every little helps esg news and stock market reaction stories about corporate social responsibility have become very frequent over the past decade and managers can no longer ignore their impact on firm value in this paper we investigate the extent and the determinants of the stock market s reaction following ordinary news related to environmental social and governance issues the so called esg factors to that purpose we use an original database provided by covalence ethicalquote our empirical analysis is based on about 33 000 esg news positive or negative targeting one hundred listed companies over the period 2002 2010 on average firms facing negative events experience a drop in their market value of 0 1 whereas companies gain nothing on average from positive announcements we find also that market participants are responsive to the media but they do not react to firms press releases or to ngos disclosures moreover our results indicate that sector s reputation mitigates the loss the goodwill hypothesis and that cultural proximity and lexical contents of esg disclosures play a significant role in the magnitude of the impact

reputation effects in the market of certifiers evidence from the audit industry i introduction asymmetric information between seller and buyer can impede mutually beneficial transactions one of the solutions to this problem is to recruit an independent third party a certifier who verifies unobserved product characteristics for the buyer the certifier s independence is at the heart of the tripartite arrangement this independence however can be compromised when sellers pay for the certification for instance in the market of auditors and credit rating agencies cra it is not the investor i e the buyer of the security who pays for the certifier s services but the company which is to be impartially rated or audited in this business model companies can naturally manipulate their ratings audits furthermore investors only have a limited power to weed out dishonest certifiers simply because companies instead of investors choose auditors and cra ultimately these problems can pervert the certifier s mission to serve the investing community dranove and jin 2010 not surprisingly this conflict of interest has often been cited as a cause for accounting scandals and more recently for inflated credit ratings e g bis cfgs 2008 the economist 2004 2006 auditors and cra alike refute the criticism of their business model arguing that the threat of losing their reputation is a sufficient disciplinary device e g the economist 2005 1 however this claim has not yet been empirically substantiated a successful mechanism of reputation has three components in the presence of conflicts of interest consider the audit market 2 first investors have to punish companies which chose low quality auditors there is evidence that capital markets severely penalize companies whose audit reports are of dubious quality e g chaney philipich and kirk 2002 gao 2003a krishnamurthy zhou and zhou 2006 pacini and hillison 2003 second this negative capital market reaction should feed into companies auditor choice i e companies should choose high quality auditors third auditors then should have the incentive to provide high quality audits the second stage of this mechanism has not been empirically validated yet in particular it has not been analyzed whether the adverse capital market reaction to low audit quality feeds into companies auditor choice and if it does how a positive effect of adverse quality signals on audit demand means that firms prefer to engage lenient auditors in order to receive favorable reports suggesting that conflicts of interest overwhelm reputation concerns and clearly fail the disciplinary mechanism a negative effect on the other hand indicates that while investors do not pay for audit services they can exert discipline on auditors indirectly by forcing public companies to choose high quality auditors a success of reputation in this paper i exploit the natural experiment of arthur andersen s collapse and test the effects of audit quality signals on companies auditor choice in discrete choice models the quality signals in this study are auditors industry specific financial restatement histories i e the proportion of clients in an industry which restated financial statements in the past i find that auditors restatement histories are a crucial driving force in the subsequent auditor choice of deserting andersen clients there are compelling reasons why auditors financial restatement histories should forcibly feed into a company s auditor choice restatements are material corrections of published financial statements which cannot be relied upon anymore and have to be reissued since the very role of the independent auditor is to ensure that financial statements are fairly presented in all material respects it appears natural to think that the auditor has not done his job properly if a financial statement has to be restated later indeed there is ample evidence that capital markets receive restatements badly

bank loan portfolios and the monetary transmission mechanism abstract we study the portfolio behavior of bank loans following a monetary tightening and find that real estate and consumer loans sharply decrease while commercial and industrial c i loans increase these responses are compared with responses following non monetary shocks which also reduce output but keep interest rates roughly unchanged during such a non monetary downturn c i loans sharply decrease while real estate and consumer loans show no substantial response these responses together with the responses of relevant lending rates are hard to reconcile with a decline in the supply of c i bank loans during a monetary downturn as stressed by the bank lending channel several arguments are presented explaining why the supply of c i loans may actually increase after a monetary contraction

does the bond market predict bankruptcy settlements this study shows the extent to which deviations from the absolute priority rule increase or decrease the bankruptcy emergence payoff to traded i e usually junior claimants bondholders the data indicate that on average bondholders benefit albeit slightly from absolute priority rule apr violations this paper also examines the degree to which the bond market in the bankruptcy filing month anticipates departures from the apr and other influences on the payoff to bondholders in other words we investigate the informational efficiency of the market for bankrupt bonds overall despite the complex and lengthy nature of bankruptcy proceedings the results support efficiency the finance literature has traditionally assumed that when a firm enters bankruptcy the creditors become the owners and the value of the firm is distributed according to the absolute priority rule apr the apr states that senior creditors should be fully compensated before junior creditors receive any portion of the bankrupt firm s value and junior creditors should receive full payment before shareholders receive any compensation in practice formal bankruptcy proceedings are complex processes that often violate the apr brown 1989 captures some of the intricacies of this process in a game theoretic model showing that the solution to the bargaining process in bankruptcy can involve deviations from the apr although the solution

did state bank branching deregulation produce large growth effects abstract previous research claiming large growth effects of deregulation of state bank branching laws is biased by contemporaneous correlation between the regressors and the error term of the regression model robustness tests indicate that the growth effect of branching reform is much smaller than initially estimated

is the stock market sticker shocked a study of market response to recent cafe regulations in the us in response to increasing environmental concerns to improve energy security and to conserve energy use the us government has proposed a new round of corporate average fuel economy cafe standards many studies have focused on how the cafe standard can be met by various automakers that have sales in the us market and the costs and benefits of the companies meeting the standard however the stock markets view on the impact of the standard on automakers profitability is largely absent we study the more recent episode of the cafe regulation in an effort to try to detect the market response using the standard event study method our empirical findings suggest that while the stock market had some responses to the regulation the large scale and systematic reaction to the regulation is absent in addition the market response pattern to the regulation appears to be tied to the individual company s compliance condition if there is any significant response at all

