Mutual Fund Trading Pressure: Firm‐Level Stock Price Impact and Timing of SEOs

We use price pressure resulting from purchases by mutual funds with large capital inflows to identify overvalued equity. This is a relatively exogenous overvaluation indicator as it is associated with who is buying—buyers with excess liquidity—rather than what is being purchased. We document substantial stock price impact associated with purchases by high‐inflow mutual funds, and find the probability of a seasoned equity offering (SEO), insider sales, and the probability of a stock‐based acquisition increase significantly in the four quarters following the mutual fund buying pressure. These results provide new evidence that firm managers are able to identify and exploit overvalued equity.     

A Geometric Analysis of Exchange Rate Adjustment Under Static and Rational Expectations*

This note presents a simple geometric apparatus for analyzing macroeconomic questions relating to small open economies. The particular problem analyzed here for illustrative purposes is the adjustment of a floating exchange rate regime, under both static and rational expectations, to a step increase in the money supply. We consider both an unanticipated immediate increase and an unanticipated announcement of a forthcoming increase. We derive the general criterion which determines whether the exchange rate initially overshoots or undershoots the change required for long-run equilibrium.     

Managerial Preference,Asymmetric Information,and Financial Structure

If firm performance affects managers' wealth or reputation, preferences of managers dominate firms' financing decisions. When information about real asset investment is symmetric, managers finance exclusively with equity. If managers know more about asset quality than do investors and if managers are sufficiently risk averse, they signal high-quality projects with debt. Increases in collateral value decrease risky debt use. Increases in interest rates that do not change productive opportunities increase debt use. The explanation for these and further results is based on underpricing of equity and overpricing of debt at the margin.     

Bank Forward Lending in Alternative Funding Environments

This paper examines the effects of loan commitments on bank lending behavior in both deposit-funding and liability management environments. Assuming that the bank lends exclusively under commitments and that the number of commitments exercised is uncertain, the bank must choose its supply of commitments. Given this choice, the bank becomes a passive lender to commitment holders. Our focus on forward credit markets sheds new light on the private bankers' assertion that they do not directly determine their level of lending, but merely “accommodate” the credit needs of their customers. Similarly, the central banker's claimed inability to control monetary aggregates in the short-run becomes understandable in a new context. It is shown that the advent of liability management will reduce the volume of loan commitments and the expected size of the bank and of the banking system. It is also shown that increased uncertainty regarding borrower takedown behavior diminishes the volume of commitments, expected bank and banking system size.     

Maturity Intermediation and Intertemporal Lending Policies of Financial Intermediaries

This paper considers the maturity intermediation and intertemporal lending decisions of risk-averse financial intermediaries. In particular, the maturity mismatch problem and the fixed-versus-variable-rate lending decision are modeled when the major source of risk involves uncertain future interest rates. The results imply that the strategy of matching the maturity of assets and liabilities is not generally optimal or even minimum risk. This is due primarily to the “built-in” hedge that the intermediary has as a result of rolling over short-term loans while continuing to finance long-term loans. Intertemporal dependencies between loan demand and costs (or both) also have an effect on the optimal degree of maturity mismatching and provide one rationale for making loans at rates below current marginal cost.     

Financial Intermediaries and Liquidity Creation

Trading losses associated with information asymmetries can be mitigated by designing securities which split the cash flows of underlying assets. These securities, which can arise endogenously, have values that do not depend on the information known only to informed agents. Bank debt (deposits) is an example of this type of liquid security which protect relatively uninformed agents, and we provide a rationale for deposit insurance in this content. High-grade corporate debt and government bonds are other examples, implying that a money market mutual fund-based payments system may be an alternative to one based on insured bank deposits.     

Capital Budgeting for Advertising Expenditures: A Contingent Claims Approach

Advertising expenditures constitute a big part of the budgets of firms. Through their impact on demand and costs, advertising activities affect the firm's pricing and output decisions as well as the firm's market value. Yet, there is no analytical framework by which these effects can be measured. This paper develops a cash flow model for a product where the advertising budget is divided between a strategic component designed to increase expected demand and a contingent component allocated to be used only if sales fall short of capacity. Contingent claims techniques are employed to evaluate the present value of the cash flows and to provide a framework for determining the size of the advertising budget, and the pricing and production strategies that maximize the firm's value. The impact of the price sensitivity, volatility, and growth rate of demand on the size of the advertising budget is also analyzed.     

Can Minimum Wages Raise Workers’ Incomes in the Long Run?

Using an intertemporal model of saving and capital accumulation with two types of agents we demonstrate that it is impossible for any binding minimum wage to increase the after‐tax incomes of workers if the production function is Cobb–Douglas with constant returns to scale, or if there are no differences in ability among workers. Moreover, it is impossible to increase the incomes of employed workers through minimum wage legislation, even under decreasing returns to scale and heterogeneity of ability among workers, unless the support provided to unemployed workers is far below what they would earn in the absence of minimum wages.     

Entry,Trade, and Exporting over the Cycle

We study how international trade and exporting affect the cyclicality of establishment creation. We build a general equilibrium model with two features: (i) new establishments start small and grow gradually and (ii) exporters are persistently bigger and more productive than nonexporters. When establishments creation costs fluctuate with aggregate productivity, the model generates procyclical fluctuations in domestic establishments and importers. Without international trade, entry is weakly countercyclical and too smooth. The model generates reasonable fluctuations in the stock of importers, exporters, and domestic establishments. With an entry margin, output is hump‐shaped following a productivity shock and this hump is stronger with trade.