returns to bidding firms who make cash offers are higher than when stock offers are made models consistent with this evidence note that as in myers and majluf 1984 a bidder with private information about the value of its assets only offers stock when its shares are overvalued by target shareholders recognizing this adverse selection target shareholders reduce their estimate of the bidder s value thus without some benefit in stock over cash as a means of payment a lemons problem arises for stock offers and bidders only choose cash offers our paper advances the use of stock in an offer through its tax advantages in the united states to realize the benefits available in nontaxable offers an offer must contain at least fifty percent stock thus when the bidder has private information about the value of its assets stock off6rs can still occur because of their tax advantage the intuition is as follows target holders can postpone the realization of capital gains when they receive stock in a takeover so other things equal they demand higher prices in cash takeovers while the offer of stock may have tax advantages the shares swapped are valued by the target as if they were offered by the average bidder making a stock offer thus a pool of higher private valuation bidder types choose cash offers in spite of the tax consequences a pool of lower private valuation types

shark repellents and managerial myopia an empirical test since the proxy fights of the 1950s commentators have debated the welfare implications of corporate takeovers although observers such as manne 1965 jensen and meckling 1976 fama 1980 and jensen and ruback 1983 argue that the market for corporate control promotes efficiency and enhances wealth some critics such as managers of firms subject to hostile takeover attempts contend that takeovers destroy firm value the critics frequently assert that takeover pressure forces managers to sacrifice profitable but slowyielding long term investments in favor of less productive short term investments that offer immediate returns while the evidence supporting takeover induced shortsightedness is largely anecdotal a recent paper by stein 1988 develops a formal

equilibrium long term labor contracts the paper presents a labor market equilibrium analysis of implicit contract theory a two period single good model is used to propose consistent notions of labor market equilibrium for long term employment contracts both when labor is specialized and cannot move in the second period and when there is free mobility without costs the result that long term contracts emerge in equilibrium even without mobility costs is novel and contrary to common beliefs the main features of equilibrium are that risk neutral firms will insure risk averse workers against downside risk yielding downward rigid wages wages are not fully rigid as in earlier work on contract theory because workers may quit and wages have to be bid up to retain them the firm gets its return of the insurance deal by paying less than marginal product in the first period the resulting equilibrium is second best and lies between productive efficiency and full insurance workers gain from long term contracts in comparison to spot markets whereas owners may not in the model with specialized skills there exist transfer payments such that both parties are better off within an equilibrium with long term contracts

ceo turnover and volatility under long term employment contracts we study the role of the contractual time horizon of chief executive officers ceos for ceo turnover and corporate policies using hand collected data on 3 954 fixed term ceo contracts we show that remaining time under contract predicts ceo turnover when contracts are close to expiration turnover is more likely and is more sensitive to performance we also show a positive within ceo relation between remaining time under contract and firm risk our results are similar across short and long contracts and are driven neither by firm or ceo survival nor technological cycles they are consistent with incentives to take long term projects with interim volatility

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

regulatory distortion of management compensation the case of golden parachutes for bank managers this paper examines whether golden parachute adoptions in the banking industry during the eighties aligned the interests of ceos with those of regulators and or shareholders our results provide evidence supporting concerns expressed by regulators that boards of directors behaved opportunistically by adopting golden parachutes prior to large bank failures in order to exploit the fdic guarantee parachute adoption was correlated with poor performance ex ante and ex post moreover adoption of parachutes virtually ceased when the fdic guarantee was withdrawn by fdicia

the behavior of flexible exchange rates evidence and implications for predicting currency price movements furthermore variations in nominal exchange rates are dominated by changes in real rates past rate changes will not be useful for predicting inflation or vice versa changes in money supplies real incomes interest rates and current or trade accounts appear not to be systematically related to changes in exchange rates in the absence of any systematic component that could be exploited for forecasting purposes what means are available for controlling exchange rate risk hedging can be used with some effect but the optimal hedging policy is still a matter of debate given the relatively low correlations between euromarket interest rates and returns on common stock indexes and relative changes in exchange rates diversification across international markets offers considerable potential for risk reduction

