It is well known that corporations issue foreign currency-denominated debt to hedge foreign currency cash flows with offsetting interest payments. We test an alternative “opportunistic” motive for foreign currency-denominated borrowing. We do so by constructing a comprehensive sample of foreign currency-denominated bonds issued by sovereign government and agency issuers with no foreign currency cash flows or foreign operations. We find strong and consistent evidence that the borrowers in our sample consider cross-currency differences in covered and uncovered interest yields in choosing the currency in which to denominate their international debt. We estimate the average gains to opportunistic covered yield borrowing to be 4 to 18 basis points. Interestingly, we also find that the average bond offering in our sample precedes a large and beneficial depreciation of the issue currency over the course of the following year. These results support what has been a frequent conjecture in the foreign debt market.

Equity capital allocation plays a particularly important role for financial institutions such as banks, who issue equity infrequently but have continuous access to debt capital. In such a context this paper shows that EVA and RAROC based capital budgeting mechanisms have economic foundations. We derive optimal capital allocation under asymmetric information and in the presence of outside managerial opportunities for an institution with a risky and a riskless division. It is shown that the results extend in a consistent manner to the multidivisional case of decentralized investment decisions with a suitable redefinition of economic capital. The decentralization leads to a charge for economic capital based on the division's own realized risk. Outside managerial opportunities increase the usage of capital and lead to overinvestment in risky projects; at the same time more capital is raised but risk limits are binding in more states. An institution with a single risky division should base its hurdle rate for capital allocated on the cost of debt. In contrast, the hurdle rate tends to the cost of equity for a diversified multidivisional firm. The analysis shows that hurdle rates have a common component in contrast to the standard perfect markets result with division-specific hurdle rates.

[This article investigates the dynamic relation between market-wide trading activity and returns in 46 markets. Many stock markets exhibit a strong positive relation between turnover and past returns. These findings stand up in the face of various controls for volatility, alternative definitions of turnover, differing sample periods, and are present at both the weekly and daily frequency. The relation is more statistically and economically significant in countries with high levels of corruption, with short-sale restrictions, and in which market volatility is high.]

Thorstein Veblen proposed that economics should be reconstructed as a “post-Darwinian” science. One of the aims of this essay is to explore the meaning of this statement. A second aim is to show that American institutional economics had largely abandoned this commitment to Darwinian principles by the time of Veblen’s death. In this context, the appearance of the book by David Hamilton (1953)—especially with its original title of Newtonian Classicism and Darwinian Institutionalism—is all the more remarkable. It reestablished the Veblenian links between Darwinism and institutionalism that most institutionalists had abandoned. The first part of this essay summarizes the philosophical and analytical meaning of Darwinism and counters some prominent misunderstandings in this area. The second part shows how Veblen had incorporated these Darwinian ideas into his thinking. The third part shows how institutionalists after Veblen abandoned these Darwinian ideas. Having established this context, the fourth part emphasizes the importance of Hamilton’s contribution. What Is Darwinism? A host of misunderstandings surround the question of Darwinism and its relation with the social sciences. Contrary to widespread suppositions, Darwinism does not support any form of racism, sexism, nationalism, or imperialism or provide any moral justification for “the survival of the fittest. ” Furthermore, Darwinism does not imply that militant conflict is inevitable, that human inequalities or power or wealth are inevitable, that cooperation or altruism are unimportant or unnatural, that evolution always leads

We derive equilibrium restrictions on the range of the transaction prices of American options on the stock market index and index futures. Trading over the lifetime of the options is accounted for, in contrast to earlier single-period results. The bounds on the reservation purchase price of American puts and the reservation write price of American calls are tight. We allow the market to be incomplete and imperfect due to the presence of proportional transaction costs in trading the underlying security and due to bid-ask spreads in option prices. The bounds may be derived for any given probability distribution of the return of the underlying security and admit price jumps and stochastic volatility. We assume that at least some of the traders maximize a time- separable utility function. The bounds are derived by applying the weak notion of stochastic dominance and are independent of a trader's particular utility function and initial portfolio position.

The Sarbanes–Oxley Act of 2002 and recently modified exchange listing requirements impose uniformly high levels of outside director monitoring on all firms. However, recent research in finance suggests that corporate governance structures, including boards of directors, are chosen endogenously by firms in response to their unique operating and contracting environments. Using the relative costs and benefits of outside director monitoring as a benchmark, I find significant cross-sectional variation in the wealth effects around the announcement and passage of these regulations. I find that firms which have high monitoring-costs and fewer benefits from outside monitoring benefited less from the regulations. In particular, I find that the wealth effects around the passage of these new regulations are positively related to firm size and age, and negatively related to growth opportunities and the uncertainty of the firm's operating environment. The results suggest that a blanket “one size fits all” governance regulation maybe detrimental to certain firms, particularly young, small, growth firms operating in uncertain business environments, that are costly for outsiders to monitor.

This paper estimates the foreign exchange rate exposure of 6917 U.S. nonfinancial firms on the basis of stock prices and corporate cash flows. The results show that several firms are significantly exposed to at least one of the foreign exchange rates Canadian Dollar, Japanese Yen and Euro, and significant exposures are more frequent at longer horizons. The percentage of firms for which stock price and earnings exposures are significantly different is relatively low, though it increases with time horizon. Overall, the impact of exchange rate risk on stock prices and cash flows is similar and determined by a related set of economic factors.

Using confidential microdata from the Characteristics of Business Owners survey, we examine why African American–owned businesses lag substantially behind white‐owned businesses in sales, profits, employment, and survival. Black business owners are much less likely than white owners to have had a self‐employed family member owner prior to starting their business and less likely to have worked in that family member’s business. Using a nonlinear decomposition technique, we find that the lack of prior work experience in a family business among black business owners, perhaps by limiting their acquisition of general and specific business human capital, negatively affects black business outcomes.

This paper establishes that instruments enable the identification of nonparametric regression models in the presence of measurement error by providing a closed form solution for the regression function in terms of Fourier transforms of conditional expectations of observable variables. For parametrically specified regression functions, we propose a root n consistent and asymptotically normal estimator that takes the familiar form of a generalized method of moments estimator with a plugged-in nonparametric kernel density estimate. Both the identification and the estimation methodologies rely on Fourier analysis and on the theory of generalized functions. The finite-sample properties of the estimator are investigated through Monte Carlo simulations.

[We examine whether spin-offs or divestitures cause improvements in conglomerate investment efficiency. At issue are endogeneity of these restructuring decisions and correct measurement of investment efficiency. Endogeneity is a problem because the factors that induce firms to spin off or divest divisions may also improve investment efficiency; measurement error is a problem because efficiency measures employ Tobin's q as a noisy proxy for investment opportunities. We find important differences between firms that divest or spin off and a control sample. After accounting for these differences and for measurement error in q, we find no evidence of improvements in investment efficiency.]