Corporate Equity Ownership and the Governance of Product Market Relationships

We assemble a sample of over 10,000 customer–supplier relationships and determine whether the customer owns equity in the supplier. We find that factors related to both contractual incompleteness and financial market frictions are important in the decision of a customer firm to take an equity stake in their supplier. Evidence on the variation in the size of observed equity positions suggests that there are limits to the size of optimal ownership stakes in many relationships. Finally, we find that relationships accompanied by equity ownership last significantly longer than other relationships, suggesting that ownership aids in bonding trading parties together.     

Transactions Costs and Holding Periods for Common Stocks

Amihud and Mendelson (1986) and Constantinides (1986) provide a theoretical basis for the proposition that assets with higher transactions costs are held by investors for longer holding periods, and vice versa. We examine average holding periods and bid-ask spreads for Nasdaq stocks from 1983 through 1991 and for New York Stock Exchange (NYSE) stocks from 1975 through 1989 and find strong evidence that, as predicted, the length of investors' holding periods is related to bid-ask spreads. We also find that the relation between holding periods and bid-ask spreads is much stronger on Nasdaq, where spreads are larger, than on the NYSE, where spreads are smaller.     

An Empirical Examination of Cash Flow Measures

In recent years in the United States and Canada, there has been an increasing interest in cash flow reporting and a strengthening belief that information on cash flows is valued in the marketplace. However, little research has been devoted to the issue. Regulatory bodies in the U.S. (Financial Accounting Standards Board) and Canada(Canadian Institute of Chartered Accountants) require that an enterprise should disclose separately cash flows from operating, financing and investing activities in their cash flow statements. The data in the cash flow statements are expected to help investors assess the firm's liquidity, financial flexibility and risk. On the other hand, the British Accounting Standards Committee (ASC) does not require a statement of cash flows. This study employs a cross-sectional equity valuation model to examine the association of cash flows from operating, financing and investing activities with security prices. A sample of 403 U.S. firms is used for the ten-year period of 1976–85. The results of this study indicate that there exists a strong association between the various cash flow components included in the cash flow statements and the market value of the firm.     

Credit Traps and Macroprudential Leverage

We construct a macroeconomic model with overlapping generations to study credit traps—prolonged periods of stagnant real activity accompanied by low productivity, financial sector undercapitalization, and credit misallocation. Shocks to bank capital tighten banks' borrowing constraints causing them to allocate credit to easily collateralizable but low productivity projects. Low productivity weakens bank capital generation, reinforcing tight borrowing constraints, sustaining the credit trap steady state. Macroprudential policy to limit bank leverage can be welfare enhancing. In the presence of a credit trap, optimal leverage policy is countercyclical.     

Costly Information Acquisition,Social Networks,and Asset Prices: Experimental Evidence

We design an experiment to study the implications of information networks for incentives to acquire costly information, market liquidity, investors' earnings, and asset price characteristics in a financial market. Social communication crowds out information production as a result of an agent's temptation to free ride on the signals purchased by her neighbors. Although information exchange among traders increases trading volume, improves liquidity, and enhances the ability of asset prices to reflect the available information in the market, it fails to improve price informativeness. Net earnings and social welfare are higher with information sharing due to reduced acquisition of costly signals.     

TAX REVISIONS OF 2004 AND PRO SPORTS TEAM OWNERSHIP

Tax law revisions of 2004 altered the “roster depreciation allowance” enjoyed by pro sports team owners. Supporters claimed this would practically eliminate costly legal oversight by the IRS and, ultimately, increase owner tax bills. Government officials and leagues remained silent on team value impacts but outside analysts argued they would rise by 5%. We model this policy change and investigate it empirically. Supporters in Congress were absolutely correct that owner tax payments should increase but outside analysts underestimated team value increases by half. No wonder Major League Baseball and the National Football League favored the revision. (JEL D21, G38, H25, L83)     

Measuring Corporate Bond Mortality and Performance

This study develops an alternative way to measure default risk and suggests an appropriate method to assess the performance of fixed-income investors over the entire spectrum of credit-quality classes. The approach seeks to measure the expected mortality of bonds and the consequent loss rates in a manner similar to the way actuaries assess mortality of human beings. The results show that all bond ratings outperform riskless Treasuries over a ten-year horizon and that, despite relatively high mortality rates, B-rated and CCC-rated securities outperform all other rating categories for the first four years after issuance, with BB-rated securities outperforming all others thereafter.