corporate financial policy and corporate control abstract this paper presents evidence that stockholder wealth declines on average when managers respond to attempted hostile takeovers with defensive changes in asset and ownership structure the data also indicate that these corporate restructurings are typically quite large and that many are attempts by managers to create barriers specific to the hostile bidder and or to consolidate a block of voting securities in the hands of management allies the evidence suggests that defensive motives whether beneficial or harmful influence corporate asset and ownership structure

valuation effects of greenmail prohibitions greenmail payments are widely viewed as actions designed by managers to perpetuate their tenure in offiee this view which suggests that greenmail prohibitions would enhance shareholder wealth receives mixed empirical support in this paper the average market reaction to charter amendments prohibiting greenmail payments is weakly nega tive suggesting there is a value to maintaining managerial flexibility nonlinear maxi mum likelihood estimation however reveals a strong positive correlation between the market reaction and the firm s abnormal stock price runup over the three months just prior to the proxy mailing date for the subsample of firms with a relatively large prior runup the precommitment not to pay greenmail is value enhancing if the prior runup reflects takeover rumors then this evidence is consistent with the proposition that greenmail pay ments amidst takeover speculations are value decreasing

optimal toeholds in takeover contests abstract we offer an explanation for why raiders do not acquire the maximum possible toehold prior to announcing a takeover bid by endogenously modeling the target firm s value following an unsuccessful takeover we demonstrate that a raider may optimally acquire a small toehold even if the acquisition does not drive up the pre tender target price this occurs because although a larger toehold increases profits if the takeover succeeds it also conveys a higher level of managerial entrenchment and hence a lower firm value if the takeover fails we derive new predictions regarding the optimal toehold and target value following a failed takeover we also examine the impact of a rival bidder and dilution

are the representative agent s beliefs based on efficient econometric models abstract no they are not at least not in the uk by examining gdp dynamics we find that over a time span of two decades an easy to perform adaptive expectations model systematically outperforms other standard predictors in terms of squared forecasting errors this should reduce model uncertainty and thereby lead to increased homogeneity in expectations however data collected in surveys show that great variety in expectations persists even in this situation moreover granger tests indicate that the forecasting fitness of the best predictor can be further enhanced by the use of information provided by survey expectations these results based on real time data and robust to both several predictors and nonlinearities weaken the general validity of approaches assuming predictions based on efficient econometric models

monetary policy indeterminacy and learning abstract forward looking monetary models with taylor type interest rate rules are known to generate indeterminacies with a potential dependence on extraneous sunspots for some structural and policy parameters we investigate the stability of these solutions under adaptive learning focusing on common factor or resonance frequency representations in which the observed sunspot has a suitable time series structure we consider specifications incorporating both lagged and expected inflation in the phillips curve and both expected and inertial elements in the policy rule we find that some policy rules can indeed lead to learnable sunspot solutions and we investigate the conditions under which this phenomenon arises

adaptive learning endogenous uncertainty and asymmetric dynamics abstract i present a simple model where forecasting confidence affects aggregate demand it is shown that this model has similar stability properties under statistical and evolutionary learning as a model without a confidence affect from this setup i introduce expectational business cycles where output fluctuates due to learning heterogeneous forecasting models and random changes in the efficient forecasting model agents use one of two forecasting models to forecast future variables while heterogeneity is dictated via an evolutionary process increased uncertainty due to a shock to the structure of the economy may result in a sudden decrease in output as agents learn the equilibrium output slowly increases to its equilibrium value expectational business cycles tend to arrive faster last longer and are more severe as agents possess less information

the effect of management s choice between negotiated and competitive equity offerings on shareholder wealth this paper investigates the effect on shareholder wealth of two events that change management s choice between negotiated and competitive underwritten equity offerings these two events are the suspension and termination of suspension of rule 50 this rule is based on the public utility holding company act of 1935 and requires certain utilities to use the competitive method the results indicate that the shareholders of the affected utilities experience an abnormal negative return on the announcement of the suspension of rule 50 and an abnormal positive return on the announcement of the termination of suspension this evidence is consistent with the joint hypothesis i competitive offerings are less costly than negotiated offerings and ii manager shareholder agency costs are a determinant of the corporate choice between these two methods of raising equity

