Keynes, population, and equity prices

Keynes in 1937 examined the phenomenon of the Great Depression from a longrun perspective in contradiction to the "General Theory," where the focus was on the shortrun. "Some Economic Consequences of a Declining Population," Keynes' article, reveals the context in which the "General Theory" was written. In the "General Theory," the focus is on short-term fluctuations, i.e., business cycles, but Keynes fails to provide any theoretical explanation as to why the depression of the 1930s was so severe and intractable. In the 1937 article, the depression is seen as the result of the combined effects of a decline in longrun growth due to population growth decline and a shortrun cyclical decline, together producing severe economic consequences. What is important for the purposes of this discussion is the implication, within the context of the 1937 article, that not only was the stock market crash of 1929 related to population change (with its accompanying collapse in expectations) but that, in general, changes in the rate of growth of population are accompanied by stock price movements in the same direction. The remainder of the discussion is devoted to a simple empirical test of this relationship. The data used are population size (POP), defined as the total residential population in the US from 1870-1979, and the Standard and Poor 500 Stock index (SP) for the corresponding 109-year period. In addition, a 3rd series was constructed, a price deflated Standard and Poor index (RSP) with a base period of 1870, to account for possible inflationary distortion of the index. The empirical results do not invalidate the hypothesis that population growth rates affect equity markets. In fact, there seems to be strong evidence that they are related in a manner suggestive of Keynes' intutition, namely, that the stock market crash of 1929 was due to factors more fundamental than those often perceived from a shortrun perspective. According to Keynes (1937), population is the most important determinant of longrun movements in real per capita income (given the state of technology, the real rate of interest, the age structure of the population, and the size share of income). So the focus is on population and its effects on economic growth. Due to the fact that the stock market presumably discounts longrun economic conditions as reflected in equity prices, it would seem that if Keynes were correct in his theoretical speculations, longterm equity price movements should relate to population change. In this sense, the paper may be regarded as an empirical test of a proposition of Keynes. More generally, the paper is suggestive in several ways. The relationship between business cycles and stock market cycles has been understood to the point of being rather obvious, but the effects of population on both has been less clear. It does appear on the basis of the evidence presented that the malaise of the stock market during the past 16 years, especially in real terms, may be due to factors more fundamental than those often perceived.     

The Search for a Critical Concentration Revisited

This paper examines the issue of whether there is a four-firm critical concentration ratio above which industries earn supranormal profits. A statistical test is employed to investigate the functional stability of the estimated relationship. Although the initial results indicate a range in the concentration ratio of between 0.48 and 0.55 over which the functional relationship destabilizes, additional analysis fails to identify a clear break in the concentration-profitability relationship. It can only be concluded that a critical concentration does not appear to exist.     

RELATIONSHIP BETWEEN BUSINESS DEFINITION AND THE LONG‐TERM GROWTH OF COMPANIES: IS LEVITT RIGHT?

Abstract.  Theodore Levitt argued that organizational growth can be threatened because firms define their businesses incorrectly. He believed that businesses should be defined in terms of 'needs', not 'products', if they are to survive in the long term. In this paper I investigate the relationship between business definition and the long-term growth of companies in order to prove Levitt's idea. I statistically analyse relationships between past business definitions and financial performance up to the present using 50 Japanese electric/electronics companies. I find that there is a clear relationship between 'functionality' of a business definition and long-term growth in sales and aggregate market value.     

The instantaneous capital market line

Summary. We show that if the intercept and slope of the instantaneous capital market line are deterministic, then investors will not hold any hedge portfolios in the sense of Merton [9, 11]. They will choose portfolios that plot on the capital market line, and they will slide up and down the capital market line over time as their wealth and risk tolerance change. This result allows us to aggregate over investors and derive a single factor CAPM where the first and second moments of security returns may change stochastically over time and markets are potentially incomplete.Received: 21 June 2004, Revised: 10 December 2004, JEL Classification Numbers: G11, G12.An earlier version of this paper was presented at the Econometric Society Meeting in Pasadena (1997) under the title “Portfolio selection and asset pricing with dynamically incomplete markets and time-varying first and second moments”.     