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

environmental shocks and sustainability in microfinance evidence from the great famine of ireland i study the effects of a major environmental shock on microfinance lending by analyzing the irish loan funds during the great famine of ireland i find that funds in districts worse affected by bli

in defense of base drift the federal reserve has been criticized for allowing the base from which it calculates its target growth paths for the monetary aggregatesto drift from year to year in response to past deviations from target drift in the base implies that target misses permanently affect the levels of the monetary aggregates using a simple theoretical model this paper shows that the optimal degree of base drift consistent withprice stability depends on the importance of permanent versus transitory income and velocity disturbances neither zero base drift nor complete base drift are likely to be compatible with price stability copyright 1986 by american economic association

a latent structure approach to measuring reputation the present study provides estimates of reputation as a dynamic latent variable that is determined by price premiums and market data further it analyzes the effect of extrinsic factors on reputation specifically this study seeks to i quantify the reputation of washington apples over time ii study the dynamic nature of reputation and iii analyze the effect of the label washington apple the model adopted in this study is the dynamic multiple indicator multiple cause dymimic modeling approach which is a special case of the general latent variable modeling scheme called state space models both dymimic and hedonic approaches are applied to the data on washington apples and results from the two approaches are compared reputation plays an important role in assuring product quality in markets where consumers can only imperfectly judge the product quality until after consumption if reputation effects are absent in these types of markets there is an incentive for producers to reduce quality and take short run gains before buyers catch on in order to avoid such quality cutting products with good reputations will sell for premium prices shapiro 1983 showed theoretically that price premiums are necessary for producers to invest in quality and reputation there is an extensive theoretical literature on reputation but empirical studies are limited empirical studies on the impact of firm reputation on shareholder wealth or product demand include jarrell and peltzman 1985 borenstein and zimmerman 1988 and karpoff and lott 1993 caves and green 1996 showed that factors that may affect a firm s reputation influence the relationship between price and quality gorton 1996 analyzed how a bank s reputation for default affects the discount rate on its debt the measurement of the value of reputation to producers in terms of price premiums and how a reputation can be built up and destroyed are important issues that have not been empirically analyzed the current study provides estimates of reputation as a dynamic latent variable that is determined by price premiums and market data further it analyzes the effect of extrinsic factors on reputation steenkamp 1990 points out that consumers observe at the moment of purchase the intrinsic and extrinsic product quality cues but not the quality attributes intrinsic cues are characteristics of the product such as color freshness texture and flavor while extrinsic

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

measuring the effects of regulation with stock price data this article examines the usefulness of stock returns in measuring the effects of regulation when the dates on which market expectations change are not known and standard sources e g the wall street journal are used to choose announcement dates twenty major changes in regulatory constraint since 1887 are considered tests using either monthly or daily data are found to have surprisingly little ability to detect the effects of regulation the evidence shows that formal regulatory announcements are generally anticipated in cases where it is unclear when expectations change

the equilibrium fed funds rate and the indicator properties of term structure spreads i introduction interest rate spreads figure prominently in the economics literature as monetary policy indicators for instance while some writers have focused on the predictive power of the spread between the six month commercial paper rate and the six month treasury bill rate others have emphasized spreads between short and long term interest rates 1 this paper follows the latter tradition my analysis is motivated by the work of bernanke and blinder 1992 who compare the difference between the federal funds rate and the ten year government bond rate with other interest rate spreads and find it to be a particularly useful predictor of future economic activity the rationale for using term structure spreads as monetary policy indicators is relatively straightforward 2 when assessing the stance of monetary policy it is not just the level of the federal funds rate that matters but how it relates to some implicit notion of equilibrium interest rates this insight is not new and can be found in the seminal work of wicksell 1898 xxv who wrote that it is not a high or low rate of interest in the absolute sense which must be regarded as influencing demand the causative factor is the current rate on loans as compared with what i shall be calling the natural rate of interest the direct empirical implementation of the wicksellian insight is however obviously hampered by the fact that the natural rate of interest is not an observable variable as suggested by laurent 1988 and bernanke and blinder 1992 the slope of the term structure is often used as a proxy for the spread between a short term interest rate and its unobservable equilibrium level thus the yield curve steepens as short term interest rates are perceived to be below their equilibrium levels i follow a more direct approach to measuring the stance of monetary policy instead of using the slope of the term structure as a proxy for the gap between observed and equilibrium federal funds rates i introduce a model based method to constructing a measure of the level of the equilibrium funds rate as described below this equilibrium rate is calculated for the real sectors of the economy conditional on the observed rate of inflation thus the equilibrium rate is constructed to be independent of the inflation objectives of monetary policy and the implied difference between actual and equilibrium rates the funds rate spread constitutes my monetary policy indicator this paper provides an overview of the proposed methodology and compares the funds rate spread with traditional indicators of the monetary policy stance ii a model based measure of the spread i rely on the estimated structure of a macroeconometric model to measure the equilibrium federal funds rate the theoretical framework is the mit penn ssrc mps model which is housed at the federal reserve board this is a large scale quarterly model of the u s economy it consists of more than 100 behavioral equations about 200 identities and over 100 exogenous variables in its theoretical foundations the long run properties of the model are akin to a neoclassical growth model whereas the dynamic structure is essentially keynesian 3 the approach used in this paper is a departure from the traditional literature in at least two dimensions first i use an explicit theoretic framework to compute the equilibrium measure as opposed to the empirically based approach of using long term interest rates second by focusing on the equilibrium level of the federal funds rate i have a more direct way to gauge the stance of monetary policy the equilibria analyzed here correspond to intermediate run dynamics a time frame that seems most relevant for the conduct of monetary policy conceptually the equilibrium notion i explore is a simple one for a given position of the mps model s is block the equilibrium federal funds rate is defined as the one consistent with unemployment at its natural rate after all lags in the model have fully worked through

predisclosure information firm capitalization and security price behavior around earnings announcements several studies on the relationship between earnings reports and security price behavior provide evidence suggesting that a significant portion of the information revealed through earnings reports is reflected in security prices prior to the report month e g ball and brown 1968 and brown and kennelly 1972 this has been attributed at least partly to the existence of other more timely sources of information which allow market agents to forecast earnings prior to their release the evidence above reflects an average finding across all firms one question of interest is whether there are significant systematic crosssectional differences in the security price reactions to earnings announcements of firms which are associated with specific firm characteristics that lead to differential amounts of predisclosure information this study focuses on firm size capitalization as one such characteristic a firm

