comparing the incomes of nations a critique of the international comparison project this article s main purpose is to discuss certain key problems that arise in calculating purchasing power parities ppps when making international comparisons of real product while reviewing partially the work of irving kravis alan heston and robert summers 1982 before beginning the discussion the author wishes to record his opinion that this work of kravis heston and summers carried out and successively published over the past 15 years represents one of the great contributions to applied economics in the article that precedes this one kravis provides a survey of the applications of this type of data but it must be emphasized that any such listing can do only partial justice to the scope of new applications which seem to arise almost every day apart from applications to various aspects of international economic policy there is so much greater international variation in basic economic variables such as real income and relative prices than is usually found in typical intranational intertemporal comparisons that the new data inevitably represent an enormous increment in our science s general capacity for statistical experiment thus the debt owed to this team of research workers by the economics profession at large is immeasurable a ppp is essentially a form of international or interregional price index complicated but not essentially changed by the existence of national currencies for example suppose we found by some kind of index number calculation that the general price level in region a was 10 percent higher than in region b of the same country given a common currency the exchange rate between the money circulating in the two regions is clearly 1 0 but the ppp for region a in comparison with region b is 0 91 this being the number by which it is necessary to multiply a given nominal income in a to give it the same purchasing power as a corresponding income in b it follows that the ppp must be some average of the ratios among individual commodity prices in the two regions in the case of two countries with different currencies one can speak of a commodity ppp as being the rate of exchange between the two currencies which would equalize the price of a given commodity then the general ppp for the two countries is some average of the commodity ppps in international as in intertemporal comparisons there is a duality between the problem of measuring price levels and

clearly irrational financial market behavior evidence from the early exercise of exchange traded stock options this paper analyzes the early exercise of exchange traded options by different classes of investors over the 1996 to 1999 period a large number of exercises are identified as clearly irrational without invoking any model of market equilibrium customers of discount brokers and customers of full service brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior rational and irrational exercise is triggered for discount and full service customers by the underlying stock price attaining its highest level over the past year and by high returns on the underlying stock it is well known that in the absence of market frictions it is irrational to exercise american call options early except in some circumstances just before the underlying stock goes ex dividend even in the presence of market frictions it is possible to identify without the imposition of any model of market equilibrium call exercises that are clearly irrational in this paper we employ a previously unavailable data set to analyze the rationality of early exercises of chicago board option exchange cboe calls over the 1996 to 1999 period by customers of discount brokers discount customers customers of full service brokers full service customers and traders at large investment houses trading for their firms own accounts firm proprietary traders our first main finding is that there are a large number of early exercises that can be definitively identified as irrational and irrational exercise activity is not evenly distributed across the investor classes discount customers and full ser

how does the stock market absorb shocks abstract using a comprehensive set of news stories we find a stark difference in market responses to positive and negative price shocks accompanied by new information when there is a news story about a firm positive price shocks are followed by reversal while negative ones result in drift this is interpreted as the stock market overreaction to good news and underreaction to bad news these seemingly contradictory results can be explained in a single framework considering the interaction of retail investors with attention bias and arbitrageurs with short run capital constraints consistent with this hypothesis we find that both patterns are stronger when the attention bias is stronger and when the arbitrage capital is scarce

anchoring on historical high prices and seasoned equity offerings we document that firms financing decisions are affected by historical high prices the ratio of the monthly high price to the 12 month historical high price positively affects the probability of a seasoned equity offering seo furthermore the postannouncement market reaction is muted and the offering discount is smaller if the preannouncement stock price is high relative to its historical high price the results suggest that historical high price reference points may help managers rationally time seos to take advantage of market reception and minimize issuance costs

psychological factors and stock option exercise we investigate stock option exercise decisions by over 50 000 employees at seven corporations controlling for economic factors psychological factors influence exercise consistent with psychological models of beliefs employees exercise in response to stock price trends exercise is positively related to stock returns during the preceding month and negatively related to returns over longer horizons consistent with psychological models of values that include reference points employee exercise activity roughly doubles when the stock price exceeds the maximum price attained during the previous year

exercise behavior valuation and the incentive effects of employee stock options abstract we use a large database on eso exercises to document characteristics of exercise behavior and calibrate a utility based model for measuring how differences in exercise behavior are manifested in option values and incentives option values and incentives computed from the model calibrations are compared to those computed from models used to value tradable options our analysis provides guidance to both academics and practitioners about how differences in exercise behavior and model choice affect measures of eso values and incentives and underscores the importance of gaining a thorough understanding of the underlying economic forces that affect the behavior of eso holders

