Effects of Alternative Goodwill Treatments on Merger Premia: Further Empirical Evidence

In this study, we extend our analysis of the effects of international accounting diversity on market behavior. Specifically we examine whether national differences in the treatment of purchased goodwill are associated with differences in premia offered by non-U.S. acquirers other than the British when bidding for U.S. target companies. We find merger premia offered by foreign acquirors who enjoy advantageous accounting or tax treatments relative to U.S. acquirors to be higher, on average, than those offered by U.S. acquirors. Regression analyses show that goodwill accounting does explain merger premia. The higher coefficient on goodwill in German acquisitions, relative to Japanese acquisitions, indicates that merger premia are associated with accounting diversity among various countries in the sense that, while tax benefits are available in both Japan and Germany, more favorable accounting treatments are operative in the latter.     

An agency theory perspective of the Israeli labor market segmentation: Past,present, and future

In this paper we use agency theory to present a process of the dichotomization of the Israeli workforce into two structures, each representing distinct organizational cultures. The first structure is the private sector, led by the high-tech industry; a model where the principal has strong control over the activities of the agent. The second is the public sector, an opposing model in which the principal has virtually no control over the activities of the agents and as a result, the effectiveness within this sector deteriorates. We argue that such conflicting systems cannot exist side by side without affecting each other and we suggest a role for human resource management (HRM) in future developments. Within the public sector it is the responsibility of the principal, the Israeli government, to gain more control over the agent and employ professional HRM systems for this purpose.     

Probabilistic forecasts of volatility and its risk premia

The object of this paper is to produce distributional forecasts of asset price volatility and its associated risk premia using a non-linear state space approach. Option and spot market information on the latent variance process is captured by using dual ‘model-free’ variance measures to define a bivariate observation equation in the state space model. The premium for variance diffusive risk is defined as linear in the latent variance (in the usual fashion) whilst the premium for variance jump risk is specified as a conditionally deterministic dynamic process, driven by a function of past measurements. The inferential approach adopted is Bayesian, implemented via a Markov chain Monte Carlo algorithm that caters for the multiple sources of non-linearity in the model and for the bivariate measure. The method is applied to spot and option price data on the S&P500 index from 1999 to 2008, with conclusions drawn about investors’ required compensation for variance risk during the recent financial turmoil. The accuracy of the probabilistic forecasts of the observable variance measures is demonstrated, and compared with that of forecasts yielded by alternative methods. To illustrate the benefits of the approach, it is used to produce forecasts of prices of derivatives on volatility itself. In addition, the posterior distribution is augmented by information on daily returns to produce value at risk predictions. Linking the variance risk premia to the risk aversion parameter in a representative agent model, probabilistic forecasts of (approximate) relative risk aversion are also produced.     

Modeling common volatility characteristics and dynamic risk premia in European equity markets

The paper applies a Factor-GARCH model to evaluate the impact of the market portfolio, as a single common dynamic risk factor, on conditional volatility and risk premia for the returns on size-based equity portfolios of three major European markets; France, Germany and the United Kingdom. The results show that for the size-based portfolios the factor loading for the dynamic market factor is significant and positive but the association between the risk premia and the conditional market volatility is weak. However, the dynamic market factor is shown to explain common characteristics in the conditional variance such as asymmetry and persistence. This finding is consistent across markets and portfolio sizes.     

Unstable Diffusion Indexes: With an Application to Bond Risk Premia

This paper studies the empirically relevant problem of estimation and inference in diffusion index forecasting models with structural instability. Factor model and factor augmented regression both experience a structural change with different unknown break dates. In the factor model, we estimate factors and loadings by principal components. We consider least squares estimation of the factor augmented regression and propose a break test. The empirical application uncovers instabilities in the linkages between bond risk premia and macroeconomic factors.     

Premia for correlated default risk

Using data on corporate default experience in the U.S. and market rates of CDX index and tranche swaps of various maturities, we estimate reduced-form models of correlated default timing in the CDX High Yield and Investment Grade portfolios under actual and risk-neutral probabilities. The striking contrast between the estimated processes followed by the actual and risk-neutral arrival intensities of defaults, and between the parameters governing the actual and risk-neutral dynamics of the risk-neutral intensities, indicates the presence of substantial default risk premia in CDX swap market rates. The effects of risk premia on swap rates covary strongly across maturities, and depend on general stock market volatility and several measures of credit spreads. Large moves in the effects of these premia on swap rates have natural interpretations in terms of economic and financial market developments during the sample period, April 2004 to October 2007. Our results suggest that a large portion of the movements in CDX swap market rates observed during the sample period may be caused by changing attitudes toward correlated default risk rather than changes in the economic factors affecting the actual risk of clustered defaults, which ultimately governs swap payoffs.     

