The Fallacy of Free Trade *

The purpose of this paper is to explode the myth of free trade. Productivity and real wages in the United States rose sharply between 1950 and 1972, but since then real earnings have been falling in spite of a continuous rise in productivity. It turns out that America was more or less a closed economy until 1972, as its trade/GNP ratio was close to 10%; but since then it has become an open economy. the theoretical model shows how real wages may fall in an open economy, but not in a closed economy, in spite of rising productivity.     

Reforming the Bookbuilding Process for IPOs

The controversy over IPOs has raised questions about whether retail investors are being unfairly denied access to shares in IPOs and whether the new Internet auction methods might provide a fairer and more efficient way to allocate shares. This article argues that much of the popular concern may be misdirected. By and large, bookbuilding is well designed to accomplish price discovery in a cost-effective way. And standard auctions, which have been all but abandoned in a number of countries, have generally proved disappointing for equity IPOs (although they have been successful for bond offerings). The authors propose a "hybrid" form of securities issuance that would retain the advantages of bookbuilding while incorporating a public offer "tranche" for retail investors and other measures designed to increase transparency.     

Introduction: macroeconomic implications of capital flows in a global economy

The papers in this volume address issues raised by the wave of financial crises that hit emerging markets since the mid 1990s. Several of the papers examine the role that different credit market frictions may have played in triggering the crises, or in determining the effects of policies aimed at containing them. Other papers ask more general questions about the implications of international financial integration for business cycles, risk sharing, and sovereign lending.     

Industrial strategy for late starters: The experience of Kenya,Tanzania and Zambia

Based on the existing literature and the circumscribed data base, this paper assesses the extent and nature of industrialization in three African countries. After a promising start, their drive to industrialize is now faltering. The record is influenced much more by the macroeconomic situation of each country than by industrial policy. It is clear that future industrial advsnce will depend heavily on the pace of rural development and success in strengthening links between industry and the rest of the economy. Catering to world markets is not likely to provide a major stimulus for the industrial sector of many African economies in the near-term future.     

Call options and the risk of underlying securities

Merton (1973) in his seminal article ‘Theory of Rational Option Pricing’ showed that the rationally determined price of a call option is a non-decreasing function of the ‘riskness’ of its associated common stock. In deriving his results, Merton made restrictive assumptions about the way the market prices payoff distributions, and used the Rothschild-Stiglitz (1970) measure to compare the riskiness of securities. I show by means of an example that the Merton result will not in general be true. I then derive a sufficient condition for the option on one stock to have higher market value than the option on another stock, when both the stocks have the same price, and explain why the Merton result is valid in the Black-Scholes environment.     

On Footloose Industries and Labor Disputes with Endogenous Information Asymmetry

If capital becomes internationally mobile but labor does not, are outcomes of labor disputes tilted in favor of workers or employers? In this paper, we show that the answer depends critically on how the information structure of the dispute changes endogenously with capital mobility, and in addition, whether international investment incentives selectively favor the outflow of capital from the most or the least productive firms. In doing so, this paper brings together three strands of literature that are not often seen together—incentive compatible contracting, wage and unemployment outcomes of labor disputes, and international capital mobility with heterogeneous firms.     

Unconstrained estimates of the equity risk premium

Estimates of the equity risk premium implied by analyst forecasts—generally 2–4 %—are often significantly below realized equity returns of 6 %. Measurement error could result from conservative assumptions, reliance upon consensus rather than detailed forecasts, the use of market rather than target prices, and regression analysis, which can be influenced by a small number of observations. We address these potential sources of measurement error. Our estimates are consistent with subsequently realized returns and capture systematic risk exposure. Alternative techniques could capture another form of priced risk or identify firm characteristics associated with systematic mispricing. From 1999 to 2008, we estimate an average equity risk premium in the United States of 5.3 %. The estimate increases from 3.1 % for 1999–2000 to 5.9 % from 2001 to 2008, comparable to the historical average of realized equity returns.     

CAPM for estimating the cost of equity capital: Interpreting the empirical evidence

We argue that the empirical evidence against the capital asset pricing model (CAPM) based on stock returns does not invalidate its use for estimating the cost of capital for projects in making capital budgeting decisions. Because stocks are backed not only by projects in place, but also by the options to modify current projects and undertake new ones, the expected returns on stocks need not satisfy the CAPM even when expected returns of projects do. We provide empirical support for our arguments by developing a method for estimating firms' project CAPM betas and project returns. Our findings justify the continued use of the CAPM by firms in spite of the mounting evidence against it based on the cross section of stock returns.     

Innovativeness in family firms: a family influence perspective

This paper investigates the relationships between family influence and family firm performance. Specifically, we investigate how generational ownership dispersion, family management involvement, and family member reciprocity affect firm performance. We also consider the moderating role of innovativeness. Our findings indicate that family firm influence can have both positive and negative consequences for family firm performance. Implications and areas for future research are discussed.