Bank Leverage Limits and Regulatory Arbitrage: Old Question-New Evidence

Banks are regulated more than most firms, making them good subjects to study regulatory arbitrage (avoidance). Their latest arbitrage opportunity may be the new leverage rule covering the largest U.S. banks; leverage rules require equal capital against assets with unequal risks, so banks can effectively relax the leverage constraint by increasing asset risk. Consistent with that conjecture, we find that banks covered by the new rule shifted to riskier, higher yielding securities relative to control banks. The shift began almost precisely when the rule was finalized in 2014, well before it took effect in 2018. Security level analysis suggests banks actively added riskier securities, rather than merely shedding safer ones. Despite the risk shifting, overall bank risk did not increase, evidently because the banks most constrained by the new leverage rule significantly increased leverage capital ratios.     

NETWORK SECURITY: VULNERABILITIES AND DISCLOSURE POLICY*

Software security is a major concern for vendors, consumers and regulators. When vulnerabilities are discovered after the software has been sold to consumers, the firms face a dilemma. A policy of disclosing vulnerabilities and issuing updates protects only consumers who install updates, while the disclosure itself facilitates reverse engineering of the vulnerability by hackers. The paper considers a firm that sells software which is subject to potential security breaches and derives the conditions under which a firm would disclose vulnerabilities. It examines the effect of a regulatory policy that requires mandatory disclosure of vulnerabilities and a ‘bug bounty’ program.     

Playing With Food: Content Analysis of Food Advergames

This study examines how food marketers use advergames, custom‐built and branded online games, to promote food products to children and provides the nutritional content of the food products featured in the advergames. The results reveal that food marketers use advergames heavily, with candy and gum or food products high in sugar most frequently appearing in the analyzed games. Children are often invited to “play with” the foods integrated as active game components. Finally, despite the educational benefits of interactive games, fewer than 3% of the games analyzed in this study appear to educate children about nutritional and health issues.     

Strategy Selection,Surrogation, and Strategic Performance Measurement Systems

Strategic performance measurement systems operationalize firm strategy with a set of performance measures. A consequence of such alignment is the tendency for managers to lose sight of the strategic construct(s) the measures are intended to represent, and subsequently act as though the measures are the constructs of interest, a phenomenon referred to as surrogation. We investigate how involvement in strategy selection affects managers’ propensity to exhibit surrogation. We predict and find that strategy selection reduces surrogation. Surprisingly, we do not find that engaging in strategy deliberation, a key process underlying strategy selection, reduces surrogation. Thus, managers’ involvement in the actual choice of strategy appears to be both a necessary and sufficient condition to mitigate surrogation. Our paper broadens understanding of factors that influence surrogation, such as the effects of different aspects of managers’ strategic involvement and buy‐in. Further, by documenting how managers behave within (as opposed to simply with) strategic performance measurement systems, we highlight the potential for managers to endogenously influence the effectiveness of such systems.     

Who Pays for Protection in Australia?*

A simple model is used to measure the transfer effects resulting from protection in Australia. The model is not concerned with the deadweight losses associated with protection. The concept of ‘true’ protection is employed to construct a transfer matrix which shows how income is transferred between sectors. The results indicate that exporters are the sole losers from protection. The cost to Australian exporters is about 1.5 per cent of GDP.     

Entry,Trade, and Exporting over the Cycle

We study how international trade and exporting affect the cyclicality of establishment creation. We build a general equilibrium model with two features: (i) new establishments start small and grow gradually and (ii) exporters are persistently bigger and more productive than nonexporters. When establishments creation costs fluctuate with aggregate productivity, the model generates procyclical fluctuations in domestic establishments and importers. Without international trade, entry is weakly countercyclical and too smooth. The model generates reasonable fluctuations in the stock of importers, exporters, and domestic establishments. With an entry margin, output is hump‐shaped following a productivity shock and this hump is stronger with trade.     

Regime Shifts in Price‐Dividend Ratios and Expected Stock Returns: A Present‐Value Approach

We incorporate regime shifts in the mean of price‐dividend ratios into the present value model of van Binsbergen and Koijen (2010) who propose a latent variable approach to modeling expected returns and dividend growth rates. We find that accounting for regime shifts results in much lower persistence of expected returns and higher volatility of expected returns, and thus higher in‐sample predictability, when compared to the results from the van Binsbergen and Koijen (2010) model. We also show that the main source of the increase in the mean of price‐dividend ratios in the mid‐1990s is a decrease in the mean of expected returns.     

A MODEL OF ENDOGENOUS PAYOFF MOTIVES AND ENDOGENOUS TIMING IN A MIXED DUOPOLY*

A model of endogenous payoff motives and endogenous order of moves is analysed in a mixed duopoly. We find that, when a non‐negative price constraint is imposed on public and private firms' quantity choice, both firms always choose to be relative‐payoff‐maximisers, and both simultaneous move and sequential move can be sustained in equilibrium. In contrast, when non‐negative absolute profit constraint is imposed, public and private firms always choose to be absolute‐payoff‐maximisers, and only sequential move can be sustained in equilibrium.     

DOES THE EFFECTIVENESS OF BOARD OF DIRECTORS AFFECT FIRM PERFORMANCE OF CONSUMER CO‐OPERATIVES? THE CASE OF ICOOP KOREA

Consumer co‐operatives in Korea have been growing rapidly since they launched their own shops. If co‐operatives would be too much oriented to enlargement or economic growth, they might easily pay no attention to members’ participation which is one of the priorities in co‐operatives. It could lead to losing the value of co‐operatives. So it is important to adjust the balance between members’ participation and economic growth. This paper focuses on the role of board of directors in doing that. It aims to examine how effectiveness of the board influences members’ participation and the participation has effect on performance of co‐operatives in the case of iCOOP Korea. The variables such as communication with members and usage of management skills and knowledge are employed as measures of the effectiveness of the board in decision‐making process. The data are collected by survey the respondents of which are 222 directors of 30 primary co‐operatives. It is analyzed by Structural Equation Model. The findings of the research are as follows. Firstly, communication of the board with members increases the members’ democratic participation, and the increased participation contributes to improving the financial performance. Secondly, management skills and knowledge of the board does not have significant relations with the level of members’ participation, even though members’ economic participation has significantly positive relation with the financial performance. The findings imply that members’ voluntary participation will be increased when boards of co‐operatives try to reflect members’ needs in the decision making processes, and it can help the co‐operatives improve their financial performance. It suggests a clue for the trade‐off between the value of co‐operatives and growth of business which many co‐operatives are trying to resolve.     

STRATEGIC BUDGET CONSTRAINTS IN A UNIONIZED MIXED OLIGOPOLY

This paper considers the budget‐constraint problem where the government decides whether or not to impose a budget constraint on the public firm, assuming the public firm is less efficient than private firms. We find that imposing budget constraints on the public firm is the preferred choice because of the welfare‐improving effect. Our model suggests that the wage levels of the public firm can be lower or higher than those of private firms depending upon the degree of inefficiency. These results differ from Ishida and Matsushima's findings that in a unionized mixed duopoly, tight budget constraints can enhance social welfare when the public firm is as efficient as private firms.