This paper examines the predictions of the performance based arbitrage hypothesis for the merger arbitrage market. Performance based arbitrage [Shleifer, A., Vishny, R.W., 1997. The limits of arbitrage. Journal of Finance, 52 (1), 35–55] is the notion that funds under management are withdrawn from arbitrageurs following trading losses, resulting in inefficient prices for securities subject to arbitrage trades. I examine general comovement in merger arbitrage spreads and the response of spreads to large arbitrage losses and substantial changes in deal flow. I find little evidence that merger arbitrage spreads exhibit systematic comovement or are substantially affected by important liquidity events in this market.

This paper documents average acquisition discounts for stand-alone private firms and subsidiaries of other firms (unlisted targets) of 15% to 30% relative to acquisition multiples for comparable publicly traded targets. My results are strongly consistent with the notion that sale prices for unlisted targets are affected by both the need for, and availability of, the liquidity provided by the buyer. Corporate parents are significantly liquidity-constrained prior to the sale of a subsidiary, particularly when the subsidiary is being sold for cash. Furthermore, acquisition discounts are significantly greater when debt capital is relatively more expensive to obtain, and when the parent firm has below-market stock returns in the 12 months prior to the sale.

A company officer is an "alumnus" if he previously worked for an audit firm. Iyer, Bamber, and Barefield (1997) find that alumni have ties with their former audit firms and alumni are more inclined to provide economic benefits to former firms if they have stronger ties. If the alumnus is a senior corporate officer, the alumnus may benefit his former firm by recommending that the company appoint the firm as its auditor. However, the company's audit committee may be concerned that officer-auditor ties threaten audit quality. Therefore, an independent audit committee may not sanction the appointment of the officer's former firm. This study investigates (a) whether companies tend to appoint officers' former audit firms, and (b) whether independent audit committees mitigate this tendency. We document that companies appoint officers' former firms more often than they appoint alternative audit firms. However, companies are less likely to appoint officers' former firms if audit committees are more independent. This suggests that independent audit committees strengthen audit quality by deterring affiliations between audit firms and officers. © CAAA.

We investigate cross-country determinants of private credit, using new data on legal creditor rights and private and public credit registries in 129 countries. Both creditor protection through the legal system and information-sharing institutions are associated with higher ratios of private credit to gross domestic product, but the former is relatively more important in the richer countries. An analysis of legal reforms shows that credit rises after improvements in creditor rights and in information sharing. Creditor rights are remarkably stable over time, contrary to the hypothesis that legal rules are converging. Finally, legal origins are an important determinant of both creditor rights and information-sharing institutions. The analysis suggests that public credit registries, which are primarily a feature of French civil law countries, benefit private credit markets in developing countries.

Why is GDP growth so much more volatile in poor countries than in rich ones? We identify three possible reasons: (i) poor countries specialize in fewer and more volatile sectors; (ii) poor countries experience more frequent and more severe aggregate shocks (e.g., from macroeconomic policy); and (iii) poor countries' macroeconomic fluduations are more highly correlated with the shocks affecting the sectors they specialize in. We show how to decompose volatility into the various sources, quantify their contribution to aggregate volatility, and study how they relate to the stage of development. We document the following regularities. First, as countries develop, their productive structure moves from more volatile to less volatile sectors. Second, the volatility of country-specific macroeconomic shocks falls with development. Third, the covariance between sector-specific and country-specific shocks does not vary systematically with the level of development. There is also some evidence that the degree of sectoral concentration declines with development at early stages, and increases at later stages. We argue that many theories linking volatility and development are not consistent with these findings, and suggest new directions for future theoretical work.

The purpose of this paper is to provide a comprehensive analysis of corporate valuation around the world. Specifically, we (i) document and compare corporate valuation around the world, and (ii) identify the key factors that drive cross-country differences in valuation. In doing so, we utilize the country-level Tobin’s q (CTQ), computed as the ratio of the aggregate market value to book value of all assets held by all public firms domiciled in a country, which amounts to the Tobin’s q for the ‘market portfolio’ of the country. The key findings of the paper are: First, CTQ varies greatly across countries, ranging from 0.73 for Venezuela to 2.11 for Finland, with the international mean of 1.30 during our sample period 1999–2004. Despite the steady integration of the world economy in recent years, corporate valuation remains starkly different across countries. Second, apart from the effect of corporate governance, cross-country differences in corporate valuation are significantly driven by the growth options of countries represented by the R&D intensities, capital expenditures, and GDP growth. In addition, the degree of capital market openness has a significant, independent effect on valuation. Third, our regression analyses show that CTQ varies directly with shareholder rights, enforcement of insider trading laws, GDP growth, R&D intensity, and the degree of capital market openness. The key findings remain robust to the inclusion of inflation and industry effects.

Lower birth weight babies have worse outcomes, both short-run in terms of one-year mortality rates and longer run in terms of educational attainment and earnings. However, recent research has called into question whether birth weight itself is important or whether it simply reflects other hard-to-measure characteristics. By applying within twin techniques using an unusually rich dataset from Norway, we examine the effects of birth weight on both short-run and long-run outcomes for the same cohorts. We find that birth weight does matter; despite short-run twin fixed effects estimates that are much smaller than OLS estimates, the effects on longer-run outcomes such as adult height, IQ, earnings, and education are significant and similar in magnitude to OLS estimates.

ABSTRACT We study portfolio choice when labor income and dividends are cointegrated. Economically plausible calibrations suggest young investors should take substantial short positions in the stock market. Because of cointegration the young agent's human capital effectively becomes “stock‐like.” However, for older agents with shorter times‐to‐retirement, cointegration does not have sufficient time to act, and thus their human capital becomes more “bond‐like.” Together, these effects create hump‐shaped life‐cycle portfolio holdings, consistent with empirical observation. These results hold even when asset return predictability is accounted for.

ABSTRACT Previous empirical studies of information cascades use either naturally occurring data or laboratory experiments. We combine attractive elements from each of these lines of research by observing market professionals from the Chicago Board of Trade (CBOT) in a controlled environment. Analysis of over 1,500 individual decisions suggests that CBOT professionals behave differently from our student control group. For instance, professionals are better able to discern the quality of public signals and their decisions are not affected by the domain of earnings. These results have implications for market efficiency and are important in both a positive and normative sense.

ABSTRACT We describe how episodic illiquidity arises from a breakdown in cooperation between market participants. We first solve a one‐period trading game in continuous‐time, using an asset pricing equation that accounts for the price impact of trading. Then, in a multi‐period framework, we describe an equilibrium in which traders cooperate most of the time through repeated interaction, providing apparent liquidity to one another. Cooperation breaks down when the stakes are high, leading to predatory trading and episodic illiquidity. Equilibrium strategies that involve cooperation across markets lead to less frequent episodic illiquidity, but cause contagion when cooperation breaks down.