Survival

Empirical analysis of rates of return in finance implicitly condition on the security surviving into the sample. We investigate the implications of such conditioning on the time series of rates of return. In general this conditioning induces a spurious relationship between observed return and total risk for those securities that survive to be included in the sample. This result has immediate implications for the equity premium puzzle. We show how these results apply to other outstanding problems of empirical finance. Long-term autocorrelation studies focus on the statistical relation between successive holding period returns, where the holding period is of possibly extensive duration. If the equity market survives, then we find that average return in the beginning is higher than average return near the end of the time period. For this reason, statistical measures of long-term dependence are typically biased towards the rejection of a random walk. The result also has implications for event studies. There is a strong association between the magnitude of an earnings announcement and the postannouncement performance of the equity. This might be explained in part as an artefact of the stock price performance of firms in financial distress that survive an earnings announcement. The final example considers stock split studies. In this analysis we implicitly exclude securities whose price on announcement is less than the prior average stock price. We apply our results to this case, and find that the condition that the security forms part of our positive stock split sample suffices to explain the upward trend in event-related cumulated excess return in the preannouncement period.     

Strategic Debt Service

When firms experience financial distress, equity holders may act strategically, forcing concessions from debtholders and paying less than the originally-contracted interest payments. This article incorporates strategic debt service in a standard, continuous time asset pricing model, developing simple closed-form expressions for debt and equity values. We find that strategic debt service can account for a substantial proportion of the premium on risky corporate debt. We analyze the efficiency implications of strategic debt service, showing that it can eliminate both direct bankruptcy costs and agency costs of debt.     

What Can America Learn from the British Tax System?

This paper examines elements of British tax policy and discusses their implications for the US, where several recent proposals would mirror aspects of the British system. These include reducing filing requirements under the individual income tax, indexing capital gains for inflation, cutting mortgage interest deductions, enacting a value added tax, and integrating the corporate and personal income taxes. The paper also discusses implications of the poll tax for tax reform. Britain and America have made different choices involving equity, efficiency, simplicity and other goals. These choices offer the chance to help identify the impact of tax policy. JEL classification: H20.     

The Issue Decision of Manager-Owners under Information Asymmetry

A firm must issue common stock in order to undertake a new investment, and the firm's manager-owners can value the firm more accurately than the market. The ability of the manager-owners to trade in the firm's shares during the issue (a) reduces the investments that are foregone because of the market's mispricing the firm's shares, (b) changes the size and direction of the stock price change when the firm announces a new stock issue, and (c) changes the market value of the firm before and after the issue announcement, whether or not it decides to issue.     

The Effects of Transaction Costs and Different Borrowing and Lending Rates on the Option Pricing Model: A Note

This paper modifies the Black-Scholes option pricing model to include the effects of transaction costs and different borrowing and lending rates. The paper demonstrates that these market imperfections tend to offset each other yielding a bounded range of prices for each option. The paper also shows that under some conditions the option pricing hedge may be society's lowest cost financial intermediary.     

BUSINESS CYCLES AND RACIAL DISPARITIES IN PUNISHMENT

Deeply rooted historical patterns allow us to make a correlation between imprisonment and unemployment and the marginalization of blacks. This paper examines the interrelationships among criminal activity, punishment, and cycles of the economic system based on the influence of political and economic forces on forming penal policies. The penal system is viewed as a device by which labor market fluctuations can be regulated. We examine differences between blacks and whites and between the North and the South to arrive at this paper's thesis: that race provides the link among economic cycles, employment, and crime.     

Impact of energy audits on home energy consumption

The purpose of this study was to examine the impact of energy audits on home energy consumption rate, and to determine factors affecting participation in energy audit/weatherization programmes. Objectives included: (i) developing a linear model for predicting home energy consumption; (ii) examining the role of home energy audits in consumption rate; (iii) determining whether audit participation had increased over a two-year period; (iv) surveying reasons for non-participation, and (v) identifying sources of audit/conservation information which were most acceptable to consumers. The model expressed home energy consumption per square foot as a linear function of demographic, attitudinal and structural variables. The three most significant predictors in the model were adequacy of information, housing tenure and income. Eight out of 10 conservation measures studied were significantly more likely to exist in the homes of those who had had an audit. Three of these measures were also significant in the model. Study findings included a 7% increase in audit participation from 1981 to 1983. Lack of money and information were the two major factors inhibiting participation. Consumers indicated a need for conservation information from acceptable sources such as short courses or workshops, county extension agents, or skilled craftspeople.     

Economic and Political Factors in Formal Grievance Resolution

The resolution of formal grievances is largely determined by the applicable rights of grievant and the facts surrounding disputes. However, to the extent these rights and/or facts are unclear, the granting or denial of grievances is also partially determined by economic and political factors. A model of the impact of such factors on the favor ability of grievance decisions is developed and tested. The tests yield support for the general thesis and for several specific hypotheses.