Knowledge that Transforms

Supposethat a representative downstream firm must buy relationship-specific capital before an upstream monopolist is privately informed of its unit costs.We show that the upstream firm will write a contract before the downstream firm invests, specifying a maximum (list) price which may be discounted when costs are low.This model therefore rationalizes transactions/list pricing: a prevalent mode of inter-firm trading.We use our results to explain Stigler and Kindahl's findings on medium-term price dynamics.

Leonid Hurwicz, Mark Walker, On the Generic Nonoptimality of Dominant-Strategy Allocation Mechanisms: A General Theorem That Includes Pure Exchange Economies, Econometrica, Vol. 58, No. 3 (May, 1990), pp. 683-704

The authors introduce, in this paper, a method for solving nonlinear quadratic Pareto problems. The method provides the analyst with a set of time series realizations for the variables in the economy. By obtaining a large number of these realizations, they can approximate the empirical distributions of a variety of statistics, which will give a detailed description of the model's properties. In particular, those statistics can be compared with the similar ones obtained from actual data, and different criteria for goodness of fit can be defined on the basis of these comparisons. Copyright 1990 by The Econometric Society.

ABSTRACT In a sample of 326 US acquisitions between 1975 and 1987, three types of acquisitions have systematically lower and predominantly negative announcement period returns to bidding firms. The returns to bidding shareholders are lower when their firm diversifies, when it buys a rapidly growing target, and when its managers performed poorly before the acquisition. These results suggest that managerial objectives may drive acquisitions that reduce bidding firms' values.

ABSTRACT Customer relationships arise between banks and firms because, in the process of lending, a bank learns more than others about its own customers. This information asymmetry allows lenders to capture some of the rents generated by their older customers; competition thus drives banks to lend to new firms at interest rates which initially generate expected losses. As a result, the allocation of capital is shifted toward lower quality and inexperienced firms. This inefficiency is eliminated if complete contingent contracts are written or, when this is costly, if banks can make nonbinding commitments that, in equilibrium, are backed by reputation.

ABSTRACT Analyses of rational speculation usually presume that it dampens fluctuations caused by “noise” traders. This is not necessarily the case if noise traders follow positive‐feedback strategies—buy when prices rise and sell when prices fall. It may pay to jump on the bandwagon and purchase ahead of noise demand. If rational speculators' early buying triggers positive‐feedback trading, then an increase in the number of forward‐looking speculators can increase volatility about fundamentals. This model is consistent with a number of empirical observations about the correlation of asset returns, the overreaction of prices to news, price bubbles, and expectations.

ABSTRACT This paper examined the returns earned by subscribing to initial public offerings of equity (IPOs). Rock (1986) suggests that IPO returns are required by uninformed investors as compensation for the risk of trading against superior information. We show that IPOs with more informed investor capital require higher returns. The marketing underwriter's reputation reveals the expected level of “informed” activity. Prestigious underwriters are associated with lower risk offerings. With less risk there is less incentive to acquire information and fewer informed investors. Consequently, prestigious underwriters are associated with IPOs that have lower returns.

ABSTRACT This paper presents new empirical evidence of predictability of individual stock returns. The negative first‐order serial correlation in monthly stock returns is highly significant. Furthermore, significant positive serial correlation is found at longer lags, and the twelve‐month serial correlation is particularly strong. Using the observed systematic behavior of stock returns, one‐step‐ahead return forecasts are made and ten portfolios are formed from the forecasts. The difference between the abnormal returns on the extreme decile portfolios over the period 1934–1987 is 2.49 percent per month .

ABSTRACT The fact that investment policies are often restricted appears to have been neglected in the performance measurement literature. This paper, using a standard information model, shows how the introduction of constraints on the proportion of assets to be invested in the market affects the expected portfolio returns and the value of a portfolio manager's performance. The results are related to the classical Treynor and Mazuy (1966) conjectures about characteristic lines.