preferred risk habitat of individual investors abstract the preferred risk habitat hypothesis introduced here is that individual investors select stocks whose volatilities are commensurate with their risk aversion the data 1995 2000 holdings of over 20 000 clients at a large german broker are consistent with the predictions of the hypothesis the returns of stocks within each portfolio have remarkably similar volatilities when stocks are sold they are replaced by stocks of similar volatilities and the more risk averse customers indeed hold less volatile stocks greater volatility specialization is associated with lower sharpe ratios primarily because more specialized investors hold fewer stocks and thereby expose themselves to more unsystematic risk

investment under uncertainty heterogeneous beliefs and agency conflicts we develop a structural model to investigate the effects of asymmetric beliefs and agency conflicts on dynamic principal agent relationships optimism has a first order effect on incentives investments and output which could reconcile the private equity puzzle asymmetric beliefs cause optimal contracts to have features consistent with observed venture capital and research and development rd baker ruback and wurgler 2007 ben david graham and harvey 2008 further long term principal agent relationships feature dynamic actions by both parties for example vc projects have salient features such as dynamic staging of the vc s investments progressive vesting of the entrepreneur s stake and the presence of intertemporal milestones or performance targets that must be met for the project to continue observed contracts also feature complex combinations of different types of financial securities with debt and equity like

the effect of advance notification of plant closings on unemployment using data from the 1984 displaced worker survey the authors model the determinants of time without work following job displacement for a large sample of workers laid off because of plant shutdowns between 1979 and 1984 the major focus of the paper is on the role of advance notification in mitigating unemployment the estimating procedure accommodates right censored observations stemming from continuing or open ended spells of unemployment advance notification is found to have significantly reduced the duration of unemployment of those notified workers who did not draw unemployment insurance benefits and in particular of those who left the plant prior to termination advance notice had much less effect on the time without work of notified workers whose spell length of unemployment was long enough for them to collect unemployment insurance benefits

vent for surplus a case of mistaken identity 1 introduction adam smith s theory of the gains from international trade has caused a great deal of controversy and confusion among economic theorists and historians of economic thought on the one hand smith is interpreted as arguing that foreign trade that vents surplus products is necessary to maintain or generate a full utilization of a country s resources on the other hand smith throughout much of the wealth of nations advocates a system of natural or perfect liberty which insures that markets operate to efficiently allocate productive resources across industries so as to direct that industry that its produce may be of the greatest value smith 1994 p 484 but if markets allocate resources to their most productive uses how are we to make sense of such stark statements that surpluses in any given sector must be sent abroad without such exportation a part of the productive labour of the country must cease and the value of its annual produce diminish smith 1994 p 403 many economists write off the apparent discrepancy between a vent for surplus gain from trade and a system of natural liberty and suggest it is a flaw in smith s logic j s mill states it is in truth a surviving relic of mercantile theory mill 1987 p 579 others have attempted to vindicate smith s theory of the gains from trade arguing that the vent for surplus is meant to apply only to underdeveloped economies myint 1958 1977 staley 1973 or where goods are produced jointly kurz 1992 blecker 1997 develops an approach that reconciles the vent for surplus gain with other aspects of smith s trade theory for economies that are subject to an unnatural and retrograde order smith 1994 p 412 these arguments although significant fail to explain why smith appears to have applied the vent for surplus gain from trade to all economies involved in trade including otherwise nondistorted developed nations trading in single product goods this paper offers an alternative interpretation of the vent for surplus argument that is both consistent with trade between developed economies and with smith s system of natural liberty we show how a vent for surplus gain from trade can exist in the context of trade between developed nations by emphasizing the link between this gain from trade and smith s theory of productive and unproductive labor we argue that a move away from a freely developed pattern of trade will cause market prices to deviate from natural prices shifting resources from more to less productive uses causing the value of national output to fall smith never argues that capital and productive labor will become unemployed without sufficient vents this formulation combined with an understanding of smith s rhetoric shows that smith s theory of the gains from trade is completely compatible with his system of natural liberty and suggests a more coherent theory of the gains from trade than is typically attributed to smith in this interpretation of smith the term vent for surplus is a misnomer 2 vent for surplus and the proposed defense of smith smith s treatment of the gains from trade is almost without exception thought to consist of two separate arguments in chapter i book iv smith states between whatever places foreign trade is carried on they all of them derive two distinct benefits from it it carries out that surplus part of the produce of their land and labour for which there is no demand among them and brings back in return for it something else for which there is a demand it gives a value to their superfluities by exchanging them for something else which may satisfy part of their wants and increase their enjoyments by means of it the narrowness of the home market does not hinder the division of labor in any particular branch of art or manufacture from being carried to the highest perfection by opening a more extensive market for whatever part of the produce of their labour may exceed the home consumption it encourages them to improve its productive powers and to augment its annual produce to the utmost and thereby to increase the real revenue and wealth of the society