large shareholders and the monitoring of managers the case of antitakeover charter amendments this paper examines the role of large shareholders in monitoring managers when they propose antitakeover charter amendments we attempt to distinguish between two competing hypotheses the active monitoring hypothesis and the passive voting hypothesis we find a statistically significant positive relation between institutional ownership and the stockholder wealth effects of various types of amendments after controlling for ownership concentration among institutions managerial ownership and firm size our empirical evidence lends support to the active monitoring hypothesis proposed by demsetz 1983 and shleifer and vishny 1986 that the existence of large shareholders leads to better monitoring of managers

stock vesting conditions control benefits and managerial replacement this article considers the effect of vesting conditions of stock based compensation on firms decisions to replace managers i indicate that firms may excessively replace managers with both long and short term vested stock based compensation while excessive retention can only be caused by short term vested options if the discount factor is sufficiently small i also show that short term vested stock based compensation is the equilibrium contract the study also has implications for regulations concerning mandatory deferral and clawback of executive pay

explicit versus implicit contracts evidence from ceo employment agreements we report evidence on the determinants of whether the relationship between a firm and its chief executive officer ceo is governed by an explicit written or an im plicit agreement we find that fewer than half of the ceos of s p 500 firms have comprehensive explicit employment agreements consistent with contracting theory explicit agreements are more likely to be observed and are likely to have a longer du ration in situations in which the sustamabihty of the relationship is less certain and where the expected loss to the ceo is greater if the firm fails to honor the agreement when a firm hires a chief executive officer ceo it enters into a complex relationship that has significant long term implications for its stockholders establishing the terms of this relationship requires determining the ceo s responsibilities compensation perquisites and term of employment the con ditions under which either party can sever the relationship and restrictions on the ceo s outside activities among other considerations despite the com plexity of these arrangements many public companies including some of the largest choose not to put such terms in writing in 2000 less than half of the firms in the s p 500 had a comprehensive written or explicit employment agreement ea with their ceos the other firms had either no written agree ment at all or agreements that covered only limited aspects of their relationship with the ceo such as change of control nondisclosure noncompete or nonso licitation agreements these latter firms and their ceos relied on implicit eas through which the ceo was employed at will we report evidence on the determinants of whether the relationship between a firm and its ceo is contractually defined in an explicit agreement this

local convergence properties of a cobweb model with rationally heterogeneous expectations abstract this paper gives local stability conditions for convergence of the price dynamics in a cobweb model with rationally heterogeneous expectations generalizing the example of brock and hommes 1997 when agents choose between rational naive and adaptive beliefs the steady state may be locally asymptotically stable if the adaptive predictor places enough weight on past prices and is costless if adaptive expectations are sufficiently more costly than naive expectations the steady state will be an unstable saddle point our results imply that adding a choice can stabilize a system which is unstable under the brock and hommes model these results illustrate how the critical parameter that governs stability is dependent on the array of available predictors

an empirical investigation of the impact of antitakeover amendments on common stock prices abstract antitakeover amendments are amendments to a corporation s charter that impede the ability of an outsider to gain control of the firm a number of individuals and institutions have onjected to such amendments on the grounds that they are not in the best interests of the shareholders of the firms that adopt them this paper employs event time methodology to investigate the impact of antitakeover amendments on the common stock prices of firms that adopt them the results indicate that the announcement of such amendments is associated with a positive revaluation of stock price contrary to the concerns of their critics we conclude that antitakeover amendments are proposed by managers who seek to increase the value of the firm and are approved by stockholders who share that objective

productivity dispersion and output fluctuations an evolutionary model we develop a model of technology choice with search costs innovators develop technology of varying quality or productivity firms acquire technology after paying a search cost to find high productivity technology the resulting model has mixed equilibria with productivity dispersion however such mixed equilibria are unstable under the logit dynamic from evolutionary game theory instead the economy converges to limit cycles whose existence we verify numerically we conclude therefore that mixed equilibria is not a robust explanation of productivity dispersion in our model instead such productivity dispersion is a cyclical phenomenon an additional implication is that cyclical productivity dispersion contributes to endogenous fluctuations in aggregate output

