Exchange rate exposure and foreign exchange derivatives: do ineffective hedgers modify future derivatives use?

Recent studies examining the relationship between stock returns and exchange rate changes have provided evidence that the exchange rate exposure of non-financial companies is reduced by the use of foreign exchange derivatives. Building on such research, this study investigates whether past ineffective derivative hedging contributes to explaining future derivatives use. To the extent that companies monitor the effectiveness of their currency risk management practices, past ineffective hedgers can be expected to modify their future use of foreign exchange derivatives accordingly. In our study of 94 non-financial US multinationals, we provide evidence that the change in derivatives use from 1996–1998 to 1998–2000 can be explained in part by the ineffective hedging of currency risk in 1996–1998, controlling for variables associated with theories of optimal hedging. Additional analyses confirm that such primary results are robust to firm size, the level of foreign operations, and the use of derivatives to partially hedge currency risk. Our results imply that as exchange markets and risk management practices change, the use of derivatives to manage exchange rate risk also changes. Our contribution to this field of study is that we find evidence that past ineffective hedgers tend to increase their future use of FXDs.     

Australian Audit Committees — Do They Meet Best Practice Guidelines?

The paper reports the results of a study of Australia's largest 250 companies' audit committees in two years (1998 and 2001). The audit committees were scrutinised on the bases of audit committee independence and the frequency of meetings. Australia's audit committees did not score highly on either criterion and most companies fell short of best practice guidelines. Further, it was puzzling and of concern that Australian audit committees appear to have deteriorated in terms of independence and frequency of meetings between 1998 and 2001.     

Multilateral Reforms of Trade and Environmental Policy

The paper analyzes environmental tax policy reform using a competitive model of world trade that includes production‐generated environmental damage (pollution) and trade tariffs. The authors examine the feasibility of Pareto‐improving multilateral reforms of environmental taxes, and show that any environmental tax reform that is mutually welfare‐improving when compensating lump‐sum transfers are assumed is also welfare‐improving when a suitable tariff reform (but no transfers) is combined with the tax changes. Several specific reform proposals are developed. These results expand the feasible set of mutually improving policy proposals for international policy initiatives.     

The Impacts of Unemployment on Alternative Poverty Rates

The analysis uses March Current Population Survey data to estimate state-level cross-section/time-series models of the effects of the unemployment rate on alternative poverty rates. The measures include the official headcount rate, and alternatives based higher thresholds, revised equivalence scales and income defined as inclusive and exclusive of taxes and cash and in-kind transfers. The estimated effects turn critically on the measurement approaches, both for the total sample population and for four population sub-groups. For several alternative poverty rate measures, the unemployment rate has no significant impact on poverty. By contrast, real per-capita median earnings have strong and consistently negative effects on the poverty rates of all groups studied. The findings thus provide important lessons for researchers exploring the links between economic conditions and poverty, and for policy makers developing poverty reduction strategies.     

Wage and price controls in the equilibrium sequential search model

In this paper, we study the effects of wage and price controls on employment, output, and welfare in a simplified version of the Bénabou (J. Econom. Theory 60 (1993) 140) equilibrium sequential search model with bilateral heterogeneity. We show that a price ceiling increases output but the change in welfare depends on three effects: the reduction in aggregate search costs, the increase in surplus due to increased output, and the transfer of production to the least efficient firm. The model is formally identical to a standard equilibrium search model of the labor market so analogous results hold for the minimum wage.     

Corporate Board Composition, Protocols, and Voting Behavior: Experimental Evidence

We examine voting by a board designed to mitigate conflicts of interest between privately informed insiders and owners. Our model demonstrates that, as argued by researchers and the business press, boards with a majority of trustworthy but uninformed “watchdogs” can implement institutionally preferred policies. Our laboratory experiments strongly support this conclusion. Our model also highlights the necessity of penalties on insiders when there is dissension among board members. However, penalties for dissent appeared to have little impact on the experimental outcomes.