Culture,democracy, and market reforms: Evidence from transition countries

Transition countries differed widely in the extent to which they implemented market reforms. This paper empirically investigates the role of culture as a potential determinant of market reform adoption among the post-socialist economies of Eastern Europe and Central Asia. I examine an unbalanced panel of up to 21 transition countries over the period 1989–2001 and estimate the relationship between different cultural typologies and the adoption of liberalizing reforms. I report that a sense of individualism and intolerance for unequal dispersion of power within societies are robustly associated with greater market reform efforts. Only limited evidence exists for the influence of other cultural attitudes.     

Earnings management by firms announcing earnings after SEC filing

This study examines motivation and stock market reactions of firms announcing earnings in the Wall Street Journal (WSJ) after filing with the Security Exchange Commission (SEC). Most firms announce earnings in the WSJ before SEC filing. Firms that reverse this sequence are voluntarily delaying public earnings announcements. The authors find that these firms are not only poor financial performers but also engage in earnings managements. They are delaying their WSJ announcements to postpone announcing bad news. The authors find significant stock price reactions to both the SEC filing and the WSJ announcement. The price reaction to earnings is incomplete at the SEC filings. The market continues reacting to firms' subsequent WSJ announcements as if the SEC filing fails to communicate earnings information to some investors.     

Board oversight of executive performance and compensation

Making sure the relative roles of the board and management are clear and agreed upon is becoming more important as market and regulatory forces compel boards to govern at levels of detail once considered micromanagement, but are now required and necessary in the current environment of heightened governance accountability. A clear understanding of each other's roles and responsibilities is step one in building a solid partnership between the board and chief executive. A second element of building a strong foundation for the board-CEO relationship is taking time early on to establish mutual expectations about working together. The board's responsibilities in CEO performance management and compensation include setting performance expectations and goals that are clear and measurable and coaching and motivating the CEO. When a CEO fails, one of the most important steps for the board to take is to look in the mirror and commit to the rigorous due diligence needed to avoid future mistakes. Boards should always have CEO succession on their agenda.     

Inequality and convergence in Europe's regions: reconsidering European regional policies

In this paper we take a critical look at current European regional policies. First, we document the motivation for such policies, that is, the large income disparities across the regions of the EU15. Large disparities are certainly present. Second, we illustrate the various instruments adopted and discuss their underpinnings in established economic theories. Next, we look at available data, searching for three kinds of evidence: (1) if disparities are either growing or decreasing, we conclude they are neither; (2) which are the major factors explaining such disparities and, in particular, if they are the factors predicted by the economic models adopted by the Commission to justify current policies, we conclude this is most certainly not the case; (3) if there are clear signs that EU policies, as opposed to other social and economic factors, are actually reducing such disparities, we cannot find any clear sign of such desired impact. Our conclusion is that regional and structural policies serve mostly a redistributional purpose, motivated by the nature of the political equilibria upon which the European Union is built. They have little relationship with fostering economic growth. This casts a serious doubt on their social value and, furthermore, strongly questions extending such policies to future members of the European Union. A successful EU enlargement, in our view, calls for an immediate and drastic revision of regional economic policies.
— Michele Boldrin and Fabio Canova     

Does competitive pricing cause market breakdown under extreme adverse selection?

We study market breakdown in a finance context under extreme adverse selection with and without competitive pricing. Adverse selection is extreme if for any price there are informed agent types with whom uninformed agents prefer not to trade. Market breakdown occurs when no trade is the only equilibrium outcome. We present a necessary and sufficient condition for market breakdown. If the condition holds, then trade is not viable. If the condition fails, then trade can occur under competitive pricing. There are environments in which the condition holds and others in which it fails.     

