Inflationary Finance, Capital Controls, and Currency Substitution

This paper studies currency substitution in an environment where agents' inflation tax-evasive demand for foreign money is balanced by the concern for the possibility that the government may impose economy-wide capital controls under which foreign currency transactions are costly. Under the assumption of endogenous beliefs, the results show a persistent demand for foreign money despite efforts by the government to reduce inflation. In addition, the economy can exhibit multiple, Pareto-ranked steady states with different levels of currency substitution. The stability analysis suggests that the economy converges to the inferior steady state, on the "wrong side" of the Laffer curve.     

The information content of stock split announcements: Do options matter?

We provide a new test of the informational efficiency of trading in stock options in the context of stock split announcements. These announcements tend to be associated with positive abnormal returns. Our traditional event study results show abnormal returns that are significantly lower for optioned than non-optioned stocks, whether traded on the NYSE, Amex, or Nasdaq. After controlling for market returns, capitalization, book-to-market ratio, and trading volume, we find that the abnormal returns are significantly lower for NYSE/Amex optioned than non-optioned stocks. Although the results for Nasdaq stocks are not as clear, the overall effects tend to be lower after optioning. These findings are consistent with the hypothesis that the prices of optioned stocks embody more information, diminishing the impact of the stock split announcement. They provide new evidence of the beneficial effects of options on their underlying stocks.     

Reexamining the uncertain information hypothesis on the S&P 500 Index and SPDRs

This paper examines the uncertain information hypothesis on one major index and its corresponding exchange-traded fund: the S&P 500 Index and SPDRs in the pre-SPDRs (01/63–12/93) and post-SPDRs (01/94–12/03) periods. Two strategies are used to measure the economic significance of the uncertain information hypothesis. Overall, we present evidence confirming the uncertain information hypothesis in the post-SPDRs period. However, we fail to convert the statistically significant gains observed into economic gains under a conservative approach. In addition, the degree of difference in the volatilities of the 5-day post-event returns (in both the S&P 500 and the SPDR) among the three subgroups diminishes in the post-SPDR period. Hence, we conclude that the market is in fact short-term efficient in a more realistic setting.     

CEO Ownership and Discretionary Investments

Abstract:  This study investigates empirically the relationship between CEO ownership and discretionary investments such as R&D and capital expenditures. We assert that the under-investment problem is high for R&D-intensive projects, while the over-investment problem is high for capital expenditures because of differences in risk between the two types of investments. Building on the linkages between investments and investment-related agency problems, we hypothesize that the relationship between CEO ownership and investments depends on whether increasing ownership mitigates or exacerbates the under- or over-investment problem. We find a non-linear association between CEO stock ownership and R&D investments; R&D investments increase and then decline across increasing levels of ownership. Further, we find that R&D investments and CEO stock options are positively associated at high levels of option holdings. In contrast, capital expenditures do not vary with CEO ownership (stock or options). Finally, consistent with our underlying assumption, we find that the influence of R&D investments on future firm risk is significantly larger than that of capital expenditures. Our findings indicate that managerial risk aversion affects discretionary investments.     

Reviews

“THE RURAL ECONOMY” M. Healey and B. llbery (Eds), 1985: The Industrialization of the Countryside Norwich: Geo Books, £32.50.

P. Lowe, G. Cox, M. MacEwen, T. O'Riordan, M. Winter, 1986: Countryside Conflicts. The Politics of Farming, Forestry and Conservation.

Aldershot: Gower Publishing Company, £19.50 hardback, £8.95 paper.

E. Stern and J. Turbin, 1986: Youth Employment and Unemployment in Rural England. Report of a One Year Pilot Study in Four Rural Areas for the Development Commission Development Commission/Tavistock Institute of Human Relations.

“GLOBAL RESTRUCTURING, LOCAL RESPONSE?” Philip Cook (Ed), 1986: Global Restructuring, Local Response. London: Economic and Social Research Council £10.00.

“LOCAL ECONOMIC DEVELOPMENT” Cordle, P., 1985: Employment and Industrial Development-Local Authority Initiatives. CIPFA, £5.00. V. Hausner (Ed) 1986: Critical Issues in Urban Economic Development, Volume II. Oxford: Clarendon Press, £22.50

“CRISIS IN THE INDUSTRIAL HEARTLAND” Spencer, K., Taylor, A., Smith, B., Mawson, J., Flynn N. and Batley, R., 1986: Crisis in the Industrial Heartland: A Study of the West Midlands. Oxford University Press, £7.95.

“BLACK POLITICS AND URBAN CRISIS” Brian D. Jacobs, 1986: Black politics and urban crisis in Britain. Cambridge: Cambridge University Press £25.00 Hardback.

“UNEMPLOYMENT AND LABOUR MARKET POLICIES” Hart, P. E. (Ed), 1986: Unemployment and Labour Market Policies Aldershot: Gower, 1950