New Findings Regarding Day-of-the-Week Returns over Trading and Non-Trading Periods: A Note

This paper decomposes daily close to close returns into trading day and non-trading day returns. We discover that all of the average negative returns from Friday close to Monday close documented in the literature for stock market indexes occurs during the non-trading period from Friday close to Monday open. In addition, average trading day returns (open to close) are identical for all days of the week. January/firm size/turn-of-the-year anomalies are shown to be interrelated with day-of-the-week returns.     

Exchange Rates and Cash Flows in Differentiated Product Industries: A Simulation Approach

How do exchange rate changes impact firms' cash flows? We extend a simulation method developed in industrial organization to answer this question. We use prices, quantities, and product characteristics for differentiated products, coupled with a discrete choice framework and an assumption of price competition, to estimate marginal costs for all producers. Using a Monte Carlo approach we generate counterfactual prices and profits for different levels of exchange rates. We illustrate the method using the market for bottled water. Our results stress that even in a relatively simple market such as this one, different brands face very different exchange rate risks.     

Resource Allocation Auctions within Firms

There is growing interest in the use of markets within firms. Proponents have noted that markets are a simple and efficient mechanism for allocating resources in economies in which information is dispersed. In contrast to the use of markets in the broader economy, the efficiency of an internal market is determined in large part by the endogenous contractual incentives provided to the participating, privately informed agents. In this paper, we study the optimal design of managerial incentives when resources are allocated by an internal auction market, as well as the efficiency of the resulting resource allocations. We show that the internal auction market can achieve first‐best resource allocations and decisions, but only at an excessive cost in compensation payments. We then identify conditions under which the internal auction market and associated optimal incentive contracts achieve the benchmark second‐best outcome as determined using a direct revelation mechanism. The advantage of the auction is that it is easier to implement than the direct revelation mechanism. When the internal auction mechanism is unable to achieve second‐best, we characterize the factors that determine the magnitude of the shortfall. Overall, our results speak to the robust performance of relatively simple market mechanisms and associated incentive systems in resolving resource allocation problems within firms.     

Asset Wealth and Asset Decumulation among Households in the Retirement Survey

This paper examines the asset positions of households at and around retirement in Britain using the Retirement Survey ‘waves’ of 1988–89 and 1994. The data provide the first panel evidence on retirement behaviour and asset evolution for a sample of older households in Britain. The analysis in this paper shows the importance of housing and private pension wealth for this age-group in Britain, and also the differential wealth holdings between surviving respondents and those who died or failed to respond for other reasons in 1994. It provides some preliminary evidence as to whether households decumulate assets after retirement in accordance with the ‘textbook’ version of the Life-Cycle Hypothesis of consumption.     

Do Changes in Dividends Signal the Future or the Past?

Many dividend theories imply that changes in dividends have information content about the future earnings of the firm. We investigate this implication and find only limited support for it. Firms that increase dividends in year 0 have experienced significant earnings increases in years ?1 and 0, but show no subsequent unexpected earnings growth. Also, the size of the dividend increase does not predict future earnings. Firms that cut dividends in year 0 have experienced a reduction in earnings in year 0 and in year ?1, but these firms go on to show significant increases in earnings in year 1. However, consistent with Lintner's model on dividend policy, firms that increase dividends are less likely than nonchanging firms to experience a drop in future earnings. Thus, their increase in concurrent earnings can be said to be somewhat “permanent.” In spite of the lack of future earnings growth, firms that increase dividends have significant (though modest) positive excess returns for the following three years.     

Managerial Ability, Compensation, and the Closed-End Fund Discount

This paper shows that the existence of managerial ability, combined with the labor contract prevalent in the industry, implies that the closed‐end fund discount should exhibit many of the primary features documented in the literature. We evaluate the model's ability to match the quantitative features of the data, and find that it does well, although there is some observed behavior that remains to be explained.     

An Examination of Gains to Acquirers of Mutual Thrifts in Merger Conversions

This paper examines the wealth impact of acquiring mutual thrifts in merger conversions. We find that these transactions produced wealth gains both before and after the passage of FIRREA. These gains, however, are statistically significant only in the post-FIRREA period, indicating that regulatory changes resulting from FIRREA made such mergers more appealing. Cross-sectional analyses indicate that merger conversions enhance value by providing an opportunity to expand into potentially lucrative markets. Acquisitions of mutuals that present substantial opportunities for branch closings lead to larger gains. In addition, acquirer gains increase with the relative size of the transaction and are larger for acquisitions in markets served by competing firms that are small relative to the merged entity. Contrary to popular belief, variations in bidder gains appear to be unrelated to changes in the regulatory capital position resulting from the merger conversion.     

Growth Opportunities and Risk-Taking by Financial Intermediaries

We show that growth opportunities which cannot be converted to cash under conditions of financial distress $\left(G_z\right)$ are a critical determinant of an intermediary's choice of risk. Financial institutions in which $G_z$ is a low proportion of total assets will be much more likely to engage in go-for-broke behavior. The model leads to a reevaluation of the effectiveness of several traditional remedies for dealing with banks that take excessive risks such as raising insurance premiums, intervening before capital is depleted, and restricting investment options. The model also has implications about a new approach to the examination of financial intermediaries.     

Changes in the Cost of Intermediation: The Case of Savings and Loans

The minimum cost output configuration for a firm may change as the result of a variety of factors, including changes in market structure. In this paper we test this structural change hypothesis with savings and loan data. We find support for the hypothesis that separable, constant returns to scale production functions characterize the average savings and loan in our sample in 1983. This is in contrast to the cost complementarities found in 1978. We argue that this result may be the result of regulatory changes that allowed savings and loans to alter their production mix to fully capture the benefits of joint production.