Knowledge that Transforms

This paper analyzes the behavior of U. S. governors from 1950 to 1986 to investigate a reputation-building model of political behavior. We argue that differences in the behavior of governors who face a binding term limit and those who are able to run again provides a source of variation in discount rates that can be used to test a political agency model. We find evidence that taxes, spending, and other policy instruments respond to a binding term limit if a Democrat is in office. The result is a fiscal cycle in term-limit states, which lowers state income when the term limit binds.

We examine the reduced-form relationship between per capita income and various environmental indicators. Our study covers four types of indicators: urban air pollution, the state of the oxygen regime in river basins, fecal contamination of river basins, and contamination of river basins by heavy metals. We find no evidence that environmental quality deteriorates steadily with economic growth. Rather, for most indicators, economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement. The turning points for the different pollutants vary, but in most cases they come before a country reaches a per capita income of $8000.

This paper examines cross-subsidy, moral hazard, and bank liability issues related to the provision of federal deposit insurance by "rerunning" its implementation, i.e., determining fair premium values, over the period 1927-1932. The pre-1933 period was characterized by historically high asset-price volatility, a large number of bank failures, and a weak federal safety net. In this economic context, we find a high degree of self-insurance on the part of the banks in our sample, both in terms of higher overall capital levels and a strong correlation between capital levels and asset volatility. Potentially large, regional cross-subsidies among banks were also found. Journal of Economic Literature Classification Number: G21.

This paper considers a standard monetary economy with indivisible primary assets and transaction costs. When assets are indivisible, if a steady-state equilibrium with positive savings exists, there necessarily exists a very large set of equilibria. The intermediation of indivisible assets substantially reduces the set of competitive equilibria, and enhances the "flexibility" of prices. We state sufficient conditions for intermediaries to form and hold all primary assets directly. We define and analyze various measures of the consumer surplus created by intermediaries. We show that conventional measures of intermediary output bear no obvious relation to the consumer surplus created by intermediation. Journal of Economic Literature Classification Numbers: E40, G20.

The tax, employee benefit, capital structure, and corporate control effects of ESOPs are examined by estimating the stock market reaction to ESOP announcements. This is the first empirical examination of the relationship between computed firm-specific tax savings and firm value, and therefore provides evidence that helps resolve the theoretical dispute over ESOP tax savings. The results show that investors expect ESOPs to increase cash flows through tax savings, and to reduce the likelihood of takeover for companies subject to takeover attempts when ESOPs are announced.

This paper examines the behavior of institutional traders. We use unique data on the equity transactions of 21 institutions of differing investment styles which provide a detailed account of the anatomy of the trading process. The data include information on the number of days needed to fill an order and types of order placement strategies employed. We analyze the motivations for trade, the determinants of trade duration, and the choice of order type. The analysis provides some support for the predictions made by theoretical models, but suggests that these models fail to capture important dimensions of trading behavior.

We document that firms making seasoned equity offerings during 1975–1989 substantially underperformed a sample of matched firms from the same industry and of similar size that did not issue equity. This underperformance persists even after controlling for trading system, offer size, and the issuing firm's age and book-to-market ratio. It is similar to that previously documented for initial public offerings, suggesting that managers take advantage of overvaluation in both the initial and seasoned equity offering markets.

Greater corporate focus is consistent with shareholder wealth maximization. Diseconomies of scope in the 1980s are confirmed by a trend towards focus or specialization, a positive relation between stock returns and focus increases, and the failure of diversified firms to exploit financial economies of scope (coinsurance of debt or reliance on internal capital markets). Large focused firms were less likely to be subject to hostile takeover attempts than were other firms, but diversified firms were distinguished in the 1980s mostly by being relatively active participants, as both buyers and sellers, in the market for corporate control.

We estimate diversification's effect on firm value by imputing stand-alone values for individual business segments. Comparing the sum of these stand-alone values to the firm's actual value implies a 13% to 15% average value loss from diversification during 1986–1991. The value loss is smaller when the segments of the diversified firm are in the same two-digit SIC code. We find that overinvestment and cross-subsidization contribute to the value loss. The loss is reduced modestly by tax benefits of diversification.

This paper examines whether information across international markets is rationally incorporated into stock prices. We find that Japanese Nikkei index-based futures traded in the U.S. provide complete information about contemporaneous overnight Japanese returns. Moreover, existing cross-dependence between the U.S. and Japanese stock index returns is subsumed by the information content of the derivative securities. Our findings cast doubt on trading models based on irrational traders who either overreact or only partially adjust to movements in foreign stock markets.