Although the world of banking and finance is becoming more integrated every day, in most aspects the world of financial regulation continues to be narrowly defined by national boundaries. The main players here are still national governments and governmental agencies. And until recently, they tended to follow a policy of shielding their activities from scrutiny by their peers and members of the academic community rather than inviting critical assessments and an exchange of ideas. The turbulence in international financial markets in the 1980s, and its impact on US banks, gave rise to the notion that academics working in the field of banking and financial regulation might be in a position to make a contribution to the improvement of regulation in the United States, and thus ultimately to the stability of the entire financial sector. This provided the impetus for the creation of the “US Shadow Financial Regulatory Committee”. In the meantime, similar shadow committees have been founded in Europe, Japan and Latin America. The specific problems associated with financial regulation in Europe, as well as the specific features which distinguish the European Shadow Financial Regulatory Committee (ESFRC) from its counterparts in the US and Japan, derive from the fact that while Europe has already made substantial progress towards economic and political integration, it is still primarily a collection of distinct nation–states with differing institutional set-ups and political and economic traditions. Therefore, any attempt to work towards a European approach to financial regulation must include an effort to promote the development of a European culture of co-operation in this area, and this is precisely what the European Shadow Financial Regulatory Committee seeks to do. In this paper, Harald Benink, chairman of the ESFRC, and Reinhard H. Schmidt, one of the two German members, discuss the origin, the objectives and the functioning of the committee and the thrust of its recommendations.

We model the endogenous emergence of social perceptions about occupations and their impact on occupational choice. In particular, an individual’s social approval increases with his community's perception of his skill in his chosen career. These perceptions vary across communities because individuals better assess the skill of those in occupations similar to their own. Such imperfect assessment can distort choices away from comparative advantage. When skill distributions differ across occupations and/or correlate positively, the community perceives one occupation more favorably. This favored sector experiences overcrowding, but misallocation occurs across both sectors. Furthermore, a positive skill correlation can produce multiple steady states.

Stephen Haber et al. explore economic growth in key sectors of the Mexican economy, 1876–1929, an era of political instability and (1914–17) civil war. The authors demonstrate that economic growth continued amidst political instability and offer an explanation for their conunterintuitive finding. Reviewing the evidence advanced by the authors, Robert Bates summarizes and comments on their argument, and applies it to “out of sample” data from Africa.

In this paper, we present a case study of underwriter trading in the aftermarket of a recent initial public offering (IPO). The lead underwriter for this issue actively repurchased approximately 15% of the issue size to cover its initial short position. Detailed audit-trail and short-covering data identify the timing, volume, and counterparties for the Lead's trades. We find that price-support objectives are important on the first two short-covering days. Subsequently, repurchases appear to be governed primarily by their profitability and market liquidity. The Lead incurs lower transaction costs than other large traders, but provides substantial liquidity to the market.

This paper examines the role of leverage in tender offers for widely held firms. We show that a leveraged “bootstrap acquisition” can implement an outcome that—from an economic perspective—is quite similar to the outcome implemented by the Grossman-Hart dilution mechanism. To raise the funds for the takeover, the raider initially sets up a new acquisition subsidiary that issues debt backed by the target's assets and future cash flows. In the first step of the acquisition, the raider acquires a majority of the target's stock through a tender offer. In a second step, the target is merged with the raider's indebted acquisition subsidiary. The fact that the acquisition subsidiary is indebted lowers the combined firm's share value and thus the incentives for target shareholders to hold out in the tender offer. This allows the raider to lower the bid price, make a profit, and overcome the free-rider problem.