investor preference for large firms new evidence on economies of size in the last several decades industrial organization literature has been replete with studies demonstrating a systematic relationship between accounting rates of return and firm size in the direction of greater and more stable accounting profits for larger firms these studies have been subject to criticism for an alarming number of statistical and conceptual problems the most important of which alleges a serious bias in accounting profit measures as proxies for economic profit 2 the criticisms have resulted in a stalemate in the interpretation of empirical evidence on firm size and performance nevertheless there is continued interest in the area ostensibly resulting from policy concerns with large firm advantages in both product and capital markets this paper provides new evidence concerning the industrial organization literature controversy of the connection between firm size and performance stock market data are used to examine the relationship between capital market returns risk and firm size the findings suggest that even if there were no advantages of large size in the product market equal rates of operating profit large firms would still have a substantial capital raising advantage over small firms this advantage is unrelated to the widely recognized floatation cost economies even after controlling for nondiversifiable risk using the capital asset pricing model capm investors still demonstrate a statistically significant and economically important preference for the securities of larger firms investors apparently place a premium on large firms which is not attributable to large firms observed lower risk as captured by the widely used measure of nondiversifiable risk beta risk this finding a fresh contribution to the

small firms and the merger mania empirical research has found an average or even superior performance of small firms this seems to be at variance with the secular concentration process and the recurrent merger waves this paper tries to integrate size and merger research higher profitability of small firms is explained by their incentive structure and shorter decision lags but also by lower wages and higher individual risk premia their faster growth in the eighties was in addition fostered by diversification of demand miniaturization of technology and a need for flexibility under uncertainty the merger wave on the other hand does not necessarily prove that large firms are superior managers and shareholders may be seduced by stockmarket optimism a sizeable industry of banks agents and lawyers have their own interests in mergers mergers may be important in declining markets and for the acquisition of technology on average mergers do not improve efficiency profits or internal growth small and large firms serve different purposes performance depends on the market incentives and technology the establishment growth and closure of small firms as well as mergers are attempts to find the optimal organization for utility maximization in a world of severe uncertainty and diverse needs

dynamic market models in industrial organization abstract this paper surveys empirical work done on dynamic models of market performance these fall into one of two categories structural models which model how market structure and performance change in response to entry and reduced form models which describe change regardless of how it is brought about a typical example of each type of model is chosen from the literature and simulations are used to draw out the implications of the estimated coefficients both models depict the competitive process in the us economy as being extremely slow

the decline of dominant firms 1905 1929 the theory of dynamic limit pricing implies that a firm maximizes its wealth by gradually sacrificing its dominant market share we extend the theory by simulation methods to show that higher structural entry barriers generally result in both higher profits and a slower sacrifice of market share the model is applied to 42 once dominant firms in u s manufacturing to explain jointly the declines of their market shares and the profit rates earned during 1905 1929 the statistical results agree substantially with the hypothesis that these firms behaved consistently with maximizing their wealth through dynamic limit pricing

recent trends in the size structure of italian manufacturing firms this paper analyses the re emergence of small scale production which has characterised the more recent phase of industrial development in western countries providing updated evidence about the phenomenon and focussing in particular the attention on italy where it has been assuming peculiar relevance

on the relationship between aggregate merger activity and the stock market abstract this paper presents substantial evidence to show that the well documented correlation between aggregate merger activity and indices of share prices is unstable and thus of little predictive value further granger causality testing suggests that such correlations are spurious reflecting other more fundamental forces which jointly determine movements in both series

dynamic limit pricing and internal finance abstract this paper examines a model of dynamic limit pricing with a profit maximizing fringe constrained to finance new investment from internal finance in a differential game the dominant firm controls price thereby determining the current earnings of the fringe while the fringe chooses its optimal retention ratio if market growth is less than the discount rate an important feature of the solution is that price must eventually drop to the fringe long run cost of production if market growth is initially rapid the dominant firm is much more aggressive in limiting fringe growth

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

european industrial policy and industrial policy in europe among the most vexing problems facing those concerned with the formation and implementation of industrial policy is deciding what it is why it exists and whether there ought to be more or less of it than exists at present any random collection of six economists is sure to produce at least a dozen different opinions on the subject not least because many economists have trouble in reconciling their gut reaction that industrial policy should not exist with the obvious fact that it does the vigorous debate that now rages between those who believe that industrial policy should and those that believe that it should not be consciously pursued by gov ernments is but a pale reflection of the true diversity of opinion that exists on the subject even amongst that group of economists who are enthusiastic about industrial policy the range of specific policy proposals that have been put forth is enormous and the debate within this group is no less active and acrimonious than that between the pros and antis following what is a clear if unintended character istic of many of the contributions to this debate this paper is devoted to complicating ratherthan simpli fying the issues in particular the question that we shall explore is whether there might be a type of industrial policy which should be applied at a supra national level although this question has been actively discussed in europe since the signing of the treaty of rome at least the revival of free marketideologies the looming menace of 1992 and recent discussions of european political union have all added a good deal of fuel to the fire more than a few ambitious european politicians have launched initiatives that apparently usurp national policy prerogatives and the response by many national governments has become increasingly angry and strident traditional liberalism struggled for years to define the boundaries of the state in terms of the

