Short sale constraints,dispersion of opinion,and stock overvaluation: Evidence from earnings announcements in China

Using a clean setting in China, we test the Miller (1977) hypothesis that stocks are overvalued in the presence of short sale constraints and dispersion of opinion as an extension of Berkman et al. (2009). We find that stocks with short sale constraints have significantly negative abnormal returns during earnings announcement periods, especially when investors have diverse opinions. These results are robust to alternative measures of abnormal returns and endogeneity concern. The findings help to explain the impact of short sale constraints on pricing efficiency and have important policy implications for relaxing restrictions on short selling and improving regular information disclosure in emerging markets.     

Land conservation,growth and welfare

This paper identifies the factors, such as leaving land fallow and conservation inputs, for conserving and enhancing soil fertility of land. The growth and welfare effects of these land policies are then examined. Leaving land fallow and conservation inputs raise the equilibrium soil fertility. In the short run, the polices can render unfavorable impacts to the economy, such as decreases in the land supply by the fallow plan, or reductions in public services and falls in private capital formation. Nonetheless, both policies have ambiguous impacts on growth and welfare of the economy in the long run. Furthermore, due to the favorable impact on initial consumption, the welfare-maximizing tax rate or transfer ratio is larger than the one for growth maximization. However, for the land fallow ratio, both rates are the same.     

Offshoring,globalization, and welfare

We investigate the issue of offshoring in a general-equilibrium model of two countries and one sector of increasing returns to scale. Our model uncovers that offshoring occurs and endogenously evolves in a bell-shaped pattern when trade costs decline, explaining some stylized facts in developed countries. Furthermore, this simple framework can be applied to examine the welfare issue. We find that a fall in offshoring costs benefits the high-wage country but hurts the low-wage country. On the other hand, the low-wage country benefits with trade liberalization. The impact of falling trade costs on the welfare of the high-wage country depends on the values of offshoring freeness.     

Endogenous search,price dispersion,and welfare

This paper studies the welfare cost of inflation in a frictional monetary economy with endogenous consumer search. Equilibrium entails price dispersion, where sellers compete for buyers by posting prices. We identify three channels through which inflation affects welfare. The real balance channel is the source of welfare loss. Its interaction with the price posting channel generates a welfare cost larger than Lucas (2000). The search channel reduces the welfare cost by more than one half through general equilibrium effect. The aggregate effect of these three channels on welfare is non-monotonic. Additionally, the welfare cost of inflation fluctuations is negligible.     

Integration, agglomeration and welfare

This paper studies the social desirability of agglomeration, and the efficiency arguments for policy intervention in a simple, analytically tractable new economic geography model. The location pattern emerging as market equilibrium is ‘bubble-shaped’, i.e. it features dispersion both at high and low trade costs and stable equilibria with partial and full agglomeration for intermediate levels of trade costs. We show that the market equilibrium is characterized by over-agglomeration for high trade costs and under-agglomeration for low trade costs, and we work out analytically that a net pecuniary externality is the underlying cause of this market failure. One particularly noteworthy result is that the net pecuniary externality is positive at high levels of trade freeness. However, there is no market under-agglomeration unless this positive net pecuniary externality interacts with an additional congestion force originating in the (per se efficient) competitive housing market.     

Volatility and welfare

This paper explores the relationship between volatility and welfare. Even though households prefer smooth streams of consumption and leisure, welfare can be increasing in the volatility of an exogenous driving force if factor supply is sufficiently elastic. We provide some analytical results for a model without capital, and do some quantitative exercises in a model with capital and a variety of shocks. Welfare is greater in high shock volatility regimes under plausible parameter values. Augmenting the model with features that increase the elasticity of factor supply extends the range of parameters over which higher volatility results in greater welfare.     

Migration consequences of welfare reform

We investigate whether recent changes in welfare policy affect the migration of low-educated unmarried mothers. Estimates indicate that welfare reform is associated with an increase in employment-related intrastate migration, and a decrease in non-employment related migration, both within and between states. The net effect was a small increase in intrastate migration and a small decrease in interstate migration. The close link between migration and employment suggests that welfare reform has motivated low-income women to move for economic reasons. In general, welfare policy appears to have a much larger effect on residential location because of its relationship to employment than because of benefit differences between states.     

Shadow costs of incomplete information and short sales in the valuation of the firm and its assets

This paper presents a simple framework for the valuation of compound options within shadow costs of incomplete information and short sales. The shadow cost includes two components. The first component is the product of pure information cost due to imperfect knowledge and heterogeneous expectations. The second component represents the additional cost caused by the short-selling constraint. Information costs are linked to Merton's (1987. Journal of Finance 42, 510) model of capital market equilibrium with incomplete information, CAPMI. This model is extended by Wu et al. (1996. Review of Quantitative Finance and Accounting, 7, 136) who propose an incomplete-information capital market equilibrium with heterogeneous expectations and short sale restrictions, GCAPM. This model is used in our paper to provide for the first time in the literature analytic solutions for derivatives in the presence of both shadow costs of incomplete information and short sales.When deriving the compound call option formula, we consider a call option on a stock, which is itself an option on the assets of the firm. Our methodology incorporates shadow costs of incomplete information and short sales on the firm's assets as well as the effects of leverage in the capital structure. The formula can be useful in the valuation of several corporate liabilities in the presence of information uncertainty and short sales constraints about the firm and its cash flows. Our analysis can be used for the valuation of several real options.     

Volatility, growth, and welfare

This paper constructs an endogenous growth model driven by self-fulfilling expectation shocks to explain the stylized fact that the average growth rate of GDP is related negatively to volatility and positively to capacity utilization. The implied welfare gain from further stabilizing the U.S. economy is about a quarter of annual consumption, which is consistent in order of magnitude with estimates based on the empirical studies of Ramey and Ramey (1995) and Alvarez and Jermann (2004). Hence, policies designed to reduce fluctuations can generate large welfare gains because smaller fluctuations are associated with permanently higher rates of growth.     