comparative studies of national incomes and prices income comparisons between persons or groups of persons in different countries are a special field of inquiry mainly because there are different currency units for the most part the other theoretical and empirical problems encountered in international income comparisons are similar to those of within nation comparisons between different persons at the same time or different groups of persons either interspatially or what is more common intertemporally e g constant price series of national income the qualifications mainly and for the most part are included because some writers hold that international comparisons are complicated or even invalidated by differences in consumption patterns sometimes differences in tastes are held to underlie these variations in consumption patterns variations that are often much larger between countries than those found between regions within a country or between different periods in the same country this essay focuses in its methodological aspects on these special problems the basic problems that are common to international and within nation comparisons are left to the standard literature on national accounts 2 we turn now to the currency unit problems and reserve the question of tastes for a later section

a general framework for evaluating executive stock options abstract motivated by recent recommendations by both european and american accounting standards boards that executive stock options be expensed in firms statements we provide an analytical and flexible framework for their evaluation our approach takes into account the vesting period american style resetting and reloading provisions that are features of many option programs and also considers the trading restriction on executives we identify a recursive structure in the stream of options that are granted to the executive over the course of her employment by exploiting this we are able to obtain a near explicit formula for the option value this enables us to discuss the joint effects of the different features on the exercising strategies and firms granting cost especially we highlight some significant interactions among these features

the effects of endowment and loss aversion in managerial stock option valuation assuming a positive influence of stock price volatility on stock option value incentive alignment proponents argue that stock option compensation encourages managerial risk seeking and thus aligns managers and shareholders risk preferences our findings show that stock option holders overvalue unexercisable options relative to options being offered and to normative e g black scholes valuations further the influence of stock price volatility on holders subjective valuations depends on stock price trend in sum results suggest that during stock option valuation managers draw on heuristics that financial options theory and models fail to capture we discuss implications for compensation design and research

broad based employee stock options grants and ipo firms this paper examines the broad based grant of employee stock options esos in the period following the initial public offering ipo stock option grants are used to reduce the negative effects of conflicts of interests associated with a firm s going public the study documents that option grants can be seen as corporate governance instruments for a number of model specifications also it is found that there is a robust relation between option grants and market and accounting returns respectively to the best of the authors knowledge no previous study has investigated the determinants of the grants of employee stock options in the post ipo period to both upper level and lower level executives during a period of sixteen years because the cross sectional data of this study amply encompasses more than a business cycle it is possible to examine the grants of esos across tight and soft labour markets during the former type of labour market it appears that more options are granted also the empirical res

revisiting the incentive effects of executive stock options abstract we develop a multiperiod framework to evaluate the incentive effects of executive stock options esos for a given increase in the grant date firm stock price and a concurrent increase in return volatility the increment of total value at the vesting date acts as a proxy for the incentive effects of esos if the option is attached to the existing contract without adjusting cash compensation we suggest that a firm should not always fix the strike price to the grant date stock price instead the strike price should vary with the length of the vesting period we also show that compared with at the money options restricted stock generates greater incentives to increase stock prices in some scenarios especially when equity based awards are vested early if the vesting period is long the firm could grant options instead of restricted stock to maximize incentives

taxation and executive compensation evidence from stock options abstract understanding the effects of taxes on executive compensation provides insight into the process determining this compensation and is a key input to top income tax rate policy a 2010 tax reform in canada which greatly increased the effective tax rate on stock option compensation for a subset of firms provides a natural experiment with which to address this issue difference in differences estimates suggest that this tax increase resulted in an immediate reduction in both stock option grants and the fraction of total compensation made up of stock options with limited if any substitution towards other components of compensation

prospect theory liquidation and the disposition effect there is a well known intuition linking prospect theory with the disposition effect the tendency of investors to sell assets that have risen in value rather than fallen recently several authors have studied rigorous models in an attempt to formalize the intuition however some have found it difficult to predict a disposition effect while others produce a more extreme prediction where investors never voluntarily sell at a loss we solve a model of asset liquidation where investors realize utility over gains and losses and utility is concave over gains and convex over losses under the preferences of tversky and kahneman tversky a d kahneman 1992 advances in prospect theory cumulative representation of uncertainty j risk uncertainty5 4 297 323 and lognormal asset prices investors exhibit a disposition effect as gains are realized at a greater rate than losses nonetheless in contrast to the extant literature we find that the investor will give up and sell at a loss when the asset has a sufficiently low sharpe ratio this paper was accepted by brad barber teck ho and terrance odean special issue editors

