Efficiency and Organizational Structure: A Study of Reverse LBOs

This paper is a report on 72 firms which went public since 1983 but previously underwent a full or divisional LBO. Accounting measures of performance reveal significant improvements in profitability which resulted mainly from these firms' ability to reduce costs. Firms experience dramatic increases in leverage at the LBO, but the leverage ratios are gradually reduced. The evidence is consistent with the hypothesis that the change in the governance structure of these firms towards more concentrated residual claims created a new organizational structure which is more efficient than its predecessor.     

Dualism in Part-Time Employment

This paper draws on open-ended interviews of managers to characterize two distinct types of part-time employment in service industries. "Secondary" part-time employment displays the typical characteristics of a secondary labor market; "retention" part-time jobs are primary labor market jobs. Some predictions of this model are tested on Current Population Survey data.     

The Dollar, the Oil Price and Policy Divergence

There is currently a clear divergence of policy between the United States, Japan and Germany. With the US in recession and concern growing over the severity of the slump, interest rates have been cut in a move to revive the economy. In contrast Japan and Germany are both experiencing strong growth and monetary policy remains tight to combat inflation. This divergence was seen most clearly when the Federal Reserve Board lowered its discount rate to 6 per cent on 1 February, the day after the Bundesbank had raised its Lombard rate to 9 per cent. With G7 increasingly concerned about domestic factors, less emphasis is placed upon stable exchange rates and as a result the dollar is at an all-time low. The last two G7 communiqués have stressed ‘stability oriented monetary policies’, an ambiguous phrase which fails to define ‘stability’ either in terms of exchange rates, inflation or growth. Thus both the German and Japanese policy of high interest rates to reduce inflation and low US interest rates aimed at stimulating the economy can be termed as ‘stability oriented’. This analysis focuses on these divergent policy responses in two alternative scenarios to the world forecast we presented last month. The first scenario considers what might happen if the Federal Reserve Board were to stimulate the US economy by further cuts in interest rates, whilst Japanese and German rates were unchanged in the face of inflationary pressures. This case may be relevant if the recent US loosening of monetary policy is not sufficient to encourage growth because of a ‘credit crunch’, so that a more expansionary policy is required by the Fed. As a consequence, policy diverges further and the dollar weakens. The second scenario focuses upon a reduction in inflationary pressures in Japan and Germany brought about by an oil price fall. In this case we assume that US policy is already loose enough to avoid a prolonged recession, but that German and Japanese monetary policy is relaxed as inflationary forces recede. In this case policies converge. Each scenario thus concentrates on one of !he two features which are causing the policy divergence amongst G3 countries: recession in the US, inflation in Germany and Japan.     

Asset-pricing Puzzles and Incomplete Markets

The representative agent theory of asset pricing is modified to incorporate heterogeneous agents and incomplete markets. The model features two types of agents who differ up to a nontradable, idiosyncratic component in their endowment processes. Numerical solutions indicate that individuals are able to diversify a substantial portion of their idiosyncratic income risk through riskless borrowing and lending alone. Restrictions on the variability of intertemporal marginal rates of substitution ( Hansen and Jagannathan (1991) ) are used to argue that incomplete markets, as modeled here, cannot account for the properties of asset returns that are anomalous from the perspective of representative agent theory.     

Money as a Potential Anchor for the Price Level: a Critique of the P* Approach

A number of recent articles have attempted to restore the use of a simple measure of the money supply as an indicator of future price levels and to re-establish a causal link from money to prices. Most notably Hallman, Porter and Small (HPS) (1989a), (1989b) originated the approach using US data and Hannah and James(1989) have applied it to the UK The approach broadens the traditional idea of a constant velocity of money by introducing the notion of V* and Q*, the long-run value of velocity and income. These are then used to define P from the traditional quantity theory of money as the long-run equilibrium price level. The analysis then proceeds to estimate a standard Error Correction Model (ECM) for price determination with the levels effect given by (P-P*)t-1. The conclusion drawn is that 'a measure of money that determines the long-run future level of prices is useful in determining the proper monetary policy for attaining price stability. We have shown, through the construction of P*, that M2 can serve as this determinant for the price level' (Hallman, Porter and Small (1982a) p. 23).
We argue in this paper that the P* approach is flawed. It is certainly more complex than traditional monetarist approaches but the fundamental questions of causality are in no way either affected or resolved. The P* analysis is a variant on more conventional cointegration analysis (Engle and Granger (1987), Johansen (1988), Hall (1989)) and we argue that the Johansen framework allows us to address the question in a formal and more complete way. When this approach is applied to the US data used by HPS, we find that while the P* relationship does indeed represent a cointegrating one, it does not have a causal link with prices but rather the causality runs from prices to money - this result conforms well to the work of Hendry and Ericsson (1990) or Hall, Henry and Wilcox (1990), which use this form of relationship to model the demand for money.