market incentives for safe commercial airline operation using a sample of nearly all fatal u s airline accidents between 1960 and 1985 this paper attempts to quantify the costs that airlines incur due to crashes the potential costs include those due to loss of life and equipment tort liability increased regulatory oversight and loss of demand as consumers turn away from products perceived to be unsafe examination of the deviations from expected demand following accidents reveals little or no effect prior to airline deregulation and weak indication of a response to recent crashes these results are consistent with the changes in an airline s equity value following an accident which are statistically significant but quite small relative to the total social cost of the accident

microcredit and adjustment to environmental shock evidence from the great famine in ireland the great famine of ireland from 1845 to 51 ranks as one of the most lethal of all time claiming approximately one eighth of the country s population utilizing famine relief commission reports to develop a micro level dataset of blight severity i find that in the short run districts more severely infected by blight experienced larger population declines and accumulations of buffer livestock by small to medium sized farms in the medium and long runs however worse affected districts experienced greater substitutions toward other tillage crops and grazing livestock particularly by small to medium sized farms using annual reports of the irish loan funds i further find that access to microfinance credit was an important factor in non demographic adjustment to blight worse affected districts with at least one microfinance fund during the famine experienced substantially smaller relative population declines and larger relative increases in buffer livestock during and immediately after the famine and greater relative medium and long run substitutions toward other crops and grazing livestock than worse affected districts without a fund

the objectives and priorities of monetary policy under different federal reserve chairmen this paper utilizes a monetary policy reaction function that relates policy intentions to forecasts of policy objectives estimates of this reaction function over the post accord period suggest that the burns period was unique while the martin and volcker periods were extremely similar the burns period was structurally distinct from both the martin and volcker periods further model specifications that allow for an independent influence on monetary policy from different presidential administrations also imply that there are significant differences in monetary policy under different fed chairmen copyright 1990 by ohio state university press

airline passenger fatality and the demand for air travel after the 11 september tragedy 20 of the scheduled us airline flights were cancelled and the passenger load factor was down to 56 from 66 6 a year ago was the high death toll or the nature of the attack itself responsible for this dramatic decline using the us data we find that the demand for air travel did fall in years of relatively high fatality rate but the demand is not sensitive to whether the high fatality rate is due to any terrorist activities our estimation results suggest that even after controlling for the sharp increase in the fatality rate because of the 11 september tragedy a considerable proportion of the decline in demand for air travel that year is still unexplained this evidence could suggest that there has been a fundamental shift in consumers perception of air travel safety in the aftermath of the tragedy

social structure and development a legacy of the holocaust in russia we document a statistical association between the severity of the persecution displacement and mass murder of jews by the nazis during world war ii and long run economic and political outcomes within russia cities that experienced the holocaust most intensely have grown less and both cities and administrative districts oblasts where the holocaust had the largest impact have worse economic and political outcomes since the collapse of the soviet union we provide evidence that the lasting impact of the holocaust may be attributable to a permanent change it induced in the social structure across different regions of russia

what does reputation really assure the relationship of trademarks to expectations and legal remedies i introduction klein and leffler 1981 and shapiro 1982 1983 have shown that a firm that engages in repeat transactions has an incentive to use the market as distinct from formal legal processes to assure the quality of its product the firm charges a price above salvageable costs of production and invests the premium in reputation trademark capital that it forfeits wholly or in part if it allows quality to fall below the standards it represents to its customers 1 the quality assurance hypothesis seems to be supported by stock market event studies such as those by jarrell and peltzman 1985 and karpoff and lott 1993 which show that product recalls airline crashes deceptive advertising and fraud result in trademark losses the quality assurance hypothesis however does not explain the massive size of these losses which typically are many times the outlays incurred by the firm as a result of the event the law and economics literature on contracts offers an answer to this and related puzzles suggesting that trademark capital does more than assure quality it assures specific performance that is fulfillment of the precise terms of the contract 2 after developing the specific performance hypothesis section ii we show that it is supported by the evidence from event studies furthermore it explains other phenomena not covered by the quality assurance hypothesis including why competitors of firms whose products are recalled lose wealth why some damages such as those in airline crashes intentionally fail to provide full compensation and why firms who sell to other firms also invest in trademark capital section iii we conclude with a summary and a few remarks on the issue of market versus legal forces section iv ii the specific performance hypothesis the quality assurance hypothesis focuses on the problems that arise when the physical characteristics of a commodity are costly to determine even after purchase and sellers warranties and quality representations are costly to enforce because higher quality usually costs more to produce and can be sold at a higher price producers have an incentive to represent their goods as being of higher quality than they really are or having established a reputation to cut quality and costs when consumers observe that the quality of the goods they purchase is lower than they had been led to believe they shift to lower cost lower quality goods whose quality is easier to determine higher quality goods seemingly are driven off the market klein and leffler 1981 hypothesize that a firm that engages in repeat transactions can gain by producing higher quality goods charging a price above salvageable costs of production and investing the premium in firm specific trademark capital the value of this trademark also described as reputation or goodwill is the present value of the expected stream of price premiums misrepresentation causes a reduction in this income stream and a corresponding loss in trademark capital 3 thus trademarks assure quality without a third party to enforce the contract 4 a buyer however is concerned about other characteristics of a transaction besides the physical attributes of the product the expected harm if the seller breaches the contract for example by misrepresenting the product failing to deliver it on time or failing to provide future service and the ability of the legal system to assure full compensation also matter accordingly a seller who engages in repeat transactions has an incentive to provide a bond that assures specific performance rather than just product quality when a breach results in damages that are hard to measure and the legal system does not enforce contracts costlessly the next task therefore is to examine the limitations of the legal system in enforcing contracts and providing compensation in case of breach specific performance and penalty clauses the courts could require contracting parties to provide specific performance