issuing costs to existing shareholders in competitive and negotiated underwritten public utility equity offerings abstract this paper presents the results of an empirical investigation of whether there is any difference in the cost incurred by public utilities if they issue new equity through a negotiated or competitive underwriting we conclude that the expected cost of a competitive offer is less than the expected cost of a negotiated offer but that the variance of the cost is substantially greater with a competitive offer these results are interesting because most public utilities use negotiated underwriting unless forced by regulation to use competitive offers this paper is also an addition to the growing agency theory literature

heterogeneous expectations adaptive learning and evolutionary dynamics this paper presents a linear self referential macroeconomic model with the possibility of multiple equilibria where agents have the choice of using one of two forecasting models one of minimum state variable form and the other of sunspot form to form expectations of current and future prices endogenous predictor selection is modeled as an evolutionary game where individuals choose among the forecasting models based on relative performance some nash solutions are not relevant as they are not stable under evolutionary or adaptive learning finally it is shown that the sunspot equilibrium is fragile against temporary shocks to information costs

raiders or saviors the evidence on six controversial investors abstract carl icahn irwin jacobs carl lindner david murdock victor posner and the late charles bluhdorn are usually portrayed as corporate raiders the evidence here however shows that between 1977 and 1982 when it was first announced that they had purchased stock in a given firm stock prices on average increased significantly the investors activities in target firms for the two years following the initial stock purchase are likewise inconsistent with raiding we discuss two hypotheses that are consistent with the evidence first these investors improve the management of target firms second they are systematically able to identify under priced stocks

defensive mechanisms and managerial discretion we study a model where firms may possess free cash flow and takeovers may be disruptive we show that the possibility of a takeover combined with defensive mechanisms and the ability to pay greenmail can solve the free cash flow problem in an efficient way the payment of greenmail reveals information that generates a stock price decline that exceeds the value of the greenmail payment even though the payment of greenmail is value maximizing optimal defensive measures limit takeover attempts if the target stock price is too low we also provide cross sectional implications of the analysis

the fragility of sunspots and bubbles abstract expectational stability e stability is used to examine the multiplicity of solutions in a range of rational expectations models of interest including muth s inventory model and an overlapping generations model in these model it is found that sunspot and other rational bubble solutions are either e unstable or weakly but not strongly e stable

behavioural heterogeneity under evolutionary pressure macroeconomic implications of costly optimisation a model is developed in which a continuum of agents makes interdependent output decisions in a stochastic environment characterised by strategic complementarity two groups are distinguished naive agents follow a costless adaptive expectations rule while sophisticated agents incur an optimisation cost to achieve self fulfilling expectations the paper studies the dynamics generated as the population composition evolves under pressure of differential payoffs sophisticated agents are favoured if optimisation is cheap or the stochastic environment highly variable but naive agents generally persist a higher long run share of sophisticated agents is associated with greater output variability and low output persistence several attempts have been made in the recent macroeconomic literature to explore the implications of allowing for behavioural heterogeneity among economic agents typically the standard postulates of unbounded rationality are held to apply only to a subset of the population while the remainder is assumed to behave in accordance with some alternative specification the nature of which depends on the situation being analysed akerlof and yellen

learning and adaptation s impact on market efficiency a dynamic model with learning and adaptation captures the evolution in trader beliefs and trading strategies through a process of learning and observation traders improve their understanding of the market traders also engage in a process of adaptation by switching between trading strategies based on past performance the asymptotic properties are derived analytically demonstrating that convergence to efficiency depends on the model of adaptation

