Inflation,currency exchange rates,and the international securities markets

A time-state-preference model of an efficient and complete international financial market is employed to investigate the conditions under which the international Fisher Effect will hold, and the forward currency exchange rate will be an unbiased estimate of the future spot rate. The presence of stochastic inflation within countries in the fiat-currency prices of real goods will destroy both relationships, even in the absence of any institutional imperfections or trading barriers. Similarly, expected inflation rate differentials across countries will not coincide with spot-versus-forward currency exchange rate differentials.     

Market efficiency across securities exchanges

Considerable empirical evidence has been presented in the literature of finance in recent years addressed to the question of the informational efficiency of the American capital market. The present paper adds to that evidence. In particular, securities traded off the NYSE—on the American Stock Exchange, on regional exchanges, and over the counter—are found to exhibit return characteristics that imply rather more frequent price departures from equilibrium than for their NYSE-listed counterparts. The data consist of the actual investment experiences of a large sample of individual investors with securities traded in the various locales.     

Earnings and announcement time lags

This research is addressed to the issue of whether films that generate lower (higher) than expected earnings figures release those figures to the public later (earlier) than expected. Earnings expectations were gathered from the Value Line Investment Service and expectations of a firm's earnings announcement date were generated via each of five simple models. The results indicate that lower (higher) actual earnings relative to forecasted earnings are most likely to be released to the public later (earlier) than expected. Thus, investors might have the opportunity to act on the anticipation of bad news before its actual announcement to the public.     

Understanding absenteeism: The potential contribution of economic theory

The issue of employee absenteeism has been an important subject of psychological research for at least 35 years. Although there has been a substantial research effort, only recently has movement occurred toward a comprehensive theoretical framework with testable implications. This paper offers an economic theory of absence which provides substantial insight into the incentive aspect of the problem. The theory is tested using data from a large industrial site.     

Capital cost and adjusted present value: Reconciliation and amplification

In recent years the adjusted present value method has been propounded for capital budgeting analysis. A comparison of the standard cost of capital approach to the adjusted present value method indicates that the two analyses produce exactly equivalent present value appraisals, as long as the enterprise contemplating the asset has a policy of keeping the degree of leverage constant. The conclusions reached are independent of the firm's target leverage position matching its present posture.     

Currency,Marginal Tax Rates,and the Underground Economy

This paper has attempted to isolate that portion of the underground economy which is both measurable and controllable. The standard variables postulated by Cagan, income and interest rates, are still important, although the value of the income elasticity of currency demand may be larger than expected. Marginal tax rates have a positive and significant influence on currency holdings, which supports Tanzi's work and contradicts the findings of the Internal Revenue Service. While not all the increase in currency holdings in the last 20 years can be explained by using tax rates, somewhere between $11 and $12 billion worth of currency can be attributed to that source. While unemployment compensation ought to affect the size of the underground economy, no statistical verification can be found through the specification contained here. Finally, it is noted that the trend toward less currency holding, which one would expect from the recent banking innovations, would have occurred had not other forces offset it.One of the forces which has probably led to an increase in currency holdings is increased drug-related activity. However, that portion of the underground economy which exists because of crime has been largely ignored here because little of it can be controlled by economic policy. What is explored here is a measurement of how much underground activity we could dissuade by lowering taxes, and further, how those lower taxes would influence tax collections. The effects appear to be large enough to warrant concern about the impact of tax rates on incentives.     

Market-based and accounting standards for public utility rate regulation

The possible usefulness of finance theory in developing appropriate approaches to the regulation of public utility service prices has received considerable attention. Of particular interest has been the matter of cost of capital as a guide to fair rate of return determination. From an underlying concept of the proper goal of regulation—to duplicate for public utility investors the risks and rewards they would be subjected to if their capital were committed to unregulated enterprises—the present paper develops a basis for selecting the correct regulatory approach. That approach is seen to be supportive of traditional accounting-based regulatory commission procedures, and to argue against cost of capital as a return standard.     

Monetary policy and the daily behavior of interest rates

It is possible that previous research has failed to detect significant variation in the ex-ante real interest rate because the Federal Reserve follows a policy designed to stabilize the real rate. If the Fed is successful, there will be little month-to-month variation in the real rate. Nonetheless, research to date has relied on monthly or quarterly data. This paper presents the results of new tests that use daily data in an attempt to detect short-term variation in the ex-ante real rate. Though the tests reveal that the real rate is not constant, most of the detected variation is related to reserve settlement on Wednesday.     

