This is a review article of The New Financial Order: Risk in the Twenty-First Century (Princeton University Press 2003) by Robert J. Shiller.

The purpose of our work is to explore contagious financial crises. To this end, we use simplified, thus numerically solvable, versions of our general model [C.A.E. Goodhart, P. Sunirand, D.P. Tsomocos, A Model to Analyse Financial Fragility, Oxford Financial Research Centre Working Paper No. 2003fe13, 2003]. The model incorporates heterogeneous agents, banks and endogenous default, thus allowing various feedback and contagion channels to operate in equilibrium. Such a model leads to different results from those obtained when using a standard representative agent model. For example, there may be a trade-off between efficiency and financial stability, not only for regulatory policies, but also for monetary policy. Moreover, agents who have more investment opportunities can deal with negative shocks more effectively by transferring ‘negative externalities’ onto others.

This paper investigates the forecasting accuracy of bankruptcy hazard rate models for U.S. companies over the time period 1962–1999 using both yearly and monthly observation intervals. The contribution of this paper is multiple-fold. One, using an expanded bankruptcy database we validate the superior forecasting performance of Shumway's (2001) model as opposed to Altman (1968) and Zmijewski (1984). Two, we demonstrate the importance of including industry effects in hazard rate estimation. Industry groupings are shown to significantly affect both the intercept and slope coefficients in the forecasting equations. Three, we extend the hazard rate model to apply to financial firms and monthly observation intervals. Due to data limitations, most of the existing literature employs only yearly observations. We show that bankruptcy prediction is markedly improved using monthly observation intervals. Fourth, consistent with the notion of market efficiency with respect to publicly available information, we demonstrate that accounting variables add little predictive power when market variables are already included in the bankruptcy model.

Public policies designed to increase utilization of existing technologies may also affect incentives to develop new technologies. This paper investigates this phenomenon by examining policies designed to increase usage of preexisting vaccines. I find that these policies were associated with a 2.5-fold increase in clinical trials for new vaccines. For several diseases, the induced innovation is socially wasteful, though small in magnitude. In one case, however, the "dynamic" social welfare benefits from induced innovation exceed the policies' "static" benefits from increasing vaccination with existing technology. These findings underscore the importance of including technological progress in economic analysis of public policy.

This article decomposes the participation process of a prototypical program into eligibility, awareness, application, acceptance, and enrollment. With this decomposition, we determine the sources of unequal participation for different groups and demonstrate that variables often have very different effects at different stages in the participation process. Our analysis shows that personal choices substantially affect participation and that awareness of program eligibility is a major source of variation in participation.

This paper examines the change in the average level of moral development over a 7.5‐year period of promotion, attrition, and survival in five Big 6 firms. The study improves upon previous cross‐sectional studies that found decreases in the average level of moral development at the senior manager and partner levels, which has been referred to as the “inverted‐U” phenomenon. Problems with these studies that limit the generalizability of their findings include their cross‐sectional nature and samples that usually come from one or two firms. Over a 7.5‐year period, we found that the participating Big 6 firms retained auditors with higher average levels of moral development (measured using the defining issues test), while those with lower average levels left the firms. The average level of moral development for new partners was at least as high as the group from which they came. This research suggests that the concern about Big 6 firms retaining a higher proportion of auditors with lower moral development may be an artifact of research design.

Corporate cash flows are highly volatile and strongly procyclical. We examine the asset-pricing implications of the sensitivity of corporate cash flows to economic shocks within a continuous-time model in which dividends are a stochastic fraction of aggregate consumption. We provide closed-form solutions for stock values and show that the equity premium can be represented as the sum of three components which we call the consumption-risk, event-risk, and corporate-risk premia. Calibrated to historical data, the model implies a total equity premium many times larger than in the standard model. The model also generates levels of equity volatility consistent with those experienced in the stock market.

AbstractThis paper investigates the forecasting accuracy of bankruptcy hazard rate models for U.S. companies over the time period 1962–1999 using both yearly and monthly observation intervals. The contribution of this paper is multiple-fold. One, using an expanded bankruptcy database we validate the superior forecasting performance of Shumway's (2001) model as opposed to Altman (1968) and Zmijewski (1984). Two, we demonstrate the importance of including industry effects in hazard rate estimation. Industry groupings are shown to significantly affect both the intercept and slope coefficients in the forecasting equations. Three, we extend the hazard rate model to apply to financial firms and monthly observation intervals. Due to data limitations, most of the existing literature employs only yearly observations. We show that bankruptcy prediction is markedly improved using monthly observation intervals. Fourth, consistent with the notion of market efficiency with respect to publicly available information, we demonstrate that accounting variables add little predictive power when market variables are already included in the bankruptcy model.

ABSTRACT We empirically analyze the dynamics of executives' pay‐to‐performance sensitivities. Option pay‐to‐performance sensitivities become weaker as options fall underwater, often leading to pressures to reprice options or restore pay‐to‐performance sensitivity in other ways. Building a detailed data set on executives' portfolios of stock and options, we find that the responsiveness of pay‐to‐performance sensitivities (created by all executive holdings of stock and options) to changes in stock price is large. The elasticity of pay‐to‐performance sensitivities with respect to stock price decreases is about 0.7 and is larger for high‐option executives and for executives with high percentages of options already underwater. The dominant mechanism through which companies offset declines in option pay‐to‐performance sensitivities is larger option grants following stock price declines; on average, these larger grants restore approximately 40% of the stock‐price‐induced pay‐to‐performance sensitivity declines. Option repricings are inconsequential in this regard, despite the attention they have attracted. In looking at positive returns, we find the reverse: higher returns both directly increase pay‐to‐performance sensitivities and lead to larger option grants, which raise pay‐to‐performance sensitivities further. Thus, option grants to executives tend to be largest following large stock price increases or large stock price decreases.

ABSTRACT For a sample of U.S. firm years from 1980 through 1996 we document a positive association between the excess value of diversification as defined by Berger and Ofek [1995] and security analyst ratings of voluntary disclosure as developed by the Association for Investment Management and Research. We also examine an alternative proxy for disclosure quality that captures the degree of segment disaggregation and document a positive association between this measure and excess value. Our results are robust to controls for firm performance and information environment. Taken together, these phenomena suggest that disclosure plays a monitoring role in disciplining management's investment decisions. However, tests of the association between disclosure and the value of firms' investment spending yield mixed results.