On insider trading and belief evolution

In a market with stochastic demand with seller competition at most one seller can acquire costly information about demand. Other sellers entertain idiosyncratic beliefs about the market demand and the probability that an informed seller is trading in the market. These idiosyncratic beliefs co-evolve with the potential insider’s inclination to acquire information.True demand expectations (in the Bayesian sense) are not evolutionarily stable when beliefs, via revelation, can be used to commit to more aggressive behavior. The commitment effect fades away in large markets and has the same direction for both strategic substitutes and complements. Whether one observes an insider, in the long run, depends on information costs. For strategic substitutes insider activity benefits the whole population whereas the uninformed sellers could gain even more than the insider.     

An Ethics Case in Point: MacLine - the commercial value of ethical management

'Small businesses do not have the depth to sustain mistakes and losses in the way that large businesses can. It is the view of the management of MacLine that an ethical approach to business is one of the key factors in ensuring the long term survival of the business.'Dr Yehuda Baruch is Visiting Research Fellow at the Centre for Organisational Research, London Business School, Sussex Place, Regent's Park, London NW1 4SA; and Mr Mark Lewis is Managing Director of MacLine. Teachers interested in having a package of teaching notes and transparencies relevant to this case may contact Dr Baruch at the above address.     

A System of personalized funds: A proposal for a centrally planned economy

A proposal is made for establishing a system of personalized funds in a centrally planned economy, to be used mainly for the encouragement and implementation of innovation.     

Patient flow analysis and the delivery of radiology service2

In recent years there has been an increased awareness regarding the cost of radiologic health care, and the patient delays encountered in the delivery to the consumer. The purpose of this paper is to demonstrate that, at least in one case in the Diagnostic Radiology Department at Temple University, the assumption that better service can be given to patients provided more technicians and orderlies are available, is not valid. The facts tend to indicate that the real problem lies in scheduling techniques, and improved utilization of available equipment. Therefore, it is safe to conclude that for improved radiologic services, the emphasis should be directed towards the design of the management systems and scheduling techniques, and not the staff and/or facilities.     

A Rude Awakening: Internet Shakeout in 2000

This study explores various value-drivers of business-to-consumer (B2C) Internet companies' share prices both before and after the market correction in the spring of 2000. Although many market observers had predicted that the shakeout would eventually occur (e.g., Perkins and Perkins 1999), the ultimate and previously unanswered challenge lay identifying which stocks would fall and which ones would survive the shakeout. We develop an empirical valuation model and provide evidence that the Internet stocks that this model suggests were relatively over-valued prior to the Internet stock market correction experienced relatively larger drops in their price-to-sales ratios when the shakeout occurred. This result is robust to the inclusion of competing explanatory variables suggested by the economics literature related to industry rationalizations.We examine the ability of a valuation model comprised of both financial (accounting) variables and nonfinancial web traffic metrics to explain Internet companies' market values during each of 1999 and 2000. Our findings suggest that the reach and stickiness web traffic performance measures are value-relevant to the share prices of Internet companies in each of 1999 and 2000. Our findings of significance for the year 2000 contradict the recent claims of some analysts that web traffic measures are no longer important. We also explore the valuation role of our proxy for B2C companies' current rate of cash burn and find that this proxy is a significant value-driver in each of 1999 and 2000, but with differential valuation implications for each period. Our results suggest that the market was favorably disposed towards Internet companies' aggressive cash expenditures in 1999, but appeared to adopt a more critical view of Internet companies' cash burn rates in 2000. Our results further suggest that investors adopted a more skeptical attitude towards expenditures on intangible investments as the Internet sector began to mature. We find that investors appear to implicitly capitalize product development (R&D) and advertising expenses (customer acquisition costs) during the earlier period when the market was more optimistic about the prospects of B2C companies. However, only product development costs are implicitly capitalized into value, on average, subsequent to the shakeout in the spring of 2000. Finally, we provide statistical evidence to support the conjecture that different parameter vectors characterize the estimated market valuation models for each of 1999 and 2000. Overall, our study provides a preliminary view of the shakeout and maturation of one of the most important New Economy industries to emerge to date–the Internet.     

Russian experts: missing actors of the budget process

Abstract

This article provides an examination of the role of experts in the Russian budget process. Experts are those whose role is based on specialised knowledge and technical skills, rather than affiliation to an agency, association or political party. Ideally their contributions are impartial. In the first part of the article the channels of expert influence are described, primarily within the executive branch. Features are found in these channels that mean that impartial advice is not always guaranteed. In the second part, on the basis of a survey of experts, the answers to two questions are sought: whether they feel that impartial advice is expected of them and whether they provide it. There are negative elements in the responses on both counts, suggesting that despite some evidence of demand for such advice on the part of policy-makers, expert advice is often not impartial.     

What information belongs in a warning?

A general approach is described for determining the information content of warnings. It begins with a formal analysis of the magnitudes of the risks arising from misuse (or even from proper use) of a product. It proceeds with structured, open-ended interviews intended to elicit consumers' naive conceptualizations of the processes creating and controlling those risks. Communications are then focused on information filling the most consequential gaps in their knowledge. The implementation of those warnings will depend on the extent of the knowledge gaps, and the opportunities for closing them. This approach allows for an estimate of the residual problems to be expected, if a warning program is implemented. It can also help to focus the policy debate over whether a product warning will achieve an acceptable level of misunderstanding. © 1998 John Wiley & Sons, Inc.     

Penetrating the Book-to-Market Black Box: The R&D Effect

The book-to-market (BM) phenomenon – the positive association between BM and subsequent returns – looms large among capital market enigmas. Economic theory postulates that the difference between market and book values of companies reflects their future abnormal profits. We capture these abnormal profits for a large sample of science-based companies by estimating the value of the off-balance sheet investment generating those profits – the value of R&D capital – and show empirically: (i) Firms' R&D capital is associated with their subsequent stock returns. (ii) For R&D intensive firms, this 'R&D effect' subsumes the 'book-to-market effect.' (iii) The association between R&D and subsequent returns appears to result from an extra-market risk factor inherent in R&D, rather than from stock mispricing. We thus provide an explanation for the book-to-market phenomenon of R&D companies.     

Does corporate ownership structure affect its strategy towards diversification?

We claim that there is a link between corporate control structure and managers’ strategy towards unrelated mergers and risk diversification. Companies with greater ownership concentration are less diversified. Evidence also shows that corporate diversification generally results in value loss while focussing is value increasing. This highlights the potentially detrimental effect of agency problems on corporate strategy. Copyright © 1999 John Wiley & Sons, Ltd.     

Sabotaging in contests with monitoring efforts

This paper considers a 3‐stage contest with both sabotage and monitoring efforts that aim to reduce sabotage. In the first stage, the regulator sets his monitoring efforts for each contestant. In the second stage, each contestant determines his sabotaging efforts, based on the monitoring efforts that were imposed by the regulator. In the third stage, each contestant determines his productive efforts in the contest. The results supply a justification to exert monitoring efforts because these efforts may benefit both the contestants and the regulator (a win‐win situation). Furthermore, the paper defines the conditions where exerting monitoring efforts would be worthwhile.