Instrumental variables are widely used in applied econometrics to achieve identification and carry out estimation and inference in models that contain endogenous explanatory variables. In most applications, the function of interest (e.g., an Engel curve or demand function) is assumed to be known up to finitely many parameters (e.g., a linear model), and instrumental variables are used identify and estimate these parameters. However, linear and other finite-dimensional parametric models make strong assumptions about the population being modeled that are rarely if ever justified by economic theory or other a priori reasoning and can lead to seriously erroneous conclusions if they are incorrect. This paper explores what can be learned when the function of interest is identified through an instrumental variable but is not assumed to be known up to finitely many parameters. The paper explains the differences between parametric and nonparametric estimators that are important for applied research, describes an easily implemented nonparametric instrumental variables estimator, and presents empirical examples in which nonparametric methods lead to substantive conclusions that are quite different from those obtained using standard, parametric estimators.

[We explore whether government ownership affects the cost of debt using a sample of fully and partially privatized companies. On average across firms, a one-percentage-point decrease in government ownership is associated with an increase in the credit spread, used as a proxy for the cost of debt, by three-quarters of a basis point. However, fully privatized companies exhibit lower credit spreads than partially privatized firms, indicating the cost of a lengthy privatization process. Empirical evidence suggests that these findings result from decreasing government guarantees, firm performance improvements, ownership uncertainty, and bondholder-shareholder conflicts.]

This article proposes an empirically tractable way to incorporate intra-day noise into a VWAP trading rule. In volatile markets, news arrives unexpectedly and rapidly. This should influence a trader’s trading decisions. However, the literature has not incorporated such information into an algorithmic trading framework. Subsequently, this paper presents a Dynamic VWAP (DVWAP) framework that allows informed traders to utilize random news; and thus, improve trade-execution.

We address whether the joint bidding by private equity consortiums facilitates collusion in the takeover market. We employ a sample of 870 takeovers of publicly traded targets in the 2003 to 2007 period, the time period which is the focus of investigation by the Justice Department and the source of cases for class action lawsuits. A unique aspect of our analysis is that we determine the identification of private equity bidders from actual merger documents rather than rely on sources such as Securities Data Corp and that we analyze both prominent private equity bidders as well as smaller private equity firms. Our analysis finds competitive reasons for consortium formation based on scale, risk and bidder expertise. We also find that both single private equity bidders and private equity consortiums are associated with significantly greater levels of takeover competition than other types of bidders. While we find some evidence that target abnormal returns are lower in private equity consortium deals for narrow windows around the initial takeover-related announcement date, we find that these results do not hold for longer event windows that better account for the differences in the takeover process across types of bidders. Analysis that controls for the endogenous selection of consortium formation also fails to find any negative effect of consortiums on either takeover competition or target returns. We also do not find any negative effects of consortiums formed by prominent private equity firms. We interpret the evidence to be inconsistent with a collusive explanation for consortium formation in the 2003 to 2007 period and to be consistent with competitive reasons for consortium formation.

We find that over six hundred auditors with fewer than 100 SEC clients exit the market following SOX. Compared to the non-exiting auditors, the exiting auditors are lower quality, where quality is gauged by: (1) avoidance of AICPA peer reviews and failure to comply with PCAOB rules, and (2) severity of the peer review and inspection reports. In addition, clients of exiting auditors receive higher quality auditing from successor auditors, as captured by a greater likelihood of receiving going concern opinions. Our results suggest that the PCAOB inspections improve audit quality by incentivizing low quality auditors to exit the market.

The market for corporate control is generally regarded as an important disciplinary mechanism in well developed economies. Entrenchment mechanisms commonly used by US firms in the form of anti-takeover provisions (ATPs) may offer some protection from disciplinary action, facilitating entrenchment and value-reducing behavior. One manifestation of entrenchment is poor acquisitions, with the literature reporting significant losses to large acquirers, and to acquirers with a higher number of ATPs. We examine the profitability of acquisitions in Australia, a market where US-style ATPs are prohibited. The results show that unlike their US counterparts, large Australian acquirers earn significant value for their shareholders, both in terms of announcement returns and long-run operating performance improvements. Takeover premiums are also substantially lower than those reported for the US and UK, and do not differ between large and small acquirers. Premiums are also positively correlated with long-run operating performance, indicating that they reflect real synergies, as opposed to hubris or overpayment. We also find that bidders who destroy value in takeovers are likely to be subsequently acquired. However, unlike US evidence, larger acquirers are just as likely to be targeted for takeover as smaller acquirers, indicating that size is not an effective impediment to the disciplining function of the market for corporate control in Australia. The findings are robust to several econometric issues common to the type of models used in our analysis.

[We analyze complex bond portfolios within the framework of a dynamic general equilibrium asset-pricing model. Equilibrium bond portfolios are nonsensical and imply a trading volume that vastly exceeds observed trading volume on financial markets. Instead, portfolios that combine bond ladders with a market portfolio of equity assets are nearly optimal investment strategies. The welfare loss of these simple investment strategies, when compared to the equilibrium portfolio, converges to zero as the length of the bond ladder increases. This article, therefore, provides a rationale for naming bond ladders as a popular bond investment strategy.]