We study the stock market's reaction to aggregate earnings news. Prior research shows that, for individual firms, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. We find a substantially different pattern in aggregate data. First, returns are unrelated to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns correlate negatively with concurrent earnings; over the last 30 years, for example, stock prices increased 5.7% in quarters with negative earnings growth and only 2.1% otherwise. This finding suggests that earnings and discount rates move together over time and provides new evidence that discount-rate shocks explain a significant fraction of aggregate stock returns.

This article studies the pricing of options in an extended Black Scholes economy in which the underlying asset is not perfectly liquid. The resulting liquidity risk is modeled as a stochastic supply curve, with the transaction price being a function of the trade size. Consistent with the market microstructure literature, the supply curve is upward sloping with purchases executed at higher prices and sales at lower prices. Optimal discrete time hedging strategies are then derived. Empirical evidence reveals a significant liquidity cost intrinsic to every option.

Using a unique set of household level panel data, we estimate the effect of capital gains on saving by asset type, controlling for observable and unobservable household specific fixed effects. The results suggest that the decline in the personal saving rate since 1984 is largely due to the significant capital gains in corporate equities experienced over this period. Over five-year periods, the effect of capital gains in corporate equities on saving is substantially larger than the effect of capital gains in housing or other assets. Failure to differentiate wealth affects across asset types results in a significant understatement or overstatement of the size of their impact, depending on the asset.

We propose a framework for analyzing transformations of demand. Such transformations frequently stem from changes in the dispersion of consumers' valuations, which lead to rotations of the demand curve. In many settings, profits are a U-shaped function of dispersion. High dispersion is complemented by niche production, and low dispersion is complemented by mass-market supply. We investigate numerous applications, including product design; advertising, marketing and sales advice; and the construction of quality-differentiated product lines. We also suggest a new taxonomy of advertising, distinguishing between hype, which shifts demand, and real information, which rotates demand.

How does the formation of cross-country teams affect the organization of work and the structure of wages? To study this question, we propose a theory of the assignment of heterogeneous agents into hierarchical teams, where less skilled agents specialize in production and more skilled agents specialize in problem solving. We first analyze the properties of the competitive equilibrium of the model in a closed economy, and show that the model has a unique and efficient solution. We then study the equilibrium of a two-country model (North and South), where countries differ in their distributions of ability, and in which agents in different countries can join together in teams. We refer to this type of integration as globalization. Globalization leads to better matches for all southern workers but only for the best northern workers. As a result, we show that globalization increases wage inequality among nonmanagers in the South, but not necessarily in the North. We also study how globalization affects the size distribution of firms and the patterns of consumption and trade in the global economy.

This paper measures changes in mutual fund trading costs following two reductions in the tick size of U.S. equity markets: the switch from eighths to sixteenths and the subsequent switch to decimals. We estimate trading costs by comparing a mutual fund's daily returns to the daily returns of a synthetic benchmark portfolio that matches the fund's holdings but has zero trading costs by construction. We find that the average change in trading costs of actively managed funds was positive following both reductions in tick size with a larger and statistically significant increase following decimalization. In contrast, index fund trading costs were unaffected.

The empirical literature provides conflicting assessments about how firms choose their capital structures. Distinguishing among the three main hypotheses (“tradeoff”, pecking order, and market timing) requires that we know whether firms have long-run leverage targets and (if so) how quickly they adjust toward them. Yet many previous researchers have applied empirical specifications that fail to recognize the potential for incomplete adjustment. A more general, partial-adjustment model of firm leverage indicates that firms do have target capital structures. The typical firm closes about one-third of the gap between its actual and its target debt ratios each year.

We analyze allocations to institutional and retail investors in 441 initial public offerings (IPOs). In addition to the well-known favorable first-day returns, we show that institutions also obtain more allocations in IPOs with better long-term performance. We find that initial institutional flips help predict future returns, suggesting that at least some institutions retain valuable private information about IPO firms. Collectively, these findings illustrate the importance of aftermarket relations between underwriters and investors and that underwriters have discretionary means to compensate IPO investors beyond first-day returns and price stabilization.

We investigate the implications of changes in the structure of the U.S. economy for monetary policy effectiveness. Estimating a vector autoregression over the pre- and post-1980 periods, we provide evidence of a reduced effect of monetary policy shocks in the latter period. We estimate a structural model that replicates well the economy's response in both periods, and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy's volatility. We find that by responding more strongly to inflation expectations, monetary policy has stabilized the economy more effectively in the post-1980 period.

We analyze a randomized experiment in which 14,000 tax filers in H&R Block offices in St. Louis received matches of zero, 20 percent, or 50 percent of IRA contributions. Take-up rates were 3 percent, 8 percent, and 14 percent, respectively. Among contributors, contributions, excluding the match, averaged $765 in the control group and $1100 in the match groups. Taxpayer responses to similar incentives in the Saver's Credit are much smaller. Taxpayers did not game the experiment by receiving a match and strategically withdrawing funds. Tax professionals significantly influenced contribution choices. These results suggest that both incentives and information affect behavior.