Adjustment costs and theory of investment under uncertainty

It is shown that the stochastic investment rule for the price-setting monopolist facing random demand differs from the deterministic rule, due to the presence of the covariance of the marginal utility of profits and the MRTS between capital and labor. For the risk-neutral quantity-setting monopolist, the optimal current investment under random demand is shown to be greater than that under deterministic conditions, given that production technology is of the Cobb-Douglas type with constant returns to scale. When random wages and prices follow first-order autoregressive schemes, the risk-neutral competitive firm's current investment level is shown to be at least equal to that under certainty.     

The determination of corporate optimal capital structure under value maximization and informational asymmetry

In this article we examine the optimal capital structure of the firm under conditions of informational asymmetry, i.e., when the manager of the firm is viewed by the market as possessing inside information about the firm's future profitability. Unlike previous research on this topic, in this study we preserve the objective of value maximization when examining the signaling property of corporate capital structure. We also recognize explicitly the other consequences of debt financing on the value of the firm. An integrated analysis of the capital structure problem within the context of rational expectation is presented, and a signaling equilibrium is derived and discussed. The nature of the welfare costs that emerge from the existence of informational asymmetry is also analyzed.     

Comparison of alternative models for estimating the cost of equity capital for electric utilities

In this article five models used to estimate the cost of equity capital for electric utilities are systematically compared. We show the impact of model specification, data definitions, and estimation techniques on the estimates. Our search for the “best” model is based on reasonableness of estimates and the Pesaran-Deaton test for non-nested hypotheses. Conclusions emerging from the study are the following: 1) all models explain approximately the same proportion of the variation; 2) recognition of natural nonlinearities in the models does not lead to improvement; 3) no model can consistently reject the other models.     

The economic relationship between service quality and market protection for regulated household-goods moving

In considering the effects of motor carrier regulation, the direct measurement of service quality is an often neglected issue. This paper is an empirical investigation of the relationship of entry controls to service quality for household goods (HHG) moving services. The major research questions, which are based on inferences in the economic literature, have considerable importance for HHG regulation. The major finding is that carriers who receive the greatest market protection from the ICC provide inferior service quality and do not compete away excess returns by raising the level of service quality. Based on the study results, a number of theoretical and policy implications are discussed.     

The error learning hypothesis: The evidence reexamined

This paper reexamines the error learning hypothesis, taking explicit account of both the measurement error in forward rates and the nonstationary of liquidity premiums. The evidence is consistent with the model, but with lower explanatory power than the previous results of Meiselman (1962) and Van Horne (1965).     

Some evidence on the role of money illusion in labor supply behavior

The Keynesian idea that workers are subject to money illusion in their labor supply decisions is tested by estimating a labor supply function that includes the price level as an independent variable. The model is estimated with data drawn from various BLS publications and is aggregated by SMSA. The results indicate a significant negative supply response to price-level changes after controlling for the nominal wage rate, income, and the SMSA's unemployment rate. There is no significant difference between workers' supply response to the price level and the nominal wage rate, which suggests that workers are not subject to money illusion.     

The anatomy of the Korean general trading company

The historical development of Japanese trading companies is reviewed. The concept of “trading company” is developed along three dimensions: product diversification, area diversification, and functional diversification. The seven year history of Korean General Trading Companies is analyzed with regard to their historical background, modus operandi, and current problems. The analysis reveals that most of the Korean GTCs, in spite of their impressive performance in terms of trade volume, have experienced severe deterioration of profitability. Finally, the paper states the change of the Korean Government's policy on the GTCs and contemplates its implication for GTCs' future direction within the context of the definition of trading company.     

Information processing analysis of a stochastic model of brand choice

A formal and detailed comparison between Morrison's brand loyal model and its information processing counterpart reveals serious internal inconsistencies and other shortcomings of this stochastic model.     

Entry inclinations under uncertainty

This paper considers the market entry decision of a potential entrant that behaves as if it knew the future market demand and its own cost schedules, and formulates a set of probability judgements as to the unknown output rates that its future rivals will maintain. The special case where entry is free and each in-market seller, as well as the potential entrant, assumes that the others will not alter their production provokes the classic Cournot-Stackelberg situation. Although one might suspect that uncertainty would tend to inhibit entry as compared with an equivalent, in the expected-value sense, certainty situation, this is not at all the case. The suspucion is not necessarily true even when management is risk averse.     

The determinants of occupational mobility patterns among blue-collar jobs

Barriers to mobility are commonly believed to partition blue-collar jobs into skilled, semiskilled, and unskilled components. This paper develops a model based in large measure on the classical gravity model for purposes of ascertaining mobility pattern determinants and for testing for the presence and form of mobility barriers. The model is implemented on a 1965–1970 sample data of male mobility among 60 intermediate-detailed blue- collar occupations. The empirical results reveal that mobility patterns in the blue-collar component conform well with neoclassical theoretical expectations. Very little support is found for the view that the blue-collar labor market is highly structured or segmented in its operations through the mobility process.