world product and income a review article kravis heston and summers provided comparable price and volume data for gross domestic product and its components for each of 34 countries varying in affluence from india and malawi to the united states the article discusses the data and the way in which they are generated and considers the use of these data for applied demand analysis

loss aversion in a consumption savings model abstract we propose a model of consumption and saving based on kahneman and tversky s prospect theory that implies a fundamental asymmetry in consumption behavior inconsistent with other models of consumption when there is sufficient income uncertainty a person resists lowering consumption in response to bad news about future income this resistance is greater than the resistance to increasing consumption in response to good news we present empirical evidence from five countries that confirms this behavior

international price discrimination the pharmaceutical industry abstract it is generally asserted that price discrimination is a common feature of the international pharmaceutical market resulting in unnecessarily high medical costs to developing countries since it is pharmaceuticals that are the largest component of their health care expenditures however little comprehensive empirical research has been carried out to test this hypothesis this article compares the prices of identical packages of pharmaceutical products for 32 countries for the year 1975 and examines which factors contribute to thehuge price differences a strong positive relationship between price level and per capita gdp is found a 10 increase in per capita income being associated with on average 8 higher drug prices the implementation of direct price control measures by the government results on average in a 20 price reduction while government policies such as bulk purchasing through a centralized government agency promotion of the use of generics and to a lesser extent excluding patent protection seem to be sucessful in lowering the general price level of pharmaceuticals these results suggest that the pharmaceutical industry charges what the market will bear

executive option exercises and financial misreporting abstract several recent papers document that the magnitude of potential gains from stock based compensation is positively related to the likelihood of misreporting in a sample of firms that announce restatements of their financial statements from 1997 to 2002 we examine whether managers realize these potential gains occurring from their accounting choices after controlling for diversification needs and stock price impact we find no significant evidence of higher option exercises by executives in the misreported years however for firms that are more likely to have made deliberate aggressive accounting choices we find significant evidence of higher option exercises for these firms option exercises are higher by 20 60 in comparison to industry and size matched nonrestating firms options exercises by executives are also increasing in the magnitude of the restatement as captured by the effect of the restatement on net income these higher option exercises tend to be more pervasive and are not just confined to the ceo and cfo of the firm

the timing of 52 week high price and momentum abstract we propose a new momentum strategy based on the timing of a stock s 52 week high price we find that the stocks that attained the 52 week high price in the recent past significantly outperform the stocks that attained the 52 week high price in the distant past in particular the top 10 of the stocks with the most recent 52 week high price outperform the bottom 10 of the stocks with most distant 52 week high price by 0 70 per month further conditioning on the recency of 52 week high price significantly increases the profitability of momentum strategy based on the nearness of current price to the 52 week high price specifically the average monthly return of this strategy is about twice as large for stocks with recent 52 week high price as compared with stocks with distant 52 week high price

two principles for the next round or how to bring developing countries in from the cold t he november 1999 wto ministerial meeting in seattle was expected to usher in a new round of negotiations the ninth in a series that began in geneva in 1947 although wto members proved unable to launch a round efforts will continue in 2000 to develop a negotiating agenda in this paper i want to reinforce the call of the wto s director general mr moore for the next set of negotiations to be a development round basic notions of equity and a sense of fair play require that the next round reflect developing country interests and concerns more than was the case in earlier rounds seattle demonstrated that without greater balance the success of future negotiations will be imperiled dissatisfaction by developing countries regarding the extent to which their interests were reflected was a factor leading to the failure of the ministerial meeting the stakes are high there is a growing gap between the developed and the less developed countries highlighted in this year s world development report world bank 1999 the international community is doing too little to narrow this gap aid per capita to the developing world has fallen by nearly a third in the 1990s too often cuts in aid budgets are accompanied by the slogan trade not aid exhortations for the developing world to participate fully in the global marketplace and lectures about how government subsidies and protectionism distort prices and impede growth all too often there is a hollow ring to these exhortations as developing countries take steps to open their economies and

portfolio choice and trading volume with loss averse investors this paper presents a model of portfolio choice and stock trading volume with lossaverse investors the demand function for risky assets is discontinuous and non monotonic as wealth rises beyond a threshold investors follow a generalized portfolio insurance strategy this behavior is consistent with the evidence in favor of the disposition effect in addition loss averse investors will not hold stocks unless the equity premium is quite high the elasticity of the aggregate demand curve changes substantially depending on the distribution of wealth across investors in an equilibrium setting the model generates positive correlation between trading volume and stock return volatility but suggests that this relationship should be non linear

