Knowledge that Transforms

Wilbur Lewellen, Claudio Loderer, Ahron Rosenfeld, Mergers, Executive Risk Reduction, and Stockholder Wealth, The Journal of Financial and Quantitative Analysis, Vol. 24, No. 4 (Dec., 1989), pp. 459-472

This paper tests the Kraus-Litzenberger (1976) three-moment capital asset pricing model using Hansen's (1982) generalized method-of-moments (GMM). The GMM approach does not impose strong distributional assumptions on the asset returns. This is an interesting issue since there is no obvious multivariate distribution for returns that also exhibits co-skewness. Using monthly stock returns to test the model, there is some evidence that systematic skewness is priced.

In a monetary model, it is shown that if there is a unique Pareto inefficient barter equilibrium, then a monetary equilibrium exists when traders are sufficiently patient. 1.

The authors estimate a model of production and investment based on the theory of dynamic duality. They are particularly interested in the effects of R&D spillovers and in calculating the social and private rates of return. Cost-reducing, factor-biasing and capital-adjustment spillover effects are estimated for four industries. The existence of R&D spillovers implies that the social and private rates of return to R&D capital differ. The authors estimate that the social return exceeds the private return in each industry. Moreover, there is significant variation across industries in the differential between the social and private rates of return. Copyright 1989 by The Review of Economic Studies Limited.

The issue of dynamic efficiency is central to analyses of capital accumulation and economic growth. Yet the question of what characteristics should be examined to determine whether actual economies are dynamically efficient is unresolved. This paper develops a criterion for determining whether an economy is dynamically efficient. The criterion, which holds for economies in which technological progress and population growth are stochastic, involves a comparison of the cash flows generated by capital with the level of investment. Its application to the United States economy and the economies of other major OECD nations suggests that they are dynamically efficient.

For thirty years it has been accepted that consumption is smooth because permanent income is smoother than measured income. This paper considers the evidence for the contrary position, that permanent income is in fact less smooth than measured income, so that the smoothness of consumption cannot be straightforwardly explained by permanent income theory. The paper argues that in postwar U.S. quarterly data, consumption is smooth because it responds with a lag to changes in income.

ABSTRACT Recent empirical research has identified a significant amount of volatility in stock prices that cannot easily be explained by changes in fundamentals; one interpretation is that asset prices respond not only to news but also to irrational “noise trading.” We assess the welfare effects and incidence of such noice trading using an overlapping‐generations model that gives investors short horizons. We find that the additional risk generated by noise trading can reduce the capital stock and consumption of the economy, and we show that part of that cost may be borne by rational investors. We conclude that the welfare costs of noise trading may be large if the magnitude of noise in aggregate stock prices is as large as suggested by some of the recent empirical litrature on the excess volatility of the market.

ABSTRACT We demonstrate how an auction model can be used in a traditional capital budgeting context to assign a value to the strategic advantage of long‐term forward contracts. Research in the field of industrial organization has pointed to the danger of ex post opportunistic bargaining as a motivation for the use of forward contracts in natural resources and manufactured products, but no operational procedure exists for estimating the value secured by these contracts. Arbitrage methods for valuing forward contracts assume a competitive market in which the factors creating the bargaining problem and motivating the use of long‐term contracts are not present. Use of the model is illustrated in the case of take‐or‐pay contracts for natural gas.

ABSTRACT The ability of capital markets to distinguish firms of different value by the size of their initial equity offerings is attenuated when insiders can sell equity more than once. A model is developed in which there is price risk from holding equity between periods. When the uncertainty is small, there must be pooling in the first period. When uncertainty is large, the pooling equilibria dominate the separating equilibrium.

ABSTRACT The end of favorable tax treatment for long‐term capital gains caused investors to reassess traditional tax‐induced trading strategies. This study compares trading behavior in December 1986 and January 1987 with previous years. Our results indicate that these tax code changes had a powerful effect on trading behavior. Relative trading volume was considerably higher in December 1986 for long‐term winners but not significantly lower for long‐term losers. Results also indicate altered trading patterns based on short‐term gains in December 1986 and for long‐term winners in January 1987.