massaging mean variance inputs returns from alternative global investment strategies in the 1980s this paper explores the impact of adjustments to the inputs on total returns terminal wealth and portfolio turnover in an unconstrained monthly mean variance mv asset allocation over time it is well known that mv allocations are very sensitive to small forecast errors in the means and covariances this sensitivity is especially pronounced for errors in means one way to control this sensitivity to forecast errors is to use stein estimation we examined three naive applications of stein estimation for six individual country stock indexes five country bond indexes and five cash indexes this study has two major conclusions first any of the suggested adjustments to inputs dominate the results of an unadjusted input mv optimization adjusted input portfolios have higher mean return less variance and greater terminal wealth than unadjusted input portfolios second these improvements become even greater with transaction costs

industrial organization paradigms empirical evidence and the economic case for competition policy the recent reform of competition policy in canada prompts one to ask whether there remains a tenable economi c case for antitrust policy to answer this question this paper begi ns by sketching competing industrial organization i o paradigms th e empirical evidence bearing on these paradigms particularly the m ainline structure conduct performance paradigm which has provided the main theoretical support for competition policy is examined it is concluded that recent theoretical and empirical work in i o have undermined the traditional economic case for competition policy the last section of the paper attempts a partial reconstruction of the ca se for competition policy along somewhat unorthodox lines

endogenous cost effectiveness analysis and health care technology adoption abstract increased health care spending has placed pressure on public and private payers to prioritize spending cost effectiveness ce analysis is the main tool used by payers to prioritize coverage of new therapies we argue that reimbursement based on ce is subject to a form of the lucas critique the goals of ce policies may not materialize when firms affected by the policies respond optimally to them for instance because costs in ce analysis reflect prices set optimally by firms rather than production costs observed ce levels will depend on how firm pricing responds to ce policies observed ce is therefore endogenous when ce is endogenously determined policies aimed at lowering spending and improving overall ce may paradoxically raise spending and lead to the adoption of more resource costly treatments we empirically illustrate whether this may occur using data on public coverage decisions in the united kingdom

causes of increased competition in the u s economy 1939 1980 examines the sources of increased competition in the united states u s between 1939 to 1980 in this paper authors consider the review of related literature trends and patterns of competitive structure in the u s economy influence of antirust actions on competition

economic success factors in spanish small retail businesses an analysis based on sector relative definitions the purpose of this study was to carry out a sectorial analysis of the strategic profile of successful small businesses in spanish retailing first a one dimensional statistical formalisation of the concept of small business was proposed based on yearly sales revenue and relative to the sector likewise some statistical formalisations of the concept of economic success were proposed based on profit margins and also relativised according to sector once a conceptual framework was established a sectorial model of strategic characterisation of successful small retailing firms was developed the results of applying these proposals to the spanish retail industry confirmed the importance of a sectorial approach as opposed to an overall analysis

medical care costs how much welfare loss hardly a week goes by without a front page newspaper article on rising health care costs and the uninsured in this article i focus mainly on costs arguing that the issue has been somewhat misconceived while the level of medical care spending in the u s is a cause for concern the welfare losses associated with rises in that level of spending may not be as large as the public rhetoric can make them seem in fact cost containment may not be as urgent as is widely supposed and some proposed cost containment policies may result in welfare losses for the insured and even increase the number of uninsured

were the returns from stocks and bonds of different countries really different in the 1980 s we analyzed the total equity returns of indexes from australia canada germany japan the uk and the us and total fixed income returns of indexes from all but australia excluded due to lack of data to see if the returns of stocks and bonds were statistically different across markets during the 1980s at the end of 1989 these countries represented over 87 of the market capitalization of the morgan stanley capital international msci world equity index and over 88 of the salomon brothers world bond index this study used monthly observations from january 1980 through december 1989 and examined returns based in local currency and hedged and unhedged us dollars we found that sample mean stock and bond returns during the 1980s were statistically indistinguishable across countries however because the sample variances were so large relative to the sample means it would have been difficult to detect differences in population means by any test we found evidence of variance heterogeneity which may be

more evidence on the undercounting of small firm r d abstract drawing from the seo national survey on r d and innovation in the netherlands we argue that there must be an underrecording of small scale r d by orders of magnitude in the r d survey by the dutch central statistical office such underrecording holds for manufacturing and even more so for service firms this finding is confirmed by estimates based on records of firms receiving r d subsidies which we use as a third independent source in order to allow for international comparability of r d data the survey methods of the dutch central statistical office are similar to those in other oecd countries therefore our findings in the dutch manufacturing and service industries are likely to have an impact for the measurement of r d in other oecd countries the results have implications for our judgement about the famous schumpeterian hypotheses concerning the influence of firm size and market structure on r d

