We document that gold mining firms have consistently realized economically significant cash flow gains from their derivatives transactions. We conclude that these cash flows have increased shareholder value since there is no evidence of an offsetting adjustment in firms’ systematic risk. This finding contradicts a central assumption in the risk management literature that derivatives transactions have zero net present value, and highlights an important motive for firms to use derivatives that the literature has hitherto ignored. Although we find considerable evidence of selective hedging in our sample, the cash flow gains from selective hedging appear to be small at best.

This study examines the role of political connections in firms’ financing strategies and their long-run performance. We view political connections as an example for domestic arrangements which can reduce the benefits of global financing. Using data from Indonesia, we find that firms with strong political connections are less likely to have publicly traded foreign securities. As a result, estimates of the performance consequences of foreign financing are severely biased if value-creating domestic arrangements such as political relationships are ignored. Connections not only alter firms’ financing strategies, they also influence long-run performance. Tracking returns across several regimes, we show that firms have difficulty re-establishing connections with a new government when their patron falls from power, leading closely connected firms to underperform under the new regime and subsequently to increase their foreign financing.

This note revisits the identification theorems of Brown (1983) and Roehrig (1988). We describe an error in the proofs of the main identification theorems in these papers, and provide an important counterexample to the theorems on the identification of the reduced form. Specifically, the reduced form of a nonseparable simultaneous equations model is not identified even under the assumptions of these papers. We provide conditions under which the reduced form is identified and is recoverable using the distribution of the endogenous variables conditional on the exogenous variables. However, these conditions place substantial limitations on the structural model. We conclude the note with a conjecture that it may be possible to use classical exclusion restrictions to recover some of the key implications of the theorems in more general settings.

Nobel Prize Lecture, December 8, 2005

How should benefit-cost analysis account for the value that benevolent individuals place on others' enjoyment of public goods? When adding up the benefits to be compared with costs, should we sum the private valuations, the altruistic valuations, or something else? This paper argues that private valuations are appropriate if concern for the well-being of others respects their private preferences. The discussion has implications for family decision-making, welfare economics, and the design of applied contingent valuation studies.

The empirical literature on credit risk has relied mostly on the corporate bond market to estimate losses in the event of default. The reason for this is that, as bank loans are private instruments, few data on loan losses are publicly available. The contribution of this paper is to apply mortality analysis to a unique set of micro-data on defaulted bank loans of a European bank. The empirical results relate to the timing of recoveries on bad and doubtful bank loans, the distribution of cumulative recovery rates, their economic determinants and the direct costs incurred by that bank on recoveries on bad and doubtful loans.

We examine market behavior around earnings announcements to understand the consequences of the increased disclosure that non-U.S. firms face when listing shares in the U.S. We find that absolute return and volume reactions to earnings announcements typically increase significantly once a company cross-lists in the U.S. Furthermore, these increases are greatest for firms from developed countries and for firms that pursue over-the-counter listings or private placements, which do not have stringent disclosure requirements. Additional tests support the hypothesis that it is changes in the individual firm's disclosure environment, rather than changes in its market liquidity, ownership, or trading venue, that explain our findings.

If investors are myopic mean-variance optimizers, a stock's expected return is linearly related to its beta in the cross-section. The slope of the relation is the cross-sectional price of risk, which should equal the expected equity premium. We use this simple observation to forecast the equity-premium time series with the cross-sectional price of risk. We also introduce novel statistical methods for testing stock-return predictability based on endogenous variables whose shocks are potentially correlated with return shocks. Our empirical tests show that the cross-sectional price of risk (1) is strongly correlated with the market's yield measures and (2) predicts equity-premium realizations, especially in the first half of our 1927–2002 sample.

This paper studies the nature of capital adjustment at the plant-level. We use an indirect inference procedure to estimate the structural parameters of a rich specification of capital adjustment costs. In effect, the parameters are optimally chosen to reproduce

This paper examines the link between capital market governance (CMG) and several key measures of market performance. Using detailed data from individual stock exchanges, we develop a composite CMG index that captures three dimensions of security laws: the degree of earnings opacity, the enforcement of insider laws, and the effect of removing short-selling restrictions. We find that improvements in the CMG index are associated with decreases in the cost-of-equity capital (both implied and realized), increases in market liquidity (trading volume, market depth, and U.S. foreign investments), and increases in market pricing efficiency (reduced price synchronicity and IPO underpricing). The results are quite consistent across individual components of CMG and over alternative market performance measures.