Welfare Effect of Mergers and Multilateral Trade Liberalization

In a two‐country model where firms behave à la Cournot, we show that trade liberalization increases (decreases) the social desirability of those mergers that generate sufficiently large (small) reductions in marginal cost. There exists a range of intermediate levels of marginal cost savings such that marginal tariff reductions increase (decrease) the desirability of merger at sufficiently low (high) tariff levels. Moreover, in the neighborhood of free trade, we show that if trade liberalization increases the profitability of a merger, it necessarily also increases its desirability.     

Debtor-in-possession financing

Several recent papers have documented the benefits of debtor-in-possession (DIP) financing in the restructuring of firms in Chapter 11. However, the view on benefits is not unanimous and some legal scholars have raised doubts about DIP financing's effects on debt-holders and the possibility of expropriative wealth transfers. In this paper we address this issue by analyzing both stock and bond price data for a comprehensive sample of DIP loans and find significant positive abnormal stock and bond returns at the announcement of DIP loans. Also, we do not find evidence of wealth transfers from junior to senior debt-holders. Further, we examine the DIP loan process in detail and we document important institutional features of DIP loans such as maturity, covenants, fees and interest charges. We find evidence of intense monitoring using covenants. We also find higher fees and charges associated with DIP loans. We argue that overall the results are consistent with the information processing role of financial intermediaries.     

Dividend reinvestment plans: An empirical analysis

This study examines the effect of initiating discount and no discount dividend reinvestment plans on shareholder wealth. The results show a negative response to DRP announcements, which is significantly smaller than that found in studies of new equity offerings. These results are consistent with the Scholes and Wolfson (1989) hypothesis that managers in need of equity capital use DRPs to mitigate the adverse stock price effects of new equity issue announcements. Furthermore, there is a significant difference in the price response of discount and no discount DRPs for industrial firms. This result is supportive of the signaling potential of discount DRPs. Supportive evidence is also found in the analysis of firm characteristics for industrial firms.     

Electoral goals and center-state transfers: A theoretical model and empirical evidence from India

We construct a model of redistributive politics where the central government is opportunistic and uses its discretion to make transfers to state governments on the basis of political considerations. These considerations are the alignment between the incumbent parties at the central and state levels and whether a state is a swing state or not. A testable prediction from the model is that a state that is both swing and aligned with the central government is especially likely to receive higher transfers. We test this prediction using Indian data for 14 states from 1974–75 to 1996–97. We find that a state which is both aligned and swing in the last state election is estimated to receive 16% higher transfers than a state which is unaligned and non-swing.     

Why are firms unlevered?

In this paper, we examine why firms have no debt in their capital structure. We reject the hypothesis that zero-leverage policies are driven by entrenched managers attempting to avoid the disciplinary pressures of debt. These firms do not have weaker internal or external governance mechanisms. The debt initiation decisions of these firms are not preceded by shocks to their entrenchment, such as takeover threats or the emergence of activist blockholders. Our evidence supports the hypothesis that these firms are financially constrained. Zero-debt firms are small, young, conserve cash from cash-flow, and are more likely to lease their assets. When they have access to a line of credit, they face stricter covenants and higher all-in costs than comparable control firms. They lose market share in economic downturns, consistent with the financial constraints explanation, but inconsistent with theories of predation which suggest that they may be voluntarily stockpiling debt capacity.     

Fairness in International Trade Negotiations: Developing Countries in the GATT and WTO

Does fairness matter in the hard bargaining and horse‐trading that is associated with trade negotiations? This paper presents a positivist analysis of the particular concepts of fairness that developing countries have appealed to in their trade negotiations within the auspices of the GATT and WTO, how these notions have evolved, and the impact that they have had on negotiated outcomes. Treating the concept of fairness as my central dependent variable, I argue that the notion of fairness can only be understood in terms of the institutional context it is embedded in, which includes institutional structure as well as the participatory processes that underlie it. I advance three hypotheses on the relationship between institutional context: the fairness discourse, and the influence and manoeuvre that member countries can have in shaping that discourse. Focusing on the role of fairness in the negotiation positions of developing countries, I explain its substance and evolution through learning and adaptation by these countries within the very particular institutions of the GATT and the WTO, and the coalitions they form a part of and interact within.     