gradual incorporation of information pharmaceutical stocks and the evolution of president clinton s health care reform abstract we examine the effect of the evolution of president clinton s health care reform proposal over january 1992 october 1993 on pharmaceutical stock prices we identify a 52 3 percent decline in market adjusted prices which we then associate with health care reform applying a new technique isotonic regression we find most of the decline occurred gradually much of the decline occurred as the clinton plan adopted strategies to contain health care costs including managed competition and implicit regulation indirect evidence suggests that the wealth lost by pharmaceutical companies may have been largely an anticipated transfer our results are relevant to understanding the likely effects of the clinton plan and more recent proposals many other policy changes are marked by gradual public revelation of information which may not be completely observable by a researcher our approach may uncover information about the anticipated effects of policies unavailable from a traditional event study

migration with endogenous moving costs we study a dynamic model of labor migration in which moving costs decrease with the number of migrants already settled in the destination this assumption is supported by sociological studies of migrant networks with endogenous moving costs migration occurs gradually over time once it starts it develops momentum and migratory flows may increase even as wage differentials narrow in addition migration tends to follow geographical channels and low moving cost individuals migrate first these patterns are consistent with historical evidence from the great black migration of 1915 1960 in the united states much of which cannot be reconciled with existing migration models excerpt

the economic impact of the famine in the short and long run both short and long term economic consequences of the irish famine of the period 1845 1849 are reviewed the author concludes that the famine completely altered the structure of the irish labor market and that the migration associated with the famine resulted in the integration of ireland with world labor markets and a significant increase in irish wages annotation

does the fed beat the foreign exchange market abstract this paper s estimates and tests of fed intervention profits are the first that explicitly adjust for foreign exchange risk premia failure to adjust may grossly affect estimated profits profits appear economically and statistically significant whether risk premia are modeled as time constant or as appreciation s market beta depending on fed intervention the estimates are sensitive to the method of risk adjustment and to the periods used because a key variable cumulative intervention is i 1 test statistics may have non standard distributions a problem affecting past tests this paper s tests account for non standard distributions possible explanations of these profits have mixed empirical support in the literature

touched by tragedy capital market lessons from the crash of valujet flight 592 abstract this study presents an event time analysis of the effects of the crash of valuejet flight 592 the mandated f a a shutdown of valujet and the subsequent restart of the airline on valujet shareholders and two portfolios composed of the stocks of major and low cost competitors the results of the study document immense losses for valujet s shareholders as well as large contagion losses for the holders of other low cost airlines but statistically significant gains for the owners of major airline stocks a cross sectional analysis of the abnormal returns registered at the time of the crash and shutdown suggests that fleet age and low cost status but not an airline s public safety record were significant of the determinants changes in share prices for competitor firms

narrative and var approaches to monetary policy common identification problems abstract romer and romer romer c d romer d h 1989 does monetary policy matter a new test in the spirit of friedman and schwartz in blanchard o j fischer s eds nber macroeconomics annual 1989 mit press cambridge ma pp 121 170 romer c d romer d h 1994 monetary policy matters journal of monetary economics 34 75 88 adopted a narrative approach to address the identification problems in time series models of monetary policy based on federal reserve documents the romers created a dummy variable equal to one in periods when the federal reserve contracted in response to perceived inflationary pressures this paper shows 1 the dummy variable is predictable from past macroeconomic variables reflecting the endogenous response of policy to the economy 2 unpredictable changes in the dummy do not generate dynamic responses that look like the effects of monetary policy the identification problems that plague time series models also afflict the narrative approach

do international acquisitions by emerging economy firms create shareholder value the case of indian firms while overseas acquisitions by emerging economy firms are gaining increased attention from the business press our understanding of whether and why this inorganic mode of international expansion creates value to acquirer firms is limited we argue that international acquisitions facilitate internalization of tangible and intangible resources that are both difficult to trade through market transactions and take time to develop internally thus constituting an important strategic lever of value creation for emerging economy firms furthermore the magnitude of value created will be higher when the target firms are located in advanced economic and institutional environments country markets that carry the promise of higher quality of resources and therefore stronger complementarity to the existing capabilities of emerging economy firms an event study of 425 cross border acquisitions by indian firms during 2000 2007 supports our predictions

the effect of changes in the federal funds rate target on market interest rates in the 1970s abstract this paper examines the influence of monetary policy on interest rates by estimating the effect of changes in the federal funds rate target the federal reserve s policy instrument on market interest rates in the 1970s we find that changes in the target caused large movements in short term rates and smaller but significant movements in intermediate and long term rates we hypothesize that the similarity of the reactions of three six and twelve month rates to changes in the target offers a possible explanation for the lack of support for the expectations theory from studies that have tested the theory using these rates

an empirical analysis of stock returns around dividend changes this paper documents significant drift in stock returns following announcements of changes in cash dividends the magnitude is i smaller for increases than for decreases ii inversely related to firm size and positively to dividend yield change and iii concentrated in the first quarter beta changes do not explain the drift and it is robust in various subperiods next it is shown that dividend increases are positively autocorrelated especially every fourth quarter the prices keep reacting to future announcements as if the market ignores these autocorrelations dividend decreases exhibit weak autocorrelation and the returns are negative for the following three announcements

tax reform unraveling the tax reform act of 1986 was widely heralded as the most significant change in our nation s tax law since the income tax was extended to the masses during world war ii it was the crowning domestic policy achievement of president ronald reagan who proclaimed it the best antipoverty measure the best pro family measure and the best job creation measure ever to come out of the congress of the united states the law s rate reductions and base broadening reforms were mimicked throughout the countries belonging to the oecd even at the time however reading the paeans to this legislation was like watching a tennessee williams play something was terribly wrong but nobody was talking about it two decades later the changes wrought by the 1986 act have proven neither revolutionary nor stable tax experts now regard the 1986 act as a promise failed the public seems to agree and considerable public support exists for a flat tax or a national sales tax to replace the income tax i shall examine the most important individual and corporate income tax changes since 1986 before turning to proposals for restructuring the nation s tax system

