Racial prejudice and residential segregation: The Yinger model revisited

Yinger's model of racial prejudice in the housing market is the first rigorous alternative to Bailey's early work. It is important both because his specification of racial prejudice is intuitively plausible and because it has been adopted in much empirical work but never before been subjected to rigorous theoretical examination. However, his derivation of equilibrium conditions rests in part on inappropriate analyses that significantly affect his conclusions. This paper derives what I regard as the appropriate equilibrium conditions. Yinger's original finding that the white community has strong incentives to foster seller discrimination against blacks remains strongly supported.     

Regulatory Capital of Financial Institutions: A Comparative Analysis

This study analyzes regulatory capital requirements of banks, thrifts and securities firms. Regulatory capital has traditionally guarded against credit risk and has been set on an asset‐by‐asset basis. Regulators now recognize the need to guard against a wider range of risks and to measure risk in a portfolio context rather than on an asset‐by‐asset basis. However, the measurement of portfolio risk in the presence of a wide variety of financial instruments and the complexity of financial institutions requires a level of sophistication that regulators are unlikely to possess. Consequently, it is important to reassess the purpose of regulatory captial. Regulatory capital now guards against the failure of the entire financial institution, while regulatory responsibility extends only to the insurance fund that guarantees bank deposits or brokerage accounts. Narrowing the regulatory focus to protect only insured accounts would reduce the need to consider all the activities of a financial instituion as is now necessary in order to establish regulatory capital.     

THE CAPITAL STRUCTURE PUZZLE: ANOTHER LOOK AT THE EVIDENCE

Since the formulation of the M & M irrelevance propositions 40 years ago, financial economists have been debating whether there is such a thing as optimal capital structure—a proportion of debt to equity that maximizes current firm value. Some finance scholars have followed M & M by arguing that both capital structure and dividend policy are largely “irrelevant” in the sense that they have no significant, predictable effects on corporate market values. Another school of thought holds that corporate financing choices reflect an attempt by corporate managers to balance the tax shields and disciplinary benefits of greater debt against the increased probability and costs of financial distress. Yet another theory says that companies do not have capital structure targets, but instead follow a financial pecking order in which retained earnings are preferred to outside financing, and debt is preferred to equity when outside funding is required. In reviewing the evidence that has accumulated since M & M, the authors argue that taxes, bankruptcy (and other “contracting”) costs, and information costs (the main factor in the pecking order theory) all appear to play an important role in corporate financing decisions. While much if not most of the evidence is consistent with the argument that companies set target leverage ratios, there is also considerable support for the pecking order theory's contention that firms are willing to deviate widely from their targets for long periods of time. According to the authors, the key to reconciling the different theories—and thus to solving the capital structure puzzle—lies in achieving a better understanding of the relation between corporate financing stocks (leverage ratios) and flows (specific choices between debt and equity). Even if companies have target leverage ratios, there will be an optimal deviation from those targets—one that will depend on the transactions and information costs associated with adjusting back to the target relative to the costs of deviating from the target. As the authors argue in closing, a complete theory of capital structure must take account of these adjustment costs and how they affect expected deviations from the target.     

USING EXCHANGE-TRADED EQUITY FLEX PUT OPTIONS IN CORPORATE STOCK REPURCHASE PROGRAMS

Casual evidence suggests that as many as 10% of the companies repurchasing their stock over the past decade have used the sale of puts on the company's stock as part of the repurchase program. This article describes a new instrument for such corporate stock buybacks recently introduced by the American Stock Exchange: Equity Flex puts on the issuer's stock. When and if the puts are exercised, the company's shares are retired—often on better terms and with better cash flow timing than the company could achieve with a conventional stock repurchase program.
To date, such stock repurchase programs have been conducted primarily using over-the-counter put options. The new Equity Flex puts promise to eliminate the relative advantages of OTC transactions and offer stock repurchasers better pricing and increased liquidity. Use of exchange markets can also help overcome any reluctance a financial officer might have to rely on prices offered by a single dealer.     

The valuation effects of overseas listings: The case of the Tokyo Stock Exchange

Shareholders of U.S. firms that listed stock on the Tokyo Stock Exchange from 1973 to 1989 are shown to have experienced no significant wealth gains. The pattern of the market's reaction to a Tokyo listing tracks closely the reactions to a domestic listing, where gains prior to listing are later erased. The findings indicate no advantages to a listing for a firm with a prior business presence in Japan, and they do not support the hypothesis of diminishing returns to foreign listings. The findings are consistent with the integration of international capital markets.     

Boundaries of the firm: evidence from the banking industry

Agency theory implies that asset ownership and decision authority are complements. Using 1998 data from Texas commercial banks, we test whether the likelihood of local ownership of bank offices increases with the importance of granting local managers greater decision authority (for example, due to location or customer base). Our empirical evidence is consistent with this hypothesis. It suggests that complementarities between strategy and organizational structure can foster differentiation among firms in terms of location, customers, and products. It also supports the growing view that small locally-owned banks have a comparative advantage over large banks within specific environments.     

Alternative methods for raising capital: Rights versus underwritten offerings

This paper provides an analysis of the choice of method for raising additional equity capital by listed firms. Examination of expenses reported to the SEC indicates that rights offerings involve significantly lower costs; yet underwriter are employed in over 90 percent of the offerings. The underwriting industry, finance textbooks, and corporate proxy statements offer several justifications for the use of underwriters. However, estimates of the magnitudes of these arguments indicate that they are insufficient to justify the additional costs of the use of underwriters. The use of underwriters thus appears to be inconsistent with rational, wealth-maximizing behavior by the owners of the firm. The paper concludes with an examination of alternate explanations of the observed choice of financing method.     

Incentives for Managing Accounting Information: Property-Liability Insurer Stock-Charter Conversions

Incentives to manage accounting information are examined within 63 property‐liability insurance company conversions from mutual ownership to common stock charter. In the conversion process, policyholders' embedded equity claims must be valued. Since mutuals have no separately traded equity, accounting numbers are a critical input in this valuation. Incentives for surplus management vary across firms; the strongest evidence of surplus management is observed among firms where the mutual's executives become the firm's principal stockholders following conversion. The evidence suggests that converting firms manage accounting information primarily by adjusting liabilities and selectively establishing investment losses—not by altering claims settlement policy.