Knowledge that Transforms

Only one-fourth of U.S. families own stock. This paper examines whether the consumption of stockholders differs from the consumption of nonstockholders and, if so, whether these differences help explain the empirical failures of the consumption-based CAPM. Household panel data are used to construct time series on the consumption of each group. The results indicate that the consumption of stockholders is more volatile and more highly correlated with the excess return on the stock market. These differences help explain the size of the equity premium, although they do not fully resolve the equity premium puzzle.

Announcements of stock repurchase tender offers are examined as a source of information about firms' future earnings prospects and market risk levels. We document positive earnings surprises and equity systematic risk reduction following tender offers. Announcement stock price reactions are positively correlated with earnings surprises over the concurrent and subsequent two years, and negatively correlated with changes in equity market risk. Finally, stock price reactions to quarterly earnings announcements are more strongly correlated with time-series based earnings surprises in the year prior to the tender offer than during the subsequent year, consistent with tender offer announcements conveying earnings information.

This paper investigates the hypothesis that CEOs in their final years of office manage discretionary investment expenditures to improve short-term earnings performance. We examine the behavior of R & D expenditures for a sample of firms in industries that have significant ongoing R & D activities. The results suggest that CEOs spend less on R & D during their final years in office. However, we find the reductions in R & D expenditures are mitigated through CEO stock ownership. There is no evidence that the reduced R & D expenditures are associated with either poor firm performance or reductions in investment expenditures that are capitalized for accounting purposes.

SEC, AAER, Auditing enforcement releases, Market reaction

Executive compensation, R&D, Stock based measures

Analyst forecasts, Analyst forecast consensus, Market association, Timely aggregate analyst forecasts

Recent work demonstrates that dynastic assumptions guarantee the irrelevance of all redistributional policies, distortionary taxes, and prices-the neutrality of fiscal policy (Ricardian equivalence) is only the "tip of the iceberg." In this paper, we investigate the possibility of reinstating approximate Ricardian equivalence by introducing a small amount of friction in intergenerational links. If Ricardian equivalence depends upon significantly shorter chains of links than do these stronger neutrality results, then friction may dissipate the effects that generate strong neutrality, without significantly affecting the Ricardian result. Although this intuition turns out to be essentially correct, we show that models with small amounts of friction have other untenable implications. We conclude that the theoretical case for Ricardian equivalence remains tenuous.

This paper develops a discrete state space solution method for a class of nonlinear rational expectations models. The method works by using numerical quadrature rules to approximate the integral operators that arise in stochastic intertemporal models. It is particularly useful for approximating asset pricing models and has potential applications in other problems as well. An empirical application uses the method to study the relationship between the risk premium and the conditional variability of the equity returns under ARCH endowment processes. Copyright 1991 by The Econometric Society.

In this paper we provide a framework to study the aggregate dynamic behavior of an economy where individual units follow (S, s) policies. We characterize structural and stochastic heterogeneities that ensure convergence of the economy's aggregate to that of its frictionless counterpart, determine the speed at which convergence takes place, and describe the transitional dynamics of this economy. In particular, we consider a dynamic economy where agents differ in their initial positions within their bands and face both stochastic and structural heterogeneity; where the former refers to the presence of (unit specific) idiosyncratic shocks, and the latter to differences in the widths of units' (S, s) bands and their response to aggregate shocks. We study the evolution of the economy's aggregate and the evolution of the difference between this aggregate and that of an economy without macroeconomic friction, where the latter pertains to a situation where individual units adjust with no delay to all shocks. We also examine the sensitivity of this difference to common shocks. For example, in the retail inventory problem the aggregate deviation and sensitivity to common shocks correspond to the aggregate inventory level and its sensitivity to aggregate demand shocks, respectively.

Fumio Hayashi, Tohru Inoue, The Relation Between Firm Growth and Q with Multiple Capital Goods: Theory and Evidence from Panel Data on Japanese Firms, Econometrica, Vol. 59, No. 3 (May, 1991), pp. 731-753