inference using qualitative and quantitative information with an application to monetary policy i introduction there has been a revival of interest in the use of qualitative information in macroeconomic analysis recently an impetus for this revival is the apparent inability of modern statistical analyses that use only quantitative information to resolve significant macroeconomic controversies for example the direction of causality between money and output continues to be the subject of considerable debate the use of qualitative information in macroeconomic analysis has a long tradition mitchell 1927 and burns and mitchell 1946 use the descriptions in thorp s 1926 annals and several statistical series to identify the unobserved phase of the business cycle 1 in their chapters on the federal reserve friedman and schwartz 1963 use diaries policy records and monetary aggregates to identify the stance of monetary policy the essence of this traditional method is that it is prudent to use both qualitative and quantitative information in the process of inference because of the potential gain in confidence associated with cross verification both types of information are needed to identify the asymmetries and nonlinearities that are characteristic of business cycles policy initiatives and other economic phenomena questions concerning the interpretation of results using qualitative information however have been raised 2 a source of unease is the difficulty of assessing a researcher s distillation of the information in descriptive materials no obvious metric for evaluating the coding of a qualitative variable exists i present an alternative framework for combining qualitative and quantitative information in order to draw inferences of an unobservable variable quantitative information is an observable time series variable qualitative information is an indicator variable coded by a researcher that reflects the distillation of literary materials motivated by the traditional method i consider the case where both types of observable information are imperfect representations of an unobserved state variable an iterative algorithm that uses quantitative and qualitative information to draw inferences of the unobservable variable is constructed the algorithm produces an inference of the unobservable state variable for each sample period using the two types of information it also produces a probabilistic assessment of whether the qualitative indicator is a reliable indicator of the true unobserved state as discussed in more detail below this algorithm is closely related to those of cosslett and lee 1985 and hamilton 1989 the algorithm is applied to the problem of determining the stance of monetary policy a goal is to confront a problem that economic agents may actually face because of the secrecy surrounding the monetary policy process a description of that problem is how can observable information qualitative and quantitative be combined to infer the stance of monetary policy also can the reliability of the qualitative information or a distillation of it be measured i implement the algorithm using two prominent indicators of monetary policy the paper is organized as follows the alternative framework for using qualitative and quantitative information to draw inferences of an unobservable variable is presented in the next section the application to the problem of inferring the stance of monetary policy is presented in section iii in this section indicators of policy are introduced the model is estimated and the relationship between the dynamic conditional monetary policy inferences and an important forecaster of macroeconomic activity is explored section iv concludes ii an alternative framework for inference stochastic structure my alternative framework is based on a particular conception of the statistical model underlying the traditional method let y sub t denote a quantitative variable and i sub t denote a 0 1 qualitative variable

asset returns discount rate changes and market efficiency the primary purpose of this paper is to reconcile the previous findings of discount rate endogeneity with the presence of discount rate announcement effects in securities markets the crux of this reconciliation is the distinction between technical discount rate changes that are endogenous and nontechnical changes which contain some informative policy implications in essence we attempt to separate expected discount rate changes from unexpected changes or equivalently the expected component of discount rate changes from the unexpected component if markets are efficient the former should have no announcement effects while the latter may be associated with an announcement effect accordingly the focus of the empirical analysis is on the interaction between discount rate exogeneity the specific monetary policy regime and accouncement effects in addition we examine whether the behavior of these markets in the postannouncement period is consistent with the rapid price adjustment implied by market efficiency

central bank communication and monetary policy a survey of theory and evidence over the last two decades communication has become an increasingly important aspect of monetary policy these real world developments have spawned a huge new scholarly literature on central bank communication mostly empirical and almost all of it written in this decade we survey this ever growing literature the evidence suggests that communication can be an important and powerful part of the central bank s toolkit since it has the ability to move financial markets to enhance the predictability of monetary policy decisions and potentially to help achieve central banks macroeconomic objectives however the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy

the credit channel of monetary policy transmission evidence from stock returns christophre georges this paper offers a novel test of the credit view of the monetary policy transmission mechanism using stock market returns we identify fed policy shocks using newspaper accounts and track daily stock prices immediately following the shocks if the credit channel is important then firms that are dependent on bank credit and internal funds should receive a relatively greater benefit loss from a fed easing tightening than firms with access to nonbank credit at favorable terms we identify ten policy shocks during the expansion of 1993 94 and the credit crunch period of the 1990 91 recession and find little evidence supportive of an operative credit channel jel e5 i introduction recently there has been renewed interest in the mechanism by which monetary policy innovations are transmitted into changes in aggregate output according to the traditional money view monetary policy influences market interest rates inducing changes in interest sensitive spending and consequently changes in output by assumption there is no distinction between financial assets and thus bank loans and internal funds are of no special interest in contrast the credit view e g bernanke and blinder 1988 assumes that bank loans are special due to information asymmetries some businesses are dependent on banks for loanable funds a withdrawal of reserves by the fed causes the supply of bank loans to fall and bank dependent businesses consequently reduce their spending a broader version of this view e g gertler and gilchrist 1993 bernanke and gertler 1995 claims that credit market imperfections contribute to the propagation of monetary policy shocks without working exclusively through the su pply of bank loans tight monetary policy may for example cause a deterioration of borrowers net worth thereby increasing external finance premia in either case this transmission mechanism operates through firms that are credit constrained in the sense that nonbank credit is an imperfect substitute for internal funds and bank loans empirical evidence on the transmission mechanism has been mixed see bernanke and blinder 1992 ramey 1993 kashyap et al 1993 gertler and gilchrist 1993 1994 christiano et al 1996 oliner and rudebusch 1995 1996 kashyap and stein 2000 two fundamental problems make direct tests of the credit view difficult the difficulty of identifying exogenous monetary policy shocks and the difficulty of identifying the relationship between these shocks and subsequent real activity this article offers a novel empirical test of the credit view using stock market returns if the credit channel is important then firms that are credit constrained should receive a relatively greater benefit loss from a fed easing tightening than firms with access to nonbank credit at favorable terms this relative benefit loss should be reflected in the behavior of stock prices immediately following news of the fed policy change we therefore identify changes in market expectations of fed policy calculate abnormal returns the deviations of the actual returns from the returns predicted by an asset pricing model for individual securities immediately following these innovations and test for systematic relationships between these abnormal returns and indicators of credit constraints at the firm level this approach is more indirect than others in the literature but has the advantage of mitigating the two identification problems noted above first the policy shocks that we use are changes in stock market expectations of fed policy we can identify these closely using daily accounts in the business press 1 second because the stock market reacts quickly to changes in expectations of future profitability we observe near contemporaneous responses of stock prices to policy shocks regardless of when in the future profits are expected to be altered

