While stories abound in the business press about multibillion dollar leveraged buyouts (LBOs), scant attention has been paid to this type of buyout financing in smaller companies. Some observers argue that LBOs are little more than financial manipulation, while others suggest that they are an alternative form of entrepreneurial endeavor and that smaller company LBOs may serve to rejuvenate formerly stodgy organizations. In this study, data from 56 firms that experienced an LBO between 1981 and 1987 were analyzed to ascertain the current state of smaller company LBOs and what changes, if any, occur after the LBO takes place. Most of the smaller company LBOs occur in industries far different from the high-growth, high-technology environments of the glamorous start-up. The cash flow requirements of the high debt component seem to favor industries in which growth is very slow or even negative and in which the technology is stable. Likewise, smaller LBOs are relatively immune from foreign competition. The typical smaller company LBO individual has generally been associated with the company as an officer or director prior to the buyout, and possesses at least a college education. While it was presumed that the typical LBO individual would be between 40 and 55 years of age, a substantial number of both older and younger individuals were discovered in the study. In terms of internal operating changes after the buyout, it was expected that the locus of decision making would shift toward the lead investor and that managerial compensation would become increasingly incentive based. Unexpectedly, little change in the locus of decision making occurred, but there was a pronounced shift away from salaried compensation. Sample firms indicated that asset stripping or personnel layoffs occurred relatively infrequently, and the most common operating changes focused on such revenue-generation efforts as increased sales and marketing and on imposing more stringent capital budgeting requirements. The study suggests that the once-stable environments in which these firms operated may become far more exciting in the future. On the positive side, these smaller companies are being operated by owner-managers experienced in both the company and the industry. The financial requirements of the high debt levels and the resulting emphasis on cash flow rather than profitability may make these firms extremely fierce competitors. On the negative side is the instability that may be caused by the high debt levels. Because most of these companies have not yet faced an economic recession, their long-term viability remains to be tested.

Gary Becker's "rotten kid theorem" asserts that if all family members receive gifts of money income from a benevolent household member, then even if the household head does not precommit to an incentive plan for family members, it will be in the interest of selfish family members to maximize total family income. The author shows by examples that the rotten kid theorem is not true without assuming transferable utility. He finds a simple condition on utility functions that is necessary and sufficient for there to be the kind of transferable utility needed for a rotten kid theorem. While restrictive, these conditions still allow one to apply the strong conclusions of the rotten kid theorem in an interesting class of examples. Copyright 1989 by University of Chicago Press.

An analysis of the dual problem described by Ronn (1987) reveals that it provides a powerful and easily interpretable test for the hypothesis of a single class of marginal investors, including models of equilibrium based on a “representative tax bracket.” When Ronn's empirical tests are interpreted via the dual, they lend additional support to his conclusions in providing a strong rejection of the representative tax bracket hypothesis. A valid dual LP used to test the hypothesis can be obtained with fewer assumptions than Ronn's primal; in addition, a minor error in Ronn's presentation of the dual is corrected.

This paper examines the problem faced by the Federal Reserve in announcing its private information about its future policies. Because it would like to manipulate expectations and pursue a time-inconsistent policy, the Fed cannot reveal its policy objectives precisely and credibly. It can, however, communicate some information about its goals through the cheap talk mechanism of Vincent Crawford and Joel Sobel: making announcements that are imprecise, and only giving ranges within which these goals may lie. Copyright 1989 by American Economic Association.

This paper develops a model of inefficient managerial behavior in the face of a rational stock market In an effort to mislead the market about their firms' worth, managers forsake good investments so as to boost current earnings. In equilibrium the market is efficient and is not fooled: it correctly conjectures that there will be earnings inflation, and adjusts for this in making inferences. Nonetheless, managers, who take the market's conjectures as fixed, continue to behave myopically. The model is useful in assessing evidence that has been presented in che “myopia” debate. It also yields some novel implications regarding firm structure and the limits of intergation.

ABSTRACT This paper values a contingent claim to discrete stochastic cash flows generated by a Poisson arrival process with a randomly varying intensity parameter. In the most general case, both the size and the arrival intensity of cash flows may correlate wih state variables in a continuous time economy. Assuming the conditions of an intertemporal capital aset pricing model, solutions for the value of the contingent claim can be found using various techniques. The paper suggests immediate applications to the valuation of insurance contracts, the decision to build a firm with unknown future investment opportunities, and the pricing of mortgage‐backed securities.

This paper offers a personal perspective on the development of decision theory and related subjects during the past half century. It first reviews six milestones in the foundations of decision analysis that are associated with Frank P. Ramsey, John von Neumann and Oskar Morgenstern, Leonard J. Savage, Maurice Allais and Ward Edwards, West Churchman and Russell Ackoff, and Kenneth Arrow. It then gives a personal account of further developments over the past 30 years in linear utility theory, subjective probability and ambiguity, nonlinear preference and utility, stochastic dominance and inequality analysis, multiattribute utility theory, and the theory of social choice. The paper could be viewed as a supplement to my extensive review of utility theory in Management Science some 20 years ago. However, it makes no claim of completeness since its main aim is to recall important debts and describe what it has been like to be a part of the development of decision analysis in the past few decades.