Real (adaptation) options and the valuation of equity: some empirical evidence

Data from 1,374 firms across four broad industrial groupings are used to assess the contribution that real (adaptation) options make to overall equity values. The analysis indicates that real (adaptation) options make a significant contribution to the equity value of firms with a market to book ratio (of equity) of around unity or less. As the market to book ratio grows beyond this level, however, the contribution made by real (adaptation) options decays quickly away and equity values are mainly comprised of the present value of the dividends that firms are expected to pay. This means that for around one in every five of the firms in our sample real (adaptation) options make a significant contribution to overall equity value. Thus, while linear equity valuation models would seem to be appropriate for the substantial majority of firms on which our sample is based, there is a sizeable minority of firms where real (adaptation) options have a significant impact on equity values. For this latter group of firms there will be a non-linear relationship between equity value and its determining variables. This has important implications for the regression procedures that are applied in this area of accounting research.     

Regulator performance,regulatory environment and outcomes: An examination of insurance regulator career incentives on state insurance markets

In this paper we test whether the past or future labor market choices of insurance commissioners provide incentives for regulators in states with price regulation to either favor or oppose the industry by allowing prices that differ significantly from what would otherwise be the competitive market outcome. Using biographical data on insurance regulators, economic and state specific market structure and regulatory variables, and state premium and loss data on the personal automobile insurance market, we find no evidence consumers in prior approval states paid significantly different “unit prices” for insurance than consumers in states that allow competitive market forces to determine equilibrium prices during the time period 1985–2002. We do, however, find evidence regulators who obtained the position of insurance commissioner by popular election and those who seek higher elective office following their tenure as insurance commissioner allow higher overall “unit prices” relative to competitive market states. The “unit price” of insurance in regulated states is not statistically different from the competitive market outcome for regulators that make lateral moves back into state government and it is mildly higher for regulators who enter the insurance industry following their tenure. Finally, we find some evidence regulators who describe themselves as consumer advocates are successful reducing the price of insurance in favor of consumers in regulated markets. Overall the results are consistent with the existence of asymmetric information in the regulatory process that agents use to enhance their career aspirations.     

How do house prices affect consumption? Evidence from micro data

Housing is a major component of wealth. Since house prices fluctuate considerably over time, it is important to understand how these fluctuations affect households’ consumption decisions. Rising house prices may stimulate consumption by increasing households’ perceived wealth, or by relaxing borrowing constraints. This paper investigates the response of household consumption to house prices using UK micro data. We estimate the largest effect of house prices on consumption for older homeowners, and the smallest effect, insignificantly different from zero, for younger renters. This finding is consistent with heterogeneity in the wealth effect across these groups. In addition, we find that regional house prices affect regional consumption growth. Predictable changes in house prices are correlated with predictable changes in consumption, particularly for households that are more likely to be borrowing constrained, but this effect is driven by national rather than regional house prices and is important for renters as well as homeowners, suggesting that UK house prices are correlated with aggregate financial market conditions.     

Testing the significance and the non-linearity of the Phillips trade-off in the Euro Area

This paper tests the significance and the non-linearity of the Phillips trade-off in the aggregate Euro Area, in an unobserved components model of stochastic NAIRU and trend output featuring the Phillips equation and the Okun law as main identifying equations, with quarterly data for 1970:I-2002:III. The Phillips curve turns out to be linear and its trade-off statistically significant, while non-linearity shows up in the Okun relation. The results prove to be robust to alternative lag length structures of the model, and to alternative non-linear functional forms. The trend-cycle decompositions estimated with the model capture the main features of the Euro Area’s recent macroeconomic record.First version received: 1 September 2003 / Final version received: June 2004CEMPRE - Centro de Estudos Macroeconómicos e Previsão - is supported by the Fundação para a Ciência e a Tecnologia, Portugal, through the Programa Operacional Ciência, Tecnologia e Inovação (POCTI) of the Quadro Comunitário de Apoio III, which is financed by FEDER and Portuguese funds.We thank comments on earlier versions by Fabio Canova, Miguel St Aubyn, Alvaro Almeida, Pete Richardson, Kevin Ross, and two anonymous referees. We acknowledge James D. Hamilton’s help with the confidence bands. The usual disclaimer applies.     

Resource based relative value scale: a new challenge and opportunity for health care cost management

Beginning in 1992, the use of resource based relative value scale (RBRVS) will greatly change the way physicians are reimbursed for services to Medicare patients. This new system will also have implications for trust funds and corporate providers of health care benefits.     

Changes needed in agricultural policy for female-headed farm families in tropical Africa

The decline in per-capita agricultural production has been reversed somewhat in tropical Africa by the structural adjustment programs which have increased producer prices, liberalized marketing and devalued currencies. But the 30% of smallholder farm households which are female-headed will not be assited much due to their special constraints of shortages of labor and credit, lack of extension visits and appropriate labor-saving technologies. For these households, the authors argue, improved extension services, credit for agricultural inputs, small ruminant animals and poultry, labor-saving devices and craft inputs will be necessary to increase their incomes and levels of living.