Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation

Standard models of informed speculation suggest that traders try to learn information that others do not have. This result implicitly relies on the assumption that speculators have long horizons, i.e., can hold the asset forever. By contrast, we show that if speculators have short horizons, they may herd on the same information, trying to learn what other informed traders also know. There can be multiple herding equilibria, and herding speculators may even choose to study information that is completely unrelated to fundamentals.     

The Fed,the Bond Market,and Gradualism in Monetary Policy

We develop a model of monetary policy with two key features: the central bank has private information about its long‐run target rate and is averse to bond market volatility. In this setting, the central bank gradually impounds changes in its target into the policy rate. Such gradualism represents an attempt to not spook the bond market. However, this effort is partially undone in equilibrium, as markets rationally react more to a given move when the central bank moves more gradually. This time‐consistency problem means that society would be better off if the central bank cared less about the bond market.     

Using a Systems Framework for Organizing Family Financial Planning

This paper organizes the family financial-planning process into a systems framework. Systems concepts are applied to family financial-planning using a functional interpretation of systems analysis. The framework provided in this paper can be helpful to professionals researching family financial behavior and its outcomes, planning programs and curricula, and offering financial planning services. It can also be used by families in their own financial planning.     

Concern with Immediate Consequences Magnifies the Impact of Compulsive Buying Tendencies on College Students' Credit Card Debt

This research examines whether temporal orientation moderates the impact of compulsive buying tendencies (CBT) on credit card debt. Participants completed the consideration of future consequences scale, a compulsive buying scale, and reported their credit card debt. Results revealed that CBT mediated the relationship between concern with immediate consequences and credit card debt, and high concern with immediate consequences magnified the impact of CBT on credit card debt. This suggests that compulsive buyers who focus on maximizing immediate consequences are at a much higher risk of building up significant amounts of credit card debt.     

Payday Loan Choices and Consequences

High‐cost consumer credit has proliferated in the past two decades, raising regulatory scrutiny. We match administrative data from a payday lender with nationally representative credit bureau files to examine the choices of payday loan applicants and assess whether payday loans help or harm borrowers. We find consumers apply for payday loans when they have limited access to mainstream credit. In addition, the weakness of payday applicants’ credit histories is severe and longstanding. Based on regression discontinuity estimates, we show that the effects of payday borrowing on credit scores and other measures of financial well‐being are close to zero. We test the robustness of these null effects to many factors, including features of the local market structure.     

The Effects of Uncertainty and Disclosure on Auditors' Fair Value Materiality Decisions

Financial accounting standards increasingly require fair value measurements. I experimentally examine how uncertainty affects auditors’ adjustment decisions when evaluating fair values. I manipulate two types of uncertainty, input subjectivity and outcome imprecision, and one reporting choice, supplemental disclosure. I find that auditors are most likely to require adjustments when fair values contain both more input subjectivity and more outcome imprecision, but that this likelihood diminishes when clients supplement recognized fair values with additional disclosure. Thus, consistent with moral licensing, I find that auditors tolerate greater potential misstatement in the financial statements when clients provide disclosure, suggesting that the SEC's preference for supplemental disclosure may have the unintended consequence of affecting fair values recognized in the body of the financial statements. I also provide evidence that auditors determine adjustment size by comparing recorded fair value to the nearest bound, rather than the midpoint, of the auditors’ own range estimate, consistent with strict application of auditing standards.     

Contract enforcement,institutions, and social capital: the Maghribi traders reappraised1

Social scientists draw important lessons for modern development from the medieval Maghribi traders who, it has been argued, lacked effective legal mechanisms for contract enforcement and instead relied on informal sanctions based on collective ostracism within an exclusive coalition. We show that this claim is untenable. Not a single empirical example adduced as evidence of the putative coalition shows that a coalition actually existed. The Maghribi traders made use of the formal legal system in order to enforce agency agreements in long‐distance trade. A subset of the traders did form a web of trusted business associates that contributed to informal contract enforcement, but this was very different from the hypothesized coalition, in neither being exclusive nor having a clearly defined membership. The Maghribi traders combined reputation‐based sanctions with legal mechanisms, in ways that resemble the practices of medieval European merchants. We find no evidence that the Maghribi traders had more ‘collectivist’ cultural beliefs than their European counterparts.     

Internal Capital Markets and the Competition for Corporate Resources

This article examines the role of corporate headquarters in allocating scarce resources to competing projects in an internal capital market. Unlike a bank, headquarters has control rights that enable it to engage in “winner-picking”—the practice of actively shifting funds from one project to another. By doing a good job in the winner-picking dimension, headquarters can create value even when it cannot help at all to relax overall firm-wide credit constraints. The model implies that internal capital markets may sometimes function more efficiently when headquarters oversees a small and focused set of projects.     

Bank Reserves and Financial Stability

A stochastic financial model is developed which derives the reserve levels on financial assets which minimize price level fluctuations. It is shown that these levels of reserves are a function of the structure of unanticipated shocks to asset demands and are, in general, quite different from the levels which minimize the fluctuations of either the nominal or real value of these assets. Application of the model to currency and demand deposits in the U.S.A. suggest that the price-Stablizing reserve ratio on demand deposits is approximately one-half of the 12% currently mandated by the Monetary Control Act of 1980.