In practice, there are substantial deviations from the doctrine of ‘absolute priority’, which governs the rights of the firm's claimholders in the event of bankruptcy. To determine whether or not the possibility of such deviations is reflected in the prices of the firm's securities, this study examines the risk and return characteristics of financial claims against firms in court-supervised bankruptcy proceedings. Debt claims against bankrupt firms are indeed ‘risky’, exhibiting levels of systematic risk similar to that of common stocks in general. While some of the findings are anomalous, the data are generally consistent with the view that the capital market ‘properly’ prices risky debt claims to reflect both their risk characteristics and the possibility of departures from the doctrine of absolute priority.

A simple, necessary and sufficient condition is derived under which portfolios that are mean-variance efficient on a before-tax basis are also efficient on an after-tax basis and vice-versa. Under this condition and the hypothesis that investors demand after-tax efficient portfolios, the ‘no-tax’ form of the Capital Asset Pricing Model provides an accurate description of equilibrium asset returns even though investors in the economy may be subject to a wide variety of tax rates on dividends and capital gains. Evidence reported by Black and Scholes (1974), however, makes the condition for equivalence of before and after-tax efficiency empirically implausible. The paper thus concludes with a characterization of some essential differences between before and after-tax efficient portfolios and of the after-tax efficiency losses associated with before-tax efficient portfolios. The relation of these results to the issue of corporate dividend policy choices is also discussed.

In this paper we have extended the Bierman-Hass model to include the effect of a second parameter, the terms of settlement in the event of default. The addition of this second factor was found to not alter the independence between a bond's risk differential and its maturity. Our analysis of the required risk differential for various borrower credit characteristics demonstrates the tradeoff between p and γ. Throughout, we have assumed the loan size does not affect p or γ.

I. Random process models and the operation of an efficient competitive economy, 677.—II. Statistical evidence, 679.

[This paper demonstrates how a two or three component error structure can be used with seemingly unrelated regressions. Its application may be particularly useful with large panel data sets when the researcher wishes to estimate several equations simultaneously and believes that errors both between and within equations are correlated over time and across units. Relatively simple algorithms are presented for estimation of the error covariance matrix and generalized least squares coefficients.]

T HE traditional hypotheses of industry organization relate various aspects of market structure to cross-sectional variation in profitability among industries or firms. It is presumed that association between profitability and structure indicates the existence of excess profits that would be absent under perfect competition. The fundamental causes of excess profits reaped by a whole industry are the existence of entry barriers, and the ability of firms within the industry to coordinate their output-price decisions. On the other hand, varying profitability among firms even within an industry may be due either to the superior bargaining position of the firm within a system of oligopolistic coordination or to superior efficiency in production and distribution. The relationship of structure and profitability, and the attendant interpretations, have been repeatedly examined at the level of ex post rates of return on capital. Such rates are by nature backward-looking since they register the average success of past investments. They do not, therefore, reveal the ability of a firm to retain and extend its excess returns into the future. In contrast to traditional studies this paper seeks to examine the future-oriented implications of market structure. A forward-looking index of profitability is a firm's market value. The basic issue which can be examined in the light of a value-based test of profitability and market structure is this: Does current structural position imply an ability on the part of the firm to maintain excess profits in the future? It must be noted that even if current structural position implies (or is implied by) superior efficiency, the ability of the firm to maintain such advantages into the future implies correspondingly a deficiency in the long-run competitive process since entry would presumably be expected to wipe out such efficiency differentials. It should also be clear that even if the basic question posed were answered in the negative, this would not imply that structural position is unrelated to ex post profits. Thus, the scope of the current work is complementary to traditional studies. The theoretical premises of the hypotheses are laid out in section B. Section C contains a description of specification for statistical tests. Section D presents empirical results and section E summarizes major conclusions.

James B. Hagerbaumer, The Gini Concentration Ratio and the Minor Concentration Ratio: A Two Parameter Index of Inequality, The Review of Economics and Statistics, Vol. 59, No. 3 (Aug., 1977), pp. 377-379

T HE economic rewards of college training, which have been substantial for decades, began to fall at the outset of the 1970s. The once sizeable premium to the college graduate diminished; attainment of professional and managerial job status became less frequent; and the rate of return to the college investment dropped after having risen in the 1960s (Freeman, 1975, 1976a). In this paper I use information on individuals from the Current Population Survey (CPS) March consumer income tapes for 1969 and 1974 to examine the dimensions and routes of the decline in the economic value of college training. The 1969 tape contains income from 1968, when the college market was still strong; the 1974 tape contains income for 1973 when the market was weakening. The CPS tape data are supplemented with other statistics, which permit some evaluation of developments through 1975. The paper focuses on white men and women, as the market for college-educated blacks has been dealt with in detail elsewhere (Freeman, 1977). Particular attention is given to young persons on the hypothesis that, for reasons to be elucidated later, the market for their services is likely to be especially active, and thus that declines in the relative position of graduates will be concentrated among them. The paper is divided into three sections. The first presents reasons for expecting a decline in the economic rewards to college in the 1970s and for expecting the decline to be most severe among the young. Section II contains an analysis of the CPS data regarding change in the early 1970s and supplementary evidence through 1975. Section III examines the possibility that the developments under study represent normal cyclic changes and then investigates the impact of the changes on potential future income streams and rates of return to the college investment. There are four principal findings: (1) The economic return to college measured by the income or occupational differences between college and high school graduates fell markedly for young men in the 1970s, a sharp break with past stability that is not readily explained by cyclic developments. (2) Among women there was a noticeable fall in the occupational position of graduates but an unclear pattern of change in relative incomes. (3) Because of the concentration of the drop in relative incomes among young men, the cross-section age-earnings profiles for college graduates twisted in favor of older workers in the 1970s. (4) As a result of the decline in relative incomes and continued increases in the direct cost of college, rates of return to the investment dropped noticeably in the early 1970s.

The current magnitudes of foreign investment (both on a cumulated-stock and annual-flow basis) call into question the treatment of the foreign investment sector in the U.S. national income accounts. While not a very significant problem, say, 20 years ago, the dimensions of U.S. investment abroad, both in absolute terms and in relation to the U.S. economy now call for further statistical recognition than given in the national income accounts, where foreign-investment income-earning activities are only partly included and those flows which are included are netted out and shown in insufficient detail.