expectation calculation and macroeconomic dynamics the authors establish a framework wherein agents make expectation revision decisions subject to a specified calculation technology and preferences over forecast errors the technology endows agents with correctly specified economic models but the cost of expectation calculation using these models leads to gradual and incomplete adjustment to long run rational expectation equilibrium the rational expectations hypothesis emerges as a special case of the equilibrium paths obtained in the authors framework in a natural rate model of monetary policy calculation technology gives rise to long run nonneutrality and hysteresis effects and incomplete adjustment of forecast rules causes output fluctuations to be amplified copyright 1992 by american economic association

the existence of self enforcing implicit contracts implicit contracts are nontrivial nash equilibria to the post hiring trading game between a worker and the employer these are supported by intrafirm rather than labor market reputations the existence of an implicit contract that supports efficient trade is proved in a simple model

dual class shares a review the majority of firms traded in the world s three largest stock exchanges london new york and tokyo follow the one share one vote principle however in other countries dual classes of shares are common place for example 50 percent of the publicly traded dutch firms have non voting equity and approximately 75 percent of the publicly traded danish finnish and swedish firms have shares that differ in their voting rights this paper reviews the arguments as to why firms create dual classes of shares their effect on firm value and the relative prices of shares that differ only in their voting rights copyright 1992 by oxford university press

the role of esops in takeover contests this article examines both the shareholder wealth effects of employee stock ownership plans esops announced by firms subject to takeover pressure and the takeover incidence of targets with and without esops although we do not find that defensive esops significantly reduce shareholder wealth on average we identify two factors the change in managerial and employee ownership due to the esop and the simultaneous announcement of other defensive tactics that are associated with negative stock price reactions we find that esops are strong deterrents to takeover esop targets that are acquired earn higher returns than targets without esops but the difference is not statistically significant copyright 1994 by american finance association

empirical models of the exchange rate separating the wheat from the chaff various popular exchange rate models a standard monetary model a portfolio balance model and sticky price models are estimated and evaluated using u s canadian data for the 1970s nonnested hypothesis tests demonstrate that none are correctly specified the data suggest 1 the exchange rate persistence observed is not fully explained by any of the models 2 the small durbin watson statistics indicate longer lags are required 3 the current account is a useful explanatory variable 4 the portfolio balance model fits the data well but has potentially serious problems measuring the stock of foreign assets this abstract was borrowed from another version of this item

the construction of tender offers capital gains taxes and the free rider problem shareholders are less likely to tender shares in the first stage of a two tier offer than in an any or all offer this is inconsistent with the view that two tier offers overcome the free rider problem this article shows that two tier offers with a fully taxable first stage and a nontaxable second stage are structured to induce shareholders with low capital gains tax liabilities to accept the first stage and shareholders with high capital gains tax liabilities to accept the second stage in offers where both the first and second stage compensations are taxable high tendering rates occur in the first stage copyright 1988 by the university of chicago

job protection versus contracts at will trading off entrenchment and shirking i take an efficient contracting approach to answer the question how much job protection to offer employees in particular those at the top of organizations given their privileged information or formal authority senior managers who are not given such protection are likely to take opportunistic actions that make them less dispensable the optimal employment contract trades off the resulting inefficiencies that arise from such self made job security with the reduced incentives and higher compensation costs under explicit employment protection one implication of the model is that more senior managers such as ceos should receive both higher rents and more protection e g through contracts that are explicitly not at will or that specify a longer duration

paying the price the impact of controversial governance practices on managerial reputation this study directly examines the reputational penalties that managers pay when they engage in controversial governance practices that raise questions about managerial self interest these penalties

managerial incentives and product market competition are imperfectly competitive leibenstein 1966 claims that there may be a substantial amount of x inefficiency where x inefficiency measures the degree to which actual profits depart from the maximum of profits that could be obtained if all operations in the firm were carried out at minimal costs he offers empirical evidence from case studies showing that the welfare loss due to organizational slack is of an order of magnitude bigger than the welfare loss due to monopolistic price distortions on imperfectly competitive markets these results support the common presumption that increasing competition reduces organizational and in particular managerial slack however this early literature does not offer a theoretical explanation for the link between competition and managerial incentives in particular it ignores the fact that managerial incentives can be affected by the design of an incentive scheme in this paper i derive the optimal incentive scheme for a manager as a function of the competitiveness of the environment in which his firm operates the basic impact of increased competition is that it reduces the profits of a firm this has two effects in the model first if a firm has high costs then the reduction of profits may be sufficient to render the firm unprofitable so the probability that it has to be liquidated goes up this unambiguously induces the manager of the firm to work harder for a cost reduction in order to avoid liquidation and to keep his job second the reduction in profits may affect

