Knowledge that Transforms

The thesis of this symposium, organized by James Bicksler, was that while finance theory will surely inform practitioners, it seems appropriate to pay some attention to the opposite flow: practitioners can inform theory. Contributors include a distinguished group of practitioners with extensive backgrounds in economics, and economists with extensive public policy experience: Martin Feldstein, Robert Glauber, David Mullins, and Steven Wallman. Their topics range from privatizing social security, to managing market crashes, to the regulatory agency cost problem, to regulatory constraints in a technologically advanced world.

Property rights, company organization and governance in the transition, Marvin Jackson privatization, company management and performance - a comparative study of privatization methods in the Czech Republic, Hungary, Poland and Slovakia, Valentijn Bilsen financial intermediation and comapny management - the case of the Czech Republic, Miroslav Hrncir financial structure, performance and the banks, Alena Buchtikova and Ales Capek state-owned enterprises in transition - prospects amidst crisis, Jan Mujzel delayed privatization, financial development and management in Romania during the transition, Irina Dumitriu and Teodor Nicolaescu delayed privatization and financial development in Bulgaria, Ognian Panov impediments to financial restructuring of Hungarian enterprises, Istvan Abel and Kristofer Prander privitization anc capital markets, Andras Giday and Agnes Sari-Simko perspectives on financial systems and enterprise efficiency in the transition economies of Central and Southeastern Europe, Stavros Thomadakis.

We provide evidence about the motivation for a parent–subsidiary governance structure by analyzing valuation effects of seasoned equity offerings by publicly traded affiliated units. Our results support Nanda's (1991) theoretical model which predicts equity offerings convey differential information about subsidiary and parent value. Subsidiary equity issuance has negative valuation effects on issuing subsidiaries and positive effects on parents, while parent equity issuance reduces issuing parent wealth and increases subsidiary wealth. Our evidence suggests that a parent–subsidiary organizational structure enhances corporate financing flexibility and mitigates underinvestment problems identified by Myers and Majluf (1984). There is no evidence of subsidiary wealth expropriation.

Kristian R. Miltersen, Klaus Sandmann, Dieter Sondermann, Closed Form Solutions for Term Structure Derivatives with Log-Normal Interest Rates, The Journal of Finance, Vol. 52, No. 1 (Mar., 1997), pp. 409-430

We report results from experimental asset markets with liquidity traders and an insider where we allow bilateral trade to take place, in addition to public trade with dealers. In the absence of the search alternative, dealer profits are large—unlike in models with risk-neutral, competitive dealers. However, when we allow traders to participate in the search market, dealer profits are close to zero. Dealers compete more aggressively with the alternative trading avenue than with each other. There is no evidence that price discovery is less efficient when the specialists are not the only game in town.

If a pricing kernel assigns a premium to a risk variable that differs from the one assigned by the minimum-variance admissible kernel, then the pricing kernel must exhibit more variability than the minimum-variance kernel. Based on this intuition, we derive a variance bound that is more stringent than that of Hansen and Jagannathan (1991). When we apply our bound to the kernel of a representative consumer with power utility, we find that the consumption risk premium increases the severity of the “equity-premium puzzle” of Mehra and Prescott (1985).