Repetition, reputation, and raiding

I develop a multitarget takeover model with bid revisions, inwhich bidders desire a reputation for having low valuations.Such a reputation increases the likelihood that future targetswill accept low premium bids. Bidders develop reputation byusing low take-it-or-leave-it offers. Consequently, tender premiums,bid revision rates, and success rates are lower for continuingbidders than for those considering only a single target. Successrates vary within a series, and reputation building is morelikely with highly correlated target valuations. I provide anexploratory empirical analysis consistent with lower premiumsfrom continuing bidders and discuss some resulting implicationisregarding 'raiders', conglomerates, and resistance strategies.     

Renegotiation and the impossibility of optimal investment

In a model with asymmetric information and external equity financingit is impossible to achieve socially optimal investment becauseof renegotiation possibilities. The contractual solution suggestedby Dybvig and Zender (1991) is not dynamically consistent -the manager's contract would be renegotiated, resulting in inefficientinvestment. Moreover, no other compensation contract that wouldinduce the manager to invest efficiently survives renegotiation.Contracts that pay the manager based on the stock price, whileproducing suboptimal investment as in Myers and Majluf (1984),are robust to renegotiation.     

Boom and bust patterns in the adoption of financial innovations

We develop a dynamic model of the adoption of financial innovations.Each period, firms decide whether or not to adopt an innovationof uncertain value, and the profitability of each period's adoptionsreveals information about the innovations's value. We show thatcharacteristics of financial innovation waves cited by criticsas evidence of irrational excess are, in fact, consistent withfully rational behavior. We also show that social welfare isenhanced when more firms adopt innovations of questionable valueand that financial intermediaries have an incentive to encouragesuch adoption.     

Herbert A. Simon on What Ails Business Schools: More than ‘A Problem in Organizational Design’

We critically examine Herbert Simon's 1967 essay, ‘The business school: a problem in organizational design’. We consider this essay within the context of Simon's key ideas about organizations, particularly those closely associated with the ‘Carnegie perspective’ on organizations and how they influenced the reinvention of American business schools in the post‐Second World War era, and were deeply influenced by the post‐War context and also were appropriated by the Ford and Carnegie Foundations to reform business school teaching and research. We argue that management educators misappropriated Simon's concept of an intellectually robust and relevant research and educational agenda for business schools that has in part contributed to the intellectual stasis that now characterizes business education research and its capacity to inform management practice.     

Stock price distributions with stochastic volatility: an analytic approach

We study the stock price distributions that arise when pricesfollow a diffusion process with a stochastically varying volatilityparameters. We use analytic techniques to derive an explicitclosed-form solution for the case when volatility is drivenby an arithmetic Ornstein-Uhlenbeck (or AR1) process. We thenapply our results to two related problems in the finance literature:(i) options pricing in a world of stochastic volatility, and(ii) the relationship between stochastic volatility and thenature of 'fat tails' in stock price distributions.     

Recovering risk aversion from option prices and realized returns

A relationship exists between aggregate risk-neutral and subjectiveprobability distributions and risk aversion functions. We empiricallyderive risk aversion functions implied by options prices andrealized returns on the S&P500 index simultaneously. Theserisk aversion functions dramatically change shapes around the1987 crash: Precrash, they are positive and decreasing in wealthand largely consistent with standard assumptions made in economictheory. Postcrash, they are partially negative and partiallyincreasing and irreconcilable with those assumptions. Mispricingin the option market is the most likely cause. Simulated tradingstrategies exploiting this mispricing show excess returns, evenafter accounting for the possibility of further crashes, transactioncosts, and hedges against the downside risk.     

A Decade of Intergenerational Reports: Contributing to Long‐Term Fiscal Sustainability

The Intergenerational Reports have helped lengthen the horizon of public policy analysis in Australia, enabling governments to focus on the longer term implications of policy changes, particularly their fiscal implications. Nonetheless, it is important to note that the reports have examined fiscal sustainability from the Commonwealth's perspective, notwithstanding that fiscal sustainability is also an issue for the states and territories. Additionally, the reports have not incorporated contingent fiscal liabilities, notwithstanding their relevance to fiscal sustainability.