We examine the effect of option listing on the immediate stock-price response to earnings announcements. Contrary to prior studies using earlier data, we find firms initiating option trading after 1986 fail to exhibit a significant decline in earnings response. We then examine 420 firms initiating option trading during 1973–1993. In a series of tests controlling for market-wide effects and changing firm size we find some evidence that option listing may actually increase the stock-price response to earnings, but no evidence listing reduces the response. Both longitudinal and cross-sectional tests produce similar results.

We consider risk-neutral firms that must obtain external finance. They have access to two kinds of stochastic investment opportunities. For one, return realizations are costlessly observed by all agents. For the other, return realizations are costlessly observed only by the investing firm. We examine the optimal allocation of investment between the two projects and the optimal contract used to finance it. The optimal contractual outcome can be supported by appropriate (and determinate) quantities of debt and equity issues. Investments in projects with CSV problems are associated loosely with debt. Investments in projects with observable returns are associated with equity. Journal of Economic Literature Classification Numbers: G21, E51.

The comment reviews major features of the research design of the DMS study. Several opportunities for future research are discussed, including the exploration of the underlying information variables that influence analyst's forecasts.

[This article shows that introducing derivative assets increases incentives to collect information about asset payoffs. The increase in information collection makes the price of the underlying asset more informative and causes the expected price to increase. Extending the model to a dynamic setting with multiple risky assets, we find that introducing derivative assets for one asset increases the expected prices of positively correlated assets and reduces price reaction to future earnings announcements. These findings are consistent with the bulk of the empirical evidence on the relationship between the introduction of derivative assets and the behavior of asset prices.]

The paper presents an empirical analysis of the alleged transformation of the financial systems in the three major European economies, France, Germany, and the United Kingdom. Based on a unified data set developed on the basis of national accounts statistics, and employing a new and consistent method of measurement, the following question is addressed: Is there a general trend toward disintermediation, with banks losing importance to the markets, that is causing these three financial systems to converge? We find that there is neither a general trend toward disintermediation, nor toward a transformation from bank-based to capital market-based financial systems, nor toward a loss of importance of banks. Only in the case of France could strong signs of transformation as well as signs of a general decline in the role of banks be found. Thus the three financial systems also do not seem to be converging. However, there is also a common pattern of change: the intermediation chains are lengthening in all three countries. Nonbank financial intermediaries are taking over a more important role as mobilizers of capital from the nonfinancial sectors. In combination with the trend toward securitization of bank liabilities, this change increases the funding costs of banks and may put banks under pressure. In the case of France, this change is so pronounced that it might even threaten the stability of the financial system. Journal of Economic Literature Classification Numbers: G21 and G23.

This short essay deals with universal banking in an environment in which a government safety net (for example deposit insurance) results in a moral hazard problem for banks. It argues that universal banking significantly exacerbates the problem. Specifically, universal banking extends the distortion of incentives caused by moral hazard to other sectors of the economy.

This is the first study that decomposes unemployment into its structural and cyclical components and investigates their impact on income distribution, controlling for the influence of inflation. Increases in structural unemployment have a substantial aggravating impact on income inequality. Inflation has a progressive impact, which is due to the unexpected component. The study demonstrates that previous work failed to take into account the stochastic trend behavior of the variables. Consequently, specifications used by previous research cannot predict the behavior of income shares after 1983, whereas the specification used by this paper generates accurate forecasts. The results also indicate that a sustained GNP growth is not necessarily associated with an improvement in income inequality, because sustained GNP growth can coexist with increased structural unemployment.

Previous work on the pricing of exchange-rate risk has primarily focused on US firms and, surprisingly, found stock returns were not significantly affected by exchange-rate fluctuations. In this paper we conduct an in-depth investigation that examines whether exchange-rate risk is priced in the equity market of Japan using an intertemporal asset pricing testing procedure that allows risk premia to change through time in response to changes in macroeconomic conditions. Our multiperiod asset pricing tests show that the foreign exchange-rate risk premium is a significant component of Japanese stock returns. Specifically, the results suggest that currency-risk exposure commands a significant risk premium for multinationals and high-exporting Japanese firms. The currency-risk factor is found to be less influential in explaining the behavior of average returns for low-exporting and domestic firms. However, it is shown to exhibit large return volatility that is likely to be perceived by investors, who wish to control portfolio risk, as an important underlying source of risk. Furthermore, Japanese stock returns are found to be related to the relative distress and size factors above and beyond the covariation explained by the currency-risk factor.

We present a subclass of Langetieg's (1980).linear Gaussian models of the term structure. The bond price is derived in terms of a finite set of state variables with correlated innovations. The subclass contains a reformulation of the double-decay model of Beaglehole and Tenney (1991), enabling us to clarify interpretation of their parameters. We apply Kalman filtering to a state space formulation of the model, allowing measurement errors in the data. One-, two-, and three-factor models are estimated on U.S. data from 1987–1996 and the results indicate the subclass of models can fit the U.S. term structure.

This paper examines the impact of foreign investors on stock returns in Korea from November 30, 1996 to the end of 1997 using order and trade data. We find strong evidence of positive feedback trading and herding by foreign investors before the period of Korea's economic crisis. During the crisis period, herding falls, and positive feedback trading by foreign investors mostly disappears. We find no evidence that trades by foreign investors had a destabilizing effect on Korea's stock market over our sample period. In particular, the market adjusted quickly and efficiently to large sales by foreign investors, and these sales were not followed by negative abnormal returns.