The recent failure of U.S. monetary policy

Summary The very slow growth of the broad money supply has been a primary source of U.S. economic weakness in 1990 through 1992. The velocity link between M2 and the subsequent level of nominal GDP has not declined. But changes in bank reserves brought about by open market operations have had much less effect onM2 than the Fed anticipated for two reasons: (1) reserve requirements now apply to only a small fraction of totalM2; and (2) the new bank capital requirements limit some banks ability to lend. The Federal Reserve failed to appreciate the importance of these conditions and misjudged the strength of the monetary policy stimulus that it was providing.Professor of Economics, Harvard University, and President of the National Bureau of Economic Research.Sixth Tinbergen Lecture delivered on October 2, 1992, in The Hague for the Royal Netherlands Economic Association.     

Erklärungsansätze für vertragswidriges Verhalten Versicherungsnehmern aus Sicht der ökonomischen Theorie

The two main purposes of this paper are an introduction to the economic analysis of insurance fraud and furthermore a derivation of factors that determine fraudulent behavior of policyholders on insurance markets. Consequently, we analyze the strategic decision problems of insurance companies and the policyholders and identify some factors that can help to reduce fraudulent behavior. In this context we evaluate two derived starting points for the combat against insurance fraud: fraud detection systems and a consequent charge policy of detected defrauders. We illustrate that both points can help to reduce the cost of fraud. Furthermore, we enhance our earlier analysis with respect to the empirical fact that some individuals care about fairness or — in the insurance fraud context — the legitimacy of their actions. Surprisingly, in some market situations these concerns of some policyholders do not lead to a lower fraud probability. Finally, we discuss how and to what extent insurance companies can influence such ethical concerns of policyholders. On that score, we distinguish insurance specific and insurance unspecific factors and their impact on the consumers attitudes towards insurance fraud.     

Diversification, Ownership and Control of Swedish Corporations

We study the short‐ and long‐term valuation effects of Swedish takeovers. Using a sample of 93 bidding firms that acquired 101 targets between 1980 and 1995, we find that diversifying acquisitions lead to a negative market reaction and deterioration of the operating performance of the bidder. Announcement and performance gains in each of the three years following the acquisition occur only when bidders expand their core rather than their peripheral lines of business. Our findings suggest that focused acquisitions lead to greater synergies and operating efficiencies than diversifying acquisitions. Intra‐group acquisitions, however, show that bidders do not realise significant gains whether they adopt diversifying or focusing investment strategies by purchasing firms controlled by the Wallenberg and SHB conglomerate groups. Intra‐group targets realize significant gains regardless bidder's investment strategy. Finally, the evidence does not support the view that intra‐conglomerate acquisitions are associated with expropriation of minority shareholders. However, they appear to enhance the control rights of large shareholders of the bidding firm.     

THE DETERMINANTS OF SELECTIVE EXCHANGE RISK MANAGEMENT–EVIDENCE FROM GERMAN NON-FINANCIAL CORPORATIONS

Survey studies of both corporate exchange risk management and the corporate use of derivatives in general have shown considerable variation in managerial practices. Some firms do not hedge open positions at all, and some hedge their exposures completely. Most companies, however, hedge only those positions on which they expect a currency loss, while leaving open positions on which they expect a currency gain—a practice known as “selective hedging.” Finally, there is a small minority of firms that engage in outright speculation, deliberately creating risk exposures in addition to those arising from their normal business operations. Such findings are consistent with survey studies that suggest that a majority of corporate financial managers appear to believe that they are able to “beat the market”—a belief that, of course, is inconsistent with efficient markets theory. So why do some companies follow selective risk management strategies while other firms hedge open positions without recourse to exchange rate forecasts? In an attempt to answer this question, the author surveyed 74 German non‐financial companies about their exchange risk management practices. He found that highly levered firms were less likely to take bets in the currency markets, while bank‐controlled firms were more likely to use a selective risk management strategy. There was a negative relationship between profitability and the use of selective hedging—a finding that could be interpreted as suggesting that selective hedging does not generally benefit the firm's shareholders. Finally, there was a weak tendency for larger firms to be more inclined to use forecasts in their foreign exchange risk management.     

