Knowledge that Transforms

Because of extreme differences in factor endowments and price ratios among factors between the United States and Japan, both countries have experienced sharply different patterns of factor use and productivity growth in agriculture for the past 100 years of modern economic growth. In this study, the method of testing the Hicksian hypothesis of induced innovation was developed using the two-level CES production function. The model was applied to the historical data of U.S. and Japanese agricultural development for 1880-1980. The results were consistent with the hypothesis that different patterns of technical change in the two countries were induced by differences in the levels and the movements in relative factor prices.

Parties bound by an incomplete contract have an incentive to renegotiate after acquiring new information. The issue of the parties' investment in the relationship before renegotiation is analyzed in a simple two-period procurement model. The firm invests in the first period. It then learns its production cost, and the sponsor learns its value for the project. Williamson's underinvestment presumption is shown to hold under very general assumptions about bargaining and about the ex post asymmetry of information as long as the firm's investment is not observable by the sponsor. The introduction of a cancellation fee may well lead to even less investment contrary to what is sometimes argued. The role of ex ante price fixing as an alternative way to reintroduce some form of commitment and the problem of cost overruns are discussed. Last, it is shown that if investment is observable by the sponsor andthus may become a joint decision variable, the two parties may choose to under- or overinvest.

This study examines the stock price effects of security offerings and investigates the nature of information inferred by investors from offering announcements. Changes in share price are unrelated to characteristics of offerings such as the net amount of new financing, relative offering size, and the quality rating of debt issues. The type of security is the only significant determinant of the price response. The opposite patterns of abnormal stock returns following the announcement of completed versus cancelled offerings suggest that managers issue common stock or convertible debt when in managers' view shares are overpriced.

Yields on short-term prime-grade municipals vary through time in relation to after-corporate-tax yields on short-term U.S. Treasury securities. The pattern is not related to the default premium in municipal yields or to the historical ceiling on bank deposit rates (Regulation Q). However, there is a strong link to the default premium in corporate yields and to municipal holdings by large commercial banks. These findings suggest that taxable and tax-exempt markets are linked both by the capital-structure decisions of firms and by the tax-arbitrage activities of banks.

The Bankruptcy Reform Act of 1978 contains several provisions that can affect the cost of producing loans for financial intermediaries. In a competitive lending market the additional monitoring and expected foreclosure costs imposed by the change in the bankruptcy law should be passed on to the borrower. Using survey data from a sample of small business loans from commercial banks, evidence is presented that the enactment of the new law resulted in higher contract rates of interest.

An examination of rates of return and dollar value returns for various classes of merging firms' securities indicates that acquired companies' common stockholders, convertible and non-convertible preferred stockholders, and convertible bondholders gain in merger, as do acquiring companies' convertible preferred stockholders. Acquired companies' non-convertible bondholders and acquiring companies' convertible and non-convertible bondholders and non-convertible preferred stockholders neither gain nor lose. There is no evidence that acquiring companies' common stockholders lose and there is statistically reliable evidence that they gain. Additionally, the dollar value of both acquired and acquiring firms increase, as does the dollar value of the combined acquired and acquiring companies.

Weekly and intradaily patterns in common stock prices are examined using transaction data. For large firms, negative Monday close-to-close returns accrue between the Friday close and the Monday open; for smaller firms they accrue primarily during the Monday trading day. For all firms, significant weekday differences in intraday returns accrue during the first 45 minutes after the market opens. On Monday mornings, prices drop, while on the other weekday mornings, they rise. Otherwise the pattern of intraday returns is similar on all weekdays. Most notable is an increase in prices on the last trade of the day.

This paper documents the unusual price behavior of Treasury bills that mature at the turn of calendar months. There is a kink in the yield curve as it crosses calendar months, and this kink is most pronounced as the yield curve crosses between calendar years. Potential seasonality in the spot rate of interest could not explain these results, nor could they be explained by the ‘mispricing’ of either the last bill or first bill in a month. The exceptionally large premium on the first bill in a month tended to be earned throughout the lifetime of the bill.

This paper presents a model for the underpricing of initial public offerings. The argument depends upon the existence of a group of investors whose information is superior to that of the firm as well as that of all other investors. If the new shares are priced at their expected value, these priveleged investors crowd out the others when good issues are offered and they withdraw from the market when bad issues are offered. The offering firm must price the shares at a discount in order to guarantee that the uninformed investors purchase the issue.

We examine an unusual sample of firms within the life insurance industry: 30 firms which switched from a common-stock to a mutual-ownership structure. Our evidence indicates that the rate of growth of premium income from policyholders remains unchanged, stockholders receive a premium for their stock, and management turnover declines; thus, no group of claimholders systematically loses in the sample of firms which choose to go through the mutualization process. We therefore conclude that for this sample of firms, changing from a stock to a mutual-ownership structure is on average efficiency-enhancing.