We examine the change in the value of the underlying stock associated with long-term option introduction. Analysis of the abnormal returns associated with LEAPS (Long-Term Equity Anticipation Security) introductions indicates a decline in firm value even after we control for the endogenous nature of the listing decision. However, the evidence does not support previously-offered explanations for the price change associated with option introductions. In particular, we do not find the predicted relations between the cumulative abnormal returns and variables associated with loosening of short sale constraints such as beta, proxies for the dispersion in investor beliefs, and change in relative short interest.

Traditional asset pricing models predict that covariance between prices of different assets should be lower than what we observe in the data. This paper introduces markets for information that generate high price covariance within a rational expectations framework. When information is costly, rational investors only buy information about a subset of the assets. Because information production has high fixed costs, competitive producers charge more for low-demand information than for high-demand information. The low price of high-demand information makes investors want to purchase the same information that others are purchasing. When investors price assets using a common subset of information, news about one asset affects the other assets' prices; asset prices comove. The cross-sectional and time-series properties of comovement are consistent with this explanation. Copyright 2006, Wiley-Blackwell.

We evaluate methods used to measure abnormal changes in capital expenditures. We examine both statistical tests and models of expected capital expenditures. We find that commonly used research designs yield test statistics that are misspecified, even in random samples. In cases where sample firms share a common characteristic such as extremely low or high investment, size, leverage, return on assets or market-to-book ratio, it is very important to match sample firms to a control group that shares this pre-event characteristic. We also find that using control groups, rather than a single control firm, yields more powerful test statistics.

Abstract What is the impact of internationalization (firms raising capital and trading in international markets) on the liquidity of the remaining firms in domestic markets? To address this question, we assemble a panel database of nearly 2,900 firms from 45 emerging economies over the period 1989–2000, constructed from annual and daily data. First, we find evidence of migration. The domestic trading of firms that cross-list or issue depositary receipts in foreign public exchanges tends to decrease, while a significant proportion of their trading activity concentrates in international markets. Second, this migration is negatively related to the liquidity of the remaining firms in their home market through two separate channels. There are liquidity spillovers within markets: Aggregate domestic trading activity is positively associated with the liquidity of individual firms in the same market. Moreover, the proportion of trading abroad is negatively related to the liquidity of firms in the domestic market.

Not necessarily: a firm's fundamental value increases with uncertainty about average future profitability, and this uncertainty was unusually high in the late 1990s. After calibrating a stock valuation model that takes this uncertainty into account, we compute the level of uncertainty that is needed to match the observed Nasdaq valuations at their peak. The uncertainty we obtain seems plausible because it matches not only the high level but also the high volatility of Nasdaq stock prices. In general, we argue that the level and volatility of stock prices are positively linked through firm-specific uncertainty about average future profitability.

I develop a corporate governance framework, provide a broad overview of recent corporate governance research, and place each of the Special Issue papers within the context of this framework. The papers in the issue contribute to our understanding of a wide range of governance topics including: the role of antitakeover measures, board structure, capital market governance, compensation and incentives, debt and agency costs, director and officer labor markets, fraud, lawsuits, ownership structure, and regulation. In short, the papers span almost every aspect of governance systems.

This paper is concerned with inference about a function g that is identified by a conditional moment restriction involving instrumental variables. The paper presents a test of the hypothesis that g belongs to a finite-dimensional parametric family against a nonparametric alternative. The test does not require nonparametric estimation of g and is not subject to the ill-posed inverse problem of nonparametric instrumental variables estimation. Under mild conditions, the test is consistent against any alternative model. In large samples, its power is arbitrarily close to 1 uniformly over a class of alternatives whose distance from the null hypothesis is O(n−1/2), where n is the sample size. In Monte Carlo simulations, the finite-sample power of the new test exceeds that of existing tests.

This paper develops an agency model in which stock-based compensation is a double-edged sword, inducing managers to exert productive effort but also to divert valuable firm resources to misrepresent performance. We examine how the potential for manipulation affects the equilibrium level of pay-for-performance sensitivity and derive several new cross-sectional implications that are consistent with recent empirical studies. In addition, we analyze the impact of recent regulatory changes contained in the Sarbanes-Oxley Act of 2002 and show how policies intended to increase firm value by reducing misrepresentation can actually reduce firm value or increase the upward bias in manipulated disclosures.

We gather a unique sample of 44 tax shelter cases to investigate the magnitude of tax shelter activity and whether participating in a shelter is related to corporate debt policy. The average annual deduction produced by the shelters in our sample is very large, equaling approximately nine percent of asset value. These deductions are more than three times as large as interest deductions for comparable companies. The firms in our sample use less debt when they engage in tax sheltering. Compared to companies with similar pre-shelter debt ratios, the debt ratios of firms engaged in tax shelters fall by about 8%. The tax shelter firms in our sample appear underlevered if shelters are ignored but do not appear underlevered once shelters are considered.

We present an equilibrium theory of the organization of work in an economy where knowledge is an essential input in production and agents are heterogeneous in skill. Agents organize production by matching with others in knowledge hierarchies designed to use and communicate their knowledge efficiently. Relative to autarky, organization leads to larger cross-sectional differences in knowledge and wages: low skill workers learn and earn relatively less. We show that improvements in the technology to acquire knowledge lead to opposite implications on wage inequality and organization than reductions in communication costs.