The Mode of Acquisition in Takeovers: Taxes and Asymmetric Information

We develop a model in which the mode of acquisition conveys information concerning the value of the bidder. The model incorporates the possibility that offers containing both cash and stock can be made in a setting consistent with the U.S. tax code. We demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers. The model yields a number of unique predictions about the construction of acquisition offers. We present evidence consistent with the model.     

Vested Interest and Biased Price Estimates: Evidence from an Auction Market

This study employs a new data set from art auctions to examine the relationship between auctioneer presale price estimates and the long‐term performance of artworks. We find that the price estimates for expensive paintings have a consistent upward bias over a long period of 30 years. High estimates at the time of purchase are associated with adverse subsequent abnormal returns. Moreover, the estimation error for individual paintings tends to persist over time. These results are consistent with the view that auction house price estimates are affected by agency problems and that some investors are credulous.     

Markov-Chain Analysis of Internal Manpower Supply

The separation of manpower forecasting into a demand forecast and a supply forecast emphasizes that each depends on quite different sources of information. The demand forecast is based primarily on an estimate of sales, which is then transformed into the number and type of personnel needed to produce and sell the company's products. The information for forecasting internal supply can often be treated as if it were independent of the external environment and is often available within the firm. If a matrix representing the probability of transition from one job classification to another can be prepared for the relevant classifications, Markov-chain theory can be used to generate a forecast of internal manpower supply.     

The Budget Deficit, Public Debt, and Endogenous Growth

This paper analyzes the effects of public debt on endogenous growth in an overlapping generations model. The government fixes the budget deficit ratio. If the deficit ratio stays below a critical level, then there are two steady states where capital, output, and public debt grow at the same constant rate. An increase in the deficit ratio reduces the growth rate. If the deficit ratio exceeds the critical level, then there is no steady state. Capital growth declines continuously, and capital is driven down to zero in finite time.     

Tightening the Fiscal and Monetary Controls

The Medium-Term Financial Strategy (MTFS) is a new departure in post-war policy-making. As David Smith's Briefing Paper shows the ideas behind it are well rooted in historical experience, but nevertheless it was inevitable that there would be a major element of trial and error in the early years of its use. The experience of 1980-81 however has produced some alarming results. The monetary limits have been drastically exceeded and the PSBR is likely to be far above the original target. There are two possible explanations. Either the control system is gravely defective or the government has deliberately followed the kind of short-term discretionary policies (and has indulged in the kind of ad hoc interventionism) which the strategy was expressly designed to avoid. We believe that both explanations are true. It is also probable that they reinforced each other. The first year of the strategy was likely to be the year of greatest strain. It involved a highly ambitious attempt to reduce inflation at a time when cost pressures from wages and higher energy prices were particularly strong. The strains rapidly revealed the defects in the control system. Since the government was alarmed at the short-term consequences of its policies, it chose to make a virtue of necessity and in effect suspended its commitment to the control of sterling M3. It is possible to look back at 1980 and to say that, in the event, the government's loss of control over its policies was justified as statesmanlike flexibility. But there always appear to be good reasons for sacrificing long-term objectives for short-term expediency. The MTFS was intended to avoid the chronic tendency to accept the easy option. It is essential that in 1981 the commitment to the MTFS should be re-established and that it should be reinforced, as appears to be necessary, by a system of indicators and controls to ensure that the errors of 1980 are not repeated. Otherwise there is a serious risk that the hard-won gains in the fight against inflation will be lost in the economic upturn. In the first part of this Viewpoint we examine what happened to fiscal and monetary policy in 1980 and discuss the general lines that policy should follow in 1981-82. We conclude that in order to get fiscal policy back on course the authorities should aim for a PSBR of £10 bn in 1981-82. In the second part we discuss in more detail the reasons why monetary policy went so badly astray in 1980, focusing particularly on the role of the Bank of England. We argue that just as ‘dirty floating’ (i.e. the pursuit of exchange rate objectives) may threaten the monetary targets, so ‘dirty monetarism’ (i.e. the pursuit of interest rate objectives) may prove an even greater threat. We conclude that the discretionary activities of the Bank of England contributed to the excessive monetary growth in 1980, and that it is necessary to ensure that in future the Bank should conduct its policy on a non-discretionary basis.