CalFed Bancorp is one of 126 S&Ls suing the U.S. government for breach of contract related to supervisory goodwill, a form of goodwill created by the acquisition of insolvent thrifts during the early 1980s. Before a determination of damages in its lawsuit, CalFed announced and issued a litigation participation security giving shareholders a proportional claim on recovered damages, if any. This announcement generated a positive excess return in part because it made CalFed a more likely acquisition target. Trading in the security also reveals important, yet previously unavailable, information about CalFed's lawsuit: its price reveals a market-based estimate of damages while its beta reveals information regarding expected returns and trial duration. In a broader context, this paper identifies acquisition facilitation as a benefit of issuing targeted stock and highlights a series of lawsuits that will set important precedents regarding the determination of liability and the estimation of damages in breach of contract cases.

The paper develops the net proceeds maximization theory explaining how the spread and offering price are determined in all underwritten offerings in the U.S. The theory yields solutions for the optimal spread and offering price for all underwritten securities and it yields comparative statics that explain the cross-sectional variation in actual spreads and initial returns across different types of underwritten securities. The theory also suggests two alternative explanations to the ones offered by Chen and Ritter (J. Finance 55 (2000) 1105) for the clustering of unseasoned equity offerings spreads at 7%.

This paper evaluates the effectiveness of four econometric approaches intended to identify the learning rules being used by subjects in experiments with normal form games. This is done by simulating experimental data and then estimating the econometric models on the simulated data to determine if they can correctly identify the rule that was used to generate the data. The results show that all of the models examined possess difficulties in accurately distinguishing between the data generating processes.

I investigate the relationship between the amount of information provided by a firm's comparables (i.e., firms in the same line of business as the firm being valued) and the precision of the firm's equity valuation. When investors have more information, previous studies argue that investors can make a more precise estimate of a firm's true equity value and this implies a lower (excess) stock return volatility around corporate events such as earnings announcements. I develop a simple model that shows a negative relationship between the amount of information provided by a firm's comparables and the firm's stock return volatility. Using alternative measures of information provided by comparables and different definitions of comparables, I consistently find a negative and significant relationship between these information measures and stock return volatility, ceteris paribus.

This paper considers a health-care delivery system with two noncooperative parties: a purchaser of medical services and a specialized provider. A dynamic principal-agent model that captures the interaction between the two parties is developed. In this model, patients arrive exogenously, receive periodic treatment from the provider, suffer costly complications that require hospital care, and eventually exit the system in death. The provider chooses the intensity of treatment in each period, incurs an associated cost, and is reimbursed by the purchaser according to observed patient outcomes. The purchaser's problem is to determine a payment system that will induce treatment choices maximizing total social welfare. The optimal payment system, referred to as the outcomes-adjusted payment system, is identified. It consists of a prospective payment per patient and a retrospective payment adjustment based on adverse short-term patient outcomes. This system induces the most efficient delivery of medical services by combining the immediate “threat” of a retrospective payment adjustment with the future reward of prospective payments generated by surviving patients. A numerical example is provided in the context of Medicare's End-Stage Renal Disease program. The example compares the optimal system to systems that are currently in place. The results suggest that the purchaser can achieve significant gains in patient life expectancy by switching to the outcomes-adjusted payment system, but this requires accurate information about treatment technology, patient characteristics, and provider preferences. The life-expectancy gains do not involve increased medical expenditures.