Economic Policy in the Face of Severe Tail Events

From time to time, something occurs which is outside the range of normal expectations. We will call these “tail events” in the sense that they are way out of the tail of a probability distribution. I consider the question of the implications of tail events for economic policy and climate‐change economics. This issue has been analyzed by Martin Weitzman who proposed a Dismal Theorem. The general idea is that, under limited conditions concerning the structure of uncertainty and risk aversion, society has an indefinitely large expected loss from high‐consequence, low‐probability events. Under such conditions, standard economic tools such as cost‐benefit analysis cannot be applied. The present study is intended to put the Dismal Theorem in context and examine the range of its relevance, with an application to catastrophic climate change. I conclude that tail events are sometimes of extreme importance, and we must be extremely careful to include them in situations of deep uncertainty. However, we conclude that no loaded gun of strong tail dominance has been uncovered to date.     

Incremental information content of earnings-and nonearnings-based financial ratios*

Abstract. Given the quantity of nonearnings data disclosed in firms' annual reports, and the many dimensions of performance measured, it is likely that such information is used in establishing equilibrium prices in the market for firms' shares. This study empirically tests the hypothesis that equity price-relevant information conveyed by annual reports includes several measures other than earnings. The marginal impact of both earnings- and nonearnings-based financial ratios is analyzed and reported. The ratio information is first partitioned into distinct sets using an a priori linear components (LISREL) model. Association tests then show incremental information effects for the earnings-based ratio set as well as for several nonearnings-based ratio sets. Résumé. Étant donné la quantité de données étrangères aux bénéfices présentées dans les rapports annuels des entreprises et les nombreuses dimensions sous lesquelles le rendement est mesuré, il est probable que cette information soit utilisée dans l'établissement de prix d'équilibre dans le marché des actions des entreprises. Dans la présente étude, les auteurs procèdent à des vérifications empiriques de l'hypothèse selon laquelle l'information pertinente aux prix relative aux participations que livrent les rapports annuels comporte plusieurs mesures étrangères aux bénéfices. Les auteurs analysent l'incidence marginale tant des ratios financiers basés sur les bénéfices que de ceux qui ne le sont pas, et ils en exposent les résultats. L'information indiciaire est d'abord partagée en jeux distincts à l'aide d'un modèle de composants linéaires a priori. Les tests d'association montrent ensuite les conséquences de l'information marginale pour le jeu des ratios basés sur les bénéfices ainsi que pour plusieurs jeux de ratios qui ne le sont pas.     

The Informational Content of Initial Public Offerings

The ability of capital markets to distinguish firms of different value by the size of their initial equity offerings is attenuated when insiders can sell equity more than once. A model is developed in which there is price risk from holding equity between periods. When the uncertainty is small, there must be pooling in the first period. When uncertainty is large, the pooling equilibria dominate the separating equilibrium.     

An Examination of the Super Bowl Stock Market Predictor

Few prediction schemes have been more accurate, and at the same time more perplexing, than the Super Bowl Stock Market Predictor, which asserts that the league affiliation of the Super Bowl winner predicts stock market direction. In this study, we examine the record and statistical significance of this anomaly and demonstrate that an investor would have clearly outperformed the market by reacting to Super Bowl game outcomes.     

Does Prospect Theory Explain IPO Market Behavior?

We derive a behavioral measure of the IPO decision‐maker's satisfaction with the underwriter's performance based on Loughran and Ritter (2002) and assess its ability to explain the decision‐maker's choice among underwriters in subsequent securities offerings. Controlling for other known factors, IPO firms are less likely to switch underwriters when our behavioral measure indicates they were satisfied with the IPO underwriter's performance. Underwriters also extract higher fees for subsequent transactions involving satisfied decision‐makers. Although our tests suggest that the behavioral model has explanatory power, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns.