In this study I investigate the relation between information complexity and financial analysts' use of that information. I rank by complexity six tax-law changes enacted by the Tax Reform Act of 1986, and then examine analysts' explicit forecasts of effective tax rates around those changes. I show that analysts' revisions of their forecasts of effective tax rates appear to impound the effects of the less complex tax-law changes but not the more complex changes. Furthermore, as expected, if analysts assimilate less complex (but not more complex) information, the magnitude of the errors in their forecasts of effective tax rates increases with the effects of the more complex tax-law changes, but is unrelated to the less complex changes. Taken together, these results indicate that analysts assimilate less complex information to a greater extent than they assimilate more complex information. Either analysts' abilities to incorporate specific information into their forecasts is a decreasing function of the complexity of that information, or analysts choose not to assimilate complex information because the cost would exceed the benefit. In either case, complexity reduces analysts' use of information. These results demonstrate the importance of considering information attributes, such as complexity, when investigating why analysts' forecasts fail to incorporate all public information.

Although institutional investors have a preference for large capitalization stocks, over time they have shifted their preferences toward smaller, riskier securities. These changes in aggregate preferences have arisen primarily from changes in the preferences of each class of institution, rather than changes in the importance of different classes. Evidence also suggests that recent growth in institutional investment combined with this shift in preferences helps explain why markets in general, and smaller stocks in particular, have exhibited greater firm-specific risk and liquidity in recent years. Additional analyses suggest that institutional investors moved toward smaller securities because such securities offer “greener pastures.”

Willingness To Pay and Willingness To Accept: How Much Can They Differ? Comment by Edoh Y. Amiran and Daniel A. Hagen. Published in volume 93, issue 1, pages 458-463 of American Economic Review, March 2003

This paper provides new evidence on the substitutability between private and pension wealth by exploiting the Italian pension reform of 1992. We use a difference-in-difference estimator that exploits the differential effects of the reform on individuals belonging to several year-of-birth cohorts and different occupational groups. We find convincing evidence that saving rates increase as a result of a reduction in pension wealth. By allowing for the possibility that substitutability changes with age, we find that substitutability is particularly high (and precisely estimated) for workers between 35 and 45.

The classical model of balance of payments crises implicitly assumes that the central bank sits passively as international reserves dwindle. In practice, however, central banks typically defend pegs aggressively by raising short‐term interest rates. This paper analyzes the feasibility and optimality of raising interest rates to delay a potential BOP crisis. Interest rate policy works through two distinct channels. By raising demand for domestic, interest‐bearing liquid assets, higher interest rates tend to delay the crisis. Higher interest rates, however, increase public debt service and imply higher future inflation, which tends to bring forward the crisis. We show that, under certain conditions, it is feasible to delay the crisis, but raising interest rates beyond a certain point may actually hasten the crisis. A similar nonmonotonic relationship emerges between welfare and the increase in interest rates. It is thus optimal to engage in some active interest rate defense but only up to a certain point. In fact, there is a whole range of interest rate increases for which it is feasible to delay the crisis but not optimal to do so.

While English auctions are the most common in practice, their rules typically lack sufficient structure to yield a tractable theoretical model without significant abstractions. Rather than relying on one stylized model to provide an exact interpretation of the data, we explore an incomplete model based on two simple assumptions: bidders neither bid more than their valuations nor let an opponent win at a price they would be willing to beat. Focusing on the symmetric independent private values paradigm, we show that this limited structure enables construction of informative bounds on the distribution function characterizing bidder demand, on the optimal reserve price, and on the effects of observable covariates on bidder valuations. If the standard theoretical model happens to be the true model, our bounds collapse to the true features of interest. In contrast, when the true data†generating process deviates in seemingly small ways from that implied by equilibrium in the standard theoretical model, existing methods can yield misleading results that need not even lie within our bounds. We report results from Monte Carlo experiments illustrating the performance of our approach and comparing it to others. We apply our approach to U.S. Forest Service timber auctions to evaluate reserve price policy.

This paper investigates depository institutions' decisions whether or not to impose surcharges (direct usage fees) on nondepositors who use their ATMs. In addition to documenting patterns of surcharging, we examine motives for surcharging, including both direct generation of fee revenue and the potential to attract deposit customers who wish to avoid incurring surcharges at an institution's ATMs. Consistent with expectations, we find that the probability of surcharging increases with both the institution's share of market ATMs and the time since surcharging was first allowed in the state, and decreases with increasing local ATM density. Further, we find evidence consistent with the use of surcharges to attract deposit customers who are new to the local banking market, but we find no evidence that larger banks use surcharges as a means to attract existing customers away from smaller local competitors.

Shareholder rights vary across firms. Using the incidence of 24 governance rules, we construct a “Governance Index” to proxy for the level of shareholder rights at about 1500 large firms during the 1990s. An investment strategy that bought firms in the lowest decile of the index (strongest rights) and sold firms in the highest decile of the index (weakest rights) would have earned abnormal returns of 8.5 percent per year during the sample period. We find that firms with stronger shareholder rights had higher firm value, higher profits, higher sales growth, lower capital expenditures, and made fewer corporate acquisitions.

Although forests have diminished globally over the past 400 years, forest cover has increased in some areas, including India in the last two decades. Aggregate time-series evidence on forest growth rates and income growth across countries and within India and a newly assembled data set that combines national household survey data, census data, and satellite images of land use in rural India at the village level over a 29-year period are used to explore the hypothesis that increases in the demand for forest products associated with income and population growth lead to forest growth. The evidence is consistent with this hypothesis, which also shows that neither the expansion of agricultural productivity nor rising wages in India increased local forest cover.