potential competition in the deregulated airlines using a new and unique data set this paper applies a systems approach to the study of potential competition prices and entry relations in airline city pair markets consistent with limit pricing models future entry is directly influenced by current prices current prices thus appear to provide an important signal to potential entrants about the probability of profitable entry while results indicate the existence of barriers to entry these barriers appear to have no independent effects on price beyond there effect on actual competition through increases in concentration copyright 1990 by mit press

strategic entry deterrence in analyzing deterrence of large scale entry two classes of entry barriers may be distinguished an innocent entry barrier is unintentionally erected as a side effect of innocent profit maximization in contrast a strategic entry barrier is purposely erected to reduce the possibility of entry two types of innocent barriers may also be distinguished a postentry absolute advantage has the property that if entry did occur the established firm would be at a profit advantage over the entrant examples are superior technology or product design patents and lower input prices a preentry asymmetry advantage arises from the fundamental preentry asymmetry between established firm and potential entrant before the entrant makes his entry decision the established firm has already committed resources this prior existence gives first move advantages the preentry asymmetry is independent of symmetry or asymmetry in the rules the equilibrium concept of the postentry game that might ensue even if the postentry game will be played according to nash cournot or entrant as leader rules the preentry leadership

small business dynamics in europe this paper examines how the firm size distribution has shifted over the last two decades across a broad spectrum of european countries the evidence suggests that a shift away from large firms and towards small business has taken place particularly is the southern regions and in the high technology indutries

innovation and the welfare effects of public drug insurance rewarding inventors with inefficient monopoly power has long been regarded as the price of encouraging innovation prescription drug insurance escapes that trade off and achieves an elusive goal lowering static deadweight loss without reducing incentives for innovation as a result of this feature the public provision of drug insurance can be welfare improving even for risk neutral and purely self interested consumers the design of insurers cost sharing schedules can either reinforce or mitigate this result schedules that impose higher consumer cost sharing requirements on more expensive drugs help ensure that insurance subsidies translate into higher utilization rather than pure increases in manufacturer profits moreover some degree of price negotiation with manufacturers is likely to be welfare improving but the optimal degree depends on the size of such transactions costs as well as the social cost of weakening innovation incentives by lowering innovator profits these results have practical implications for the evaluation of public drug insurance programs like the us medicaid and medicare part d programs along with european insurance schemes

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

the success of mergers in the 1920s a stock market appraisal of the second merger wave abstract this paper examines the impact on acquiring firm shareholder wealth of mergers during the oligopoly merger wave of the 1920s these acquisitions were relatively unregulated the securities and exchange commission did not exist and antitrust laws were only loosely enforced although the lack of financial market controls and the possibility of monopoly gains should have permitted acquiring companies to capture large take over profits stock price data on 134 firms indicate only modest success the average profitability of an acquisition in the 1920s does not differ from the profitability resulting from mergers in the 1960s and 1970s despite vast differences in the economic environments

the evolution of manufacturing technology and its impact on industrial structure an international study this paper shows that plant and firm size in manufacturing and especially in engineering industry in several western industrial countries has declined since the early 1970s two hypotheses explaining the decline are advanced one is de glomeration or specialization the divestiture of non core businesses in order to free up scarce resources particularly management time to defend and nurture core business activities the second hypothesis is that the emergence of new computer based technology has improved the quality and productivity of small and medium scale production relative to standardized mass production techniques which dominated previously

technology growth and expenditure growth in health care in the united states health care technology has contributed to rising survival rates yet health care spending relative to gdp has also grown more rapidly than in any other country we develop a model of patient demand and supplier behavior to explain these parallel trends in technology growth and cost growth we show that health care productivity depends on the heterogeneity of treatment effects across patients the shape of the health production function and the cost structure of procedures such as mris with high fixed costs and low marginal costs the model implies a typology of medical technology productivity i highly cost effective home run innovations with little chance of overuse such as anti retroviral therapy for hiv ii treatments highly effective for some but not for all e g stents and iii gray area treatments with uncertain clinical value such as icu days among chronically ill patients not surprisingly countries adopting category i and effective category ii treatments gain the greatest health improvements while countries adopting ineffective category ii and category iii treatments experience the most rapid cost growth ultimately economic and political resistance in the u s to ever rising tax rates will slow cost growth with uncertain effects on technology growth

