Operational Restructuring Charges and Post‐Restructuring Performance*

Firms incur restructuring charges as a result of actions intended to improve their operating performance. However, there is little evidence on whether restructuring charges are associated with improved performance. We examine a sample of firms reporting restructuring in 1991‐93 and find that the restructuring firms' earnings increase over the levels immediately before restructuring. Compared with a control sample of firms that report no restructuring, the restructuring firms improve their earnings and operating income, but evidence for improvements in cash flow from operations is mixed. In regression analysis, we find that restructuring charges are significantly positively associated with post‐restructuring changes in earnings relative to the restructuring year, but this association is largely driven by firms with multiple restructurings and firms reporting losses in the restructuring year. We find no association between restructuring charges and post‐restructuring changes in earnings relative to the year before restructuring. Restructuring charges are significantly positively associated with post‐restructuring changes in operating income and cash flow from operations for firms with multiple restructurings. In summary, restructuring charges are associated with improved earnings, but our results suggest that restructuring in the early 1990s did not necessarily guarantee improved operating performance.     

CO‐MOVEMENT OF AUSTRALIAN STATE BUSINESS CYCLES*

We use a variety of techniques to examine the nature and degree of co‐movement among Australian state business cycles. Consistent with the results of Dixon and Shepherd (2001 ), we find that these cycles move quite closely together, with particularly strong links between the cycles of the larger states. We then seek to understand the causes of this co‐movement by using an unobserved components model to distinguish between various shocks and their transmission. Our model implies that the major source of this co‐movement in state activity is the commonality of shocks affecting state cycles. In contrast, spillovers of region‐specific shocks appear to play only a minor role in creating co‐movement, though region‐specific shocks themselves have a moderate influence on cyclical fluctuations. These findings are consistent with the results of recent studies for the United States, Canada and Europe, where common shocks have also been found to dominate regional cyclical activity.     

DO PSYCHOLOGICAL SHOCKS AFFECT FINANCIAL RISK TAKING BEHAVIOR? A STUDY OF U.S. VETERANS

Traditional economic theories assume that individuals are endowed with certain risk preferences that are unaltered by experiences. However, recent evidence indicates that macroeconomic shocks do have an effect on an individual's willingness to take financial risks. In the context of investment decisions, we examine empirically whether an individual's risk preferences are affected by other types of traumatic life experiences. Using a unique proprietary data set, we investigate whether personal traumatic experiences—such as the combat experiences of veterans—have long‐term effects on financial risk‐taking behavior. We find that having experienced combat decreases the probability of investing in risky assets. Key policy implications are noted. (JEL G11, D14)     

Weak Moral Motivation Leads to the Decline of Voluntary Contributions

We develop a model that accounts for the decay of the average contribution observed in experiments on voluntary contributions to a public good. The novel idea is that people's moral motivation is “weak.” Their judgment about the right contribution depends on observed contributions by group members and on an intrinsic “moral ideal.” We show that the assumption of weakly morally motivated agents leads to the decline of the average contribution over time. The model is compatible with persistence of overcontributions, variability of contributions (across and within individuals), the “restart effect” and the observation that the decay in contributions is slower in longer games. Furthermore, it offers a rationale for conditional cooperation.     

FUEL CHOICE FOR MULTI-FUEL VEHICLES

Consequences of consuming petroleum in transportation—e.g., air pollution, global warming, energy insecurity—have stimulated interest in alternative automotive fuels and in vehicles that can use multiple fuels and combinations of fuels. Consumer behavior in choosing motor fuels for flexible- or dual-fuel vehicles will likely be a key factor in creating and maintaining stable markets for new fuels. This paper explores the implications of recent studies on the sensitivity of choice of gasoline grade to price. It analyzes natural gas vehicle owners' refueling behavior, based on a survey of natural gas vehicles in Canada. The paper uses statistical models to estimate the importance of performance, range, refueling convenience, and other factors in the fuel choice decision. Choice of gasoline grade is highly sensitive to fuel prices. The cost advantage of natural gas also is of paramount importance for natural gas users. However, refueling convenience is essential for overall satisfaction and is a major factor in the frequency of natural gas use. Alternative fuels not only must be cost competitive with gasoline but initially will require a cost advantage so as to overcome range limitations and refueling inconvenience.     

CONCEPTUAL ISSUES IN COST/BENEFIT ANALYSIS OF WELFARE-TO-WORK PROGRAMS

During the 1980s, a number of states operated welfare-to-work programs on a demonstration basis and subjected these demonstrations to formal cost/benefit evaluations. This paper examines the evaluators' methods and summarizes and interprets their findings. Cost/benefit analysis of welfare-to-work programs can provide a rough but useful assessment of a program's efficiency in reducing welfare caseloads. But the evaluation results are more difficult to interpret than they may appear to be. For example, the results typically imply that such programs produce small net gains to society when gains and losses are measured in terms of net income. However, a sensitivity analysis measuring net gains and losses to welfare recipients in terms of changes in net utility suggests that an important modification to the evaluators' methodology might well reverse this finding in many instances.     

An end to boom and bust - can the Chancellor deliver?

In his Mansion House speech, the Chancellor of the Exchequer emphasised his desire to avoid the boom and bust cycle that has characterised the UK economy in recent years. The objective of a more stable economy is one with which it is hard to disagree. It strikes a chord with all those who have to take long-term decisions in the business community. But can the Chancellor deliver? In this article, we argue that despite the changes to the government's economic policy framework in recent years, many of the causes of the past instability of the UK economy remain. And while the Chancellor seeks to retain short-term control of interest rate decisions, there is always the risk that political pressures on monetary policy will be an added source of volatility.     

Industrial Structure and Australia– UK Intra-Industry Trade

This paper tests industry-specific hypotheses of the determinants of intra-industry trade in the context of Australia-UK trade. In doing so it separates intra-industry trade (ITT) into ITT in horizontally differentiated products and ITT in vertically differentiated products. It finds that the latter is the dominant former of ITT. Further the paper investigates the robustness of empirical results on testing industry-specific hypotheses to the choice of national (UK or Australian) industrial structure characteristics. The assumption of uniform industrial structures across countries adopted in other studies is shown not to be justified.