Abstract The proliferation of electronic limit order books operating without dealers raises questions regarding the need for intermediaries with affirmative obligations to maintain markets. We develop a simple model of dealer participation and test it using a sample of less liquid firms that trade on the Paris Bourse. The results indicate that firms with designated dealers exhibit better market quality, and that younger firms, smaller firms, and less volatile firms choose a designated dealer. Around the announcement of dealer introduction, stocks experience an average cumulative abnormal return of nearly 5% that is positively correlated with improvements in liquidity. Overall, these findings emphasize the potential benefits of designing better market structures, even within electronic limit order books, and suggest that purely endogenous liquidity provision may not be optimal for all securities.

We endogenize preferences using the “indirect evolutionary approach”. Individuals are randomly matched to play a two-person game. Individual (subjective) preferences determine their behaviour and may differ from the actual (objective) pay-offs that determine fitness. Matched individuals may observe the opponents’ preferences perfectly, not at all, or with some in-between probability. When preferences are observable, a stable outcome must be efficient. When they are not observable, a stable outcome must be a Nash equilibrium and all strict equilibria are stable. We show that, for pure-strategy outcomes, these conclusions are robust to allowing almost perfect, and almost no, observability, with the notable exception that inefficient strict equilibria may fail to be stable with any arbitrarily small degree of observability (despite being stable with no observability).

We endogenize preferences using the “indirect evolutionary approach”. Individuals are randomly matched to play a two-person game. Individual (subjective) preferences determine their behaviour and may differ from the actual (objective) pay-offs that determine fitness. Matched individuals may observe the opponents' preferences perfectly, not at all, or with some in-between probability. When preferences are observable, a stable outcome must be efficient. When they are not observable, a stable outcome must be a Nash equilibrium and all strict equilibria are stable. We show that, for pure-strategy outcomes, these conclusions are robust to allowing almost perfect, and almost no, observability, with the notable exception that inefficient strict equilibria may fail to be stable with any arbitrarily small degree of observability (despite being stable with no observability).

Most U.S. public companies have a single class of voting common shares: voting power is proportional to economic ownership. Linking votes to shares is often thought to be desirable, because, as residual claimants, shareholders have an incentive to exercise voting power well. The linkage also facilitates the market for corporate control. On the other hand, decoupling is efficient in some situations. Equity derivatives and other capital market developments now allow shareholders to readily decouple voting rights from economic ownership of shares, often without public disclosure. Hedge funds are prominent users of decoupling. Sometimes they hold more votes than economic ownership (a situation we term “empty voting”). Sometimes they hold undisclosed economic ownership without votes, but often with the de facto ability to acquire votes if needed (a situation we term ‘‘hidden (morphable) ownership”). This Article analyzes empty voting and hidden (morphable) ownership, which we term the “new vote buying.” We offer a framework for unpacking its functional elements and assess its potential benefits and costs. Two companion legal articles (Hu, Henry T.C., and Bernard S. Black, 2006a. The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, Southern California Law Review 79, 811–908#, and Hu, Henry T.C., and Bernard S. Black, 2006b. Empty Voting and Hidden Ownership: Taxonomy, Implications and Reforms, Business Lawyer 61, 1011–1069.) provide more details on current disclosure rules and offer a disclosure reform proposal.

Abstract Analysts' earnings forecasts are influenced by their desire to win investment banking clients. We hypothesize that the equity bull market of the 1990s, along with the boom in investment banking business, exacerbated analysts' conflicts of interest and their incentives to strategically adjust forecasts to avoid earnings disappointments. We document shifts in the distribution of earnings surprises and related changes in the market's response to surprises and forecast revisions. The evidence for shifts is stronger for growth stocks, where conflicts of interest are more pronounced. However, shifts are less notable for analysts without ties to investment banking and in international markets.

Municipal bonds trade in decentralized broker-dealer markets, and are underpriced when issued, but unlike equities the average price rises slowly over several days. Newly issued municipal bonds have high levels of price dispersion and the average price rises because the mix of trade sizes changes over time. While large trades occur close to the reoffering price, small trades occur between the reoffering price to as much as 5% above the reoffering price. Using a mixed-distribution model we quantify the losses uninformed traders or issuers give up to broker-dealers.

Municipal bonds trade in opaque, decentralized broker-dealer markets in which price information is costly to gather. We analyze a database of trades between broker-dealers and customers in municipal bonds. These data were only released to the public with a lag; the market was opaque. Dealers earn lower average markups on larger trades, even though dealers bear a higher risk of losses with larger trades. We estimate a bargaining model and compute measures of dealer?s bargaining power. Dealers exercise substantial market power. Our measures of market power decrease in trade size and increase in the complexity of the trade for the dealer.

US corporations hold significant amounts of cash on their balance sheets. This paper develops and tests the hypothesis that the magnitude of US multinational cash holdings are, in part, a consequence of the tax costs associated with repatriating foreign income. Consistent with this hypothesis, firms facing higher repatriation taxes hold higher levels of cash, hold this cash abroad, and hold this cash in affiliates that trigger high tax costs when repatriating earnings. In addition, less financially constrained firms and those that are more technology intensive exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.

To study the effects of new information technologies (IT) on productivity, we have assembled a unique data set on plants in one narrowly defined industry—valve manufacturing—and analyze several plant-level mechanisms through which IT could promote productivity growth. The empirical analysis reveals three main results. First, plants that adopt new IT-enhanced equipment also shift their business strategies by producing more customized valve products. Second, new IT investments improve the efficiency of all stages of the production process by reducing setup times, run times, and inspection times. The reductions in setup times are theoretically important because they make it less costly to switch production from one product to another and support the change in business strategy to more customized production. Third, adoption of new IT-enhanced capital equipment coincides with increases in the skill requirements of machine operators, notably technical and problem-solving skills, and with the adoption of new human resource practices to support these skills.