Earnings Announcements and the Components of the Bid-Ask Spread

This study investigates the behavior of the components of the bid-ask spread around earnings announcements. We find that the adverse selection cost component significantly increases surrounding the announcements, while the inventory holding and order processing components significantly decline during the same periods. Our results suggest that the directional change in the total bid-ask spread depends on the relative magnitudes of the changes in these three components. Specifically, the decreases in inventory holding costs and order processing costs imply that earnings announcements may have an insignificant impact on the total bid-ask spread, even when they result in increased information asymmetry.     

Do Hedge Funds Manipulate Stock Prices?

We provide evidence suggesting that some hedge funds manipulate stock prices on critical reporting dates. Stocks in the top quartile of hedge fund holdings exhibit abnormal returns of 0.30% on the last day of the quarter and a reversal of 0.25% on the following day. A significant part of the return is earned during the last minutes of trading. Analysis of intraday volume and order imbalance provides further evidence consistent with manipulation. These patterns are stronger for funds that have higher incentives to improve their ranking relative to their peers.     

Higher Education: Subsidizing Tuition versus Subsidizing Student Loans

We use a simple two‐period equilibrium framework to explore the effects of two different subsidization regimes for higher education on the formation of human capital and on the distribution of incomes. Individuals finance their investments in higher education through income‐contingent education loans as well as subsidies from the government. The subsidy is tax‐financed. We compare an egalitarian subsidy scheme, which reduces by a uniform amount the tuition charged to students, with a student loan subsidy which is proportional to the student's debt service obligation. We show that both types of subsidies reduce the economy‐wide underinvestment in higher education and lead to a more equal income distribution. Furthermore, according to some social welfare criterion, the student loan subsidy regime dominates the tuition subsidy regime if the subsidy level is predetermined, while the converse is true if the subsidy level constitutes a choice variable of the government.     

Effects of the 1970 Bank Holding Company Act: Evidence from Capital Markets

This study measures the effects of the 1970 amendment to the Bank Holding Company (BHC) Act on the profitability and risk of BHCs using capital market data. Differences in abnormal returns and risk among three portfolios of bank shares which differ in their regulatory status are examined in various periods preceding and following the enactment. No significant differences in performance and no change in the relative risk of any pair of portfolios were observed. Thus, the null hypothesis that the nonbank expansion provisions of the 1970 amendment had no effect on BHCs' risk and profitability cannot be rejected.     

The Effects of Inflation and Taxes on Growth Investments and Replacement Policies

This paper investigates the effect of inflation and taxes on the optimal duration of investments. The main conclusion is that inflation does not always increase the duration of investments. For example, in the case of equipment with a short replacement cycle, increased inflation tends to decrease the duration of the cycle. Contrary to the common theoretical analysis, these results imply that inflation may increase some forms of capital investments.     

Efficiency of Screening and Labor Income Inequality

We analyze the importance of information about individual skills for understanding human capital accumulation and income inequality. The paper uses the framework of an overlapping generations economy with endogenous investment in human capital. Agents in each generation differ by random individual ability, or talent, which affects the screening process. The human capital of an agent depends on both his talent and his investment in education. The investment decision is based on a public signal (test outcome), which screens all agents for their talents. We analyze how a better information system, which allows more efficient screening, affects investment in education and, hence, income inequality in equilibrium. As a main result, we find that, typically, less inequality in the distribution of actual incomes can only be achieved at the expense of more inequality in the distribution of income opportunities.     

Can Taxes Shape an Industry? Evidence from the Implementation of the “Amazon Tax”

For years, online retailers have maintained a price advantage over brick‐and‐mortar retailers by not collecting sales tax at the time of sale. Recently, several states have required that online retailer Amazon collect sales tax during checkout. Using transaction‐level data, we document that households living in these states reduced their Amazon purchases by 9.4% following the implementation of the sales tax laws, implying elasticities of –1.2 to –1.4. The effect is stronger for large purchases, where purchases declined by 29.1%, corresponding to an elasticity of –3.9. Studying competitors in the electronics field, we find some evidence of substitution toward competing retailers.