Organizational Structure and Product Market Competition

This paper explores the link between delegation of authority and product market competition. It considers a firm that is contemplating entering a market served by an incumbent. The firm can adopt either a decentralized or a centralized authority structure. In the former, authority is delegated to an agent, while in the latter, it is retained by the principal. We address the questions of how the toughness of future product market competition affects the delegation decision, and how this decision in turn affects product market competition. The delegation decision is determined by a trade‐off between inducing the agent to take greater initiative and accepting lower operating profits from a less efficient decision taken by the agent.     

Seniority bias in a tournament

The paper presents a model where the probability of promotion tends to increase with seniority (overall labor market experience) without relying on the accumulation of general human capital. To this end, we consider the optimal design of a tournament (a relative compensation scheme) between two agents with different time horizon, the young and the old, in an overlapping generations framework. When the principal can only imperfectly monitor each agent’s effort level, the difference in time horizon leads to the ex post difference in the marginal value of effort between the two agents. In this case, the optimal tournament necessarily involves a bias towards the old agent. Within this framework, we also examine the relationship between: (1) the monitoring accuracy and the optimal bias; and (2) the value of outside options and the optimal bias.     

Tests of asset pricing with time‐varying factor loads

This paper proposes an empirical asset pricing test based on the homogeneity of the factor risk premia across risky assets. Factor loadings are considered to be dynamic and estimated from data at higher frequencies. The factor risk premia are obtained as estimates from time series regressions applied to each risky asset. We propose Swamy‐type tests robust to the presence of generated regressors and dependence between the pricing errors to assess the homogeneity of the factor risk premia and the zero intercept hypothesis. An application to US industry portfolios shows overwhelming evidence rejecting the capital asset pricing model, and the three and five factor models developed by Fama and French (Journal of Financial Economics, 1993, 33, 3–56; Journal of Financial Economics, 2015, 116, 1–22). In particular, we reject the null hypotheses of a zero intercept, homogeneous factor risk premia across risky assets, and the joint test involving both hypotheses.     

Quantification of preferences in markets

In this paper we quantify agent preferences in a market. In our framework every agent has a utility level associated with each transaction, and we assume that the probability of a feasible market transaction increases with an increase in total utility. It is surprising to observe that this simple behavioral principle induces a usually unique probability measure that can be constructed by a fast numerical algorithm. This unusual combination of a rigorous model and a fast numerical algorithm makes it possible to construct a well-defined set of preferences that implies a set of observed commodity prices.     

A multivariate GARCH in mean approach to testing uncovered interest parity: evidence from Asia-Pacific foreign exchange markets

The existence of time-varying risk premia in deviations from uncovered interest parity (UIP) is investigated based on a conditional capital asset pricing model (CAPM) using data from four Asia-Pacific foreign exchange markets. A parsimonious multivariate generalized autoregressive conditional heteroskedasticity in mean (GARCH-M) parameterization is employed to model the conditional covariance matrix of excess returns. The empirical results indicate that when each currency is estimated separately with an univariate GARCH-M parameterization, no evidence of time-varying risk premia is found except Malaysian ringgit. However, when all currencies are estimated simultaneously with the multivariate GARCH-M parameterization, strong evidence of time-varying risk premia is detected. As a result, the evidence supports the idea that deviations from UIP are due to a risk premium and not to irrationality among market participants. In addition, the empirical evidence found in this study points out that simply modeling the conditional second moments is not sufficient enough to explain the dynamics of the risk premia. A time-varying price of risk is still needed in addition to the conditional volatility. Finally, significant asymmetric world market volatility shocks are found in Asia-Pacific foreign exchange markets.     

Retaining skilled employees: A human capital model with innovation and entrepreneurship

In his seminal paper, Becker argues that firms never invest in general human capital in a frictionless labor market. Nevertheless, empirical evidence shows the opposite. This paper sheds light on this puzzle by developing a principal–agent model with human capital investments. The novel feature of the model is that specific human capital increases the agent's probability to innovate. Innovation brings the opportunity of entrepreneurship, which means losing a skilled agent for the principal. The results show that higher entrepreneurial income increases the risk of employee departure and the principal may use general human capital investment for retention.     

