In recent years, securitization and other financial innovations have provided unprecedented opportunities for banks to reduce substantially their regulatory capital requirements with little or no corresponding reduction in their overall economic risks – a process termed “regulatory capital arbitrage”. These methods are used routinely to lower the effective risk-based capital requirements against certain portfolios to levels well below the Basel Capital Accord’s nominal 8% total risk-based capital standard. This paper discusses the principal techniques used to undertake capital arbitrage and the difficulties faced by bank supervisors in attempting to deal with these activities under the current capital framework.

Graphs in corporate annual reports form part of a powerfully designed annual report package that offers considerable potential for “impression management.” The primary purpose of this paper is to determine whether graph use depends on corporate performance. Time‐series analysis, not previously used in the financial graphs literature, allows discretionary changes in graph use by companies to be identified and related to changes in individual companies' corporate performance over time. Based on the prior financial graphs and accounting choice literature, we develop two hypotheses that relate changes in graph use to changes in corporate performance. These hypotheses focus on the aggregate and individual company levels. We base our analysis on the corporate annual reports of 137 top UK companies that were in continued existence during the five‐year period from 1988 to 1992. At both the aggregate and individual company levels, we find the decision to use key financial variable (KFV) graphs, the primary graphical choice, to be associated positively with corporate performance measures. This finding is consistent with the manipulation hypothesis ‐ that is, that financial graphs in corporate annual reports are used to “manage” favorably the reader's impression of company performance, and hence that there is a reporting bias.

This paper investigates the Bayesian decision-theoretic foundations of the Wall Street adage that `timing is everything'. One might think that a `small' risk-neutral trader wishes to act immediately upon any private information he possesses. I begin with a counterintuitive nding that trade timing doesn't matter for an Arrow security, as one's expected return per dollar invested is a martingale. This timing irrelevance discovery motivates an analysis of general compound securities. While timing there is ambiguous, I nd that natural monotone likelihood ratio assumptions on both private and public information restore the intuition that one should trade with all due dispatch.(This abstract was borrowed from another version of this item.)

In Becker's (1973) neoclassical marriage market model, matching is positively assortative if types are complements: i.e., match output f(x, y) is suipermoddlar in x and y. We reprise this famous result assuming time-intensive partner search and transferable output. We prove existence of a search equilibrium with a continuum of types, and then characterize matching. After showing that Becker's conditions on match output no longer suffice for assortative matching, we find sufficient conditions valid for any search frictions and type distribution: supermodularity not only of output f, but also of log f, and log f Symmetric submodularity conditions imply negatively assortative matching. Examples show these conditions are necessary.

This paper explores how Bayes-rational individuals learn sequentially from the discrete actions of others. Unlike earlier informational herding papers, we admit heterogeneous preferences. Not only may type-specific ‘herds’ eventually arise, but a new robust possibility emerges: confounded learning. Beliefs may converge to a limit point where history offers no decisive lessons for anyone, and each type's actions forever nontrivially split between two actions. To verify that our identified limit outcomes do arise, we exploit the Markov-martingale character of beliefs. Learning dynamics are stochastically stable near a fixed point in many Bayesian learning models like this one.

We investigate the determinants of multiple-bank relationships using a new data set comprising 1079 firms across 20 European countries. We document large cross-country variation in the average number of bank relationships per firm, uncovering a richness in European financial systems that extends beyond the standard description of being “bank-dominated”. After controlling for a variety of firm-specific characteristics, we find that firms maintain more bank relationships, on average, in countries with inefficient judicial systems and poor enforcement of creditor rights. Firms also maintain more relationships in countries with unconcentrated but stable banking systems and active public bond markets. Journal of Economic Literature Classification Numbers: G21, C41.

We show that a firm can use its decentralized organizational structure and transfer price as commitment devices to obtain strategic advantage in the product market only when there are nonstrategic reasons to decentralize and to distort transfer prices away from marginal costs, such as the sales office's local knowledge about market conditions and the presence of tax rate differentials across the two tax jurisdictions. Surprisingly, an increase in the sales office's tax rates may help a firm increase overall profits. An increase in the sales office's tax rates causes the firm to increase its transfer price, which in turn dampens the sales office's competition and may more than offset the effect of increased tax rates on the firm's overall profits.

Although majoritarian decision rules are the norm in legislatures, relatively few democracies use simple majority rule at the electoral stage, adopting instead some form of multiparty proportional representation. Moreover, aggregate data suggest that average income tax rates are higher, and distributions of posttax income flatter, in countries with proportional representation than in those with majority rule. While there are other differences between these countries, this paper explores how variations in the political system per se influence equilibrium redistributive tax rates and income distributions. A three‐party proportional representation model is developed in which taxes are determined through legislative bargaining among successful electoral parties, and the economic decision for individuals is occupational choice. Political‐economic equilibria for this model and for a two‐party, winner‐take‐all, majoritarian system are derived and compared.