The Future of Securities Regulation

The U.S. system of securities law was designed more than 70 years ago to regain investors' trust after a major financial crisis. Today we face a similar problem. But while in the 1930s the prevailing perception was that investors had been defrauded by offerings of dubious quality securities, in the new millennium, investors' perception is that they have been defrauded by managers who are not accountable to anyone. For this reason, I propose a series of reforms that center around corporate governance, while shifting the focus from the protection of unsophisticated investors in the purchasing of new securities issues to the investment in mutual funds, pension funds, and other forms of asset management.     

Shock Persistence and Stochastic Trends in Australian Aggregate Output and Consumption*

The distinction between transitory and permanent shocks is at the centre of the debate on which class of models is best suited to represent economic variables: stationary models around a deterministic trend, or stationary models around a stochastic trend The debate u here focused on the Australian case. It is found that both aggregate output and consumption are characterized by stochastic trends, but without a transitory component This corresponds to a measure of shock persistence equal to one for both variables. For the specific case of aggregate output, this result may be interpreted as indicating the absence of business cycles     

What Do We Know about Capital Structure? Some Evidence from International Data

We investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. We find that factors identified by previous studies as correlated in the cross-section with firm leverage in the United States, are similarly correlated in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved.     

Presidential Address: Does Finance Benefit Society?

Academics’ view of the benefits of finance vastly exceeds societal perception. This dissonance is at least partly explained by an underappreciation by academia of how, without proper rules, finance can easily degenerate into a rent‐seeking activity. I outline what finance academics can do, from a research point of view and from an educational point of view, to promote good finance and minimize the bad.     

Who Blows the Whistle on Corporate Fraud?

To identify the most effective mechanisms for detecting corporate fraud, we study all reported fraud cases in large U.S. companies between 1996 and 2004. We find that fraud detection does not rely on standard corporate governance actors (investors, SEC, and auditors), but rather takes a village, including several nontraditional players (employees, media, and industry regulators). Differences in access to information, as well as monetary and reputational incentives, help to explain this pattern. In‐depth analyses suggest that reputational incentives in general are weak, except for journalists in large cases. By contrast, monetary incentives help explain employee whistleblowing.     

The Structure of Multiple Credit Relationships: Evidence from U.S. Firms

When firms borrow from multiple concentrated creditors such as banks they appear to differentiate their allocation of borrowing. In this paper, we put forward hypotheses for this borrowing pattern based on incomplete contract theories and test them using a sample of small U.S. firms. We find that firms with more valuable and more homogeneous assets differentiate borrowing more sharply across concentrated creditors. Moreover, borrowing differentiation is inversely related to restructuring costs and positively related to firms' informational transparency. The results suggest that the structure of credit relationships is used to discipline creditors and entrepreneurs, especially during corporate reorganizations.     

Cross‐country asymmetries in monetary policy transmission: evidence from EMU members

This paper analyzes monetary policy asymmetries in EMU participating countries. In particular, we use a structural dynamic modelling approach to investigate asymmetric monetary transmission in Europe. Asymmetries are investigated in two different ways. First, we restrict the estimated structural models reflecting the monetary constraints each country faced during the EMS period. We obtain well‐behaved and comparable effects of monetary policy shocks. Second, efficiency frontiers for the selected EMU countries are estimated. In computing the optimal combinations of output gap and inflation volatility we use a weighted average of interest rate and exchange rate, i.e. the Monetary Condition Index (MCI), as a policy instrument. The impulse response analysis implemented with the MCI shows relatively small differences in the responses of the real economy to monetary policy shocks. Altogether the results suggest that, no matter which policy instrument is used, output gap and inflation respond to identical monetary shocks with a similar speed and movement, albeit with a different degree of effect.     

Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention

This paper studies a general equilibrium model that is consistent with recent empirical evidence showing that the U.S. price level and inflation are much more responsive to aggregate technology shocks than to monetary policy shocks. Specifically, we show that the fact that aggregate technology shocks are more volatile than monetary policy shocks induces firms to pay more attention to the former than to the latter. However, most important, this work adds to the literature by analytically showing how monetary policy feedback rules affect the incentives faced by firms in allocating attention. A policy rule responding more actively to inflation fluctuations induces firms to pay relatively more attention to more volatile shocks, helping to rationalize the observed behavior of prices in response to technology and monetary policy shocks.     

Does Inflation Adjust Faster to Aggregate Technology Shocks than to Monetary Policy Shocks?

This paper studies U.S. inflation adjustment speed to aggregate technology shocks and to monetary policy shocks in a medium size Bayesian vector autoregression model. According to the model estimated on the 1959–2007 sample, inflation adjusts much faster to aggregate technology shocks than to monetary policy shocks. These results are robust to different identification assumptions and measures of aggregate prices. However, by separately estimating the model over the pre‐ and post‐1980 periods, this paper further shows that inflation adjusts much faster to technology shocks than to monetary policy shocks in the post‐1980 period, but not in the pre‐1980 period.     

Game-theoretic definitions of fairness and the contractualistic foundations of justice

We discuss game-theoretic interpretations of Rawls's theory of justice with special reference to the choice of the most appropriate solution concept. We show that Core-like solution concepts, as the one proposed by Laden (1991,Philosophy and Public Affairs,20, 189–222), have undesirable implications in this context. The “Bargaining Set” has more satisfactory properties for any contractualistic approach.