WHAT WILL HAPPEN TO THE EURO?

The Stability Pact ‐ intended to make EMU governments run prudent budgets ‐ is losing its credibility. This article asks the question: what will happen if national debts start to rise again and some governments then have difficulty borrowing? It suggests that there will be calls for bailout, that the EU's political structures will not cope well with the resulting arguments over which countries will pay, and that the eventual and painful result will be a return to the principle that currencies and political areas coincide.     

Equity Volatility and Corporate Bond Yields

This paper explores the effect of equity volatility on corporate bond yields. Panel data for the late 1990s show that idiosyncratic firm‐level volatility can explain as much cross‐sectional variation in yields as can credit ratings. This finding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields.     

Open-bank assistance transactions and prompt corrective action

Open-bank assistance (OBA), provided to troubled banking institutions by the FDIC to prevent their failure, has been criticized extensively on grounds that closed-bank transactions, especially early closed bank transactions, are less expensive to the FDIC. This article analyzes a case in which OBA makes public policy sense, under conditions in which uncertainty is introduced into the valuation of a bank's nonperforming assets. Under such uncertainty, the FDIC may play a role by providing to the acquiror of the troubled institution essentially costless (to the FDIC) standby insurance on the ultimate workout values of the nonperforming assets. If properly structured, such an OBA transaction would meet critics' objections by minimizing FDIC cost and creating incentives for the early recapilization of troubled banks.     

The Contradictions of Free Market Doctrine: Is There a Solution?

The article considers six standard arguments in favour of an unfettered free market: (1) the freedom to consume; (2) the freedom of the seller; (3) the freedom of the producer; (4) freedom from government interference; (5) lower costs; (6) promotion of democracy. It demonstrates that each of these arguments turns out to be incoherent on closer examination. The ground of this incoherence it is shown, is the market doctrine's systematic omission of non-business costs and benefits from its analysis, a methodological blindness which can only be overcome by a wider-lensed comprehension of economic value.     

Econometric Cost Structure Estimates for Cellular Telephony in the United States

This article estimates economies of scale for a sample of five cellular telephony firms in the United States. We reject constant returns to scale for all but the smallest firm studied; the remaining firms exhibit decreasing returns to scale. This finding suggests that scale economies cannot be used to justify the current regulated duopoly structure of United States cellular markets.     

Profit maximization: The ethical mandate of business

The authors propose a model for business ethics which arises directly from business practice. This model is based on a behavioral definition of the economic theory of profit maximization and situates business ethics within opportunity costs. Within that context, they argue that good business and good ethics are synonymous, that ethics is at the heart and center of business, that profits and ethics are intrinsically related.Marist Father Pat Primeaux is a Professor of Theology at Saint John's University, (New York). John Stieber is a Professor of Finance and Economics at Southern Methodist University's Edwin L. Cox School of Business (Dallas). They have collaborated on several articles on the behavioral dimension of economic efficiency. They have also designed and taught courses in business ethics at both the graduate and undergraduate level.     

The 1986 U.K. Insolvency and Company Directors' Disqualification Acts: An evaluation of their impacts upon small firm financing decisions

This paper examines the potential impact of the 1986 U.K. Insolvency and Company Directors' Disqualification Acts on small firm financing decisions. With the aid of a simplified Black and Scholes (1973) option model of financing decisions, the paper illustrates how the 1986 legislation reduces the incentives for owner-managers to gamble with creditor claims, particularly in situations of financial distress, by making them personally liable for unmet claims and/or by disqualifying them from holding office for a fixed period. For instance, example 3 in the paper shows the conflict that could result from the owner-manager reducing his/her opening equity position and it further argues how the legislation should act to alleviate the situation. It remains, however, an empirical question as to whether this reduction in creditors' exposure to the risk of uncompensated wealth transfers will ultimately result in a significantly greater number of company liquidations and disqualifications, particularly during a prolonged economic downturn, or an improved/less costly supply of finance to small firms.