Operational Restructuring Charges and Post‐Restructuring Performance*

Firms incur restructuring charges as a result of actions intended to improve their operating performance. However, there is little evidence on whether restructuring charges are associated with improved performance. We examine a sample of firms reporting restructuring in 1991‐93 and find that the restructuring firms' earnings increase over the levels immediately before restructuring. Compared with a control sample of firms that report no restructuring, the restructuring firms improve their earnings and operating income, but evidence for improvements in cash flow from operations is mixed. In regression analysis, we find that restructuring charges are significantly positively associated with post‐restructuring changes in earnings relative to the restructuring year, but this association is largely driven by firms with multiple restructurings and firms reporting losses in the restructuring year. We find no association between restructuring charges and post‐restructuring changes in earnings relative to the year before restructuring. Restructuring charges are significantly positively associated with post‐restructuring changes in operating income and cash flow from operations for firms with multiple restructurings. In summary, restructuring charges are associated with improved earnings, but our results suggest that restructuring in the early 1990s did not necessarily guarantee improved operating performance.     

CO‐MOVEMENT OF AUSTRALIAN STATE BUSINESS CYCLES*

We use a variety of techniques to examine the nature and degree of co‐movement among Australian state business cycles. Consistent with the results of Dixon and Shepherd (2001 ), we find that these cycles move quite closely together, with particularly strong links between the cycles of the larger states. We then seek to understand the causes of this co‐movement by using an unobserved components model to distinguish between various shocks and their transmission. Our model implies that the major source of this co‐movement in state activity is the commonality of shocks affecting state cycles. In contrast, spillovers of region‐specific shocks appear to play only a minor role in creating co‐movement, though region‐specific shocks themselves have a moderate influence on cyclical fluctuations. These findings are consistent with the results of recent studies for the United States, Canada and Europe, where common shocks have also been found to dominate regional cyclical activity.     

DO PSYCHOLOGICAL SHOCKS AFFECT FINANCIAL RISK TAKING BEHAVIOR? A STUDY OF U.S. VETERANS

Traditional economic theories assume that individuals are endowed with certain risk preferences that are unaltered by experiences. However, recent evidence indicates that macroeconomic shocks do have an effect on an individual's willingness to take financial risks. In the context of investment decisions, we examine empirically whether an individual's risk preferences are affected by other types of traumatic life experiences. Using a unique proprietary data set, we investigate whether personal traumatic experiences—such as the combat experiences of veterans—have long‐term effects on financial risk‐taking behavior. We find that having experienced combat decreases the probability of investing in risky assets. Key policy implications are noted. (JEL G11, D14)     

Weak Moral Motivation Leads to the Decline of Voluntary Contributions

We develop a model that accounts for the decay of the average contribution observed in experiments on voluntary contributions to a public good. The novel idea is that people's moral motivation is “weak.” Their judgment about the right contribution depends on observed contributions by group members and on an intrinsic “moral ideal.” We show that the assumption of weakly morally motivated agents leads to the decline of the average contribution over time. The model is compatible with persistence of overcontributions, variability of contributions (across and within individuals), the “restart effect” and the observation that the decay in contributions is slower in longer games. Furthermore, it offers a rationale for conditional cooperation.     

PORTFOLIO BEHAVIOUR AND ASSET PRICING IN A CHARACTERISTICS FRAMEWORK

We have applied the characteristics model to the problem of portfolio behaviour and asset pricing. By defining assets in terms of characteristics, we generated individual demands for assets which depended on the prices of assets, the technological relationship between assets and asset characteristics, and the individual's preferences for different characteristics. In general, the characteristics model cannot be readily aggregated across individuals. However, when we assumed that the assets-characteristics technology had a simple form which was common to all individuals, market-clearing conditions could be used to derive an asset pricing model. Finally, we showed that the characteristics model provides a unified approach to the problem of preference-based portfolio behaviour and asset pricing. A number of existing models can be interpreted as characteristics models: the state-preference model, the parameter-preference model, the capital asset pricing model and the inter-temporal capital asset pricing model.     

FUEL CHOICE FOR MULTI-FUEL VEHICLES

Consequences of consuming petroleum in transportation—e.g., air pollution, global warming, energy insecurity—have stimulated interest in alternative automotive fuels and in vehicles that can use multiple fuels and combinations of fuels. Consumer behavior in choosing motor fuels for flexible- or dual-fuel vehicles will likely be a key factor in creating and maintaining stable markets for new fuels. This paper explores the implications of recent studies on the sensitivity of choice of gasoline grade to price. It analyzes natural gas vehicle owners' refueling behavior, based on a survey of natural gas vehicles in Canada. The paper uses statistical models to estimate the importance of performance, range, refueling convenience, and other factors in the fuel choice decision. Choice of gasoline grade is highly sensitive to fuel prices. The cost advantage of natural gas also is of paramount importance for natural gas users. However, refueling convenience is essential for overall satisfaction and is a major factor in the frequency of natural gas use. Alternative fuels not only must be cost competitive with gasoline but initially will require a cost advantage so as to overcome range limitations and refueling inconvenience.     

Uban Tolled Roads and the Value of Travel Time Savings*

The recent interest in the privatization of major urban roads has opened up the debate on the tolling of such facilities. Central to the identification of optimal tolls is a knowledge of the amount of money individuals are willing to outlay to save travel time. This paper combines a utility maximization framework with stated response data to determine values of time savings in the presence of varying levels of toll for the full set of urban journey purposes. The empirical results provide a basis for establishing one benchmark for toll setting, in the context of substantial lengths of urban roads. There are no tolled urban roads in any major urban area throughout the world     

CONCEPTUAL ISSUES IN COST/BENEFIT ANALYSIS OF WELFARE-TO-WORK PROGRAMS

During the 1980s, a number of states operated welfare-to-work programs on a demonstration basis and subjected these demonstrations to formal cost/benefit evaluations. This paper examines the evaluators' methods and summarizes and interprets their findings. Cost/benefit analysis of welfare-to-work programs can provide a rough but useful assessment of a program's efficiency in reducing welfare caseloads. But the evaluation results are more difficult to interpret than they may appear to be. For example, the results typically imply that such programs produce small net gains to society when gains and losses are measured in terms of net income. However, a sensitivity analysis measuring net gains and losses to welfare recipients in terms of changes in net utility suggests that an important modification to the evaluators' methodology might well reverse this finding in many instances.