Bank Panics,Government Guarantees,and the Long‐Run Size of the Financial Sector: Evidence from Free‐Banking America

Governments attempt to increase the confidence of financial market participants by making implicit or explicit guarantees of uncertain credibility. Confidence in these guarantees presumably alters the size of the financial sector, but observing the long‐run consequences of failed guarantees is difficult. We look to America's free‐banking era and compare the consequences of a broken guarantee during the Indiana‐centered Panic of 1854 to the Panic of 1857 in which guarantees were honored. Our estimates of a model of endogenous market structure indicate substantial negative long‐run consequences to financial depth when panics cast doubt upon a government's ability to honor its guarantees.       

Voting on Punishment Systems within a Heterogeneous Group

We consider a voluntary contributions game, in which players may punish others after contributions are made and observed. The productivity of contributions, as captured in the marginal‐per‐capita return, differs among individuals, so that there are two types: high and low productivity. Every two or eight periods, depending on the treatment, individuals vote on a punishment regime, in which certain individuals are permitted, but not required, to have punishment directed toward them. The punishment system can condition on type and contribution history. The results indicate that the most effective regime, in terms of contributions and earnings, is one that allows punishment of low contributors only, regardless of productivity. Nevertheless, only a minority of sessions converge to this system, indicating a tendency for the voting process to lead to suboptimal institutional choice.     

Sensitivity of Multivariate Tests of the Capital Asset-Pricing Model to the Return Measurement Interval

The capital asset-pricing model's (CAPM) primary empirical implication is a positively sloped linear relation between a security's expected rate of return and its relative risk (beta). Recent research indicates that inferences about the risk-return relation are sensitive to the choice of the return measurement interval. We perform multivariate tests of the Sharpe-Lintner CAPM using monthly and annual returns on market-value-ranked portfolios. The CAPM is rejected using monthly returns, a result consistent with previous research. In contrast, we fail to reject the CAPM when annual holding period returns are used.     

Investor Sentiment and the Closed-End Fund Puzzle

This paper examines the proposition that fluctuations in discounts of closed-end funds are driven by changes in individual investor sentiment. The theory implies that discounts on various funds move together, that new funds get started when seasoned funds sell at a premium or a small discount, and that discounts are correlated with prices of other securities affected by the same investor sentiment. The evidence supports these predictions. In particular, we find that both closed-end funds and small stocks tend to be held by individual investors, and that the discounts on closed-end funds narrow when small stocks do well.     

The Pricing of Oil and Gas: Some Further Results

The Hotelling Valuation Principle (HVP) implies that the unit value of an exhaustible natural resource can be written as a function of its current price, net of extraction costs; other variables such as interest rates have no additional explanatory power. The results of earlier tests using data from 1979–1981 strongly support the HVP. This paper presents a series of follow-up tests using time-series cross-section data covering the period August 1981 to December 1983. Because the variance of petroleum prices in this period was substantially less than in the earlier period, the follow-up sample proved generally noninformative. The sample also contains some observations on oil and gas royalty trusts. Tests of the HVP using these trust data yielded generally satisfactory results, although—given the limited sample size—the results must be viewed with caution.     

THE STRUCTURE OF THE FINANCIAL SERVICES INDUSTRY

Since most studies of the financial services industry have viewed the structure of the industry as fixed, there has been little discussion of its determinants. Events of the past few years make it clear that the structure of the financial services industry is changing much more rapidly than it did between the end of World War II and the mid 1960's. This paper categorizes and discusses the major factors affecting the structure of the financial services industry. The concept of supply and demand provides a useful framework for categorizing these factors. Demand is best analyzed in terms of the demand for various characteristics or attributes of financial services. These include: 1) yield; 2) liquidity; 3) safety; 4) convenience of access to the services, 5) financial advice or information. The demand for these various characteristics or attributes depends importantly on demographic and economic factors
The supply of financial services is determined by the cost curves associated with those services which are in turn determined by the cost of the factors of production and the underlying production function. Three aspects of these cost curves have an important effect on the supply of financial services and the structure of the industry — economies of scale, economies of joint production and distribution, and the management of risk. The nature of the cost and production functions underlying the supply of financial services and the structure of the industry is affected by several exogenous factors. Foremost among them are the economy, technology, regulation, and the role of the Federal government in financial service markets
Based on the discussion of how the various exogenous factors affect the structure of the financial services industry, an attempt is made to predict how structure will change as deregulation occurs.