distance constraints the limits of foreign lending in poor economies how far does mobility of multinational banks solve problems of financial development using a panel of 80 000 loans over 7 years i show that greater cultural and geographical distance between a foreign bank s headquarters and local branches leads it to further avoid lending to informationally difficult yet fundamentally sound firms requiring relational contracting greater distance also makes them less likely to bilaterally renegotiate and less successful at recovering defaults differences in bank size legal institutions risk preferences or unobserved borrower heterogeneity cannot explain these results these distance constraints can be large enough to permanently exclude certain sectors of the economy from financing by foreign banks

how are stock prices affected by the location of trade abstract we examine pairs of large siamese twin companies whose stocks are traded around the world but have different trading and ownership habitats twins pool their cash flows so with integrated markets twin stocks should move together however the difference between the prices of twin stocks appears to be correlated with the markets on which they are traded most i e a twin s relative price rises when the market on which it is traded relatively intensively rises we examine several explanations of this phenomenon including the discretionary use of dividend income by parent companies differences in parent expenditures voting rights currency fluctuations ex dividend date timing issues and tax induced investor heterogeneity only the last hypothesis can explain some but not all of the empirical facts we conjecture that a country specific sentiment shocks might affect share intensity b investors are rational but markets are segmented by frictions other than international transactions costs such as agency problems

the excess sensitivity of layoffs and quits to demand excessive layoffs in bad times and excessive quits in good times both stem from the same weakness in practical employment arrangements the specific nature of worker firm relations creates a situat

worker separations in a nonstationary corporate environment abstract assessing ten years of unique personnel data from a large firm this paper investigates how determinants of worker turnover differ between periods of corporate expansion and decline performance and career progress considerably reduce the hazard of job separation during downsizing for blue collar workers but are less important for white collar workers effects of firm tenure occupation education training part time status and gender are largely in accordance with the implications from existing models but no model generates all patterns observed in the data age effects are sensitive to retirement options and discontinuous dropping in response to the anticipation of becoming eligible for early retirement during downsizing and jumping at the actual retirement age

optimism bias portfolio delegation and economic welfare this study explores the effects of investor optimism bias in a portfolio delegation framework we show that the optimistic investor increases his portfolio delegation while the risk averse manager reduces investment in the risky asset the investor suffers welfare loss due to lower expected return but the manager enjoys increased compensation the investor s optimism bias aggravates the moral hazard problem

happiness and productivity some firms say they care about the well being and happiness of their employees but are such claims hype or scientific good sense we provide evidence for a classic piece rate setting that happ

individualism and stock price crash risk employing a sample of 26 473 firms across 42 countries from 1990 to 2013 we find that firms located in countries with higher individualism have higher stock price crash risk furthermore individualism can be transmitted by foreign investors from overseas markets to influence local firms crash risk and can exacerbate the impact of firm risk taking and earnings management on crash risk moreover the positive relation between individualism and crash risk is amplified during the global financial crisis and attenuated by enhanced country level financial information transparency and the adoption of international financial reporting standards

