In this paper we investigate the claim that hedge funds offer investors a superior risk-return trade-off. We do so using a continuous time version of Dybvig's (1988a, 1988b) payoff distribution pricing model. The evaluation model, which does not require any assumptions with regard to the return distribution of the funds in question, is applied to the monthly returns of 77 hedge funds and 13 hedge fund indices over the period May 1990 - April 2000. The results show that as a stand-alone investment hedge funds do not offer a superior risk-return profile. We find 12 indices and 72 individual funds to be inefficient, with the average efficiency loss amounting to 2.76% per annum for indices and 6.42% for individual funds. Part of the inefficiency cost of individual funds can be diversified away. Funds of funds, however, are not the preferred vehicle for this as their performance appears to suffer badly from their double fee structure. Looking at hedge funds in a portfolio context results in a marked improvement in the evaluation outcomes. Seven of the 12 hedge fund indices and 58 of the 72 individual funds classified as inefficient on a stand-alone basis are capable of producing an efficient payoff profile when mixed with the S&P 500. The best results are obtained when 10-20% of the portfolio value is invested in hedge funds.

I test whether corporate governance is ineffective in emerging markets by estimating the link between CEO turnover and firm performance for over 1,200 firms in eight emerging markets.I find two main results.First, CEOs of emerging market firms are more likely to lose their jobs when their firm's performance is poor, suggesting that corporate governance is not ineffective in emerging markets.Second, for the subset of firms with a large domestic shareholder, there is no link between CEO turnover and firm performance.For this subset of emerging market firms, corporate governance appears to be ineffective.

This paper examines whether mandatory auctions promote the efficient restructuring of distressed firms relative to a reorganization-based bankruptcy system such as Chapter 11. Under a mandatory auction system, aggressive bidding by a coalition of incumbent management and pre-bankruptcy creditors may deter outside bidders, may result in the coalition paying more than its valuation to acquire the firm, and may result in assets remaining in a lower value use. In a reorganization-based bankruptcy system, management's voluntary choice to seek an auction conveys information about the coalition's valuation, which facilitates competition. Our model shows that a reorganization-based bankruptcy system that encourages, but does not mandate auctions, can actually increase the likelihood that an outside bidder enters and the assets of the bankrupt firm are redeployed.

This study examines the effects of teen alcohol use and availability on educational attainment. We demonstrate that teens who faced a lower minimum legal drinking age (MLDA) were substantially more likely to drink. However, we find that changes in MLDA had small and statistically insignificant effects on educational attainment. Using matched cohorts from two data sets, we also report two‐sample instrumental variables estimates of the effect of teen drinking on educational attainment. These estimates are smaller than the corresponding ordinary least squares estimates and statistically insignificant, indicating that teen drinking does not have an independent effect on educational attainment.

Using a new Bayesian method for the analysis of diffusion processes, this article finds that the nonlinear drift in interest rates found in a number of previous studies can be confirmed only under prior distributions that are best described as informative. The assumption of stationarity, which is common in the literature, represents a nontrivial prior belief about the shape of the drift function. This belief and the use of “flat” priors contribute strongly to the finding of nonlinear mean reversion. Implementation of an approximate Jeffreys prior results in virtually no evidence for mean reversion in interest rates unless stationarity is assumed. Finally, the article documents that nonlinear drift is primarily a feature of daily rather than monthly data, and that these data contain a transitory element that is not reflected in the volatility of longer-maturity yields.

Since the early 1980's, patterns of emergingmarket finance have changed significantly. Greater integration of capital markets and a trend toward a greater use of direct lending through bonds has led to relatively decreased use of indirect finance through syndicated bank loans. These changes have produced benefits to investors through opportunities for risk diversification and to emerging-market sovereign borrowers by increasing the investor base. The broadened investor base in bond financing, however, raises problems of coordination and collective action in the event of a sovereign borrower's default and restructuring. Now, three parties are involved in determining the debt markdown required to produce solvency: the debtor, creditors, and the global taxpayer through international financial institutions (IFI's). The complex relationships among the borrowers, creditors, and the global taxpayer have made restructuring obligations a costly and time-consuming exercise, especially with the possibility of holdouts. Both the sovereign borrower and its creditors have an incentive to avoid a restructuring in the hope of financial assistance from the global taxpayer. Sovereign governments may not undertake the politically painful steps involved in beginning a restructuring when there is always the hope that official assistance will be forthcoming. Creditors may not accept a reduction in the value of their claims, also in the hope that official assistance will be forthcoming. Costs of postponed and disorderly restructurings are real and substantial. Delays in restructuring can drain a country's resources and increase the ultimate costs of restoring financial sustainability. Creditors bear a burden as well, because the losses associated with the restructuring are reflected in values of

Forms of Intolerance held in early September 2001 was unfortunately obscured by the tragic events of September 11. Nonetheless, the event reflects global recognition of problems of racial, ethnic and cultural discrimination, oppression and exploitation. The following analysis, inspired by participation in collaborative international research presented to the Conference, suggests that economic discrimination may be usefully seen in terms of rents and rent-seeking. By successfully discriminating against a particular group, employers or consumers succeed in extracting rents from the group discriminate against. However, such rents are different in nature. Discriminated employees (e.g. Blacks) receive lower remuneration or inferior terms of employment. Successful discrimination allows employers to use their availability to extract additional ‘producer surplus ’ by conceding lower (‘intermediate’-level) wages or employment conditions to ostensibly privileged employees (e.g. Whites), than might be the case in the absence of discrimination. Even if there is an eventual equalization of wage rates or employment conditions between the group discriminated against and the privileged group, a ‘producer surplus ’ from the poorer wages or employment conditions may well persist

Abstract This paper examines the linkages between discretionary accruals (DAs), managerial share ownership, management compensation, and audit fees. It draws on the theory that managers of firms with high management ownership are likely to use DAs to communicate value‐relevant information, while managers of firms with high accounting‐based compensation are likely to use DAs opportunistically to manage earnings to improve their compensation. OLS regression results of 648 Australian firms show that (1) there is a positive association between DAs and audit fees; (2) managerial ownership negatively affects the positive relationship between DAs and audit fees; and (3) this negative impact is further found to be weaker for firms with high accounting‐based management compensation.

Agency theory implies that asset ownership and decision authority are complements. Using 1998 data from Texas commercial banks, we test whether the likelihood of local ownership of bank offices increases with the importance of granting local managers greater decision authority (for example, due to location or customer base). Our empirical evidence is consistent with this hypothesis. It suggests that complementarities between strategy and organizational structure can foster differentiation among firms in terms of location, customers, and products. It also supports the growing view that small locally-owned banks have a comparative advantage over large banks within specific environments.