Asymmetric Information,Managerial Opportunism,Financing, and Payout Policies

We examine corporate issuance and payout policies in the presence of both adverse selection (in capital markets) and managerial opportunism. Our results establish the importance of the locus of decision control in the firm. When shareholders determine policies, debt financing is always optimal in the presence of either adverse selection or managerial opportunism. However, when both of these problems are simultaneously present, equity issuance can become an optimal signaling mechanism. Shareholders' most preferred signaling mechanism is restricting dividends, followed by equity financing, and finally underpricing securities. When managers determine policies, a reversed hierarchy may be obtained.     

Strategic Financial Disclosure: Evidence from Labor Negotiations

Abstract. Evidence of strategic behavior in public financial disclosure is provided by analyzing 673 disclosures that were made before, during, and after four Canadian labor strikes. Financial disclosures included quantitative and qualitative information about the sampled companies that appeared in print media during the periods of interest. Strategic behavior involved the naming of one actor by another in the disclosures. The analyses showed that disclosure frequency was much higher during and immediately preceding the strikes than in other periods. Network-analytic techniques were employed to examine the linkages among seven groups of actors that were named in the disclosures. The disclosure networks increased in density during the strikes but became less centralized. Our analysis supports the view that strategic interactions in disclosures are multilateral and dynamic. Thus, any attempt to model financial disclosure during labor negotiations as a bilateral single-period game would appear to be simplistic. Disclosure management in this setting seems to occur within a complex economic and social setting.     

A Tax-Tax Clientele for Inde-linked Bonds: A Comment

This comment describes the U.S. federal income tax treatment of corporate bonds that are indexed for inflation and argues that these bonds do not have a tax-tax clientele in the United States.     

Negotiated Block Trades and Corporate Control

We identify negotiated trades of large-percentage blocks of stock as corporate control transactions. When a block trades and the firm is not fully acquired, cumulative abnormal returns average 5.6%, and 33% of the chief executives are replaced within a year. Stock-price increases are larger when control passes to the new blockholder, when management does not resist the blockholder's effort to influence corporate policy, and when the block purchaser eventually fully acquires the firm. These findings suggest that the specific skills and expertise of blockholders, and not just the concentration of ownership, are important determinants of firm value.     

THE ROLE OF DIFFERENTIATION STRATEGY IN LOCAL TELECOMMUNICATION ENTRY AND MARKET EVOLUTION: 1999–2002*

We examine the role of differentiation among competitive local exchange carriers (CLECs) in nearly 1,200 U.S. cities in 1999 and 2002, before and after a valuation crash affecting communications firms. We test and reject the null hypothesis of homogeneous competitors. We also find strong evidence that differentiated CLECs account for both potential market demand and the business strategies of competitors when making their entry decisions. Finally, product heterogeneity in markets in 1999 helps predict how the structure of markets evolved through 2002. We conclude that the policy debate for local telecommunications regulation should account for differentiated behavior.     

Dynamic Portfolio Selection by Augmenting the Asset Space

We present a novel approach to dynamic portfolio selection that is as easy to implement as the static Markowitz paradigm. We expand the set of assets to include mechanically managed portfolios and optimize statically in this extended asset space. We consider “conditional” portfolios, which invest in each asset an amount proportional to conditioning variables, and “timing” portfolios, which invest in each asset for a single period and in the risk‐free asset for all other periods. The static choice of these managed portfolios represents a dynamic strategy that closely approximates the optimal dynamic strategy for horizons up to 5 years.     

Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve

We examine the role of price discovery in the U.S. Treasury market through the empirical relationship between orderflow, liquidity, and the yield curve. We find that orderflow imbalances (excess buying or selling pressure) account for up to 26% of the day‐to‐day variation in yields on days without major macroeconomic announcements. The effect of orderflow on yields is permanent and strongest when liquidity is low. All of the evidence points toward an important role of price discovery in understanding the behavior of the yield curve.     

Enforced Standards Versus Evolution by General Acceptance: A Comparative Study of E-Commerce Privacy Disclosure and Practice in the United States and the United Kingdom

We present data on privacy practices in e‐commerce under the European Union's formal regulatory regime prevailing in the United Kingdom and compare it with the data from a previous study of U.S. practices that evolved in the absence of government laws or enforcement. The codification by the E.U. law, and the enforcement by the U.K. government, improves neither the disclosure nor the practice of e‐commerce privacy relative to the United States. Regulation in the United Kingdom also appears to stifle development of a market for Web assurance services. Both U.S. and U.K. consumers continue to be vulnerable to a small number of e‐commerce Web sites that spam their customers, ignoring the latter's expressed or implied preferences. These results raise important questions about finding a balance between enforced standards and conventions in financial reporting. In the second half of the 20th century, financial reporting has been characterized by both a preference for legislated standards and a lack of faith in its evolution as a body of social conventions. Evidence on whether this faith in standards over conventions is justified remains to be marshaled.     

THE STRUCTURE OF THE FINANCIAL SERVICES INDUSTRY

Since most studies of the financial services industry have viewed the structure of the industry as fixed, there has been little discussion of its determinants. Events of the past few years make it clear that the structure of the financial services industry is changing much more rapidly than it did between the end of World War II and the mid 1960's. This paper categorizes and discusses the major factors affecting the structure of the financial services industry. The concept of supply and demand provides a useful framework for categorizing these factors. Demand is best analyzed in terms of the demand for various characteristics or attributes of financial services. These include: 1) yield; 2) liquidity; 3) safety; 4) convenience of access to the services, 5) financial advice or information. The demand for these various characteristics or attributes depends importantly on demographic and economic factors
The supply of financial services is determined by the cost curves associated with those services which are in turn determined by the cost of the factors of production and the underlying production function. Three aspects of these cost curves have an important effect on the supply of financial services and the structure of the industry — economies of scale, economies of joint production and distribution, and the management of risk. The nature of the cost and production functions underlying the supply of financial services and the structure of the industry is affected by several exogenous factors. Foremost among them are the economy, technology, regulation, and the role of the Federal government in financial service markets
Based on the discussion of how the various exogenous factors affect the structure of the financial services industry, an attempt is made to predict how structure will change as deregulation occurs.