No Pain,No Strain: Impact of Health on the Financial Security of Older Americans

This study uses data from the 2002 and 2004 Health and Retirement Study to investigate the impact that new and existing health problems have on the financial strain of older Americans. Two‐period models are estimated for a series of financial ratio guidelines that take into account household solvency, liquidity, and investment asset accumulation. We test our models using a subjective measure of self‐reported health status and two objective measures of health that control for the severity of specific health conditions. The results show that health problems significantly increase the likelihood of financial strain for older individuals, but the effects vary by the measure of financial strain used and how health status is defined. Specifically, existing health conditions were more likely to affect solvency and investment asset accumulation than liquidity, while new health events were more likely to affect solvency. The severity of the condition did not seem to matter as much as whether the condition was chronic. These results provide insight into the future financial security of older Americans and have important implications for health policy and research.     

Knowledge Market Design: A Field Experiment at Google Answers

In a field experiment at Google Answers, we investigate the performance of price‐based online knowledge markets by systematically manipulating prices. Specifically, we study the effects of price, tip, and a reputation system on both an answerer's effort and answer quality by posting real reference questions from the Internet Public Library on Google Answers under different pricing schemes. We find that a higher price leads to a significantly longer, but not better, answer, while an answerer with a higher reputation provides significantly better answers. Our results highlight the limitation of monetary incentives and the importance of reputation systems in knowledge market design.     

The Errors in the Variables Problem in the Cross-Section of Expected Stock Returns

Recent research has documented the failure of market beta to capture the cross-section of expected returns within the context of a two-pass estimation methodology. However, the two-pass methodology suffers from the errors-in-variables (EIV) problem that could attenuate the apparent significance of market beta. This article provides a new correction for the EIV problem that is robust to conditional heteroscedasticity. After the correction, I find more support for the role of market beta and less support for the role of firm size in explaining the cross-section of expected returns. While the EIV correction leads to a diminished role of firm size, the size variable remains a significant force in explaining the cross-section of expected returns.     

The Impact of Merger Bids on the Participating Firms' Security Holders

This paper investigates whether merger bids have an impact on the wealth of the participating firms' bondholders and stockholders. Monthly and daily bond and stock returns are calculated relative to the announcement date of a merger bid for a sample of conglomerate mergers. The results show that while the stockholders of target firms gain from a merger bid, no other securityholders either gain or lose. To provide direct evidence on the existence of “diversification effects” and “incentive effects,” we test whether the bondholders' returns are dependent upon the correlation between the returns of the merging firms and whether the size of the bondholders' and stockholders' returns in individual mergers are correlated. The results are consistent with a capital market that efficiently resolves conflicts of interest between stockholders and bondholders.     

Intersectoral Labor Immobility,Sectoral Comovement,and News Shocks

Sectoral comovement of output and hours worked is a prominent feature of business cycle data. However, most two‐sector neoclassical models fail to generate this sectoral comovement. We construct and estimate a two‐sector neoclassical Dynamic Stochastic General Equilibrium (DGSE) model generating sectoral comovement in response to both anticipated and unanticipated shocks. The key to our model's success is a significant degree of intersectoral labor immobility, which we estimate using data on sectoral hours worked. Furthermore, we demonstrate that imperfect intersectoral labor mobility provides a better explanation for the sectoral comovement than an alternative model emphasizing the role of labor‐supply wealth effects.     

Segment Disclosure Transparency and Internal Capital Market Efficiency: Evidence from SFAS No. 131

Using the adoption of SFAS 131, I examine the effect of segment disclosure transparency on internal capital market efficiency. SFAS 131 requires firms to define segments as internally viewed by managers, thereby improving the transparency of managerial actions in internal capital allocation. I find that diversified firms that improved segment disclosure transparency by changing segment definitions upon adoption of SFAS 131 experienced an improvement in capital allocation efficiency in internal capital markets after the adoption of SFAS 131. In addition, I find that the improvement in internal capital market efficiency was greater for firms that suffered more severe agency problems before the adoption of SFAS 131 and also for firms whose managers faced stronger incentives to improve efficiency after the adoption of SFAS 131. My results suggest that more transparent segment information can help resolve agency conflicts in the internal capital markets of diversified firms, thus improving investment efficiency.