Knowledge that Transforms

The sharp decline in the stock prices of several firms at which employees held a large fraction of their 401(k) plan assets in company stock, including Enron, Global Crossing, Lucent, and Polaroid, has sparked a public-policy debate about investment options in 401(k) plans. At many large firms, particularly those with retirement saving plans that combine elements of an Employee Stock Ownership Plan (ESOP) with a traditional 401(k), a substantial fraction of defined-contribution retirement-plan assets are held in company stock. Such undiversified holdings are a source of concern because they raise the volatility of the retirement wealth for employees and expose some workers to the prospect of very small retirement values. Holding an undiversified position in employer stock may be particularly costly because of the potential correlation between company stock returns and the value of the worker’s human capital, which may depend on the company’s prospects. This paper reviews the extent of undiversified company-stock investments in 401(k) plans, evaluates the cost of such investments from an employee’s perspective, and discusses a range of policy actions that could address the excessive concentration of retirement plan assets.

We examine retail and wholesale prices for a large supermarket chain over seven and one-half years. We find that prices fall on average during seasonal demand peaks for a product, largely due to changes in retail margins. Retail margins for specific goods fall during peak demand periods for that good, even if these periods do not coincide with aggregate demand peaks for the retailer. This is consistent with “loss-leader” models of retailer competition. Models stressing cyclical demand elasticities or cyclical firm conduct are less consistent with our findings. Manufacturer behavior plays a limited role in the countercyclicality of prices.

Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relationship between morning sunshine in the city of a country's leading stock exchange and daily market index returns across 26 countries from 1982 to 1997. Sunshine is strongly significantly correlated with stock returns. After controlling for sunshine, rain and snow are unrelated to returns. Substantial use of weather‐based strategies was optimal for a trader with very low transactions costs. However, because these strategies involve frequent trades, fairly modest costs eliminate the gains. These findings are difficult to reconcile with fully rational price setting.

We investigate the relation between founding‐family ownership and firm performance. We find that family ownership is both prevalent and substantial; families are present in one‐third of the S&P 500 and account for 18 percent of outstanding equity. Contrary to our conjecture, we find family firms perform better than nonfamily firms. Additional analysis reveals that the relation between family holdings and firm performance is nonlinear and that when family members serve as CEO, performance is better than with outside CEOs. Overall, our results are inconsistent with the hypothesis that minority shareholders are adversely affected by family ownership, suggesting that family ownership is an effective organizational structure.