Debt Restructuring and Economic Recovery: Analysing the Argentine Swap

When Argentine sovereign default in December 2001 led to a collapse of the peso, the burden of dollar debt became demonstrably unsustainable. But it was not clear what restructuring was feasible, nor when. Eventually, in 2005 after a delay of more than three years, a super‐majority of creditors accepted a swap that essentially involved the ‘pesification’ of dollar liabilities. With the IMF not playing its customary role in arranging a swap, we consider whether a bilateral bargaining approach can help explain the final settlement and the delay in achieving it. We find that the swap broadly corresponds to a bargaining outcome where substantial delay occurred for both political and economic reasons. Even after political legitimacy was assured by general elections, negotiators seeking a sustainable outcome – at a time of deep recession, profound currency under‐valuation and high sovereign spreads – realised it was better to wait before settling. Other factors discussed include the definition of sustainability criteria, the effect of inter‐creditor conflict and the role of third parties in promoting ‘good faith’ bargaining. We suggest that, while these issues need further investigation, there are institutional changes that could make them less problematic.     

The G20 at the Cancun Ministerial: Developing Countries and Their Evolving Coalitions in the WTO

In large measure, the voice that developing countries were able to exercise in Cancun was a result of their effective coalition formation. In this paper we present a brief overview of the various coalitions that played an important role at Cancun. The greater part of this paper focuses on one among these various coalitions: the G20 on agriculture. The G20 presents an especially fascinating case of a coalition that combined a great diversity of members and apparently incompatible interests. All theoretical reasoning and historical precedent predicted that the group would collapse in the endgame. And yet the group survived. We investigate the sources of the unity of this group and trace them to a process of learning that allowed the group to acquire certain structural features and develop strategies that helped to cement it further. While our central dependent variable is the cohesion of the G20, we also address the derivative question of the costs and benefits of maintaining such coalitions. The Cancun coalitions give us an excellent case of coalitions that managed to retain their cohesion, but also ended up with a situation of no agreement rather than a fulfilment of even some of their demands. We examine some of the causes behind the impasse in the negotiation process and suggest ways in which future outcomes could be improved.     

Trade Liberalization and the Profitability of Mergers: a Global Analysis*

We analyze the effects of bilateral tariff reductions on the profitability of cost‐reducing horizontal mergers. Given Cournot competition in a two‐country world, for any positive tariff below a certain threshold, marginal trade liberalization is shown to encourage only those domestic mergers with sufficiently large cost‐savings and to discourage the rest. For tariffs close to, but smaller than, the prohibitive tariff, however, marginal trade liberalization necessarily encourages all domestic mergers. Moreover, we show that for a given level of cost‐savings, the impact of marginal trade liberalization may not reliably predict that of nonmarginal liberalization. Although at high tariffs, domestic mergers are shown to be unambiguously more profitable than cross‐border mergers, near free trade, mergers which yield the most cost‐savings become the most profitable. Thus, when comparing domestic and cross‐border mergers, trade liberalization encourages the type which yields the most cost‐savings.     

Telemedicine and rural primary health care: an analysis of the impact of telecommunications technology.

A scarcity of health care workers attributable to the present maldistribution of physicians is one of the most pressing health care delivery problems in rural America. Expanded utilization of non-physician primary health care providers is a possible solution to this problem. The capability of satellite clinics staffed by these personnel to provide ambulatory services efficiently and effectively can be enhanced by reducing the need for physical referral of the patients to a physician at a central clinic. The use of telecommunication technologies for conducting consultation between remotely located non-physicians and physicians can potentially reduce the required number of such referrals. This paper describes the procedures used for estimating the impact of alternative telemedicine technologies on the delivery of primary care in rural areas. Non-physician protocols were used to measure the impact of technology.