Knowledge that Transforms

Alan L. Tucker, Lallon Pond, The Probability Distribution of Foreign Exchange Price Changes: Tests of Candidate Processes, The Review of Economics and Statistics, Vol. 70, No. 4 (Nov., 1988), pp. 638-647

The strategic groups hypothesis is tested using cluster analysis in -16 selected banking markets and based on portfolio composition in 1978, 1981, and 1984. The results indicate that approximately six strategic groups exist in banking and are stable over time. Strategy choices are similar across markets. Implications of the results are (1) intraindustry profit differences may be due to strategic groups rather than efficiency differences, (2) markets may generally be defined too broadly, (3) investigations for collusion need to focus on homogeneous groups in an industry rather than the whole industry, and (4) there is no simple strategy choice for banks between retail and wholesale banking.

Recent reports of negative capital intensity coefficients in struct ure-performance equations support allegations of gross measurement error in accounting-based measures of economic profitability. This paper explores whether specification errors, rather than measurement errors alone, may explain this anomalous empirical result. Within a simultaneous equations model of capital intensity, cost of capital, and price-cost margins, the author employs Hausman specification tests to demonstrate a negative bias on capital intensity and a positive bias on concentration when one omits firm-specific cost of capital from price-cost margin equations. The roles of cost of capital and capital intensity are derived from formal structure-performance theory.

Over the period 1979-85, the petroleum industry offers a unique test of the agency theory of corporat e restructuring. A panel data set for twenty-five firms indicates con siderable support for a hybrid free cash flow model in which explorat ion expenditures appear guided by neoclassical profitability measures , but at the margin, cash flow also exerts an independent influence. The magnitude of the parameter estimates suggests that the free cash flow hypothesis does not fully explain the gains from restructuring.

Evidence on cost savings from reorganizing township low-volume, rural-road systems into larger units is presented in the study of technical efficiencies in producing local government services. Data are from a sample of midwestern townships. Heterogeneity of surface types is accounted for by specifying a multiple output translog cost function. Examination of economies of size suggest that cost savings could be realized by reorganizing townships into larger units. The presence of economies of scope suggest that jurisdictions should not specialize in maintenance responsibilities due to the joint use of inputs.