Do Information Rents in Loan Spreads Persist over the Business Cycles?

In this paper, we seek empirical evidence for information rents in loan spreads by analyzing a sample of UK syndicated loan contracts for the period from 1996 to 2005. We use various measures for borrower opaqueness and control for bank, borrower and loan characteristics and we find that undercapitalized banks charge approximately 34 bps higher loan spreads for loans to opaque borrowers. We further analyze whether this effect persists throughout the business cycle and find that this effect prevails only during recessions. However, we do not find evidence that banks exploit their information monopolies during expansion phases.     

Estimating time-varying variances and covariances via nearest neighbour multivariate predictions: applications to the NYSE and the Madrid Stock Exchange Index

In this article, we present a technique to obtain the time-varying covariance matrix for several time series for nearest neighbour predictors. To illustrate the use of this technique, we analyse the time-varying variances and correlations between the daily returns on two equity stock market indexes, the New York Stock Exchange and the Madrid Stock Exchange Index.     

Temporary overpessimism: Job loss expectations following a large negative employment shock

Job loss expectations were widespread amongst workers in East Germany following reunification with West Germany. Though experiencing a large negative employment shock, East German workers were nevertheless overpessimistic immediately after reunification with respect to their job loss risk. Over time, job loss expectations fell and converged to West German levels, which was driven by a stabilizing economic environment and by an adaptation of the interpretation of economic signals with workers learning to distinguish individual risk from firm-level risk. In fact, conditional on actual job loss risk, East German workers quickly caught up to West Germans regarding the share of correctly predicted job losses.     

Contents of Volume 7

Volume Contents

Contents of Volume 7     

Taxation and Integrated Financial Markets: The Challenges of Derivatives and Other Financial Innovations

The past decade has witnessed the explosive growth of a multiplicity of new instruments which have altered the financial landscape. These transactions have highlighted many of the inconsistencies, asymmetries and shortcomings of current tax practices and challenged some basic tax principles. The ensuing uncertainties could over the long term place considerable strain on the tax system by increasing the opportunities for abuse and raising overall compliance costs. At the same time derivatives have provided a better understanding of the operation tax laws and from this standpoint have provided a positive input into policy design. This paper has three objectives: (a) to illustrate some of the weaknesses of the current tax system by focusing on several types of novel transaction; (b) to assess the validity of various types of adjustment proposed to tax code; (c) to draw out the implications of these developments for the ongoing debate over fundamental tax reforms and over source versus residence based taxes.     

Toward an integrative cartography of two strategic issue diagnosis frameworks

There exist two prominent accounts of how managers make sense of and take action in relation to strategic issues. The threat–opportunity (TO) and feasibility–urgency (FU) approaches primarily emphasize automatic/affective and active/deliberative strategic issue diagnosis processes, respectively. Current research, however, does not effectively integrate or fully explore the relationship between these two frameworks. We employ theory‐building literature to develop a framework that highlights four distinct and increasingly integrative lenses through which such an exploration can be systematically carried out. Analyzing data from how firms reacted to the economic uncertainty of early 2003, the results of our study indicate that the FU approach is a better predictor of both intentions and actual responses than the TO approach. Our results also indicate that threat is positively related to urgency and negatively related to feasibility, while opportunity is positively related to feasibility and negatively related to urgency. Further, using the expectancy–instrumentality–valence (EIV) motivational theory as a framework, we factor analyze both TO and FU items, identifying three underlying constructs of favorability, urgency, and influence (which we dub FUI). FUI has a higher predictive efficacy than the TO approach alone. We highlight implications for theory building and research in the strategic issue diagnosis literature. Copyright © 2007 John Wiley & Sons, Ltd.