Anticipation,learning and welfare: the case of distortionary taxation

We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We extend the existing framework by introducing distortionary taxes as well as elastic labor supply, which makes agents’ decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behavior that can be interpreted as self-fulfilling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of fiscal reforms.     

Goal setting barriers: a pharmaceutical sales force case study

Prior research has established that goal setting is one of the main processes for effective management of sales forces. Developing effective sales quotas has proved difficult mainly due to the complexity of the systems utilised in the process, the granularity of the data required and the lack of attention to implementation issues. This article is based on an in-depth study of a mid-size pharmaceutical company in Spain. Our research uncovered 11 key barriers that prevent effective development of sales quotas. The article sets out directions for further research and implications for practice.     

Balance sheets, exchange rate policy, and welfare

We evaluate the welfare implications of fixed and flexible exchange rate regimes in a small open-economy model that incorporates the financial accelerator coupled with liability dollarization. We solve the model up to a second-order approximation which allows us to rigorously address the relationship between uncertainty and welfare. We identify leverage and debt-to-GDP ratios above which an exchange rate peg is welfare superior to a flexible exchange rate regime. The results indicate that emerging market countries with even moderate levels of foreign currency-denominated debt may find it beneficial to stabilize their exchange rates.     

Patent replacement and welfare gains

Patents were chosen in an era when modern public finance tools were unavailable. The same innovation outcomes can be achieved with higher welfare, if patent elements are replaced by modern features. This paper constructs two theoretical models of product innovation and simulates the welfare effects of replacing patents with an intertemporal-bounty arrangement. We find that replacing patents with this alternative has the potential to increase welfare in the United States through reform of pharmaceutical patents by $43.9-$194 billion when measured in present value terms (this is 0.3-1.3% of annual GDP) based on simulations involving four selected drug sectors. The potential to increase welfare would be higher if applied to the larger sector of drugs as a whole. In principal, patents could be replaced in other sectors as well.     

Measuring digitization: A growth and welfare multiplier

Digitization encapsulates the social transformation triggered by the mass adoption of digital technologies that generate, process and transfer information. The digitization index introduces a global measure of national performance reflecting ubiquity, affordability, reliability, speed, usability and skills. Output and welfare rise with the index while manifesting increasing returns to scale some implications for ICT public policy are drawn from these findings.     

Spatial Cournot competition and economic welfare: a note

We investigated welfare implications in location-quantity models in a symmetric linear city. We found that when firms are not agglomerated in equilibrium, increasing the distance between firms raises (reduces) producer surplus and social welfare (consumer surplus). Moreover, central agglomeration is always optimal for consumers among symmetric locations, but not necessarily for producers. Central agglomeration can be inefficient even if it is the unique equilibrium outcome. In short, the firms are more likely to agglomerate or locate closer than what welfare maximizers would dictate, whereas they locate farther apart than what consumer surplus maximizers would recommend.     

Entrepreneurial optimism and creative destruction

Using textual analysis of annual reports of US-listed firms, we provide empirical evidence that uncertainty (rather than risk) and optimism are distinctive characteristics of high-impact entrepreneurial firms (recently listed firms) relative to old incumbent firms. We construct an entrepreneurial entry predation model with uncertainty based on this evidence. We show that optimistic entrepreneurs may enter markets that otherwise would be blocked from entry by incumbents’ predatory threats. Thus entrepreneurial optimism may be to the benefit of consumers. Entrepreneurial optimism can also create a strategic advantage for entrepreneurs since incumbents may react by being less aggressive in product market interactions, which will benefit the profitability of the entrepreneur’s venture and consumers via lower prices.     

On the welfare cost of rare housing disasters

This paper examines the welfare cost of rare housing disasters characterized by large drops in house prices. I construct an OLG general equilibrium model with recursive preferences and housing disaster shocks. The likelihood and magnitude of housing disasters are inferred from historical housing market experiences in the OECD. The model shows that despite the rarity of housing disasters, Canadian households would willingly give up 6 percent of their non-housing consumption each year to eliminate the housing disaster risk. The welfare evaluation of this risk, however, varies considerably across age groups. The risk translates into a welfare loss of as much as 16 percent of annual non-housing consumption for the old, but a welfare gain of 2 percent for the young. This asymmetry stems from the fact that, compared to the old, younger households suffer less from house price declines in disaster periods, due to smaller holdings of housing assets, and benefit from lower house prices in normal periods, due to the negative price effect of disaster risk.     

Short sales,stealth trading,and the suspension of the uptick rule

Prior work contends that informed short sellers do not stealth trade because the uptick rule produces “execution uncertainty” and does not afford short sellers the opportunity to spread their trades across time. Contrary to this idea, our results show that informed short sellers tend to use larger trade sizes, instead smaller trade sizes, after the suspension of the uptick rule. Further, we find that the use of smaller short sales during the post-suspension period, which is documented in prior studies, is not a result of greater stealth-trading activity and is instead explained by a reduction in liquidity that occurs when the uptick rule is suspended.     

Measuring the welfare costs of inflation in a life-cycle model

In a neoclassical growth model with life-cycle households in which money is held to satisfy a cash-in-advance constraint, the optimal steady state inflation rate is absurdly high: in excess of 20%. Lump-sum, age-independent money injections twist and flatten the lifetime profile of utility, making this profile look more like the one that would be chosen by a planner. The cost of monetary finance of lump-sum payments is the distortion introduced to the labor-leisure choice.