Presidential Address: Discount Rates

Discount‐rate variation is the central organizing question of current asset‐pricing research. I survey facts, theories, and applications. Previously, we thought returns were unpredictable, with variation in price‐dividend ratios due to variation in expected cashflows. Now it seems all price‐dividend variation corresponds to discount‐rate variation. We also thought that the cross‐section of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discount‐rate theories based on central ingredients and data sources. Incorporating discount‐rate variation affects finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics.     

When Does Information Asymmetry Affect the Cost of Capital?

This paper examines when information asymmetry among investors affects the cost of capital in excess of standard risk factors. When equity markets are perfectly competitive, information asymmetry has no separate effect on the cost of capital. When markets are imperfect, information asymmetry can have a separate effect on firms’ cost of capital. Consistent with our prediction, we find that information asymmetry has a positive relation with firms’ cost of capital in excess of standard risk factors when markets are imperfect and no relation when markets approximate perfect competition. Overall, our results show that the degree of market competition is an important conditioning variable to consider when examining the relation between information asymmetry and cost of capital.     

Employment Opportunities for Consumer Affairs Professionals

This analysis of consumer affairs professionals in business and government describes what functions they perform, where they are employed, what education and experience is required and what their salaries are. Professional educators in the consumer field have generally ignored the career field of consumer affairs professional. Colleges and universities train consumer majors to be educators, researchers, or extension workers, but little attention is paid to the education of consumer affairs professionals for business and government. This article not only attempts to give educators in the consumer field a greater awareness of this relatively new career so that they can develop educational programs more intelligently but also attempts to make business and government more aware of what is being done in this area so they may be able to utilize the talents of consumer affairs professionals.     

Consumers and Competition in Health Care: The Case of Denturism

Denturism is the making and fitting of dentures directly for the public by nondentists. It is an example of potential competitive entry in a health services market and, like other such examples, its economic benefits must be weighed against any threat to the public health and safety. This article examines evidence relating to the economic benefits to consumers of legalizing denturism. Conservative estimates are presented of the economic benefits to consumers that would accrue under alternative institutional arrangements. Under several such arrangements it was found that the value of benefits is of the same order of magnitude as total government expenditures on dental services.     

Merger Announcements and Insider Trading Activity: An Empirical Investigation

This paper provides evidence of excess returns earned by investors in acquired firms prior to the first public announcement of planned mergers. The study is distinguished from earlier merger studies in its use of daily holding period returns for the 194 firms sampled. The results confirm statistically what most traders already know. Impending merger announcements are poorly held secrets, and trading on this nonpublic information abounds. Specifically, leakage of inside information is a pervasive problem occurring at a significant level up to 12 trading days prior to the first public announcement of a proposed merger.     

TECHNICAL NOTE : THE VARIABLE FINANCIAL INDICATOR IRR AND THE CONSTANT ECONOMIC INDICATOR NPV

The IRR (internal rate of return) and the NPV (net present value) are the two most common and important indicators in investment decisions. These two indicators, however, have intrinsic differences between one another. The IRR is a financial indicator and the NPV an economic indicator of a capital investment. The former gives the private investor's point of view and the latter the society's point of view. The value of ERR varies with the change of Financial arrangement of an investment. The NPV, however, does not but remains constant no matter how the financial arrangement changes. This paper uses an illustrative example to show their intrinsic differences and then describes a mathematical proof to substantiate the different natures of IRR and NPV.     

The market for American state government bonds in Britain and the United States, 1830–431

In the 1830s the British and American economies were hit by a series of shared macroeconomic shocks. This paper investigates the role of markets for America's State bonds in Britain and the USA during and between the crises in 1837, 1839, and 1842.There is strong evidence that the crises in 1839 and 1842 originated in the USA and spread to Britain. There is also strong evidence that credit markets for American state bonds were tighter in the USA than in London between 1839 and 1842. The idea that the depression that began in 1839 in the USA was triggered by credit conditions in Britain and transmitted via the market for state credit, finds no support here.     

Capital Market Experience for Financial Accounting Students*

Abstract. In this paper we present an innovative teaching tool for introductory financial accounting students that promotes active learning using methods at the frontier of market research. We describe the implementation of an asset market where students assume the role of traders in order to learn the role of information in price formation. We discuss the pedagogical questions which are addressed in the design of this market, and we relate the responses to questionnaires distributed to students at the end of the quarter. When we control for prior grade point averages (GPAs) of students, we find that those who participate in the market had better classroom performance. Résumé. Les auteurs présentent ici un instrument pédagogique innovateur, à l'intention des étudiants des cours d'introduction à la comptabilité financière, favorisant l'apprentissage dynamique grâce à l'utilisation de méthodes voisinant de près l'étude de marché. Ils décrivent la mise en place d'un marché de biens où les étudiants assument les fonctions de négociateurs en vue d'apprendre quel est le rôle de l'information dans la formation des prix. Ils analysent les questions pédagogiques que soulève la conception de ce marché et font état des réponses des étudiants aux questionnaires qui leur sont distribués à la fin du trimestre. Lorsqu'ils contrôlent les notes moyennes antérieures des étudiants, les auteurs constatent que ceux qui ont participé au marché font preuve d'un rendement supérieur en classe.     

IMPLICATIONS OF LIBERALISED EUROPEAN LABOUR MARKETS

This paper reviews the alternative labour market scenarios open to European policymakers in the current movement towards enhanced economic and political integration. To clarify the various issues, the paper dichotomises the policy alternatives into two camps: "euro-liberalists" and "euro-regulators." The paper concludes that the latter offers the best path towards convergence, with the proviso that the subject of regulation is a Pan-European system of labour market objectives rather than institutions.