Analysis of the impact of Sino-US trade friction on China’s stock market based on complex networks

This paper analyzes the impact of the Sino-US trade friction incident in 2018 on China's stock market by using the complex network methods. Firstly, we divide the Sino-US trade friction incident in 2018 into four research periods. Based on the GARCH-BEKK model and the Planar Maximum Filter Graph (PMFG) algorithm, the volatility spillover network between China's stock market sectors and the stock price correlation network of China's stock market corresponding to the above four research periods are constructed. Next, from the perspective of sectors in stock market, we use various network centrality indicators to build a systematic importance comprehensive evaluation index of industry sectors in the stock market through the principal component analysis method, to explore the impact of the Sino-US trade friction incident on the risk spillover effects of sectors in China's stock market. From the perspective of the overall stock market, we analyze the impact of Sino-US trade friction incident on the overall stability of the stock market through calculating the network topology indicators and conducting simulation experiments. Finally, the main factors affecting the stability mechanism of China's stock market are studied through the probit model. The results show that: (1) The risk spillover effect of various sectors in China's stock market changes significantly in different periods of Sino-US trade friction, and there are obvious cyclical rotation effects among various sectors (2) When some weighted stocks in the stock market abnormally fluctuate or suffer targeted shocks, the China's stock market's ability to maintain stability is weak, and the Sino-US trade friction will reduce the stability of China's stock market, and the higher the intensity of trade friction incident is, the more obvious the impact of the incident is. (3) The important factors that affect the abnormal fluctuations in China's stock market include four types of indicators: the stock market network structure, the fluctuation of important international stock indexes, the fluctuation of commodity prices in the international market, and the domestic macroeconomic indicators. This study provides a reference for China's financial regulatory authorities to conduct macro-prudential management, control systemic risks, and maintain the stability of financial market.     

Tender-offer premia as a management signal

In this paper we test whether tender-offer premia for share repurchases can be viewed as an outgrowth of optimizing behavior by managers in a signalling environment. This is in contrast to previous work on the signalling hypothesis which focuses on the stock market's reaction to the announcement of tender offers. Our empirical results indicate that premia are systematically related to the price of the firm's stock and the level of the stock market but are not related to either management compensation, inside holdings of stock or the ratio of shares sought to total shares.     

Task‐Specific Human Capital and Organizational Inertia

Employees' incentive to invest in their task proficiency depends on the likelihood that they will execute the same tasks in the future. Changes in tasks can be warranted as a result of technological progress and changes in firm strategy as well as from fine‐tuning job design and from monitoring individuals' performance. However, the possibility of a change in tasks reduces employees' incentive to invest in task‐specific skills. We develop a simple two‐period principal–agent model showing that some degree of inertia benefits the principal. We then analyze how organizations can optimally combine several policies to approach the optimal degree of inertia. In particular, we consider the optimal mixture of (abstaining from) exploration, managerial vision, organizational task‐specific investments, and incentive pay. Our analysis yields testable predictions concerning the relations between these organizational policies.     

Exclusionary practices in two‐sided markets: The effect of radius clauses on competition between shopping centers

We analyze exclusionary conduct of platforms in 2‐sided markets. Motivated by recent antitrust cases, we provide a discussion of the likely positive and normative effects of exclusivity clauses, which prevent tenants from opening outlets in other shopping centers covered by the clause. In a standard 2‐sided market model, we show that exclusivity agreements are especially profitable for the incumbent and detrimental to social welfare if competition is intense between the 2 shopping centers. We argue that the focus of courts on market definition is misplaced in markets determined by competitive bottlenecks.     

Debt stabilization games in the presence of risk premia

As a result of the recent financial crisis and the ensuing economic recession, fiscal deficits have soared in many OECD countries. As a consequence, government debt has been on the rise again after a period of stable or declining government debt. In this paper we analyze debt stabilization in a country that features endogenous risk premia, imposed by financial markets that evaluate the probability of debt default by governments. Endogenous risk premia arise by assuming, e.g., simple linear relations between risk premia and the level of debt. As a result the real interest rate on government debt can be written as a constant (measuring the risk-free real interest rate corrected for real output growth) plus an endogenous risk premium that depends on the debt level. We bring such an endogenous risk premium into Tabellini (1986) model and analyze the impact of it. This gives rise to a non-linear differential game. We solve this game for both a cooperative setting and a non-cooperative setting. The non-cooperative game is solved under an open-loop information structure. We present a bifurcation analysis w.r.t. the risk premium parameter.     

Competition Among Health Plans: A Two‐Sided Market Approach

We set up a two‐sided market framework to model competition between a Prefered Provider Organization (PPO) and a Health Maintenance Organization (HMO). Both health plans compete to attract policyholders on one side and providers on the other. The PPO, which is characterized by a higher diversity of providers, attracts riskier policyholders. Our two‐sided framework allows us to examine the consequences of this risk segmentation on the providers' side, especially in terms of remuneration. The outcome of the competition depends mainly on two effects: a demand effect, influenced by the value put by policyholders on the providers access and an adverse selection effect, captured by the characteristics of the health risk distribution. If the adverse selection effect is too strong, the HMO receives a higher profit in equilibrium. On the contrary, if the demand effect dominates, the PPO profit is higher in spite of the unfavorable risk segmentation. We believe that by highlighting the two‐sided market structure of the health plans' competition, our model provides a new insight to understand the increase in the PPOs' market share as observed in the USA during the last decade.