A Bayesian Approach to Real Options: The Case of Distinguishing between Temporary and Permanent Shocks

Traditional real options models demonstrate the importance of the “option to wait” due to uncertainty over future shocks to project cash flows. However, there is often another important source of uncertainty: uncertainty over the permanence of past shocks. Adding Bayesian uncertainty over the permanence of past shocks augments the traditional option to wait with an additional “option to learn.” The implied investment behavior differs significantly from that in standard models. For example, investment may occur at a time of stable or decreasing cash flows, respond sluggishly to cash flow shocks, and depend on the timing of project cash flows.     

ESTIMATING INCENTIVE AND WELFARE EFFECTS OF NONSTATIONARY UNEMPLOYMENT BENEFITS

The distribution of unemployment duration in our equilibrium matching model with spell‐dependent unemployment benefits displays time‐varying exit rates. Building on semi‐Markov processes, we translate these rates into an expression for the aggregate unemployment rate. Structural estimation using German microdata allows us to discuss the effects of an unemployment benefit reform (Hartz IV). The reform reduced unemployment by less than 0.1 percentage points. Contrary to general beliefs, the net wage for most skill and regional groups increased. Taking the insurance effect of unemployment benefits into account, however, the reform is welfare reducing for 76% of workers.     

China and the world financial markets 1870–1939: Modern lessons from historical globalization1

In this article we review the development of Chinese capital markets over a crucial period in the history of markets worldwide, and place that development in context. Despite fundamental differences between China today and China 100 years ago, it is still important to consider the effects of an imbalance between domestic and international investor markets, and the mismatch between domestic and foreign expectations about investor protection. The lessons of the last century suggest that China today should consider opening Chinese investor access to foreign capital markets in order to equilibrate the level of diversification between foreign and domestic investors. In addition, our analysis suggests that protecting of domestic corporate investor rights is at least as important as protecting foreign investor rights.     

Where Is the Risk in Value? Evidence from a Market‐to‐Book Decomposition

We study the value premium using the multiples‐based market‐to‐book decomposition of Rhodes‐Kropf, Robinson, and Viswanathan (2005). The market‐to‐value component drives all of the value strategy return, while the value‐to‐book component exhibits no return predictability in either portfolio sorts or firm‐level regressions. Existing results linking market‐to‐book to operating leverage, duration, exposure to investment‐specific technology shocks, and analysts’ risk ratings derive from the unpriced value‐to‐book component. In contrast, results on expectation errors, limits to arbitrage, and certain types of cash flow risk and consumption risk exposure are due to the market‐to‐value component. Overall, our evidence casts doubt on several value premium theories.     

Proxy Advisory Firms: The Economics of Selling Information to Voters

We analyze how proxy advisors, which sell voting recommendations to shareholders, affect corporate decision‐making. If the quality of the advisor's information is low, there is overreliance on its recommendations and insufficient private information production. In contrast, if the advisor's information is precise, it may be underused because the advisor rations its recommendations to maximize profits. Overall, the advisor's presence leads to more informative voting only if its information is sufficiently precise. We evaluate several proposals on regulating proxy advisors and show that some suggested policies, such as reducing proxy advisors' market power or decreasing litigation pressure, can have negative effects.     

Strategic and Financial Bidders in Takeover Auctions

Using data on auctions of companies, we estimate valuations (maximum willingness to pay) of strategic and financial bidders from their bids. We find that a typical target is valued higher by strategic bidders. However, 22.4% of targets in our sample are valued higher by financial bidders. These are mature, poorly performing companies. We also find that (i) valuations of different strategic bidders are more dispersed and (ii) valuations of financial bidders are correlated with aggregate economic conditions. Our results suggest that different targets appeal to different types of bidders, rather than that strategic bidders always value targets more because of synergies.     

Auctions with Endogenous Initiation

We study initiation of takeover auctions by potential buyers and the seller. A bidder's indication of interest reveals that she is optimistic about the target. If bidders' values have a substantial common component, as in takeover battles between financial bidders, this effect disincentivizes bidders from indicating interest, and auctions are seller-initiated. Conversely, in private-value auctions, such as battles between strategic bidders, equilibria can feature both seller- and bidder-initiated auctions, with the likelihood of the latter decreasing in commonality of values and the probability of a forced sale by the seller. We also relate initiation to bids and auction outcomes.     

When It Pays to Pay Your Investment Banker: New Evidence on the Role of Financial Advisors in M&As

We provide new evidence on the role of financial advisors in M&As. Contrary to prior studies, top‐tier advisors deliver higher bidder returns than their non‐top‐tier counterparts but in public acquisitions only, where the advisor reputational exposure and required skills set are relatively larger. This translates into a $65.83 million shareholder gain for an average bidder. The improvement comes from top‐tier advisors' ability to identify more synergistic combinations and to get a larger share of synergies to accrue to bidders. Consistent with the premium price–premium quality equilibrium, top‐tier advisors charge premium fees in these transactions.     

Consumer Protection in Postwar Canada: Role and Contributions of the Consumers' Association of Canada to the Public Policy Process

This article traces the contribution of the Consumers' Association of Canada (CAC) to the advancement of Canadian consumer protection legislation in the decades after World War II. The theory of the consumerism life cycle shows that the CAC as the spearhead of grassroots consumer activism in Canada was able to address effectively consumer concerns at both the administrative and policymaking levels of government. Analysis of the rise and fall of consumerism in post–WWII Canada from the perspective of the consumerism life cycle also might well have implications for the further development of that theory.