the economic side effects of dangerous drug announcements immediately prior to the passage of the 1962 food and drug administration amendments there were a number of drugs recalled from markets worldwide announcements about the dangerous side effects of these drugs were associated with lower share prices for their manufacturers and the industry as a whole we perform several analyses to sort out alternative explanations for the observed declines we find that dangerous drug announcements had no effect on the sales of other drugs and did not affect the share values of european drug makers doing little business in the united states we also find that share price reductions associated with recalls in the 1970s and 1980s were confined to the manufacturers of the recalled drugs these patterns are consistent with the hypothesis that drug company shareholders viewed the recalls in the early 1960s as signals of an increase in the cost of compliance with new and more stringent drug testing requirements

the structure of the tax system versus the level of taxation an evaluation of the 1986 act in this paper i assess the 1986 tax reform act relative to the tax system that might have evolved over the several years following 1986 had that particular tax reform not been enacted had tax reform not been enacted i believe that the pattern of steady tax increases particularly corporate tax increases and tax increases on high income individuals such as occurred in the 1982 and 1984 tax acts would have continued i also believe that the 1986 tax reform act introduced an income tax system that will be quite stable broad changes in particular changes that raise a large amount of income tax revenues are unlikely for many years so i am comparing the tax structure of the 1986 tax reform act to a system that in part has an inferior structure but that provides more revenues since i believe that the most important tax policy goal in 1986 and later should have been to raise revenues not to revise the structure of the tax system i believe that the 1986 tax reform act was harmful tax reform not only did not raise revenues it has made it more difficult to raise revenues in the future without providing significant offsetting benefits

the wealth effect of merger activity and the objective functions of merging firms abstract this paper studies the net effects of the long run sequence of events leading to merger and of merger per se on shareholder wealth the appropriate measure of the wealth effect is shown to be the abnormal dollar return cumulated over time using this measure the long run wealth effect of the event sequence culminating in merger is significantly negative for acquiring firms for acquired firms the effect is negative but not significant the immediate impact of merger per se is positive and highly significant for acquired firms but larger in absolute value and negative for acquiring firms the evidence also reveals that measured abnormal rates of return to acquiring firms are sensitive to a slight variation in model specification and dependent on firm size with smaller firms earning significantly negative post merger returns

the use of expert opinion quality and reputation indicators by consumers evidence from the french vaulting stallion semen market we build a model inspired by the standard hedonic approach developed by rosen 1974 and completed by landon and smith 1997 1998 to analyse the price of french vaulting stallion semen in 2004 we show that reputation modelled as an endogenous factor plays a less important role than information on true quality for the explanation of price dispersion this result is explained by the fact that information on studhorses is not only available but also reliable insofar as the quality of a stallion is stable over time contrary to nondurable products like wine or cigars this explains also why consumers on this market do not use expert opinions to make their choices

the sherman antitrust act and the railroad cartels a lthough it is ninety years since the railroad cartels were ruled in violation of the sherman antitrust act of 1890 in the trans missouri 1897 and joint traffic 1898 decisions there is no agreement concerning the effect of these cases on collusion by the railroads 2 gabriel kolko and paul macavoy conclude that the supreme court decisions caused a permanent breakdown of the railroad cartels 3 other observers however argue that the effect on railroad collusion was negligible 4 this article uses stock price revaluations since trans missouri was largely unanticipated and estimates of railroad rates to measure the ef

the relation between narrative and money market indicators of monetary policy this paper studies the relation between narrative based indicators of monetary policy and widely used money market indicators of monetary policy three principal findings emerge first changes in monetary policy as measured by the narrative based policy indices are associated with persistent changes in the levels of m2 and the monetary base in contrast changes in the narrative policy indicators lead to transitory changes in short term interest rates nonborrowed reserves and the spread between the six month commercial paper rate and the three month treasury bill rate third these findings are generally robust across different narrative based policy indices

income taxation uncertainty and stability abstract this paper develops a political model to analyze the stability of income tax schedules it is assumed that agents perceive any proposed alternative tax policy as more uncertain than the status quo a tax policy is stable if it is a condorcet winner it is well known that in a model without uncertainty the existence of such a policy is very rare we show however that in real cases this might not be a serious problem since small amounts of uncertainty can bring stability to the status quo it is also shown that linear tax functions can only be stable in economies with very egalitarian income distributions and high taxation levels

on the efficiency of least squares regression with security abnormal returns as the dependent variable monte carlo procedures are used to compare the finite sample performance of several estimators that may be used in cross sectional regressions with security abnormal returns as the dependent variable alternative models of event induced increases in stock return variance are examined for the event clustering scenario event clustering implies crosssectional correlation and heteroskedasticity in market model prediction errors violating one of the fundamental ordinary least squares ols assumptions i i d disturbances nonetheless provided that the conditions for asymptotic validity derived by greenwald 1983 are met the ols estimator is well specified in finite samples further for sufficiently large cross sections there is no advantage to several other more complex estimators

information spillovers incumbency and conservatism abstract this paper studies the relationship between the existing ventures of a firm and its incentives to undertake new ventures we argue that whenever a firm undertakes a new venture it does so with the risk that information associated with that venture will reflect on all of the firm s products if the costs of bad news exceed the benefits of good news the firm will be less likely to undertake the venture this is the case in our model in which an incumbent risks losing monopoly status in an established market should its new venture fail thus incumbency can breed conservatism

evaluating effective income tax progression abstract an algorithm to compute effective income tax progression is devised for use when taxes are a function of both money income and other socioeconomic attributes and the data is in grouped summary form suppressing non income information effective progression can be evaluated at percentiles in the distribution of either money or equivalent income the normative significance of the new measures is explained in both cases the methodology is illustrated by application to u s individual income tax annual data for 1950 1987 yielding contour plots which show how effective progression has varied across the income distribution and with the passage of time

