In a signal-extraction model of consumer behaviour, higher prices signal higher-quality products for a new product monopoly, even without cost asymmetries across different qualities. Moreover, higher-quality products earn greater expected profits, and the monopolist has an incentive to provide even transient improvements in quality. Finally, the monopolist has a positive incentive to conduct market research about quality, and produces more information than is socially optimal.

J. Bradford De Long, Lawrence H. Summers; Equipment Investment and Economic Growth: Reply, The Quarterly Journal of Economics, Volume 109, Issue 3, 1 August 199

This paper uses two-variable autoregressions to characterize transitory com-ponents in GNP and stock prices. Shocks to GNP holding consumption constant are almost entirely transitory, and account for large fractions of the variance of GNP growth. If consumption does not change, consumers must think that any GNP change is transitory. The facts that the consumption/GNP ratio forecasts GNP growth and that consumption is nearly a random walk drive this result. An implication is that consumption provides a good estimate of the "trend " in GNP. Prices and dividends behave similarly shocks to prices holding dividends constant are almost entirely transitory. I.

We test the empirical implications of several models of IPO underpricing. Consistent with the winner’s-curse hypothesis, we show that in markets where investors know a priori that they do not have to compete with informed investors, IPOs are not underpriced. We also show that IPOs underwritten by reputable investment banks experience significantly less underpricing and perform significantly better in the long run. We do not find empirical support for the signaling models that try to explain why firms underprice. In fact, we find that (1) firms that underprice more return to the reissue market less frequently, and for lesser amounts, than firms that underprice less, and (2) firms that underprice less experience higher earnings and pay higher dividends, contrary to the models’ predictions.

On May 26 and 27, 1994, several national newspapers reported the findings of W. Christie and P. Schultz (1994) who cannot reject the hypothesis that marketmakers of active NASDAQ stocks implicitly colluded to maintain spreads of at least $0.25 by avoiding odd-eighth quotes. On May 27, dealers in Amgen, Cisco Systems, and Microsoft sharply increased their use of odd-eighth quotes, and mean inside and effective spreads fell nearly 50 percent. This pattern was repeated for Apple Computer the following trading day. Using individual dealer quotes for Apple and Microsoft, the authors find that virtually all dealers moved in unison to adopt odd-eighth quotes.