lost in translation the effect of cultural values on mergers around the world we find strong evidence that three key dimensions of national culture trust hierarchy and individualism affect merger volume and synergy gains the volume of cross border mergers is lower when countries are more culturally distant in addition greater cultural distance in trust and individualism leads to lower combined announcement returns these findings are robust to year and country level fixed effects time varying country pair and deal level variables as well as instrumental variables for cultural differences based on genetic and somatic differences the results are the first large scale evidence that cultural differences have substantial impacts on multiple aspects of cross border mergers

social interaction and stock market participation we propose that stock market participation is influenced by social interaction in our model any given social investor finds the market more attractive when more of his peers participate we test this theory using data from the health and retirement study and find that social households those who interact with their neighbors or attend church are substantially more likely to invest in the market than non social households controlling for wealth race education and risk tolerance moreover consistent with a peer effects story the impact of sociability is stronger in states where stock market participation rates are higher

a theory of quits and layoffs with efficient turnover this paper answers the efficient turnover literature s long silence regarding the quit layoff distinction treating quits as worker initiated separations and layoffs as firm initiated separations i establish that the existence of layoffs is compatible with optimizing workers and firms forming and dissolving employment matches to exploit all the gains from trade the efficient turnover approach is shown to be consistent with many empirical regularities that distinguish quits from layoffs structural implications of the model are tested on data from the psid

does culture influence asset managers views and behavior abstract this research enters new ground by presenting comparative survey evidence on asset managers views and behavior in the united states germany japan and thailand relying on hofstede s four cultural dimensions we find that cultural differences are most helpful in understanding country differences which cannot be explained by pure economic reasoning in short controlling for various determinants the dimension of more individualism predicts less herding behavior more power distance leads to older and comparatively less experienced managers in the upper hierarchy masculinity brings men into top positions and to higher volumes of assets under personal responsibility and uncertainty avoidance is related to higher safety margins against the tracking error allowed and relatively more research effort these consequences i e the culturally different importance of herding age experience gender tracking error and research effort clearly affect investment behavior although in a complex way

the role of social capital in financial development to identify the effect of social capital on financial development we exploit social capital differences within italy in high social capital areas households are more likely to use checks invest less in cash and more in stock have higher access to institutional credit and make less use of informal credit the effect of social capital is stronger where legal enforcement is weaker and among less educated people these results are not driven by omitted environmental variables since we show that the behavior of movers is still affected by the level of social capital of the province where they were born

culture and r2 abstract consistent with predictions from the psychology literature we find that stock prices co move more less in culturally tight loose and collectivistic individualistic countries culture influences stock price synchronicity by affecting correlations in investors trading activities and a country s information environment both market wide and firm specific variations are lower in tighter cultures individualism is mostly associated with higher firm specific variations trade and financial openness weakens the effect of domestic culture on stock price comovements these results hold for various robustness checks our study suggests that culture is an important omitted variable in the literature that investigates cross country differences in stock price comovements

demand and structural change in adam smith s view of economic progress previous studies suggest that demand forces as well as widely accepted supply side factors work in smith s historical account of economic development expanding on this line of inquiry and yet giving corrections of misinterpretations this article claims that endogenous demand is at play in smith s theory of natural progress providing a historical case study of early modern england for an illustration of the demand based model of natural progress smith drew attention to the dynamics of growth with respect to the role of demand and the changing sectoral structure of economies in the model of natural progress as well as in that of historical progress in this vein smith s approach to economic development differs from hume s historical account of it first it is significant that smith was concerned with a change in income distribution and expenditure pattern brought about by economic growth with the general expansion of income changes in patterns of income distribution and consumption i e a larger share of wages and profits in national income at later stages of development that favour manufactured items boost economic growth and lead an agrarian economy to move towards manufacturing and commercial economies second it is now worth noticing that along with the progress of wealth an endogenous demand grounded on a part played by socio psychological power as distinct from material motives furnishes a taste for manufactured goods more than for agricultural goods

options to quit abstract this paper develops a theoretical model of a worker s decision problem under uncertainty about the optimal separation time when holding a representative outside offer but facing fixed costs of quitting implications of the model s closed form solution are consistent with the quit behavior of workers from a large dutch company