golden parachutes executive decision making and shareholder wealth abstract this study examines changes in executive decision making and shareholder wealth which are associated with the adoption of special executive termination agreements typically referred to as golden parachutes two hypotheses associated with golden parachutes contracts which provide remuneration if there is a change in control of the corporation are developed for empirical analysis the results suggest that the adoption of golden parachutes is associated with a positive security market reaction moreover the cross sectional analysis of the security market reaction is consistent with the hypothesis that golden parachutes have a favorable effect on the reaction of executives to takeover bids

takeover defenses ownership structure and stock returns in the netherlands an empirical analysis this study empirically examines the relationships between a firm s takeover defenses and its ownership structure and stock returns analyzing data of dutch listed companies we find that multiple antitakeover defenses are increasingly adopted when firms are characterized by relatively lower ownership concentration the evidence supports the hypothesis that more concentrated ownership of shares provides more effective monitoring of managers as defense by issuing preferred share has recently been the most widely adopted mechanism in the netherlands its impact on shareholders wealth is also analyzed we observe the presence of two opposing effects of this antitakeover measure

expectational stability and the multiple equilibria problem in linear rational expectations models linear models involving expectations of future endogenous variables generally have multiple rational expectations equilibria this paper investigates the stability of solutions in the disequilibrium sense of whether given a small deviation of expectations functions from some rational expectations equilibrium the system returns to that solution under a natural revision rule weak and strong local stability are distinguished stability conditions are calculated for a simple general linear model and applied to two macroeconomic examples in some cases there is a unique stable equilibrium in other cases a continuum of equilibria forms a weakly but not strongly stable class

dual class recapitalizations as antitakeover mechanisms abstract we report evidence on shareholder wealth effects of 94 firms recapitalizing with dual classes of common stock with disparate voting rights we find significant negative abnormal stock price returns at the announcement of the dual class recapitalization when we consider recapitalizations separately announced since the nyse imposed a moratorium is june 1984 on the delisting of companies with dual classes of equity we find significant negative abnormal returns as compared with insignificant returns in the earlier period those firms recapitalizing from june 1986 through may 1987 experienced the most significant negative returns observed

standstill agreements privately negotiated stock repurchases and the market for corporate control abstract standstill agreements are voluntary contracts which limit a substantial stockholder s ownership interest in a corporation for a specified number of years they are often accompanied by repurchase of the substantial stockholder s shares at a premium above the market price standstills and premium buybacks reduce competition for corporate control and provide differential treatment of large block stockholders the analysis indicates a statistically significant negative average effect on non participating stockholder wealth associated with standstill agreements negotiated premium repurchases are also associated with negative but less significant stockholder returns the evidence is inconsistent with the hypothesis that these management actions are in the best interests of non participating stockholders

ethical aspects of investor behavior the neoclassical paradigm assumes that shareholders utility is solely a function of their wealth and prescribes that management should act in a manner consistent with share price maximization the stakeholder view also assumes that shareholders utility derives from wealth but prescribes that managers must balance the shareholder wealth maximization objective against the rights of other constituencies thus while neoclassicists and stakeholder theorists have different prescriptives for management behavior their definitions of the shareholders interest are consistent shareholders are self interested economic agents whose utility is best served by share price maximization however if shareholders are other interested and attack importance to ethical and moral values then both the neoclassical and stakeholder view derive from invalid assumptions in this paper i present evidence that much shareholder behavior is ethically motivated as a result the basis for both the neoclassical and the stakeholder view are weakened