real investment implications of employee stock option exercises this paper examines a real cost of awarding employee stock options based on the observation that managers are extremely concerned about earnings per share dilution in equity related compensation we predict and find that firms experiencing significant employee stock option eso exercises shift resources away from real investments towards the repurchase of their own stocks we further find weak evidence of a decline in subsequent firm performance as measured by return on assets for several years following the cut in discretionary investments as a result of stock option exercises though this result is sensitive to the metric used to measure performance collectively our findings indicate that eso exercises potentially impose a real cost on the firm in terms of foregone investment opportunities

the courage of misguided convictions the field of modern financial economics assumes that people behave with extreme rationality but they do not furthermore people s deviations from rationality are often systematic behavioral finance relaxes the traditional assumptions of financial economics by incorporating these observable systematic and very human departures from rationality into standard models of financial markets we highlight two common mistakes investors make excessive trading and the tendency to disproportionately hold on to losing investments while selling winners we argue that these systematic biases have their origins in human psychology the tendency for human beings to be overconfident causes the first bias in investors and the human desire to avoid regret prompts the second

forecasting volatility using long memory and comovements an application to option valuation under sfas 123r horizon matched historical volatility is commonly used to forecast future volatility for op tion valuation under the statement of financial accounting standards sfas 123r in this paper we empirically investigate the performance of using historical volatility to forecast long term stock return volatility in comparison with a number of alternative forecasting methods in analyzing forecasting errors and their impact on reported income due to option expensing we find that historical volatility is a poor forecast for long term volatility and that shrinkage adjustment toward comparable firm volatility only slightly improves its per formance forecasting performance can be improved substantially by incorporating both long memory and comovements with common market factors we also experiment with a simple mixed horizon realized volatility model and find its long term forecasting perfor mance to be more accurate than historical forecasts but less accurate than long memory forecasts

parallel imports challenges from unauthorized distribution channels we examine the problem of parallel imports unauthorized flows of products across countries which compete with authorized distribution channels the traditional economics model of a discriminating monopolist that has different prices for the same good in different markets requires the markets to be separated in some way usually geographically the profits from price discrimination can be threatened by parallel imports that allow consumers in the high priced region some access to the low priced marketplace however as this article shows there is a very real possibility that parallel imports may actually increase profits the basic intuition is that parallel importation becomes another channel for the authentic goods and creates a new product version that allows the manufacturer to price discriminate we propose a two country three stage model to quantitatively study the effects and strategies in the third stage and in the higher priced country where parallel imports have entered we characterize the resulting market segmentation one segment of consumers stays with the authorized version as they place more value on the warranty and services that come with the authorized version another segment switches to parallel imports because a lower price is offered due to lack of country specific features or warranties parallel imports also generate a third and new segment that would not have bought this product before unlike counterfeits that are fabricated by imitators all parallel imports are genuine and sourced from the manufacturer in the lower priced country through authorized dealers therefore the manufacturer s global sales quantity should increase but profit may rise or fall depending on the relative sizes and profitability of the segments a profit maximizing parallel importer should set price and quantity in the second stage after observing the manufacturer s prices in both countries there will be a threshold of across country price gap above which parallel imports would occur in the first stage the manufacturer can anticipate the possible occurrence of a parallel import its price and quantity and its effect on authorized sales in each country to make a coordinated pricing decision to maximize the global supply chain profit under some circumstances the manufacturer should allow parallel imports and under others should prevent them through a stackelberg game we solve for the optimal pricing strategy in each scenario we then find in one extension that when the number of parallel importers increases the optimal authorized price gap should narrow but the prices and quantities of parallel imports may rise or fall in another extension we nd that when the manufacturer has other means such as monitoring dealers differentiating designs and unbundling warranties to contain parallel imports the authorized price gap can widen as a function of the effectiveness of nonpricing controls in summary parallel imports may help the manufacturer to extend the global reach of its product and even boost its global profit if the manufacturer offers a discount version through its authorized dealers it is running a high risk of confusing customers and tarnishing brand images parallel imports may cause similar concerns for the manufacturer but unauthorized dealers are perceived as further removed from the manufacturer therefore there is less risk of confusing consumers when parallel imports are channeled through unauthorized dealers furthermore they are more nimble in diverting the product whenever their transshipment and marketing costs are small enough not to offset the authorized price gap and the valuation discount this may explain why some manufacturers fiercely fight parallel imports while others knowingly use this alternative channel

capital gains overhang with a dynamic reference point financial models incorporating a reference point such as the capital gains overhang cgo model typically assume it is fixed at the purchase price combining experimental and market data this pa

