Generalized Disappointment Aversion and Asset Prices

We characterize generalized disappointment aversion (GDA) risk preferences that can overweight lower‐tail outcomes relative to expected utility. We show in an endowment economy that recursive utility with GDA risk preferences generates effective risk aversion that is countercyclical. This feature comes from endogenous variation in the probability of disappointment in the representative agent's intertemporal consumption‐saving problem that underlies the asset pricing model. The variation in effective risk aversion produces a large equity premium and a risk‐free rate that is procyclical and has low volatility in an economy with a simple autoregressive endowment‐growth process.     

Pay for Performance and Corporate Governance Reform

Directors’ pay and corporate governance continue to generate public outrage and calls for reform. Our meta‐regression analysis of all comparable UK pay‐for‐performance estimates finds little, if any, meaningful association between directors’ pay and corporate performance. However, there is evidence of the effectiveness of past “comply‐or‐explain” rules, especially the Cadbury Report. Unfortunately, the effects of past reform efforts tend to erode over time. This study also explores differences between pay–performance estimates, finding that these are largely explained by how pay and performance are measured by a given study.     

Optimal employment contracts and the returns to monitoring in a principal-agent context

Abstract. In this paper we study a two-person firm consisting of a principal and an agent. The principal hires the agent to provide some input into the production process. The output of the production process is determined by the agent's input and an exogenous state realization. Subsequent to joining the firm, but prior to choosing his input, the agent privately observes the state realization. The principal employs an imperfect monitoring system that publicly reports on the state realization. Our purpose in studying this model is to better understand the effects of monitoring on the design of the optimal employment contract and the determinants of the value of monitoring in a model with asymmetric information. Résumé. Les auteurs étudient une entreprise constituée de deux personnes, un mandant et un mandataire. Le mandant embauche le mandataire pour sa contribution au processus de fabrication. Le résultat du processus de fabrication est déterminé par la contribution du mandataire et par la réalisation d'un état exogène. Après s'être joint à l'entreprise, mais avant de déterminer quelle sera sa contribution, le mandataire observe, en privé, la réalisation de cet état exogène. Le mandant a recours à un système de suivi imparfait qui fait le point, à l'intention du public, sur la réalisation de l'état en question. L'étude de ce modèle permet une meilleure compréhension des conséquences du suivi sur la nature de contrat d'emploi optimal et des déterminants de la valeur du suivi dans un modèle caractérisé par une information asymétrique.     

INTEGRATING TRADITIONAL CAPITAL BUDGETING CONCEPTS INTO AN INTERNATIONAL DECISION-MAKING ENVIRONMENT

The capital budgeting policies of 146 multinational companies are analyzed in light of current financial theory. Extensions of domestic practices into the international area are examined. There are a number of misapplications such as applying corporatewide weighted average cost of capital to foreign affiliate cash flows rather than to cash flows actually remitted to the corporation. Also, risk is frequently measured on a local project basis (in a foreign country) rather than considering the portfolio effect on the total corporation. Ultimately, it is shown that the survey respondents hedge against the uncertainty of the procedures by adding a premium to the weighted average cost of capital as computed by financial analysts.     

Analysis of consumers' willingness to pay for new food prepared from cowpea flour

Consumers' willingness to pay for cowpea products was analysed by a multi-ordered response model. The analysis indicated that sociodemographic factors are weakly linked to consumers' willingness to pay while product characteristics are strongly linked. Marketing promotion is possible. Thus, akara products, made from cowpea paste, have potential for extending the utilization of cowpeas.     

Sources of Entropy in Representative Agent Models

We propose two data‐based performance measures for asset pricing models and apply them to models with recursive utility and habits. Excess returns on risky securities are reflected in the pricing kernel's dispersion and riskless bond yields are reflected in its dynamics. We measure dispersion with entropy and dynamics with horizon dependence, the difference between entropy over several periods and one. We compare their magnitudes to estimates derived from asset returns. This exercise reveals tension between a model's ability to generate one‐period entropy, which should be large, and horizon dependence, which should be small.