A theory of gridlock: Strategic behavior in legislative deliberations

This paper studies compromise and inflexibility in political negotiations. It provides the first analysis of gridlock, a result in which politicians fail to agree on an ideal compromise but which most voters find preferable to the status quo. A multistage game is developed in which contending political blocs choose from hardline or compromise strategies. The outcomes—compromise, gridlock, or one party's ideal legislation—are a function of the incentives of political actors to cooperate or fight. The model illustrates problems in political markets that may occur when consumers are poorly informed.     

Corporate Repurchase Decisions Following Mutual Fund Sales

This paper examines managerial response to widespread selling by mutual funds. We study the effect on share repurchases of liquidity‐based price pressure measured by mutual fund transactions caused by capital outflows. Firms whose shares undergo widespread selling by funds experiencing large outflows are more likely to repurchase their own shares, controlling for the effect of returns on share repurchases. The empirical results suggest that firms act as buyers of last resort and provide price support for their own shares.     

Capital structure and large investment projects

This paper provides empirical evidence that lumpy investment projects provide firms with the opportunity to adjust leverage at low marginal cost. Consistent with a theoretical model, I find that 1) firms sequence equity before debt during the financing period of their investment projects, and 2) that firms adjust their leverage ratios toward their target leverage during these investment periods. I also show that proactive increases in leverage observed in other studies can be explained by the evolution of firms' target leverage ratios over the financing period of a project. My results are consistent with trade-off theory and imply that firms move toward their target capital structures when they invest.     

Pairs Trading: Performance of a Relative-Value Arbitrage Rule

We test a Wall Street investment strategy, "pairs trading,"with daily data over 1962–2002. Stocks are matched intopairs with minimum distance between normalized historical prices.A simple trading rule yields average annualized excess returnsof up to 11% for self-financing portfolios of pairs. The profitstypically exceed conservative transaction-cost estimates. Bootstrapresults suggest that the "pairs" effect differs from previouslydocumented reversal profits. Robustness of the excess returnsindicates that pairs trading profits from temporary mispricingof close substitutes. We link the profitability to the presenceof a common factor in the returns, different from conventionalrisk measures.     

Valuing soil conservation benefits of agroforestry: contour hedgerows in the Eastern Visayas,Philippines

Trees can be considered as investments made by economic agents to prevent depreciation of natural assets such as stocks of top soil and water In agroforestry systems farmers use trees in this manner by deliberately combining them with agricultural crops on the same unit of land. Although advocates of agroforestry have asserted that soil conservation is one of its primary benefits, empirical estimates of these benefits have been lacking due to temporal and spatial complexity of agroforestry systems and the nonmarket aspect of soil capital assets. This study designs and applies a bio-economic framework for valuing the soil conservation benefits of agroforestry. The framework is tested with econometric analysis of data from surveys of households in Eastern Visayas. Philippines, where USAID/Government of Philippines introduced contour hedgerow agroforestry in 1983. By constructing a weighted soil quality index that also incorporates measures of soil fertility, texture and color in addition to erosion, we extend previous economic studies of soil resources. This index is regressed on a variety of farming and site specific bio-physical variables. Next, we use a Cobb-Douglas profit function to directly relate agricultural profits and soil quality. Thus, the value of soil conservation is measured as a quasi-rent differential or the share of producer surplus associated with a change in soil quality. Because this framework assumes the existence of markets, the assumption is tested by analysing the statistical significance of consumption side variables, e.g., number of household members, on production side variables, e.g., profits. Instrumental variables are used to handle the endogeneity of the soil index in the profit equation. Seemingly unrelatedregression (SUR) analysis is used to accommodate correlation of errors across the soil and profit equations. Regression results reveal the importance of agroforestry intensity, private ownership, land fragmentation, and familiarity with soil conservation as positive covariates of soil quality. Analysis of production data indicate the importance of market prices, education, farming experience, farm size, topography, and soil quality as positive covariates of household profits Investments in agroforestry to improve or maintain soil capital can increased annual agricultural profits by US$53 for the typical household, which is 6% of total income. However, there are significant up-front costs. Given that small farmers in tropical uplands are important players in the management of deteriorating soil and forest resources, policy makers may want to consider supporting farmers in the early years of agroforestry adoption.     

Continental Mergers Are Different

In recent years, business has been heavily preoccupied with two themes: merger and acquisition activity, and the development of the Single European Market. The topic of this paper combines the two: Continental mergers. The authors argue that the costs and benefits of Continental mergers are different from those of their domestic counterparts, and they need to be handled in different ways. This has implications both for the form of integration and for the way in which it is implemented. Most important, it is relevant to the selection of the right partner.     

Measuring the Performance of Banks

Banks do not publish accounts in quite the same way as other companies, and nor should they. But they should not be immune to conventional standards of performance ranking and evaluation. This companion piece to Business Strategy Review articles on measuring company performance applies some performance benchmarking to a sample of European Banks. The result: they must do better.