adam smith on foreign trade a note on the vent for surplus argument this note is exclusively concerned with the joint products foundation of adam smith s vent for surplus argument with relatively fixed proportions in which the joint products are produced it cannot be presumed that these proportions match those in which the products are domestically required for use foreign trade is thus directly beneficial to a nation since it allows its producers to dispose of some of the superfluous amounts of the products in exchange for goods produced abroad that are demanded domestically copyright 1992 by the london school of economics and political science

local happiness and firm behavior do firms in happy places invest more abstract we examine a previously unexplored relationship between local happiness and firm investment we looked at investment in general and r d intensity in particular as the relatively intangible nature of the latter may make it more subject to the effects of sentiment and affect we find that average local happiness is positively correlated with both r d intensity and firm investment after controlling for firm and local area characteristics this positive relationship may be due to the optimism and longer term perspectives that are typically associated with higher levels of life satisfaction happiness we also look at inequality in happiness levels and find that the effect of local happiness is stronger in places with more equal happiness distributions younger firms investment behavior is also more strongly correlated with local happiness levels the results remain robust to a battery of robustness tests including the use of residual and hedonic measures of happiness analysis of a sample of relocated firms and a test for reverse causality

price based return comovement abstract similarly priced stocks move together stocks that undergo splits experience an increase in comovement with low priced stocks and a decrease in their comovement with high priced stocks price based comovement is not explained by economic fundamentals firm size or changes in liquidity or information diffusion the shift in comovement following splits is greater for large stocks high priced stocks and when investor sentiment is high in the full cross section price based portfolios explain variation in stock level returns after controlling for movements in the market and industry portfolios as well as portfolios based on size book to market transaction costs and return momentum the results suggest that investors categorize stocks based on price

does religion matter in corporate decision making in america abstract we examine how corporate culture influences firm behavior prior research suggests a link between individual religiosity and risk aversion we find that this relationship also influences organizational behavior firms located in counties with higher levels of religiosity display lower degrees of risk exposure as measured by variances in equity returns or returns on assets they exhibit a lower investment rate and less growth but generate a more positive market reaction when they announce new investments finally chief executive officers are more likely to join a firm with a similar religious environment as in their previous firm when they switch employers

efficiency and the bear short sales and markets around the world we analyze cross sectional and time series information from 46 equity markets around the world to consider whether short sales restrictions affect the efficiency of the market and the distributional characteristics of returns to individual stocks and market indices we find some evidence that prices incorporate negative information faster in countries where short sales are allowed and practiced a common conjecture by regulators is that short sales restrictions can reduce the relative severity of a market panic we find strong evidence that in markets where short selling is either prohibited or not practiced market returns display significantly less negative skewness

global market integration an alternative measure and its application global markets seem to be increasingly integrated but there is no well accepted measure of integration we show that the correlation across markets is a poor measure perfectly integrated markets can exhibit weak correlation we derive a new integration measure based on the explanatory power of a multi factor model and use it empirically to investigate recent trends in global integration for most countries there has been a marked increase in measured integration over the past three decades but this is not indicated by correlations among country indexes

legal institutions and fragile financial markets abstract this study investigates equity liquidity variation with a funding constraint across 38 countries and examines whether the effectiveness of a country s legal institutions is systematically related to cross country differences in fragile equity liquidity our results show that firms from countries with more extensive disclosure requirements tend to have lower liquidity shocks due to funding constraints leading to higher firm value this effect is stronger for ex ante disclosures especially for countries with a high level of openness and market volatility our empirical results are robust to the 2sls regression model the random effect regression model the alternative measure of fragile equity liquidity and the alternative measure of disclosure and enforcement variables our study provides a better understanding of the effect of information environments amidst periods of funding constraint