value event studies this paper discusses appropriate methodology for measuring the effect of an event on the value of a firm s equity th e key points are 1 cumulative abnormal returns do not measure the effect of an event on firm value if there are dividends during the event window 2 it is generally appropriate to use pre event parameters of the return generating process even if the event alters the parameters during the event window and 3 controlling for fact ors other than the return on the market portfolio improves the power of the estimation the formula for the effect of an event on the value of a firm when there are dividends during the event window is developed a nd applied to a study of the effect of the bhopal disaster on the value of union carbide copyright 1992 by mit press

macroeconomic cycles and the stock market s reaction to monetary policy abstract this paper examines cyclical variation in the effect of fed policy on the stock market we find a much stronger response of stock returns to unexpected changes in the federal funds target rate in recession and in tight credit market conditions using firm level data we also show that firms that face financial constraints are more affected by monetary shocks in tight credit conditions than the relatively unconstrained firms overall the results are consistent with the credit channel of monetary policy transmission

tariff jumping fdi and domestic firms profits studies of the welfare implications of trade policy often do not take account of the potential for tariff jumping fdi to mitigate positive gains to domestic producers we use event study methodology to examine the market effects for u s domestic firms that petitioned for antidumping ad relief as well as the effect of announcements of fdi by their foreign rivals in the u s market on these u s petitioning firms on average affirmative u s ad decisions are associated with 3 abnormal gains to a petitioning firm when there is no tariff jumping fdi but no abnormal gains if there is tariff jumping fdi the evidence for this mitigating effect is strongest when announcements of the intended tariff jumping fdi have already occurred before an ad decision takes place which happened in fair number of cases we also find evidence that the announcements of plant expansions and to some extent new plants have significantly larger negative effects on u s domestic firms profits than other types of fdi including acquisitions and joint ventures

predictable patterns after large stock price changes on the tokyo stock exchange this paper extends to japanese stocks recent research on short term stock price adjustment to new information using standard methodologies we find that stock returns of firms included in the nikkei 300 tend to be significantly positive after large price decreases this is similar to the pattern observed for american stocks in other research the pattern remains when returns are adjusted for market movements and exists independently of the october 1987 market break we find little evidence of significant patterns following large stock price increases we also find little evidence that non transaction prices explain the persistent significant returns observed following large price decreases on the tokyo stock exchange we conjecture that broker dealers and tse member firms respond to large price decreases not by trading for their own profit but rather by selectively supplying liquidity to their preferred retail customers we conclude that ordinary investors probably cannot earn economic profits from these statistically significant patterns

strategic responses to regulatory threat in the credit card market abstract models of endogenous regulatory threat suggest that firms may cut prices in order to ease a threat of regulation i test the implications of these models using stock market data from an episode of regulatory threat in the credit card market the data show that the initial threat led to negative abnormal returns for a portfolio of credit card issuers consistent with the regulatory threat hypothesis price cuts announced after the threat led to abnormal returns that are significantly more positive than those following similar cuts outside the period of regulatory threat this pattern exists not only for those issuers announcing cuts but also for their rivals which suggests that the cuts reduced an industry wide threat of regulation factors that proxy for issuers exposure to and influence on the probability of regulation affect the size of these returns which provides corroborative evidence in favor of the regulatory threat hypothesis

the dartboard column second hand information and price pressure this study analyzes the effect of second hand information on the behavior of security prices and volume using analysts recommendations published in the monthly dartboard column of the wall street journal for the two days following the publication of the recommendations average positive abnormal returns of 4 percent nearly twice the level of abnormal returns documented in previous research on analyst recommendations and average volume double normal volume levels on the two days following publication of the recommendations are documented the positive abnormal return on announcement is partially reversed within 25 trading days the authors conclude that the positive abnormal return on announcement of the recommendations is a result of naive buying pressure as well as the information content of the analysts recommendations

bond returns liquidity and missing data this paper examines holding period returns to constant duration portfolios of u s govern ment notes and bonds and measures the return premium generated by liquidity differences in bonds the approach compares constant duration portfolios constructed in two distinct ways one using only bonds issued in the most recent treasury auction one using all other bonds comparisons of the resulting series are made meaningful by choosing narrow du ration ranges in the portfolio formation procedure this in turn induces a missing data problem in the created time series parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data it is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments

monetary shocks equity returns and volatility a firm level panel data analysis abstractthis article studies the impact of monetary policy shocks on equity returns and their volatility among nine industries and their affiliated firms in the united states we use an extension of the traditional capm as the analytical framework and approximate policy shocks with the unexpected component of the federal funds rate data on the characteristics of firms and industries are obtained from compustat and the center for research in security prices covering a sample period from 1987 to 2009 our results clearly show that responses to policy shocks vary by industry and across firms furthermore credit availability matters in certain industries and small financially constrained and bank dependent firms are found to be more vulnerable to unexpected federal funds rate shocks

monetary policy and the u s stock market does the federal reserve system consider the level of the stock market when setting monetary policy this paper examines empirically if monetary policy since the october 19 1987 stock market crash has been influenced by the stock market we conclude that the fed considers the stock market only to the extent that it influences inflation and the output gap as a consequence the federal reserve policy accommodated the high valuations in the 1990s of the stock market as measured by the s p500 p e ratio

the competitive impact of air crashes stock market evidence abstract we examine stock market reactions to commercial air crashes to test the hypothesis that consumers respond by switching to rival airlines and or flying less we focus on the stock price reactions of airlines not involved in the crash if switching occurs noncrash airlines should benefit to the extent that they are direct competitors of the crash airline we develop a measure of market overlap and regress individual non crash airline abnormal returns on this measure allowing the constant term to capture any negative spillovers the evidence supports both a switching effect and a spillover

standard errors in event studies even if true abnormal returns are uncorrelated estimated abnormal returns are not this paper presents a simple formula for the variance of estimated cumulative abnormal re turns both returns and dummy variable procedures for estimating the standard error correctly taking account of both intertemporal and contemporaneous correlation of esti mated residuals are discussed they are then applied to an event study of post merger performance it is shown that ignoring either the intertemporal or contemporaneous correlation of residuals can result in significant underestimates of standard errors