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

employee stock options as warrants abstract previous studies ignore the fact that employee stock options are warrants because these options have been an insignificant component of firms capital structures i show that this assumption is no longer correct for example for more than 36 of my sample firms employee stock options represent a more significant claim on firm value than the firm s debt and preferred stock combined moreover in contrast to the suggestions of previous research i show that employee stock options are a significant claim on firms throughout the economy including larger firms older firms and firms in old economy industries finally i show that the presumption in prior studies that employee stock options are not warrants causes a potential misunderstanding of the risk shifting interests of securityholders and biases the analysis of capital structure issues

the 52 week high momentum strategy in international stock markets abstract we study the 52 week high momentum strategy in international stock markets proposed by george and hwang george t hwang c y 2004 the 52 week high and momentum investing journal of finance 59 2145 2176 this strategy produces profits in 18 of the 20 markets studied and the profits are significant in 10 markets the 52 week high momentum profits exist independently from the jegadeesh and titman jegadeesh n titman s 1993 returns to buying winners and selling losers implications for market efficiency journal of finance 48 65 91 individual stock and moskowitz and grinblatt moskowitz t j grinblatt m 1999 do industries explain momentum journal of finance 54 1249 1290 industry momentum strategies these profits do not show reversals in the long run we find that the 52 week high is a better predictor of future returns than macroeconomic risk factors or the acquisition price the individualism index a proxy to the level of overconfidence has no explanatory power to the variations of the 52 week high momentum profits across different markets however the profits are no longer significant in most markets once transaction costs are taken into account

parallel imports demand dispersion and international price discrimination parallel imports goods imported by unauthorized resellers are advocated worldwide for undermining international price discrimination for a continuum of markets we find that uniform pricing by a monopolist yields lower global welfare than third degree discrimination if demand dispersion across markets is large though uniform pricing avoids output misallocation too many markets go unserved mixed systems permitting discrimination across but not within designated groups of markets yield significantly higher welfare than uniform pricing or unrestricted multimarket discrimination and can pareto dominate uniform pricing thus while parallel imports might benefit some countries our results weaken the multilateral case for allowing them

products liability and prescription drug prices in canada and the united states this article provides the first estimate of the degree to which product liability costs in this country contribute to the observed differences in pharmaceutical prices between the united states and canada measures of liability risk show up as large and strongly significant explanatory variables in regressions of u s and canadian price differences in the sample used here accounting for liability effects reduces the mean of the predicted price difference distribution by about one half and the median by about one third these reductions come about by virtually eliminating the upper tail of the distribution though liability effects cannot account for all the observed price differences in this sample they clearly must play a role efforts to explain international price differences in drug products which do not take account of the effects of differing legal systems are missing an important effect and suffer from a substantial omitted variable bias

moving closer to the action examining compensation design effects on firm risk we examine the influence of ceo equity based compensation on strategic risk taking by the firm building off the behavioral agency model agency theory and prospect theory we develop arguments about when equity based compensation elements will increase or decrease executive risk propensity and in turn strategic risk taking incorporating a behavioral perspective into our models of incentive alignment provides us with new and potentially more accurate predictions about how individual elements of ceo pay will influence risk selection as well as how equity compensation interacts with cash compensation and with other factors to influence risk preferences in general this study provides evidence that ceo equity based compensation significantly influences strategic risk but that this influence is more nuanced and complex than conventional treatments of executive compensation assume in particular we find that different forms of equity based pay exhibit dissimilar influences on strategic risk and that their influence changes as their value and vesting status change second we find that cash based forms of pay moderate the incentive properties of equity based pay indicating that cash based pay may affect how executives perceive risks associated with equity pay finally we find that stock price volatility and board actions each also moderate the incentive effects of equity based pay in sum our results argue for increased recognition of a behavioral perspective on executive compensation and greater precision in how we measure and model the incentive alignment properties of ceo compensation