intrinsic heterogeneity in expectation formation we introduce the concept of misspecification equilibrium to dynamic macroeconomics agents choose between a list of misspecified econometric models and base their selection on relative forecast performance a misspecification equilibrium is a stochastic process in which agents forecast optimally given their choices with forecast model parameters and predictor proportions endogenously determined under appropriate conditions the misspecification equilibrium will exhibit intrinsic heterogeneity in which all predictors are used at all times even in the neoclassical limit in which only the most successful predictors are used this equilibrium is attainable under least squares learning and dynamic predictor selection based on average profits

monetary policy transmission in a model with animal spirits and house price booms and busts abstract can monetary policy trigger pronounced boom bust cycles in house prices and create persistent business cycles we address this question by building heuristics into an otherwise standard dsge model as a result monetary policy sets off waves of optimism and pessimism animal spirits that drive house prices that in turn have strong repercussions on the business cycle we compare our findings to a standard model with rational expectations by means of impulse responses we suggest that a standard taylor rule is not well suited to maintain macroeconomic stability instead an augmented rule that incorporates house prices is shown to be superior

genetic algorithm learning and the cobweb model this paper presents the cobweb model in which competitive firms in a market for a single good use a genetic algorithm to update their decision rules about next period production and sales the results of simulations show that the genetic algorithm converges to the rational expectations equilibrium for a wider range of parameter values than other algorithms frequently studied within the context of the cobweb model price and quantity patterns generated by the genetic algorithm are also compared to the data of experimental cobweb economies it is shown that the algorithm can capture several features of the experimental behavior of human subjects better than three other learning algorithms that are considered

the rationale behind interfirm tender offers information or synergy this paper investigates the rationale behind interlirm tender offers by examining the returns realized by the stockholders of lirms that were the targets of unsuccessful tender offers and lirms that have made unsuccessful offers our results suggest that the permanent positive revaluation of the unsuccessful target shares documented by dodd and ruback 1977 and bradley 1980 is due primarily to the emergence of and or the anticipation of another bid that would ultimately result in the transfer of control of the target resources we also find that the rejection of a tender offer has differential effects on the share prices of the unsuccessful bidding firms depending upon whether the tender offer process results in a change in the control of target resources on the basis of these results we conclude that acquisitions via tender offers are attempts by bidding firms to exploit potential synergies not simply superior information regarding the true value of the target resources

the effect of poison pill securities on shareholder wealth abstract this paper examines empirical evidence about the effect of poison pill takeover defenses on shareholder wealth i find evidence that announcements of the most restrictive forms of the pill defense are associated with stock price declines also the most restrictive forms of the pill defense are associated with abnormally high rates of defeat of unsolicited tender offers although this evidence is consistent with managerial entrenchment the evidence implies that on average poison pill defenses have seemingly had only a modest effect on firm valuation

identifying control motives in managerial ownership evidence from antitakeover legislation this study uses the introduction of second generation antitakeover legislation as a natural experimental setting to infer the value that managers place on the control rights conferred by stock ownership we conjecture that managers will reduce their stockholdings in the post legislation period because they can ensure their prior level of control while holding fewer risky shares using a variety of specifications we find robust evidence consistent with this revealed preference hypothesis further demonstrating the key role played by control considerations in managers stockholding decisions the reductions in ownership are concentrated in management teams with higher levels of initial ownership and in firms without poison pills

on the fragility of sunspot equilibria under learning and evolutionary dynamics abstract in this article we investigate the possibility of sunspot equilibria to emerge from a process of learning and adaptation on agents beliefs we consider both finite state markov sunspots and sunspots in autoregressive form and derive conditions for the existence of an heterogeneous equilibrium where only a fraction of agents condition their forecasts on the sunspot we then show that when the fraction of agents conditioning their forecasts on a sunspot changes over time under evolutionary dynamics these restrictions need to evolve endogenously with population shares we argue that such requirement questions the possibility of sunspot equilibria to emerge through a process of evolution and adaptation on agents beliefs in order for a sunspot equilibrium to emerge all agents must simultaneously coordinate on the same sunspot variable at the same time

