THE ACTIVE BOARD OF DIRECTORS AND ITS EFFECT ON THE PERFORMANCE OF THE LARGE PUBLICLY TRADED CORPORATION

In recent years, boards of directors have become more active and independent of management in pursuing shareholder interests. But, up to this point, there has been little empirical evidence that active boards help companies produce higher rates of return for their shareholders. In this article, after describing the new board activism, the authors argue that past failures to document an association between independent boards and superior corporate performance can be explained by two features of the research: its concentration on periods prior to the 1990s (when most boards were largely irrelevant) and its use of unreliable proxies (such as a minimum percentage of outside directors) for a well-functioning board.
The authors hypothesize that an independent and resourceful board takes steps that require management to increase earnings available to investors. To test this hypothesis, the performance of a sample of large U.S. corporations was examined over the period 1991-1995 using two proxies for the professionalism of each company's board: (1) the letter grades (A+ to F) assigned by CalPERS for corporate governance; and (2) a presence or absence grade based on three key indicators of professional board behavior. Both of these governance metrics were associated in statistically significant ways with superior corporate performance, as measured by earnings in excess of cost of capital and net of the industry average. While acknowledging that such results do not prove causation, the authors conclude that, in the first half of the 1990s, corporations with active and independent boards added significantly more value for shareholders than those with passive, rubber-stamp boards.     

Sample size requirements in structural equation models under standard conditions

When a research of risk considers researchers who wish to utilize structured equation modeling (SEM), all users would ask for their sample size. The paper argues for the formulation of a single barebones minimum standard to be accompanied by a hierarchy of higher quality standards. The paper also offers a specific recommendation for such a barebones standard and ranks quality standards by their sample size cost. In sum, the solution to this problem involves integration: over the multitude of standards, over both single-study and multi-study perspectives, and over a broad array of research environments. Our solution deals with the multitude of solutions. It seeks maximum flexibility to accommodate a multi-study perspective, and it is sensitive to the needs of research settings where sample size is constrained or collection is costly. For these reasons we offer important suggestions and summarize recommendations.     

An expectations-driven interpretation of the “Great Recession”

The boom-years preceding the “great recession” were a time of rapid innovation in the financial industry. We explore the idea that both the boom and eventual bust emerged from overoptimistic expectations of efficiency-gains in the financial sector. We treat the bankruptcy costs facing intermediaries in a costly state verification problem as a stochastic process, and model the boom-bust in terms of an unfulfilled news-shock where the expected fall in costs are eventually not realized. In response to a change in expectations only, the model generates a boom-bust cycle in aggregate activity, asset prices and leverage, and a countercyclical credit spread.     

Output and employment in a macro model with discrete transaction costs

The paper develops a macro model for determining output and employment when discrete transaction costs exist for paying wages and for purchasing commodities. Household labor supply is a function of an effective real wage, which modifies the apparent real wage to take account of the length of the payment period and the costs associated with buying and holding commodities. Firm labor demand is derived in a model where there are lumpy payroll costs associated with making wage payments. The behavior of households and firms is brought together in a market-clearing framework to determine the values of the real wage, employment and output, as well as the time intervals between wage payments and purchases of commodities. The effects of changes in the transaction and holding cost parameters are then examined by comparative-static techniques. An increase in any of these cost parameters turns out to reduce output and the amount of labor employed in production, but also tends to raise the amount of labor absorbed by the process of transacting. The tendency of transaction labor to move in the opposite direction from production labor implies that the net effects on total work are ambiguous.     

The pricing of common exchange rate factors in the U.S. equity market

We extend Lustig et al. (Rev Financ Stud 24:3731–3777, 2011) and Brusa et al. (The International CAPM Redux, 2014) by examining if the common exchange rate factors, the dollar and carry factors, are priced in the US equity market. Our results suggest that while the carry factor has incremental pricing information relative to the US market factor, the dollar factor (or the trade-weighted exchange rate index) is redundant. Our results have important theoretical as well as practical implications. Theoretically, we suggest that financial economists take an endogenous perspective of exchange rates. Practically, we suggest that practitioners incorporate in the carry factor to measure the exposure of exchange rate risk.     

The ECB’s fiscal policy

While the ECB helped mitigate the euro crisis in the aftermath of Lehman, it has stretched its monetary mandate and moved into fiscal territory. This text describes and summarizes the crucial role played by the ECB in the intervention spiral resulting from its bid to manage the crisis. It also outlines ongoing competitiveness problems in southern Europe, discusses the so-called austerity policy of the Troika, comments on QE and presents two alternative paths for the future development of Europe.