portfolio choice and risk attitudes an experiment i introduction suppose an investor is faced with a decision concerning how to allocate financial resources between a risky lottery asset with a higher expected return and an asset with a fixed and guaranteed lower return is the choice of portfolio independent of preferences outside the standard neoclassical model in experiments with financial incentives we study how portfolio choice depends on three well documented behavioral phenomena ambiguity aversion the illusion of control and myopic loss aversion we also investigate whether participants are willing to explicitly pay a small sum of money to indulge such preferences pay for more perceived control less ambiguity or more frequent opportunities to change the portfolio based on feedback about its performance while standard finance theory presumes that investors successfully identify and process information relevant to reaching optimal decisions in recent years a body of empirical evidence suggests that there are systematic departures from this behavior behavioral finance is concerned with psychological influences in financial decision making and markets investors make decisions while trying to stay afloat in a sea of uncertainty when predictability is low people may be prone to unjustified beliefs that may survive and even flourish in such an environment 1 people may resort to rules of thumb on a conscious or subconscious level to the extent that psychological influences are present it is economically important to consider which of these actually affect risk attitudes and portfolio choice a key issue is whether any such influences disappear when monetary incentives are present we pursue a systematic experimental comparison of three of the most prominent behavioral phenomena documented in the literature the illusion of control langer 1975 is concerned with greater confidence in one s predictive ability or in a favorable outcome when one has a higher degree of personal involvement even when one s involvement is not actually relevant ambiguity aversion ellsberg 1961 is the desire to avoid unclear circumstances even when this will not increase the expected utility myopic loss aversion benartzi and thaler 1995 combines loss aversion kahneman and tversky 1979 tversky and kahneman 1992 and a tendency to evaluate outcomes frequently this combination leads investors to be more willing to invest a greater proportion of their portfolio in risky assets if they evaluate their investments less frequently we show that these phenomena are present with monetary incentives and also investigate whether people are willing to pay money to accommodate such preferences or whether they are closer to the rational model when incentives are present with the procedure we chose the willingness to actually pa for such preferences depends on the preference the great majority of investors pay for less ambiguity or more frequent feedback investment opportunities but fewer than 10 pay to roll a determinative die themselves 2 we then examine how the preferences between lotteries in the different treatments affect portfolio choice we have participants allocate their investment capital between an asset with a sure return and a risky asset with a higher expected rate of return in fact there is very little variation in investment behavior across any of the illusion of control or ambiguity aversion treatments in contrast the results found in previous experimental studies of myopic loss aversion suggest that participants invest less in their preferred option the main conclusion we draw from these findings is that the relation between which procedure or lottery people prefer and how much they are willing to actually invest in this lottery is not trivial at all people are generally unwilling to pay even small amounts of money to indulge the illusion of control and it does not influence their portfolio choice people are generally willing to pay money for less ambiguity but having less ambiguity does not influence their portfolio choice finally in some cases people are willing to pay money for more frequent feedback and opportunities to change their portfolio but again previous studies have shown that people invest less with this additional information and greater flexibility

loss aversion in aggregate macroeconomic time series abstract prospect theory has been the focus of increasing attention in many fields of economics however it has scarcely been addressed in macroeconomic growth models neither on theoretical nor on empirical grounds in this paper we use prospect theory in a stochastic optimal growth model thereafter the focus lies on linking the euler equation obtained from a prospect theory growth model of this kind to real macroeconomic data we will use generalized method of moments gmm estimation to test the implications of such a non linear prospect utility euler equation our results indicate that loss aversion can be traced in aggregate macroeconomic time series

uncertainty avoidance and the timing of employee stock option exercise we examine the impact of the cultural norm of uncertainty avoidance on employee stock option eso exercise behavior using proprietary data from a multinational firm we find that employees from countries with higher levels of uncertainty avoidance exercise their stock options earlier these findings lend support to a maintained assumption in the eso literature that employee attitudes toward uncertainty influence stock option exercise behaviors our findings further help to explain prior findings of cross cultural differences in firms compensation practices by indicating that employee responses to option based pay and firms consequent financial reporting costs vary as functions of employee uncertainty avoidance

employee stock option exercises an empirical analysis this paper describes the exercise behavior of over 50 000 employees who hold longterm options on employer stock at eight corporations employees typically exercise options years before expiration commonly sacrificing half of the black scholes value exercise is strongly associated with recent stock price movements the market to strike ratio proximity to vesting dates time to maturity volatility and the employee s level within the company these findings have implications for compensation planners the fasb as it develops a new accounting standard for options and financial statement users and preparers who apply and interpret the new fasb standard

developments in non expected utility theory the hunt for a descriptive theory of choice under risk this article reviews recent developments in the economic theory of individual decision making under risk since the 1950s it has been known that individual choices violate the standard model of expected utility in predictable ways considerable research effort has now been devoted to the project of developing a superior descriptive model following an overview of non expected utility theories which distinguishes between conventional and non conventional approaches the paper seeks to assess these alternative models in terms of empirical success using laboratory and field data and theoretical usefulness the closing sections reflect on some new directions emerging in this literature

