This paper resolves the disagreement between Longstaff et al. [2001. Journal of Finance Economics 62, 39–66] and Andersen and Andreasen [2001. Journal of Financial Economics 62, 3–37] over the effectiveness of the common business practice of using best-fit single-factor term structure models to deduce exercise strategies of Bermudan swaptions. I examine the cost of using recalibrated single-factor models to determine the exercise strategy for Bermudan swaptions in a multifactor world. I show that single-factor exercise strategies applied in a multifactor world only give rise to economically insignificant losses. Furthermore, I find that the conditional model risk as defined in Longstaff et al. [2001. Journal of Finance Economics 62, 39–66] is statistically insignificant given the number of observations. Additional tests using the Primal–Dual algorithm of Andersen and Broadie [2004. Management Science 50(9)] indicate that losses found in Longstaff et al. [2001. Journal of Finance Economics 62, 39–66] cannot, as claimed, be ascribed to the number of factors.

We examine whether an adverse event at one bank generates externalities for the banking industry, and assess whether the population of commercial banks is homogeneous. We find dividend reductions are negative events for both announcing money center and regional banks, but only reductions at money center banks have negative, contagion-type externalities. Dividend reductions at regional banks have positive competitive effects on geographic rivals. Regulatory enforcement actions induce negative valuation effects that are idiosyncratic to targeted banks, but actions against regional banks generate positive competitive effects on geographic rivals. Our evidence suggests that regional banking markets are not contestable.

We examine parent-subsidiary mergers, transactions that do not entail arm's length bargaining or a change in control. These mergers are typically followed by considerable restructuring of subsidiaries. Minority and parent returns are not significantly different from returns at third party buyouts of parent-controlled subsidiaries, transactions that entail arm's length negotiations and a change in control. Buyer returns are negative, consistent with overbidding. We conclude that parent-subsidiary mergers facilitate corporate restructuring, foster the reallocation of resources toward higher valued uses, and increase value for both parent and subsidiary.

We test whether airline consolidations generate monopoly profits by examining returns to listed carriers around horizontal airline-acquisition bids and evaluating effects of industry concentration on share-price reactions. Under Civil Aeronautics Board (CAB) regulation, returns to targets, bidders, and rival carriers are positive functions of changes in concentration implied by bids. Changes in concentration after deregulation have no positive effect on carrier returns. These results support Jordan's (1970, 1972) hypothesis that CAB activities fostered carrier collusion. There is no evidence of monopoly gains from carrier consolidations after deregulation.

Research in experimental economics has cogently challenged the fundamental precept of neoclassical economics that economic agents optimize. The last two decades have seen elaboration of boundedly rational models that try to move away from the optimization approach, in ways consistent with experimental findings. Nonetheless, the collection of alternative models has made little headway supplanting the dominant paradigm. We delineate key ways in which neoclassical microeconomics holds continuing and compelling advantages over bounded-rationality models, and suggest, via a few examples, the sorts of further, difficult pushes that would be needed to redress this state of affairs. Closer collaboration between theoretic modeling and experiments is clearly seen to be necessary.

From the perspective of the Walrasian general equilibrium model, entrepreneurial and opportunistic behavior seems foreign. Can the model be refashioned so that it can accommodate such behavior? Many would say no, but we argue the contrary. Indeed, we present a reformulation of the model that serves as a gateway to, rather than a detour from, such contemporary issues as innovation and incentives. The trick is to reexamine what perfect competition means. Starting with an historical summary of general equilibrium, we sketch an image of the perfect competitor as an active market opportunist, seeking out profit potentials wherever he can.

[I present a methodology that uses the mixed jump-diffusion model for stock returns to estimate the separate effects of information surprises and strategic trading around corporate events. Using simulation techniques, I show that for events with multiple announcements spread over a long time, the estimators derived from the mixed jump-diffusion model are more powerful compared to the traditional cumulative abnormal return estimators. The new methodology is used to study the separate effects of information surprises and strategic trading associated with blockholdings and subsequent targeted repurchases. I find that for more than 93 percent of the firms in our sample the mixed jump-diffusion model is statistically superior to the pure diffusion model in describing stock returns. More important, I find a statistically significant negative effect due to trading, while the average effect around announcements is statistically insignificant. In contrast, the standard cumulative abnormal return is not statistically different from zero.]