Do Managers of U.S. Defined Benefit Pension Plan Sponsors Use Regulatory Freedom Strategically?

We use historical particularities of pension funding law to investigate whether managers of U.S. corporate defined benefit pension plan sponsors strategically use regulatory freedom to lower the reported value of pension liabilities, and hence required cash contributions. For some years, pension plans were required to estimate two liabilities—one with mandated discount rates and mortality assumptions, and another where these could be chosen freely. Using a sample of 11,963 plans, we find that the regulated liability exceeds the unregulated measure by 10% and the difference further increases for underfunded pension plans. Underfunded plans tend to assume substantially higher discount rates and lower life expectancy. The effect persists both in the cross‐section of plans and over time and it serves to reduce cash contributions. We further show that plan sponsor managers use the freed‐up cash for corporate investment and that credit risk is unlikely to explain the finding.     

When Does Information Asymmetry Affect the Cost of Capital?

This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.     

Housing and the Macroeconomy: Inflation and the Financial Accelerator

Three themes connecting housing and the macroeconomy are discussed. First, evidence is presented for the property market as one of the drivers of U.S. consumer price inflation. Second, key drivers of house prices are explained to account for the remarkable diversity of international experience. Finally, three potential links between housing, credit, and the financial accelerator are discussed. These are the consumption channel, the investment channel, and feedback between bad loans and risk‐spreads via the financial system—and how institutional differences between countries can explain the presence, absence and magnitudes of these linkages.     

TECHNICAL NOTE : THE VARIABLE FINANCIAL INDICATOR IRR AND THE CONSTANT ECONOMIC INDICATOR NPV

The IRR (internal rate of return) and the NPV (net present value) are the two most common and important indicators in investment decisions. These two indicators, however, have intrinsic differences between one another. The IRR is a financial indicator and the NPV an economic indicator of a capital investment. The former gives the private investor's point of view and the latter the society's point of view. The value of ERR varies with the change of Financial arrangement of an investment. The NPV, however, does not but remains constant no matter how the financial arrangement changes. This paper uses an illustrative example to show their intrinsic differences and then describes a mathematical proof to substantiate the different natures of IRR and NPV.     

The Role of the Business Press as an Information Intermediary

This paper investigates whether the business press serves as an information intermediary. The press potentially shapes firms' information environments by packaging and disseminating information, as well as by creating new information through journalism activities. We find that greater press coverage reduces information asymmetry (i.e., lower spreads and greater depth) around earnings announcements, with broad dissemination of information having a bigger impact than the quantity or quality of press-generated information. These results are robust to controlling for firm-initiated disclosures, market reactions to the announcement, and other information intermediaries. Our findings suggest that the press helps reduce information problems around earnings announcements.     

APPLYING A GENETIC ALGORITHM TO INTERNATIONAL DIVERSIFICATION OF EQUITY PORTFOLIOS: A SOUTH AFRICAN INVESTOR PERSPECTIVE

This paper uses the genetic algorithm (GA) approach to generate a portfolio optimisation scenario of a South African investor who seeks to maximise return from investing in S&P500, FTSE100, NASDAQ, DOWJONES, CAC40 and the DAX from January 1, 2005, to January 31, 2008, but facing exchange rate risk. The GA searches for the optimal solution in the entire set of financial constraints without looking for partial derivatives of the utility function. Whereas most financial problems require a non‐linear and time‐varying model, the GA, with its survival principle of offspring chromosomes, is better suited to this type of problem than local optimisation methods. The performance of the GA is compared with two non‐linear models, namely the quadratic mean‐variance (QMV), which maximises the portfolio mean‐variance, and the quadratic variance minimisation (QVM), which minimises the portfolio variance. The results show that neither the QMV nor the QVM takes into account the domestic investors' risk attitude towards investing in foreign equities and therefore does not provide any international diversification benefits. In addition, the bootstrapping scenario of 10,000 simulations reveals that neither the QMV nor the QVM outperforms the GA in terms of Sharpe ratio and flexibility in dealing with investors' risk attitude towards investing in foreign equities denominated in foreign currencies.     

The Case for Intervening in Bankers’ Pay

This paper studies the default risk of banks generated by investment and remuneration pressures. Competing banks prefer to pay their banking staff in bonuses and not in fixed wages as risk sharing on the remuneration bill is valuable. Competition for bankers generates a negative externality, driving up market levels of banker remuneration and hence rival banks’ default risk. Optimal financial regulation involves an appropriately structured limit on the proportion of the balance sheet used for bonuses. However, stringent bonus caps are value destroying, default risk enhancing, and suboptimal for regulators who control only a small number of banks.     

NATURAL RESOURCE ABUNDANCE,INSTITUTIONS AND TAX REVENUE MOBILISATION IN SUB‐SAHARA AFRICA

The contribution of natural resources to tax revenues has generally yielded mixed results in the literature. This study asserts that the missing link to explaining these differences is the quality of institutions. More resource revenues reduce tax revenues when institutions are poor. Using an interaction term for natural resources and institutional quality, we show that institutions are decisive for the contribution of natural resources to tax revenue mobilisation. The interaction effect is statistically significant after controlling for per capita gross domestic product (GDP), an alternative measure of quality of institutions and additional regressors. This finding is robust to different econometric specifications and the type of natural resources.