private information in executive stock option trades evidence of insider trading in the uk uk executives stock option exercises and associated sell decisions are motivated by private inside information executives use their inside information to lock in short term gains and to sell stock acquired prior to negative abnormal stock returns this informed trading is robust to the alternative factors that might motivate the exercise of executive stock options including option moneyness and value of exercise we suggest that the disparity in informed trading between us and uk executives option trades is related to important differences in the proportion of executive remuneration linked to options the regulation of options and the taxation of option gains

comparing with the average reference points and market reactions to above average earnings surprises abstract we examine whether the average earnings surprises announced yesterday affect investors responses to earnings news announced today we find that in the short window surrounding an earnings announcement the market rewards today s earnings news that is above yesterday s average earnings surprises with a premium consistent with yesterday s average becoming a reference point for investors to classify today s earnings news as a gain or a loss the price premium for an above average earnings surprise is larger when more earnings announcements are made on the same day and when investors face greater uncertainty in assessing firms performance we interpret this evidence as suggesting that investors rely more on the average as a reference point when they are more likely to be subject to cognitive constraints in processing information we also find that firms announcing above average earnings surprises exhibit a greater abnormal trading volume consistent with the notion that beating reference points prompts investors to trade

probability weighting and employee stock options this paper documents that riskier firms with higher idiosyncratic volatility grant more stock options to nonexecutive employees standard models in the literature cannot easily explain this pattern a model in which a risk neutral firm and an employee with prospect theory preferences bargain over the employee s pay package can the key feature which makes stock options attractive is probability weighting the model fits the data on option grants well when calibrated using standard parameters from the experimental literature the results are the first evidence that risky firms can profitably use stock options to cater to an employee demand for long shot bets

risk aversion and block exercise of executive stock options abstract it is well documented that executives granted stock options tend to exercise early and in a few large transactions or blocks standard risk neutral valuation models cannot explain these patterns and attempts to capture the exercise behavior of risk averse executives have been limited to the special case of one option this paper solves for the optimal exercise behavior for a risk averse executive who is granted multiple stock options we show that utility based models do not predict block exercise behavior rather the risk averse executive exercises stock options individually at a sequence of increasing price thresholds when in addition the executive faces frictions such as costly exercise he faces a trade off between exercising little and often to maximize return and exercising larger quantities on fewer occasions to minimize effort this generates realistic block exercise behavior and yields new predictions in particular executives should begin by exercising large blocks of options but the block sizes should become smaller over time our framework also allows us to study the impact of multiple exercise dates on estimates of the cost of options to the company we find that assuming the executive can only exercise on a single occasion underestimates the cost of the options compared with allowing for optimal exercise behavior

prospect theory and liquidation decisions we solve a liquidation problem for an agent with preferences consistent with the prospect theory of kahneman and tversky econometrica 47 1979 263 291 we find that the agent is willing to hold a risky project with a relatively inferior sharpe ratio if the project is currently making losses and intends to liquidate it when it breaks even on the other hand the agent may liquidate a project with a relatively superior sharpe ratio if its current profits rise or drop to the break even point our results capture the spirit of the disposition effect and the break even effect documented in empirical and experimental studies

discussion of information distribution within firms evidence from stock option exercises abstract huddart and lang j accounting econom 34 2003 documents that higher level of employee option exercise during a particular month is associated with lower returns in subsequent months suggesting employees exploit private information in their exercise decisions while the paper extends the insider trading literature that has focused on top executives a number of inconsistencies with prior studies remain unresolved moreover the study does not establish a direct link to the private information employees supposedly exploit establishing such a link is warranted here in the light of the surprising finding that exercises by senior employees are no more informative than those by lower rank employees

an index of loss aversion to a considerable extent risk aversion as it is commonly observed is caused by loss aversion several indexes of loss aversion have been proposed in the literature the one proposed in this paper leads to a clear decomposition of risk attitude into three distinct components basic utility probability weighting and loss aversion the index is independent of the unit of payment the main theorem shows how the indexes of different decision makers can be compared through observed choices

