The Vote Is Cast: The Effect of Corporate Governance on Shareholder Value

This paper investigates whether improvements in the firm's internal corporate governance create value for shareholders. We analyze the market reaction to governance proposals that pass or fail by a small margin of votes in annual meetings. This provides a clean causal estimate that deals with the endogeneity of internal governance rules. We find that passing a proposal leads to significant positive abnormal returns. Adopting one governance proposal increases shareholder value by 2.8%. The market reaction is larger in firms with more antitakeover provisions, higher institutional ownership, and stronger investor activism for proposals sponsored by institutions. In addition, we find that acquisitions and capital expenditures decline and long‐term performance improves.     

Information and Incentives Inside the Firm: Evidence from Loan Officer Rotation

We present evidence that reassigning tasks among agents can alleviate moral hazard in communication. A rotation policy that routinely reassigns loan officers to borrowers of a commercial bank affects the officers' reporting behavior. When an officer anticipates rotation, reports are more accurate and contain more bad news about the borrower's repayment prospects. As a result, the rotation policy makes bank lending decisions more sensitive to officer reports. The threat of rotation improves communication because self‐reporting bad news has a smaller negative effect on an officer's career prospects than bad news exposed by a successor.     

USING PSEUDO‐PANELS TO MEASURE INCOME MOBILITY IN LATIN AMERICA

This paper presents a comparative overview of mobility patterns in 14 Latin American countries between 1992 and 2003. Using three alternative econometric techniques on constructed pseudo‐panels, the paper provides a set of estimators for the traditional notion of income mobility as well as for mobility around extreme and moderate poverty lines. The estimates suggest very high levels of time‐dependent unconditional immobility for the Region. However, the introduction of socioeconomic and personal factors reduces the estimate of income immobility by around 30 percent. There are also large variations in country‐specific income mobility (estimated to explain some additional 10 percent of inter‐temporal income variation). Analyzing the determinants of changes in poverty incidence within cohorts revealed statistically significant roles for age, gender, and education of the household head, the latter subject to distinctive effects across levels of attainment and transition in and out of poverty.     

A Test of the Law of One Price in Retail Banking

This paper investigates the level and the determinants of retail banking interest rate differences among Spanish banks in the period 1989–2003. We find that the interest rates of twenty five different bank loan and deposit products adjust rather rapidly to their long-term values in response to external shocks, as the relative version of the Law of One Price predicts, but the evidence runs contrary to the absolute version of the Law. Credit risk premium, part of the marginal cost of the loans granted by a particular bank, is an important source of interest rate dispersion across banks and loan products, both before and after Spain joined the Euro zone. Therefore, differences in credit risk policies across banks must be taken into account when forming expectations about European retail banking integration.     

Beliefs and Public Good Provision with Anonymous Contributors

We analyze a static game of public good contributions where finitely many anonymous players have heterogeneous preferences about the public good and heterogeneous beliefs about the distribution of preferences. In the unique symmetric equilibrium, the only individuals who make positive contributions are those who most value the public good and who are also the most pessimistic; that is, according to their beliefs, the proportion of players who most like the public good is smaller than it would be according to any other possible belief. We predict whether the aggregate contribution is larger or smaller than it would be in an analogous game with complete information and heterogeneous preferences, by comparing the beliefs of contributors with the true distribution of preferences. A trade‐off between preferences and beliefs arises if there is no individual who simultaneously has the highest preference type and the most pessimistic belief. In this case, there is a symmetric equilibrium, and multiple symmetric equilibria occur only if there are more than two preference types.     

INTERTEMPORAL COMPETITION AND AID

We study donor–recipient relationships in which the donor finances aid programs from which recipients want to divert funds in order to meet their own objectives. We analyze two economies. In the first one, the donor commits to a program budget for each period. In the second economy, the donor commits to a program budget for two periods. This introduces intertemporal competition among recipient officials. We show that intertemporal competition may weaken recipients' incentives to divert funds from aid programs. Furthermore, we show that this may occur even in the presence of regional competition among recipients.     

LEGAL CORRUPTION

We challenge the conventional definition of corruption through the analysis of legal forms of corruption, and by devoting special attention to influence induced by the private sector. This paper studies the determinants of the world pattern of legal and illegal corruption by proposing a simple theoretical model of endogenous corruption and related legal framework, and its thorough empirical test. Three types of equilibrium outcomes are identified: one based on illegal corruption, where the elite does not face any binding incentives to limit corruption; one centered around legal corruption, where the elite must incur a cost to legally protect corruption; and finally a no‐corruption outcome, where the population is able to effectively react to corruption. Testable implications from the model are derived based on country‐wide parameters. Crucially, we use a rich corporate survey, including 8,279 firms in 104 countries, tailored for this research, and featuring measures of legal corruption that are novel to the literature. The microdimension of the database enables improving on familiar shortcomings associated with the use of endogeneity‐prone, country‐wide indices of perceived corruption. The empirical results, making use of a broad range of proxies and sources, generally validate the model's explanations.     

Determinacy and Learnability of Monetary Policy Rules in Small Open Economies

This paper evaluates under which conditions different Taylor-type rules lead to determinacy and expectational stability (E-stability) of rational expectations equilibrium in a simple "New Keynesian" small open economy model, developed by Gali and Monacelli (2005) . In particular, we extend Bullard and Mitra (2002) results of determinacy and E-stability in a closed economy to this small open economy framework. Our results highlight an important link between the Taylor principle and both determinacy and learnability of equilibrium in small open economies. More importantly, the degree of openness coupled with the nature of the policy rule adopted by the monetary authorities might change this link in important ways. A key finding is that, contrary to Bullard and Mitra, expectations-based rules that involve the consumer price inflation and/or the nominal exchange rate limit the region of E-stability and the Taylor Principle does not guarantee E-stability. We also show that some forms of managed exchange rate rules can help to alleviate problems of both indeterminacy and expectational instability, yet these rules might not be desirable since they can promote greater volatility in the economy.