CEO Contracting and Antitakeover Amendments

This article examines incentives for adopting antitakeover charter amendments (ATAs) that are associated with compensation contracts. The evidence is consistent with the hypothesis that antitakeover measures such as ATAs help managers protect above-market levels of compensation. Chief executive officers (CEOs) of firms that adopt ATAs receive higher salaries and more valuable option grants than CEOs at similar firms that do not adopt them. Furthermore, the magnitude of this difference increases following ATA adoption. The evidence is inconsistent with the hypothesis that ATAs facilitate the writing of efficient compensation contracts.     

Disagreement and the Cost of Capital

We assess how forms of disagreement among investors affect a firm's cost of capital. Firms experience a lower cost of capital if investors perceive that other investors are ignoring relevant disclosures (perceived errors of omission), but a higher cost of capital if investors perceive that others are responding to irrelevant disclosures (perceived errors of commission). The impact of these two sources of disagreement on the cost of capital is determined by the distribution of opinion and the nature of disclosure. For example, even though aggregated disclosures reveal less to investors, aggregated disclosures may decrease the cost of capital by eliminating disagreement associated with perceived errors of commission. These and additional results arise because the cost of capital is driven not only by investors’ uncertainty about the firm's future earnings performance, but also by investors’ uncertainty about the evolution of beliefs, which partly determines the path of prices.     

Fundamentals,Misvaluation, and Business Investment

Does stock market misvaluation affect business fixed investment? To answer this question, we provide evidence based on U.S. firm‐level panel data. We examine the orthogonality conditions for the investment Q and Euler equations, and our qualitative tests reject the null hypothesis that investment is unaffected by misvaluation (this result is not driven exclusively by the late 1990s). To measure the quantitative effects on investment, we introduce a measure of misvaluation into standard investment equations. Our estimates imply that a one‐standard‐deviation increase in misvaluation increases investment between 20% and 60% relative to the mean level of investment in the sample.     

CONSUMER SWITCHING COSTS AND FIRM PRICING: EVIDENCE FROM BANK PRICING OF DEPOSIT ACCOUNTS*

We employ extensive information on bank deposit rates and area migration patterns to examine pricing relationships implied by switching costs. We argue that, because of the trade‐off between attracting new customers and exploiting old ones, banks offer higher deposit rates in areas experiencing more in‐migration. Further, because greater out‐migration implies that a locked‐in customer will not be with the bank for as many periods, banks will offer lower deposit rates in areas exhibiting greater out‐migration. Also, because this effect of out‐migration logically depends on the extent of in‐migration, an interaction effect exists. We find evidence strongly supporting these relationships.     

Elderly consumers: a British comment

Elderly people in Britain, a substantial minority of some 18% of the total population, are not only market-place consumers but major users of social services. With reference to a recent investigation in the U.S., this paper looks at the British situation. Issues discussed include the limitations arising from relatively low incomes, advice opportunities and trends, and major problems in the supply of social services.     

ENTRY DETERRENCE BY NON‐HORIZONTAL MERGER*

We study when and how pure non‐horizontal mergers, whether cross‐product or vertical, can deter new entry. Organizational mergers implicitly commit firms to more aggressive price competition. Because heightened competition deters entry, mergers can occur in equilibrium even when, absent entry considerations, they do not. We show that, in order to prevent a flood of entrants, mergers arise even when a marginal merger costs incumbent firms more than does a marginal entrant.