the disposition effect in securities trading an experimental analysis the disposition effect is the tendency to sell assets that have gained value winners and keep assets that have lost value losers disposition effects can be explained by the two features of prospect theory the idea that people value gains and losses relative to a reference point the initial purchase price of shares and the tendency to seek risk when faced with possible losses and avoid risk when a certain gain is possible our experiments were designed to see if subjects would exhibit disposition effects subjects bought and sold shares in six risky assets asset prices fluctuated in each period contrary to bayesian optimization subjects did tend to sell winners and keep losers when the shares were automatically sold after each period the disposition effect was greatly reduced

the risk preferences of u s executives in this paper i elicit risk attitudes of u s executives by calibrating a subjective option valuation model for option exercising data 1996 to 2008 yielding approximately 65 000 values of relative risk aversion rra for almost 7 000 executives the observed behavior is generally consistent with moderate risk aversion and a median mean rra close to one three values are validated for chief executive officers ceos by testing theory based predictions on the influence of individual characteristics on risk preferences such as gender marital status religiosity and intelligence senior managers such as ceos presidents and chairpersons of the boards of directors are significantly less risk averse than non senior executives rra heterogeneity is strongly correlated with sector membership and firm level variables such as size performance and capital structure alternative factors influencing option exercises are tested for their influence on rra values this paper was accepted by brad barber finance

application of the dea on the measurement of efficiency in the eu countries the purpose of the paper is to investigate the relative technical efficiency of the agricultural sector in the european union eu using the data envelopment analysis dea during the period 2007 2011 the authors investigated efficiency using both the input and output oriented models with the assumption of a variable return to scale they looked for causes of inefficiency and made recommendations for inefficient agricultural sectors the results show that in average the eu agricultural sectors performed efficiently as evidenced by the relatively high value of the average input and output efficiency the efficiency of the eu agricultural sectors had changed over the past few years and in both models the efficiency has generally decreased over time as the main source of inefficiency was labelled the input total utilised agricultural area and as the strength with a positive impact on efficiency there was labelled the crop output by calculating the optimal values for the input and output variables for inefficient agricultural sectors it has been found that for the efficient production of a given quantity of outputs it was necessary to reduce the value of the in put total labour in average by 6 18 the total utilised agricultural area in average by 14 45 and the total assets in average by 5 93 in case of the output oriented model for efficient use of a given quantity of inputs the agricultural sectors should produce up to 111 85 of their crop output and 113 41 of their animal output

do stock options overcome managerial risk aversion evidence from exercises of executive stock options we report that the probability that executives exercise options early decreases with the volatility of the underlying stock return we interpret this to mean that executives subjective option value increases with volatility and that option grants increase executives risk appetite further decomposition reveals that the results are most pronounced for idiosyncratic volatility consistent with our conjecture that executives believe they can better predict or influence the resolution of idiosyncratic uncertainty than systematic uncertainty and thus favor the former data are available at http dx doi org 10 1287 mnsc 2016 2495 this paper was accepted by wei jiang finance

prior consequences and subsequent risk taking new field evidence from the taiwan futures exchange we use a data set from market participants in the taiwan stock exchange capitalization weighted stock index options markets to demonstrate a strong positive relationship between prior trading outcomes and subsequent risk taking in particular investors in this market take above average risks in afternoon trading after morning gains the phenomenon is prevalent in all three types of market makers accounts and across different types of market participants our findings are consistent with the argument that prior outcomes affect subsequent risk taking through a relationship that is sensitive to the model parameters i e expected return trading period and curvature of the value function because prospect theory can predict both increased and decreased levels of subsequent risk taking we provide possible explanations behind the phenomenon and discuss reasons for the variety of findings in the existing literature

world product and income international comparisons of real gross product the volume reports on the third phase of the united nations international comparison project icp the main results provide comparisons of real gross domestic product gdp per capita for thirty four countries in 1975 quantity and price comparisons are given also for personal consumption capital formation and public consumption and further subdivisions of final expenditures on gdp are estimated

loss aversion under prospect theory a parameter free measurement agrowing body of qualitative evidence shows that loss aversion a phenomenon formalized in prospect theory can explain a variety of field and experimental data quantifications of loss aversion are however hindered by the absence of a general preference based method to elicit the utility for gains and losses simultaneously this paper proposes such a method and uses it to measure loss aversion in an experimental study without making any parametric assumptions thus it is the first to obtain a parameter free elicitation of prospect theory s utility function on the whole domain our method also provides an efficient way to elicit utility midpoints which are important in axiomatizations of utility several definitions of loss aversion have been put forward in the literature according to most definitions we find strong evidence of loss aversion at both the aggregate and the individual level the degree of loss aversion varies with the definition used which underlines the need for a commonly accepted definition of loss aversion