Incentive Fees and Mutual Funds

This paper examines the effect of incentive fees on the behavior of mutual fund managers. Funds with incentive fees exhibit positive stock selection ability, but a beta less than one results in funds not earning positive fees. From an investor's perspective, positive alphas plus lower expense ratios make incentive-fee funds attractive. However, incentive-fee funds take on more risk than non-incentive-fee funds, and they increase risk after a period of poor performance. Incentive fees are useful marketing tools, since more new cash flows go into incentive-fee funds than into non-incentive-fee funds, ceteris paribus.     

Unit initial public offerings: Staged equity or signaling mechanism?

We investigate the use of unit (i.e., package) initial public offerings by Australian industrial firms and conclude that their use reflects their role as a signaling mechanism (Chemmanur and Fulghieri, 1997), as distinct from the agency–cost explanation offered by Schultz (1993). From a sample of 394 IPOs between 1976 and 1994, the 66 firms making unit offerings are typically riskier, use less prestigious underwriters and have a lower level of retained ownership than other IPO firms. While these results are also consistent with Schultz's agency cost explanation, other results we report are not. We find no difference in underpricing etween unit IPOs and other IPO firms, nor are there any significant differences in the planned uses of proceeds reported in the prospectus, post–listing failure rates or secondary equity offerings of the type predicted by Schultz. We do however, report evidence consistent with a prediction unique to the signaling explanation. After controlling for the level of ownership retained by insiders, the proportion of firm value sold as warrants is increasing in IPO firms' riskiness.     

Three New Real Estate Price Indices for Geneva,Switzerland

This paper develops constant-quality price indices for three categories of real estate-apartment buildings, vacant land, and condominiums—for the city of Geneva, Switzerland. We use both the hedonic and repeat sales models to estimate the price level and, in turn, the rate of price change. The general pattern of each series suggests that real estate prices in Geneva were fairly stable throughout the 1970s, increased sharply during the 1980s, but gave back some of these gains in the early 1990s. Interestingly, the sharp rise in prices in the second half of the 1980s is very similar to that found in some regions of the United States. We also consider the problem, implicit in the repeat sales method, of revisions in previously estimated price indices as additional data become available in later years.     

German managers'' attitudes towards Anglo-American accounting: Results from an empirical study on global accounting harmonization

The starting-point of the present paper are systematic differences between the answers of German corporate managers and professors in an empirical study by C&L Deutsche Revision AG (1995) on accounting harmonization. In this study, managers expressed themselves in all questions more positively towards current German accounting and more negatively towards US accounting than professors. The fundamental assumption put forward in this paper is that these differences are due to differences in the economic interests of the two groups. To test this empirically, hypotheses are deduced with regard to the accounting-related interests of the executive managers. The idea behind the hypotheses is that managers' answers to questions in the C&L Industry Study can be explained by structural features of their respective companies. The hypotheses are tested using multiple regression analysis. The results of the tests show that managers' answers can, to some extent, be explained by the suggested multiple regression approach. However, the answers to the rather general and abstract question (the preferred balance between the true-and-fair-view and prudence accounting principles) are much better explained than the answers with regard to detailed US-GAAP regulations. We must assume that the managers' attitudes towards concrete US-GAAP, which are directly related to corporate accounting practice, are influenced by a multitude of firm-specific and personal factors.     

Currency competition: A partial vindication of Hayek

This paper establishes the existence of equilibria for environments in which outside money is issued competitively. Such equilibria are typically believed not to exist because of a classic overissue problem: if money is valued in equilibrium, an issuer produces money until its value is driven to zero. By backward induction, money cannot have value in the first place. This paper shows that overissuance is not a problem if agents believe that if an issuer produces more than some threshold number of notes, then only those notes issued up to the threshold will be valued; additional notes will be worthless. This result is very general, applying to any monetary economy in which equilibria with and without valued money exist if the money supply is finite. The paper also compares the allocation achieved by a monopolist to that achieved with competitive issuance in both a search and an overlapping-generations environment. The results depend on the environment considered, but two general conclusions arise. First, it is ambiguous whether competitive issuers can achieve a more desirable allocation than a monopolist. Second, with competitive issuance, a licensing agency can always improve on pure laissez-faire and achieve the efficient allocation in the long run.