Financial Market Imperfections and the Impact of Exchange Rate Movements on Exports*

This paper analyzes empirically the role of financial market imperfections in the way countries’ exports react to a currency depreciation. Using quarterly data for 27 developed and developing countries over the period 1990–2005, we find that the impact of a depreciation on exports will be less positive—or even negative—for a country if: (i) firms borrow in foreign currency; (ii) they are credit constrained; (iii) they are specialized in industries that require more external capital; (iv) the magnitude of depreciation or devaluation is large. This last result emphasizes the existence of a nonlinear relationship between an exchange rate depreciation and the reaction of a country's exports when financial imperfections are observed. This offers a new explanation for the consequences of recent currency crises in middle‐income countries.     

Auctions with private uncertainty and resale opportunities

When an auction is followed by an opportunity for resale, bidder valuations are endogenously determined, reflecting anticipated profit from buying/selling in the resale market. These valuations vary with the resale market structure, can differ across auction types, and may be lower or higher than if resale were impossible. Although resale introduces a common value element to the model, revenue equivalence can hold; when it fails, this is due not to affiliation but to differences in information conveyed to the secondary market. Information linkages between markets can also lead to signaling and, in some cases, preclude separation in the auction.     

Experimental evidence on the ‘insidious’ illiquidity risk

This paper introduces an experiment aiming to investigate the contribution of illiquidity risk to the total risk of a collective investment project. If implemented, the project succeeds with a known probability. Yet the project fails if the quota of investors is not reached in the first place. Hence strategic uncertainty compounds its effect with the “intrinsic risk” of the project. Results confirm the insidious nature of illiquidity: as long as a first collective default does not occur, investors accept high intrinsic risk projects. After a first default, they become extremely prudent and come back to market only gradually. After several defaults, private agents manage to coordinate on a relatively low intrinsic risk above which they refuse to participate in the project. Macroeconomic policy implications follow.     

社会供给视角下的宏观产权制度

由于效率标准的局限性,而且国有经济也不必然是低效率的,因此效率标准并非选择"国有"抑或"民营"的唯一依据。在一定条件下,"国有"在扩大社会供给方面具有更大的比较优势,因而国家干预社会生产的一个很重要的原因是市场不能提供满足社会消费需求空间的合意的产品。从一定意义上说,如果将"国有"理解为因行业或企业由于获得政府所构建并控制的"公共领域"资源而形成的相应权利,而将"民营"理解为行业或企业通过自身投资形成的相应权利,则"供给"可以成为"国有"抑或"民营"的一种替代性政策依据。     

RATIONAL EXPECTATIONS AND PRO SPORTS LEAGUES

We put a new set of shoes on that old workhorse, the competitive talent market (CTM) model in sports economics. There exist unique rational expectations equilibria for both national football league (NFL‐type leagues) and major league baseball (MLB‐type leagues) under the CTM model. A cursory statistical test fails to reject the empirical implications for the NFL‐type league. The model also suggests empirical tests of whether or not talent demand (marginal revenues from talent), including induced effects, actually slopes down. But like all models, the competitive talent model should be applied in its context. It describes highly cooperative North American sports leagues that have a wealth of common information. But it may not do the same for other leagues if they lack this common information.     

Romanians,Hungarians and their wages,in transition,in Romania

Legally binding treaties or memorandums have been used over time to regulate the issue of national borders of many European countries. As a result, relatively large groups of people have become ethnic minorities in other countries. They may conserve their ethnic identities, and therefore their children may accumulate ethnic human capital (e.g., language, culture, and religion) in addition to the general human capital of the country. Therefore, they can get access to an appropriate occupation linked by tradition or other factors to their ethnic group. This paper uses estimates from a selection model with an endogenous switch among three broad types of occupational groups to analyze the composition of the wage gap between Romanians and ethnic Hungarians in Romania before and during the transition from a planned to a market economy. The results suggest that the institutional settings of the controlled economy allowed Romanians to work in occupations that gave them the best returns, while the changes during the transition years allowed ethnic Hungarians to work in occupations that gave them the best returns.     

