Modigliani and Cohn hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has implications for the pricing of risky stocks relative to safe stocks. Simultaneously examining the pricing of Treasury bills, safe stocks, and risky stocks allows us to distinguish money illusion from any change in the attitudes of investors toward risk. Our empirical results support the hypothesis that the stock market suffers from money illusion.

We examine the relation between corporate governance and firms' information environments. We use the passage of state antitakeover laws in the U.S. as a source of exogenous variation in an important governance mechanism to identify changes in firms' information environments. We find that information asymmetry and private information gathering decreased and that financial statement informativeness increased following the passage of the antitakeover laws. Cross-sectional analyses indicate that the increased level of financial statement informativeness is attributable to firms that are most likely to access equity markets rather than managerial entrenchment, managerial career concerns, or managers' pursuit of the quiet life.

This paper addresses the simultaneous problems of determining input levels in a multidivisional firm and allocating the input costs to the divisions. A distinction analogous to that in economics between pure public goods and pure private goods is made between pure common inputs and pure private inputs. It is shown that for a pure common input, decentralization utilizing a full cost allocation can result in an efficient allocation of the input. Although efficient decentralization is possible in this case, the "free-rider problem" suggests that such an outcome is unlikely. In addition, it is shown that recently suggested allocation schemes based on game-theoretic concepts may not lead to an efficient allocation of pure common inputs.

The correlation between governance indices and abnormal returns documented for 1990–1999 subsequently disappeared. The correlation and its disappearance are both due to market participants' gradually learning to appreciate the difference between good-governance and poor-governance firms. Consistent with learning, the correlation's disappearance was associated with increases in market participants' attention to governance; market participants and security analysts were, until the beginning of the 2000s but not subsequently, more positively surprised by the earning announcements of good-governance firms; and, although governance indices no longer generated abnormal returns during the 2000s, their negative association with firm value and operating performance persisted.

This paper finds evidence of return predictability across economically linked firms. We test the hypothesis that in the presence of investors subject to attention constraints, stock prices do not promptly incorporate news about economically related firms, generating return predictability across assets. Using a data set of firms' principal customers to identify a set of economically related firms, we show that stock prices do not incorporate news involving related firms, generating predictable subsequent price moves. A long–short equity strategy based on this effect yields monthly alphas of over 150 basis points.

It is often argued that cost-sharing-charging a subsidized, positive price-for a health product is necessary to avoid wasting resources on those who will not use or do not need the product. We explore this argument through a field experiment in Kenya, in which we randomized the price at which prenatal clinics could sell long-lasting antimalarial insecticide-treated bed nets (ITNs) to pregnant women. We find no evidence that cost-sharing reduces wastage on those who will not use the product: women who received free ITNs are not less likely to use them than those who paid subsidized positive prices. We also find no evidence that cost-sharing induces selection of women who need the net more: those who pay higher prices appear no sicker than the average prenatal client in the area in terms of measured anemia (an important indicator of malaria). Cost-sharing does, however, considerably dampen demand. We find that uptake drops by sixty percentage points when the price of ITNs increases from zero to $0.60 (i.e., from 100% to 90% subsidy), a price still $0.15 below the price at which ITNs are currently sold to pregnant women in Kenya. We combine our estimates in a cost-effectiveness analysis of the impact of ITN prices on child mortality that incorporates both private and social returns to ITN usage. Overall, our results suggest that free distribution of ITNs could save many more lives than cost-sharing programs have achieved so far, and, given the large positive externality associated with widespread usage of ITNs, would likely do so at a lesser cost per life saved. (c) 2010 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..