Knowledge that Transforms

Applying a geographic lens to mutual fund performance, this study finds that fund managers earn substantial abnormal returns in nearby investments. These returns are particularly strong among funds that are small and old, focus on few holdings, and operate out of remote areas. Furthermore, we find that while the average fund exhibits only a modest bias toward local stocks, certain funds strongly bias their holdings locally and exhibit even greater local performance. Finally, we demonstrate that the extent to which a firm is held by nearby investors is positively related to its future expected return. Our results suggest that investors trade local securities at an informational advantage and point toward a link between such trading and asset prices.

This paper examines the relationship between gun ownership and crime. Previous research has suffered from a lack of reliable data on gun ownership. I exploit a unique data set to reliably estimate annual rates of gun ownership at both the state and the county levels during the past two decades. My findings demonstrate that changes in gun ownership are significantly positively related to changes in the hom-icide rate, with this relationship driven almost entirely by an impact of gun ownership on murders in which a gun is used. The effect of gun ownership on all other crime categories is much less marked. Recent reductions in the fraction of households owning a gun can explain one-third of the differential decline in gun homicides relative to nongun homicides since 1993. I.

The public at large, many policymakers, and a number of economists hold views of social welfare that are non‐welfarist. That is, they attach some importance to factors other than the effects of policies on individuals’ utilities. We show, however, that any non‐welfarist method of policy assessment violates the Pareto principle.

The Americans with Disabilities Act (ADA) requires employers to accommodate disabled workers and outlaws discrimination against the disabled in hiring, firing, and pay. Although the ADA was meant to increase the employment of the disabled, the net theoretical effects are ambiguous. For men of all working ages and women under 40, Current Population Survey data show a sharp drop in the employment of disabled workers after the ADA went into effect. Although the number of disabled individuals receiving disability transfers increased at the same time, the decline in employment of the disabled does not appear to be explained by increasing transfers alone, leaving the ADA as a likely cause. Consistent with this view, the effects of the ADA appear larger in medium‐size firms, possibly because small firms were exempt from the ADA. The effects are also larger in states with more ADA‐related discrimination charges.

This paper offers some new estimates of the contribution of learning to the rapid increases in labor productivity observed in the construction of Liberty ships during World War II. The study exploits new data on physical capital investment and vessel quality constructed from contemporary records held at the National Archives. Estimates of the rate of learning are shown to be sensitive to the inclusion of the new capital data, and data on vessel quality provide evidence that part of the measured productivity increases were secured at the expense of quality.

A number of developing countries have adopted deficit finance regimes involving multiple- (currency and bond) reserve requirements. A key characteristic of these regimes is that the real interest rates on reservable bonds are higher than the real return rates on currency, so that the nominal interest rates on the bonds are positive. We seek an efficiency-based explanation for the existence of multiple-reserve regimes and for this key characteristic. We find that there are economies in which some of the efficient allocations can be supported only by multiple-reserve requirements, and that positive nominal bond rates may be needed to support some of these allocations. We also find that there are economies in which allocations supported by multiple-reserve regimes with negative nominal bond rates Pareto dominate single-reserve allocations, even when the latter are efficient relative to other single-reserve allocations. Journal of Economic Literature Classification Numbers: E42, E58, H62.

We examine how corporate payout policy is affected by managerial stock incentives using data on more than 1,100 nonfinancial firms during 1993–97. We find that management stock ownership is associated with higher payouts by firms with potentially the greatest agency problems – those with low management stock ownership and few investment opportunities or high free cash flow. We also find that management stock options are related to the composition of payouts. We find a strong negative relationship between dividends and management stock options, as predicted by Lambert et al (1989), and a positive relationship between repurchases and management stock options. Our results suggest that the growth in stock options may help to explain the rise in repurchases at the expense of dividends.

This study investigates the foreign exchange risk management program of HDG Inc. (pseudonym), a US-based manufacturer of durable equipment. Precise examination of factors affecting why and how the firm manages its foreign exchange exposure are explored through the use of internal firm documents, discussions with managers, and data on3,110 foreign-exchange derivative transactions. Informational asymmetries, facilitation of internal contracting, and competitive pricing concerns appear to motivate why the firm hedges. How HDG hedges depends on accounting treatment, derivative market liquidity, exchange rate volatility, exposure volatility, and recent hedging outcomes.

This paper examines portfolio allocation across equity portfolios formed on the basis of characteristics like size and book-to-market. In particular, the paper assesses the impact of return predictability on portfolio choice for a multi-period investor with a coefficient of relative risk aversion of 4. Compared to the investor's allocation in her last period, return predictability with dividend yield causes the investor early in life to tilt her risky-asset portfolio away from high book-to-market stocks and away from small stocks. These results are explained using Merton's (Econometrica 41 (1973) 867) characterization of portfolio allocation by a multi-period investor in a continuous time setting. Abnormal returns relative to the investor's optimal early life portfolio are also calculated. These abnormal returns are found to exhibit the same cross-sectional patterns as abnormal returns calculated relative to the market portfolio: higher for small rather than large firms, and higher for high rather than low book-to-market firms. Thus, hedging demand may be a partial explanation for the high expected returns documented for small firms and high book-to-market firms. However, even with this hedging demand, the investor wants to sell short the low book-to market portfolio to hold the high book-to-market portfolio. The utility costs of using a value-weighted equity index or of ignoring predictability are also calculated. An investor using a value-weighted equity index would give up a much larger fraction of her wealth to have access to book-to-market portfolio than size portfolios. Finally, an investor would give up a much larger fraction of her wealth to have access to dividend yield information than term spread information.

This paper examines the market for catastrophe event risk – i.e., financial claims that are linked to losses associated with natural hazards, such as hurricanes and earthquakes. Risk management theory suggests protection by insurers and other corporations against the largest cat events is most valuable. However, most insurers purchase relatively little cat reinsurance against large events, and premiums are high relative to expected losses. To understand why the theory fails, we examine transactions that look to capital markets, rather than traditional reinsurance markets, for risk-bearing capacity. We develop eight theoretical explanations and find the most compelling to be supply restrictions associated with capital market imperfections and market power exerted by traditional reinsurers.