Knowledge that Transforms

Most transplanted kidneys are from cadavers, but there are also many transplants from live donors. Recently, there have started to be kidney exchanges involving two donor-patient pairs such that each donor cannot give a kidney to the intended recipient because of immunological incompatibility, but each patient can receive a kidney from the other donor. Exchanges are also made in which a donor-patient pair makes a donation to someone waiting for a cadaver kidney, in return for the patient in the pair receiving high priority for a compatible cadaver kidney when one becomes available. There are stringent legal/ethical constraints on how exchanges can be conducted. We explore how larger scale exchanges of these kinds can be arranged efficiently and incentive compatibly, within existing constraints. The problem resembles some of the “housing” problems studied in the mechanism design literature for indivisible goods, with the novel feature that while live donor kidneys can be assigned simultaneously, cadaver kidneys cannot. In addition to studying the theoretical properties of the proposed kidney exchange, we present simulation results suggesting that the welfare gains from larger scale exchange would be substantial, both in increased number of feasible live donation transplants, and in improved match quality of transplanted kidneys.

Players in a game are “in equilibrium” if they are rational, and accurately predict other players' strategies. In many experiments, however, players are not in equilibrium. An alternative is “cognitive hierarchy” (CH) theory, where each player assumes that his strategy is the most sophisticated. The CH model has inductively defined strategic categories: step 0 players randomize; and step k thinkers best-respond, assuming that other players are distributed over step 0 through step k - 1. This model fits empirical data, and explains why equilibrium theory predicts behavior well in some games and poorly in others. An average of 1.5 steps fits data from many games.

We study the price effects of changes to the S&P 500 index and document an asymmetric price response: There is a permanent increase in the price of added firms but no permanent decline for deleted firms. These results are at odds with extant explanations of the effects of index changes that imply a symmetric price response to additions and deletions. A possible explanation for asymmetric price effects arises from the changes in investor awareness. Results from our empirical tests support the thesis that changes in investor awareness contribute to the asymmetric price effects of S&P 500 index additions and deletions.

This paper analyzes the capital structures of foreign affiliates and internal capital markets of multinational corporations. Ten percent higher local tax rates are associated with 2.8% higher debt/asset ratios, with internal borrowing being particularly sensitive to taxes. Multinational affiliates are financed with less external debt in countries with underdeveloped capital markets or weak creditor rights, reflecting significantly higher local borrowing costs. Instrumental variable analysis indicates that greater borrowing from parent companies substitutes for three‐quarters of reduced external borrowing induced by capital market conditions. Multinational firms appear to employ internal capital markets opportunistically to overcome imperfections in external capital markets.

Does valuation affect mergers? Data suggest that periods of stock merger activity are correlated with high market valuations. The naïve explanation that overvalued bidders wish to use stock is incomplete because targets should not be eager to accept stock. However, we show that potential market value deviations from fundamental values on both sides of the transaction can rationally lead to a correlation between stock merger activity and market valuation. Merger waves and waves of cash and stock purchases can be rationally driven by periods of over‐ and undervaluation of the stock market. Thus, valuation fundamentally impacts mergers.

We investigate whether executive stock option repricings are systematically timed to coincide with favorable movements in the company's stock price. For a sample of 236 repricing events, we observe sharp increases in stock price in the 20‐day period following the repricing date. In addition, repricing dates tend to either precede the release of good news or follow the release of bad news in the quarterly earnings announcements. Since information about stock option repricing is not generally released to the public around the repricing date, these findings suggest that CEOs opportunistically manage the timing of the option repricing date.

We propose that the decision to pay dividends is driven by prevailing investor demand for dividend payers. Managers cater to investors by paying dividends when investors put a stock price premium on payers, and by not paying when investors prefer nonpayers. To test this prediction, we construct four stock price‐based measures of investor demand for dividend payers. By each measure, nonpayers tend to initiate dividends when demand is high. By some measures, payers tend to omit dividends when demand is low. Further analysis confirms that these results are better explained by catering than other theories of dividends.

This study characterizes institutional trading in international stocks from 37 countries during 1997 to 1998 and 2001. We find that the underlying market condition is a major determinant of the price impact and, more importantly, of the asymmetry between price impacts of institutional buy and sell orders. In bullish markets, institutional purchases have a bigger price impact than sells; however, in the bearish markets, sells have a higher price impact. This differs from previous findings on price impact asymmetry. Our study further suggests that price impact varies depending on order characteristics, firm‐specific factors, and cross‐country differences.

We examine a sample of 8,313 cases, between 1951 and 2001, where firms unexpectedly increase their research and development (R&D) expenditures by a significant amount. We find consistent evidence of a misreaction, as manifested in the significantly positive abnormal stock returns that our sample firms' shareholders experience following these increases. We also find consistent evidence that our sample firms experience significantly positive long‐term abnormal operating performance following their R&D increases. Our findings suggest that R&D increases are beneficial investments, and that the market is slow to recognize the extent of this benefit (consistent with investor underreaction).

We analyze the specifications of option pricing models based on time‐changed Lévy processes. We classify option pricing models based on the structure of the jump component in the underlying return process, the source of stochastic volatility, and the specification of the volatility process itself. Our estimation of a variety of model specifications indicates that to better capture the behavior of the S&P 500 index options, we need to incorporate a high frequency jump component in the return process and generate stochastic volatilities from two different sources, the jump component and the diffusion component.