Climate Change and the Polanyian Counter-movement: Carbon Markets or Degrowth?

In the midst of a wave of market expansion, carbon markets have been proposed as the best way to address global climate change. While some argue that carbon markets represent a modern example of a Polanyian counter-movement to the environmental crisis, we adopt a structural interpretation of Polanyi to refute this claim. Carbon markets represent a further expansion of markets that fails to address the underlying contradictions related to the commodification of nature. In addition, they increase risks to society and the domination of economic elites. While carbon markets further subject social and ecological relations to market mechanisms, we examine degrowth as a possible response to climate change that prioritises social and environmental goals over economic growth. While degrowth continues to be dismissed as impractical or impossible, a growing number of scholars, scientists and activists argue it is the only way to address global climate change. In contrast to carbon markets, we argue degrowth could represent a genuine Polanyian counter-movement in response to climate change. In addition, degrowth could help all those disenfranchised by market fundamentalism by addressing the triple crises related to the commodification of land, labour and money.     

Economic Progress,Social Regress?

A central issue in the debate regarding the relevance of social capital is whether the decline in social embeddedness that has attended modernization over the last 40 years in the United States is as harmful as Putnam, among others, claim it to be. Critics of Putnam's thesis argue that various arms‐length institutions fulfil the roles performed by social capital thereby mitigating the negative impact of its recent decline. We develop a framework that provides insight into when such institutions may be adequate and when they might not. We find that if market (economic) and non‐market (social) interactions differ in their payoffs but are interlinked through the modernization of the economy, the optimal level of modernization in market interactions will be higher than that in non‐market interactions. Further, market supporting institutions are likely to increase the divergence between economic and social interactions since analogs for market institutions that constrain opportunistic behavior are usually nonexistent in social contexts. In this sense, economic progress may be accompanied by social regress.     

Non-parametric and semi-parametric asset pricing

We find that the CAPM fails to explain the small firm effect even if its non-parametric form is used which allows time-varying risk and non-linearity in the pricing function. Furthermore, the linearity of the CAPM can be rejected, thus the widely used risk and performance measures, the beta and the alpha, are biased and inconsistent. We deduce semi-parametric measures which are non-constant under extreme market conditions in a single factor setting; on the other hand, they are not significantly different from the linear estimates of the Fama-French three-factor model. If we extend the single factor model with the Fama-French factors, the simple linear model is able to explain the US stock returns correctly.     

Extraction rights allocation with liquidity constraints

We study the optimal allocation of a resource in a second-best world in which parties may be liquidity-constrained due to credit frictions and capital market imperfections. In this setting, common to various natural resource industries, agents are unable to bid more than their budget regardless of their valuation. While auction markets are widely used mechanisms for allocating natural resource extraction rights and conservation contracts, we show that in these circumstances the competitive market –which allocates items based on rank order of bids– fails to achieve the first-best allocation. The market outcome is welfare-dominated by a hybrid mechanism consisting of random assignment followed by resale in a secondary market. Via the initial lottery, the hybrid-mechanism allocates the items with positive probability to high-valuation low-wealth individuals who would not have been able to afford them in a competitive market. High-valuation high-wealth agents, on the other hand, acquire the items in the secondary market if they do not receive them in the initial lottery. Therefore, equity in the allocation of access to the resource may be justified not only by distributional concerns but also by economic efficiency. We illustrate our model using data from buybacks of harvesting rights in the seafood industry.     

"肥猫"、股价与市场均衡:一个理论模型

本文与传统的委托-代理框架不同,在一般均衡框架下研究上市公司管理层报酬与公司股价、市场均衡之间的关系。发现在一个存在做空机制的市场中,即使不考虑上市公司的委托-代理问题,如果不给予上市公司管理层某种形式的额外补偿,市场将极端缺乏效率。在某些极端参数条件下,市场甚至不存在均衡。我们的研究表明:抛开道德方面的考虑,类似美国AIG公司高管这样肥猫的存在,在某种意义上是市场经济条件下难以避免的结果。