The Dividend Disconnect

Many individual investors, mutual funds, and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases. Behavioral trading patterns (e.g., the disposition effect) are driven by price changes instead of total returns. Investors rarely reinvest dividends, and trade as if dividends are a separate, stable income stream. Analysts fail to account for the effect of dividends on price, leading to optimistic price forecasts for dividend‐paying stocks. Demand for dividends is systematically higher in periods of low interest rates and poor market performance, leading to lower returns for dividend‐paying stocks.     

BEYOND EMU: THE PROBLEM OF SUSTAINABILITY

A common currency, as envisioned in the Maastricht treaty, is thought to be the surest way to "lock in" commitments to monetary cooperation among sovereign states. But historical evidence suggests otherwise. Comparative analysis of six currency unions demonstrates that while economic and organizational factors are influential in determining the sustainability of monetary cooperation, interstate politics matters most. Compliance with commitments is greatest in the presence of either a locally dominant state, willing and able to use its influence to sustain monetary cooperation, or a broad network of institutional linkages sufficient to make the loss of monetary autonomy tolerable to each partner.     

COMMENTS ON MARVEL: HOW FAIR IS FAIR TRADE?

Each of the papers in this symposium concludes with policy recommendations regarding the legality of resale price maintenance (RPM). The legal standard used to judge RPM affects the entire universe of manufacturer control over resale prices. Therefore, policy recommendations are valid only to the extent that the proffered economic theory applies to a substantial portion of that universe. My comments focus primarily on how much of the RPM universe is addressed by Marvel's (1985) explanations in “How Fair is Fair Trade?” If an economic theory, no matter how interesting academically, describes only a small minority of RPM instances, it should not form the basis for public policy.     

Trends in Corporate Governance

The popular press and scholarly studies have noted a number of trends in corporate governance. This article addresses, from a theoretical perspective, whether these trends are linked. And, if so, how? The article finds that a trend toward greater board diligence will lead, sometimes through subtle or indirect mechanisms, to trends toward more external candidates becoming CEO, shorter tenures for CEOs, more effort/less perquisite consumption by CEOs (even though such behavior is not directly monitored), and greater CEO compensation. An additional prediction is that, under plausible conditions, externally hired CEOs should have shorter tenures, on average, than internally hired CEOs.     

Effects of Shifting Saving Patterns on Interest Rates and Economic Activity

Individuals in the United States consistently do most of their saving through financial intermediaries, but over time there have been and continue to be major shifts in people's reliance on specific kinds of intermediary institutions. This paper assesses the potential effects on interest rates, and via interest rates (and asset prices and yields more generally) on nonfinancial economic activity, of four specific shifts in saving behavior: additional pension contributions financed by individuals, additional pension contributions financed by businesses, additional purchases of life insurance by individuals, and additional deposits in thrift institutions by individuals. The paper's results indicate that such shifts, in plausible magnitudes, would have significant effects not only on interest rates and asset-liability flows but also on both the level and the composition of nonfinancial economic activity. In particular, although the specific effects differ from one shift to another, each would disproportionately stimulate capital formation in comparison to other forms of spending.     

Simple Banking: Profitability and the Yield Curve

How does bank profitability vary with interest rates? We present a model of a monopolistically competitive bank subject to repricing frictions and test the model's predictions using a unique panel data set on UK banks. We find evidence that large banks retain a residual exposure to interest rates, even after accounting for hedging activity operating through the trading book. In the long run, both level and slope of the yield curve contribute positively to profitability. In the short run, however, increases in market rates compress interest margins, consistent with the presence of nonnegligible loan pricing frictions.