fundamentalists vs chartists learning and predictor choice dynamics abstract in a simple forward looking univariate model of price determination we investigate the evolution of expectations dynamics in the presence of two types of agents fundamentalists and chartists in particular we combine evolutionary selection among heterogeneous classes of models through predictor choice dynamics based on a logit model with adaptive learning in the form of parameters updating within each class of rules we find that for different parameterizations it can happen that fundamentalists drive chartists completely out of the market or vice versa and also that heterogeneous equilibria in which fundamentalists and chartists coexist are possible interestingly though only equilibria in which fundamentalists outperform chartists turn out to be adaptively learnable by agents

security pricing and deviations from the absolute priority rule in bankruptcy proceedings claims ultimately awarded to shareholders of firms in reorganization were examined for a sample of 30 filings under the 1978 bankruptcy reform act we measured the amount paid to shareholders in excess of that which they would have received under the absolute priority rule and found that this amount represents on average 7 6 of the total awarded to all claimants evidence is also reported that common share values reflect a significant proportion of value ultimately received in violation of absolute priority suggesting that deviations from the rule were expected by the equity markets the absolute priority rule hereafter apr states that a bankrupt firm s value is to be distributed to suppliers of capital such that senior creditors are fully satisfied before any distributions are made to junior creditors and junior creditors are paid in full before common shareholders bankruptcy reorganization proceedings however are leaving shareholders and junior creditors with valuable assets even when senior claimants receive only partial settlements as barrett and sullivan 1988 noted traditionally shareholders have been last in line their claims on a troubled company s assets have had the lowest priority and their impact on the course of bankruptcy code proceedings generally has been next to nil but lately the balance of power has been shifting warner 1977 provided one of the early discussions of the implications of deviations from the apr baldwin and mason 1983 pp 510 511 examined the resolution of claims in the massey ferguson reorganization and provided no support for the hypothesis that the market believes absolute priority rules will be enforced if the firm defaults on its financial obligations franks and torous 1989 analyzed a sample of bankruptcies that occurred during the period 1970 through 1984 and found that 21 of 27 sample cases exhibited departures from the apr more recently weiss 1990 examined 37 firms that filed for bankruptcy between 1980 and 1986 and reported that 27 of the cases involved apr violations

an empirical analysis of the reincorporation decision the literature suggests two competing explanations for reincorporations efforts at managerial entrenchment and attempts to improve contractual efficiency the empirical evidence to date is inconclusive to seek further evidence we examine a large sample of firms that changed their state of incorporation over the period 1980 1992 we find that shareholder wealth is decreased by reincorporations that erect takeover defenses but is increased by reincorporations that establish limits on director liability firms that claim they reincorporate to limit the personal liability of their board members and thereby attract better qualified outside directors do in fact expand the outside representation on their boards whereas firms citing other motives do not

the effect of pre emptive right amendments on shareholder wealth abstract pre emptive rights allow existing shareholders to purchase a new offering of shares before the general public this paper investigates the effect on shareholder wealth of removing pre emptive rights from corporate charters two hypotheses are constrasted 1 shareholder wealth maximization suggests that management uses this extra degree of freedom to pick the least cost method for raising new equity hence the amendment increases shareholder wealth 2 management welfare maximization holds that management will use the passage of the amendment to maximize their own welfare sometimes to the detriment of shareholders hence the amendment decreases shareholder wealth the evidence indicates that the amendment decreases shareholder wealth

interpreting common stock returns around proxy statement disclosures and annual shareholder meetings numerous studies have analyzed the stock market reaction to information released in proxy statements two possible biases in proxy statement research are suggested frequently misspecification of the return benchmark and a sample selection bias from analyzing only clean events this paper presents evidence that most of the conclusions of existing studies are not affected by these potential biases a significantly positive abnormal return was found around a random sample of shareholder meeting dates the result indicates that interpreting event study results for announcements occurring around annual shareholder meetings must be conducted carefully the results are consistent with the findings of kalay and loewenstein 14 who argue that risk and expected return can increase around predictable information producing events alternatively the study can be viewed as being consistent with several recent studies that find anomalous results using daily return data and large samples