On November 17, 1988, the board of directors of Nestlé AG decided to allow foreign investors to hold Nestlé registered stock, reversing a longstanding practice. This decision had a tremendous impact on the prices of the firm's three classes of common stock, as well as on the prices of several other corporations traded on the Zürich stock exchange. These price changes can be explained by the hypothesis that demand curves slope down.

This study investigates the liquidity effects of reverse stock splits using bid-ask spread, trading volume, and the number of nontrading days as proxies for the liquidity of the stock. Results indicate a decrease in bid-ask spread and an increase in trading volume after reverse splits. More importantly, the number of nontrading days significantly declines following reverse splits. For the control group, however, no such changes are observed. These results suggest that reverse splits enhance the liquidity of the stock.

Andrew C. Thompson, Valuation of Path-Dependent Contingent Claims with Multiple Exercise Decisions over Time: The Case of Take-Or-Pay, The Journal of Financial and Quantitative Analysis, Vol. 30, No. 2 (Jun., 1995), pp. 271-293

Diversified corporations have been widely criticized as being inefficient innovators with an orientation to maximizing short-term profits. This study investigates this criticism by testing whether the number of new products introduced per R&D dollar is lower among more diversified firms. We find no statistically discernible effect of diversification on innovative efficiency in a sample of 706 research-intensive firms in the 1981–1988 period. This suggests that diversified organizations are rationally designed to minimize incentive and communication problems which may hinder innovation. Consistent with this view, we find that diversified firms are more likely to have separate research and development centers.

This paper studies a dynamic insurance problem with bilateral asymmetric information and balanced budgets. There are two infinitely-lived agents in our model, both risk averse, and each has an i.i.d. random endowment stream which is unobservable to the other. In each period, each agent must have a non-negative consumption and together they must consume the entire aggregate endowment. Dynamic incentive compatibility in the Nash sense is defined. We give sufficient and necessary conditions for the existence of a constrained efficient contract. We show that a constrained efficient contract can be characterized in a Bellman equation. We demonstrate that the long-run distribution of expected utilities of each agent is not degenerate. We also develop an algorithm for computing the efficient contract and, in a numerical example, we find that the consumption processes of the agents form stationary Markov chains.

Victor L. Bernard, Robert C. Merton, Krishna G. Palepu, Mark-to-Market Accounting for Banks and Thrifts: Lessons from the Danish Experience, Journal of Accounting Research, Vol. 33, No. 1 (Spring, 1995), pp. 1-32

A definition of extended memory is provided, generalizing the ideas of long memory and persistence, based on the properties of forecasts over long horizons. Specification of nonlinear models with variables having extended memory is considered in terms of the balance of an equation and it is suggested that many more types of misspecification can occur than with usual situations and could produce important specification errors. Tests of linearity and standard methods of nonlinear modeling are briefly considered and advice is given on circumstances in which they can be used. Copyright 1995 by The Econometric Society.

This paper considers an alternative asymptotic framework to standard sequential asymptotics for nonlinear models with deterministically trending variables. The asymptotic distributions of generalized method of moments estimators and corresponding test statistics are derived using this framework. The asymptotic distributions are shown to be the same with deterministically trending variables as with non-trending variables. That is, the distributions are normal and chi-squared respectively. The asymptotic covariance matrices of the estimators, however, are found to depend on the form of the trends. These findings provide a justification for the use of standard asymptotic approximations in nonlinear models even when the variables have deterministic trends.