cost effectiveness analysis and innovation while cost effectiveness ce analysis has provided a guide to allocating often scarce resources spent on medical technologies less emphasis has been placed on the effect of such criteria on the behavior of innovators who make health care technologies available in the first place a better understanding of the link between innovation and cost effectiveness analysis is particularly important given the large role of technological change in the growth in health care spending and the growing interest of explicit use of ce thresholds in leading technology adoption in several westernized countries we analyze ce analysis in a standard market context and stress that a technology s cost effectiveness is closely related to the consumer surplus it generates improved ce therefore often clashes with interventions to stimulate producer surplus such as patents we derive the inconsistency between technology adoption based on ce analysis and economic efficiency indeed static efficiency dynamic efficiency and improved patient health may all be induced by the cost effectiveness of the technology being at its worst level as producer appropriation of the social surplus of an innovation is central to the dynamic efficiency that should guide ce adoption criteria we exemplify how appropriation can be inferred from existing ce estimates for an illustrative sample of technologies considered we find that the median technology has an appropriation of about 15 to the extent that such incentives are deemed either too low or too high compared to dynamically efficient levels ce thresholds may be appropriately raised or lowered to improve dynamic efficiency

assessing the profitability of growth by acquisition a premium recapture approach abstract this paper makes a case that because of the large premiums paid over the last 20 years by companies undertaking growth by acquisition this growth probably has been unprofitable the case has three parts the first develops a model designed to show for any premium paid for any acquiree the performance improvement required to recapture this premium and create value for the acquiring company the second part reports the distribution of premiums paid for a large sample of acquirees and uses this model to determine the specific performance improvements necessary to bring about value creation for the new parents of the acquirees the third part uses historical rate of return data to show that for typical acquirees these improvements call for levels of performance that are difficult to attain and sustain in u s industrial markets

accounting for future costs in medical cost effectiveness analysis most medical cost effectiveness analyses include future costs only for related illnesses but this approach is controversial this paper demonstrates that cost effectiveness analysis is consistent with lifetime utility maximization only if it includes all future medical and non medical expenditures estimates of the magnitude of these future costs suggest that they may substantially alter both the absolute and relative cost effectiveness of medical interventions particularly when an intervention increases length of life more than quality of life in older populations current methods overstate the cost effectiveness of interventions which extend life compared to interventions which improve the quality of life

dominant firms and their alleged decline abstract by way of a survey of recent literature on the theory of strategic competition this paper focuses on the question of whether dominant firms decline the traditional argument suggesting decline is found to be based on a rather unsatisfactory modelling of dominance and more acceptable conceptualizations suggest that such privileged positions will persist

corporate takeovers the efficiency arguments in recent years the tender offer takeover has been praised and damned with a ferocity suggesting that the survival of capitalism is at stake the truth as in most disputes with substantial metaphysical content is more prosaic some takeovers enhance economic efficiency some degrade it and the balance of effects though not fully known is most likely a close one in this essay i try to lay bare the debate s foundations and bring it back to earth with an injection of evidence

cooperation for monopolization an empirical analysis of cartelization this paper examines the ability of a large numbers cartel to raise price cost margins the cartel in question is a dairy cooperative associated milk producers inc ampi with more than 30 000 members we develop a model of spatial limit pricing that we test using the method of seemingly unrelated regressions adjusting for serial correlation our results suggest that the cartel successfully obtained and used market power and that its power was proportional to its market share in contrast after an antitrust consent decree margins fell significantly and were no longer related to market shares these results are robust under both pooled and market fixed effects analysis copyright 1994 by mit press

the distortionary effects of government procurement evidence from medicaid prescription drug purchasing in 2003 the federal state medicaid program provided prescription drug coverage to more than 50 million people to determine the price that it will pay for each drug medicaid uses the average private sector price when medicaid is a large part of the demand for a drug this creates an incentive for its maker to increase prices for other health care consumers using drug utilization and expenditure data for the top 200 drugs in 1997 and in 2002 we investigate the relationship between the medicaid market share mms and the average price of a prescription our estimates imply that a 10 percentage point increase in the mms is associated with a 7 to 10 percent increase in the average price of a prescription in addition the medicaid rules increase a firm s incentive to introduce new versions of a drug in order to raise price we find empirical evidence that firms producing newer drugs with larger sales to medicaid are more likely to introduce new versions taken together our findings suggest that government procurement rules can alter equilibrium price and product proliferation in the private sector

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

institutional investment mergers and the market for corporate control the increasing importance of institutional investors as shareholders in individual companies has led to an important debate on their impact on corporate performance in this paper we focus on their role in the market for corporate control this has so far been the subject of very little systematic investigation despite its theoretical and practical significance we consider the impact of financial institutions using two u k merger samples and employing both univariate and multivariate techniques of analysis in the first sample drawn from the low merger period 1981 1983 pre and post merger differences are found between merging companies with and without a significant institutional presence however in the takeover boom year of 1986 from which the second sample is drawn all such distinctions become blurred