Representation of constitutions under incomplete information

We model constitutions by effectivity functions. We assume that the constitution is common knowledge among the members of the society. However, the preferences of the citizens are private information. We investigate whether there exist decision schemes (i.e., functions that map profiles of (dichotomous) preferences on the set of outcomes to lotteries on the set of social states), with the following properties: (i) The distribution of power induced by the decision scheme is identical to the effectivity function under consideration; and (ii) the (incomplete information) game associated with the decision scheme has a Bayesian Nash equilibrium in pure strategies. If the effectivity function is monotonic and superadditive, then we find a class of decision schemes with the foregoing properties.     

The Effect of Trading Halts on the Speed of Price Discovery

Trading halts are aimed at reducing information asymmetry by granting investors the opportunity to reassess trades upon arrival of new, substantial information. This study is the first to address the efficiency of the price discovery process with respect to time, i.e., the speed of adjustment to new information. A unique database allow us to conduct an event study analysis and measure the impact of trading halts on price discovery while controlling for content, operational and value effects. We find that information dissemination following trading halts is over 40% faster and that abnormal trading activity is positively related to the speed of price adjustment.     

The likelihood ratio test statistic of mean-variance efficiency without a riskless asset

The question whether a given porfolio is mean-variance efficient is a basic problem of investment analysis. Mean-variance efficiency is also the basis of the Capital Asset Pricing Model. This paper presents the explicit form of the likelihood ratio test of the hypothesis that a given portfolio, or a particular market index, is ex-ante mean-variance efficient in the case where there is no riskless asset. Geometric relations are illustrated to provide intuition about the constrained maximum likelihood estimators and the test statistic, and two simple economic interpretations of the test are given.     

Measuring investor sentiment with mutual fund flows

We investigate a proxy for monthly shifts between bond funds and equity funds in the USA: aggregate net exchanges of equity funds. This measure (which is negatively related to changes in VIX) is positively contemporaneously correlated with aggregate stock market excess returns: One standard deviation of net exchanges is related to 1.95% of market excess return. Our main new finding is that 85% (all) of the contemporaneous relation is reversed within four (ten) months. The effect is stronger in smaller stocks and in growth stocks. These findings support the notion of “noise” in aggregate market prices induced by investor sentiment.     

Flexibility versus Commitment in Personnel Management

This paper compares human resources (HR) policies embedded in the Japanese and U.S. management systems. We adapt a model from the literature on irreversible investment and use it to examine the trade-off between flexibility to adjust the labor force and higher productivity stemming from the greater commitment of the firm to its employees. In the model, two types of contracts with otherwise identical workers can coexist. One possibility is for firms to commit to a permanent employment contract that precludes dismissal at will. The alternative is a temporary employment contract that allows flexibility to adjust the firm's labor force during demand downturns, but involves higher labor cost per unit of output. Using an example, we illustrate the possible magnitude of the value of flexibility and suggest that adopting long-term contracts in the wrong environment can significantly reduce firm value. The model yields predictions for the optimal labor force composition and its relation to the characteristics of the firm's market. We also consider practices that develop to complement permanent employment. The predictions are then examined in light of evidence on the HR practices in Japan and the United States in the past 50 years and are found to be consistent with the stylized facts in the literature. J. Japan. Int. Econ., December 2001, 15(4), pp. 515–556. Hebrew University, Jerusalem, Israel, and University of Illinois at Urbana-Champaign, Urbana, Illinois. © 2001 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: J31, J33, J41, J64.     

Does the stock market predict real activity? Time series evidence from the G-7 countries

This paper extends one aspect of the US stock market study of Fama (1990) and Schwert (1990). We examine the relationship between industrial production (IP) growth rates and lagged real stock returns for the G-7 countries using both in-sample cointegration and error-correction models and the out-of-sample forecast-evaluation procedure of Ashley et al. (1980). The cointegration tests show a long-run equilibrium relationship between the log levels of IP and real stock prices, while the error-correction models indicate a correlation between IP growth and lagged real stock returns for all countries except Italy. The out-of-sample tests show that in several sub-periods the US, UK, Japanese, and Canadian stock markets enhance predictions of future IP.     

An analysis of private versus public firm valuations and the contribution of financial experts

This study investigates differences in expert valuations of private versus public firms conducted for transactions outside the exchange. First, we provide evidence for extreme reliance of the experts on private firms' reported earnings, despite a possible manipulation of these earnings. In contrast, experts valuing public firms seem to rely on other, non-financial statement information sources, even if the quality of pre-acquisition earnings is higher in these firms. Second, we present evidence that the contribution of experts to investors in private firms is questionable at best. Our findings indicate that a private firm valuation performed by a potential investor based on available information provides results similar to those of the expert. Third, we show that inconclusive results regarding the existence of a discount in private firm valuations may be explained by experts' compliance with the interests of the commissioner of the valuation. This finding provides at least a partial explanation for the private company discount, one that adds to prior standard explanations (e.g., liquidity) offered in the finance literature.     

Collective contests for commons and club goods

This paper focuses on collective contests for commons and club goods. Our main objective is to examine in this context the effect of group size on its performance. The main results specify conditions for the existence (non-existence) of the group-size paradox, namely, the situation where a larger group is less (more) effective in pursuing its interest because of (despite) the combined effect of the incentives that result in the free-riding problem and the tragedy of the commons. The paper also explains under what circumstances there exists a bias towards excessive or inadequate winning group size. Finally, it examines the effect of restricted excludability of the commons good within the winning group on the relationship between group-size and its winning probability.