evidence on the role of cash flow for investment abstract recent work in macroeconomics argues that imperfections in capital markets may lead to business cycle fluctuations by propagating relatively modest shocks evidence for such a mechanism also known as the financial accelerator consists largely of firm level studies showing that cash flow is an important predictor of investment but this evidence is often viewed with skepticism because cash flow is also a good indicator of investment opportunities in this paper we develop a framework for estimating the extent to which the predictive power of cash flow can be attributed to its role as a fundamental versus its role in alleviating credit frictions for firms with access to commercial paper and bond markets we find that the perfect capital markets model of investment can fully account for the role of cash flow for firms with only limited access to capital markets as indicated by lack of participation in public debt markets however investment appears to be excessively sensitive to fluctuations in cash flow these results thus clarify the role of cash flow in investment equations and provide support for the existence of a financial accelerator

a market based evaluation of the election versus appointment of regulatory commissioners this paper examines the elected versus appointed commissioner dichotomy from a market value perspective previous empirical analysis tends to concentrate on rates rather than examining the impact on shareholders wealth we examine life insurance industry data during the period surrounding the passage of california s proposition 103 the primary impact of the referendum on life insurers is to change the method of commissioner selection from appointment to popular vote we find that this change significantly reduced the value of life insurers doing business in california this result is consistent with the recent findings of boyes and mcdowell 1989 and smartt 1994 using alternative evaluation procedures for firms in other regulated industries this implies that the change to a popular election of commissioners either increases the level of risk and or decreases the expected cash flows of regulated firms

short of euphoria abstract the tax reform act of 1986 is the most sweeping reform since the early 1940s when the pressures of war finance forced the transformation of the income tax into a mass tax and made it the core of the federal tax system since then many adjustments have been made but the basic structure of the tax has remained unchanged behind this nominal stability however a slow erosion of the tax base appears to have been at work the widening of loopholes and emergence of high income shelters gained momentum in recent years and undermined the public s faith in the income tax the compounding of the investment tax credit and accelerated depreciation diluted and distorted the base of the corporation tax the current reform reverses these trends a major accomplishment that all reformers will welcome but the reform is far from complete its base broadening goes only part of the way and though substantial gains have been made they have not come without a price the pattern of rate reduction involving a dra

studying firm specific effects of regulation with stock market data an application to oil price regulation regulations are often introduced and reformed in response to unanticipated changes in market forces in late 1973 for example opec quadrupled the world price of oil and u s policy makers responded by imposing oil price regulation such events pose a fundamental problem of interpretation for studies that use stock prices to identify the economic effects of regulation what portion of the capital gains or losses experienced by investors in regulated firms is due to regulation and what portion is due to unanticipated economic events to answer these questions we use microeconomic theory to derive hypotheses about how the capital gains and losses created by opec pricing and u s regulatory policies are related to the underlying characteristics of petroleum firms we test the hypotheses by including a model of firm specific abnormal returns in the standard market models of common stock returns earned by investors in petroleum firms the results indicate the u s oil production and refiner access to price controlled crude oil were sources of capital gains and that u s and foreign refining were sources of capital losses

regional income fluctuations common trends and common cycles this paper investigates trend and cycle dynamics in per capita income for the major u s regions during the 1956 1995 period cointegration and serial correlation common features information are used in jointly decomposing the series into trend and cycle components we find considerable differences in the volatility of regional cycles controlling for differences in volatility we find a great deal of comovement in the cyclical response for all regions but the far west possible sources underlying differences in regional cycles are explored such as the share of a region s income accounted for by manufacturing defense spending as a proportion of a region s income oil price shocks and the stance of monetary policy somewhat surprisingly we find that the share of manufacturing in a region seems to account for little of the variation in regional cycles relative to national cycles but manufacturing share differentially affects trend growth for four of the seven regions studied

the incidence of regulatory rents in the motor carrier industry this article focuses on two questions in the debate over motor carrier regulation first did regulation create eliminate or have no effect on monopoly rents in the trucking industry second ifthere were rents what was their incidence were they received by owners oftrucking firms dissipated through higher costs or captured by the teamsters union data on share price responses to deregulation announcements reveal declines in expected profits of 8 19 of totalfirm value this suggests that regulation created monopoly profits and indicates that at least some of these rents accrued to owners of trucking firms firms responses to regulatory change are modelled as functions of company s operating characteristics and measures of unionization operating efficiency and service characteristics are shown to affect the impact of deregulation on share values

monetary policy announcements and market interest rates response evidence from china abstract this paper examines the daily responses of market interest rates to three monetary policy announcements in china using the event study approach i find that the interest rate responses to announced changes in the regulated retail interest rate and the required reserve ratio are positive and significant at all maturities of interest rates but smaller at the long end of the yield curve by contrast market interest rates barely respond to the qualitative mpc announcements about the monetary policy stance these findings are robust to alternative econometric methods that correct for potential bias arising from violations of the identification assumption these findings suggest that the pbc should formulate its policy communication in a quantitative way

the liability of good reputation a study of product recalls in the u s automobile industry in this paper we explore opposing theoretical claims about how organizational reputation affects market reactions to product defects on the one hand good reputation could be a disadvantage because expectations about product quality are more likely to be violated by defects in highly reputed products on the other hand a good reputation could be an advantage because of strong inertial effects on reputation orderings we empirically test these competing hypotheses using data on product recalls in the u s automobile industry from 1975 to 1999 our results support for the idea that reputation can be an organizational liability in that highly reputed firms suffer more market penalty as a result of their product recalls we also propose that the reputational effects are moderated by two important factors substitutability and generalism specialism our results show that having few substitutes with an equivalent level of reputation or a focused product identity stemming from specialism buffers the negative market reactions to product recalls we conclude with a discussion on the implications of these results for institutional reputation and status theories

in search of a signaling effect the wealth effects of corporate name changes abstract we find that evidence of a positive stock price reaction to the announcement of a name change is very weak and is sensitive to sample selection we interpret the evidence as a caution against the popular opinion that corporate name changes have significant valuation effects we also find little evidence that corporate name changes correspond to changes in a firm s stock return covariability with its industry index or changes in the firm s earnings growth rate these results cast doubt on two purported motives for name changes that they convey information to the market about changes in the firm s line of business or that they signal management s private information about the firm s future performance corporate name changes may serve useful purposes but such purposes have small valuation effects or tend to be anticipated by investors