national culture and the choice of exchange rate regime abstract based on the social analysis framework of williamson we argue that national culture especially the individualism collectivism dimension located in the social embeddedness level can guide behaviors and decisions in a country including the choice of exchange rate regime we argue that individualistic societies are more likely to choose floating regimes because their economic agents are independent overconfident and have higher levels of risk tolerance individualistic societies are also associated with better financial development fewer capital controls and more democratic institutions which are all tied to a higher probability of choosing a floating exchange rate regime we use data on 78 countries over the 1976 2014 period and we control for common determinants of exchange rate regimes we find that individualistic countries have a significantly higher probability of implementing a floating regime than a fixed regime our evidence is robust to using an instrumental variables approach an alternative estimation technique an alternative regime classification alternative proxies for culture a subsample analysis and additional controls we also find that other cultural dimensions uncertainty avoidance power distance and masculinity can influence the choice of exchange rate regime but their effect is weaker than that of individualism

stock return comovement around the dow jones islamic market world index revisions we examine patterns of comovement in stock returns around the dow jones islamic market world index djimwi quarterly revision events our analysis is based on a sample of 8250 companies from eighteen countries during the period may 1999 june 2012 we find that a stock s comovement with the djimwi increases when it joins and decreases when it leaves the index we also find that the comovement of newly added deleted stocks with the existing djimwi constituents increases declines during periods of high trading activity and during the month of ramadan further tests reveal that changes in the fundamentals have no impact on the comovements of added and deleted stocks overall our results indicate that stock returns respond to the emotional state of investors around information free events

price reaction of ethically screened stocks a study of the dow jones islamic market world index this paper investigates the short term effects on the price of the ethically screened stocks of the dow jones islamic market world index djimwi quarterly revisions using a sample of 8 250 stocks from may 1999 through june 2012 we find a significant price reaction of the ethically screened stocks following additions and deletions the results show that additions deletions from emerging stock markets tend to experience a greater and significantly positive negative price response than additions deletions from the developed markets further tests reveal that the price reactions following djimwi revisions are likely to be driven by shifts in investor sentiment rather than changes in firm fundamentals

survey evidence on diffusion of interest and information among investors abstract questionnaire surveys of institutional and individual investors were undertaken to learn about patterns of communications it was found that direct interpersonal communications are very important in investor decisions questions elicited what fraction of investors were unsystematic and allowed themselves to be influenced by word of mouth communications or other salient stimuli randomly sampled investors were studied as well as investors in stocks whose price had recently increased dramatically contagion or epidemic models of financial markets are proposed in which interest in individual stocks is spread by word of mouth the survey evidence is interpreted as supporting such models

culture openness and finance abstract differences in culture proxied by differences in religion and language cannot be ignored when examining why investor protection differs across countries we show that a country s principal religion predicts the cross sectional variation in creditor rights better than a country s natural openness to international trade its language its income per capita or the origin of its legal system catholic countries protect the rights of creditors less well than protestant countries a country s natural openness to international trade mitigates the influence of religion on creditor rights culture proxies are also helpful in understanding how investor rights are enforced across countries

maxing out globally individualism investor attention and the cross section of expected stock returns we examine the role of cultural difference in the pricing of positive extreme returns max for 47 000 stocks from 42 countries from 1990 to 2012 we find that investors overpay for stocks with high max and that max premium the spread from long short strategy based on low and high max stocks is both statistically and economically significant worldwide the negative relation between idiosyncratic volatility and expected returns or idiosyncratic volatility puzzle exists only for stocks with high max implying that the puzzle may arise from the overpayment for stocks with high max and the subsequent return reversal consistent with the expectation that overpayment will be stronger for overconfident investors the max premium is larger in countries with high individualism index idv than it is in countries with low idv furthermore we find the max premium to be larger and the difference in the max premium between high and low idv countries to be more pronounced when vix and volatility are high our fi

happiness and time preference the effect of positive affect in a random assignment experiment abstract we conduct a random assignment experiment to investigate whether positive affect impacts time preference where time preference denotes a preference for present over future utility our result indicates that compared to neutral affect mild positive affect significantly reduces time preference over money this result is robust to various specification checks and alternative interpretations of the result are considered our result has implications for the effect of happiness on time preference and the role of emotions in economic decision making in general finally we reconfirm the ubiquity of time preference and start to explore its determinants djel d12 d83 i31