Dual Bond Ratings: A Test of the Certification Function of Rating Agencies

Bond researchers have recently observed that issues with split ratings have yields more closely resembling the yields on bonds with the lower of the two ratings. This evidence could lead researchers to question why an issuer ever obtains more than one rating in an environment where two ratings, when split, can never reduce yields, whereas two ratings, when split, can increase yields. This paper explores the rating function in a certification framework and concludes that investors value a second rating. Bond issues with two identical ratings have yields significantly less than issues receiving that rating from only one rating agency.     

Vertical disintegration and the life-cycle of firms and industries

T0he degree of vertical integration experienced by a firm is an important managerial decision variable. It is an issue where there is a distinct lack of unanimity in studies on the economics of organizations. Moreover, studies have tended to ignore the complementary feature of vertical disintegration. This study examines the basic Stigler hypothesis that vertical disintegration is the typical development in growing industries. Using UK data on divestments, the results initially indicated some positive relationship between industry growth and vertical divestment activity; however, when different categories of asset transfer were examined, the Stigler view was rejected in favour of a null hypothesis.     

Leveraged Acquisitions and the Market for Corporate Control

What is the function of the market for corporate control? Mike Wright and two colleagues outline the advantages of an active market in corporate control and review the consequences of leveraged buyouts.     

Assessing the Impact of FCC Lifeline and Link-Up Programs on Telephone Penetration

Lifeline programs sponsored by the Federal Communications Commission (FCC) in cooperation with the states and Local Exchange Companies (LECs) are authorized to increase telephone penetration. Estimates of a variant of Perl's (1983) economic model with 1990 Census Data broken to the state level indicate that expenditures on these programs have a positive statistical effect on telephone penetration in most models. However, program elasticities are extremely small, suggesting that very large expenditure increases per poor household would have little effect on telephone penetration. Importantly, there is no relationship between the size of the state program elasticity and the level of state income or the magnitude of state poverty. We also demonstrate that the 1990 Census Data is superior to the Current Population Survey as a data base.     

Estimating Telephone Demand with State Decennial Census Data from 1970–1990

A telephone demand model (logit) is estimated with pooled Decennial Census data (1970, 1980 and 1990) for the states. Previous studies using pooled FCC penetration data are suspect due to large standard errors in the sample. Since our model includes data across time this allows the inclusion of long distance price and increases the variation in the standard variables. Time-effect dummy variables control for unobserved shifts in the data. Given that these dummy variables may pick up some of the effect of the long distance price, as well as other unobserved effects, their estimated impact is relatively small. Robust model results lead to the conclusion that elasticities decline through time. Furthermore, while subsidized penetration is more effective for targeted than untargeted programs, the cost per year of adding a household to the network is very high in either case (for 1990 about $5368 for untargeted; and for targeted $191 in 1990 and $1581 in 1998).     

Federal Reserve System Rising: The Expansion of Board Veto Authority on the Eve of the Great Depression

Most scholars agree that restrictive Federal Reserve System (FRS) policies contributed to the depression’s duration and severity. FRS policy mistakes are attributed to faulty ideas, poor leadership, and decentralised institutions. Extant scholarship treats ideas as constraints which systematically led policy-makers astray. This paper instead focuses on the dual roles ideas play in shaping institutions and uniting coalitions behind institutional projects. It traces the rise and fall of New York FRS Governor Benjamin Strong’s ‘great idea’ that the FRS should promote international monetary stability. Declining support for New York’s internationalism enabled a rural Board faction to expand its veto power from 1928 to 1930. In the critical year following the 1929 stock market crash, Board obstruction of New York FRS attempts to lower its discount and bill rates caused its investments to fall faster than the system’s bond portfolio expanded, forcing outstanding system credit to contract. Beyond showing that the Board’s pre-depression rise mattered, the paper speaks to broader debates about how ideas become empowered to shape policies and inform interests.