Analysts' Forecasts: Low-Balling,Market Efficiency,and Insider Trading

The phenomenon of low-balling reported in the financial press involves downward biased projections of earnings by managers or analysts, thereby artificially lowering market expectations and creating a positive earnings surprise when actual earnings are announced. This study reports that the stock market does respond to such surprises relative to analysts' reported forecasts. Further, the proportion of insider buy-transactions in the period prior to the earnings forecast is significantly higher for the sample with high positive earnings surprise than for the control sample with zero forecast errors. The study cannot distinguish whether managers or analysts are the source of the low-balling and therefore makes no statement on the legality of such insider trades.     

Governance indexes and valuation: Which causes which?

Two recent papers document a significant relation between valuation multiples and governance indices during the 1990s. We test whether causation runs from governance to valuation or vice versa. We find that valuation multiples during the early 1980s, a period preceding the adoption of the provisions comprising the governance indices, are highly correlated with valuation multiples during the 1990s. After controlling for valuation multiples during 1980–1985, no significant relation exists between contemporaneous valuation multiples and governance indices during the 1990s. The results are consistent with the hypothesis that firms with low valuation multiples were more likely to adopt provisions comprising the governance indices, not that the adoption of these provisions depresses valuation multiples.     

SOUTH–SOUTH TRADE: BEYOND GEOGRAPHY

Starting from a low base, south–south trade has picked up momentum over the last two decades. It is emerging as a new dimension of the global economy and can potentially usher in several benefits for developing economies. The emerging economies of the dynamic south (EEDS) not only provided a striking impetus to south–south trade but also contributed to the changing mise-en-scène of the global economy. However, given the moribund state of the Doha Round, additional policy measures need to be taken by the EEDS.     

LEVERAGE, RESOURCE ALLOCATION AND GROWTH

The effects of resource allocation on firms comprising the competitive economy are examined within the structure of a simple general equilibrium model. The study shows that capital structure of a firm is independent of its value, — a result that can be characterized as the mirror-image of the celebrated Modigliani-Miller proposition. The structure of present analysis highlights how costs of capital assets change, what affects the prices of the firms, and how these changes are reflected in the operations of the firms in an overall economic set up. The paper then establishes that if debt is increased, and the (relatively) levered firm expands, its stock price goes up and the (relatively) less levered firm shrinks and moves in the opposite direction in all respects. The appropriate conditions for profitable leveraged buyout are spelled out, and other conditions are also specified as to when merger is unprofitable. Finally, the paper is concluded with some thoughts on possible future research along the lines outlined in this work.     

Profit Possibilities in Currency Markets: Arbitrage, Hedging, and Speculation

This paper reviews and extends the existing literature on covered arbitrage, delineates the conditions for profitable arbitrage with the hedging instruments of forward and options contracts in the foreign exchange markets, and defines the maximum possible profits out of a given market environment. Next, the simple rules on speculation are articulated with and without transaction costs, and then we show how speculation can be covered with options and forwards. Finally, speculation is integrated with arbitrage and hedging, and further compounding of profit possibilities is illustrated.     

A Characterization of Complete Security Markets On A Brownian Filtration1

This paper provides a characterization theorem for a complete securities market when security prices follow Itô processes on a multidimensional Brownian filtration. This characterization theorem is a special case of Harrison and Pliska (1983), and it clarifies a counterexample provided by Müller (1989).     

The 2007 Nobel Memorial Prize in Mechanism Design Theory

This paper provides an overview of mechanism design theory, and explains the roles played by Leonid Hurwicz, Eric Maskin and Roger Myerson in the development of this field.     

FINANCIAL GLOBALISATION: PAST AND PRESENT

This article compares and contrasts the two modern periods of financial globalisation, approximately a century apart. The focal point of the first period was around the turn of the twentieth century, while that of the second was around the turn of the twenty‐first century. Financial globalisation in the latter era was far deeper and there was a remarkable across‐the‐board transformation of the global financial system. An interesting twenty‐first‐century phenomenon is the recent change in direction of capital flows: that is, sizeable sums of capital flowing from non‐industrial countries to advanced industrial countries.