Consensus Beliefs Equilibrium and Market Efficiency

This paper presents an analysis of the concept of consensus beliefs and its relation to market efficiency. We show that unless traders have rational expectations, the two published interpretations of consensus beliefs are not useful for considerations of market efficiency. One interpretation (see Verrecchia 6 ) has no implication for market efficiency. Under the second interpretation (see Verrecchia 7 , 8 ) consensus beliefs equilibria are efficient, but they typically do not exist unless traders have rational expectations.     

A Policy Framework for the New Chancellor

In the Mansion House speech, Mr. Clarke, the new Chancellor, left his options very clearly open. He reconfirmed his commitment, like his predecessors, to low inflation; but added that low inflation is not enough, asserting the importance of commerce. He asserted the need to reduce the public sector deficit, but did not commit himself to further measures beyond those already announced by Mr. Lamont. He argued for lower taxes, but said that taxes cannot always fall. He acknowledged the importance of narrow and broad money, but said that he would monitor a range of indicators in formulating policy. Even the greater emphasis relative to his predecessors on growth may have been more a matter of presentation, not a shift in policy emphasis.     

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.     

Risk Management: Coordinating Corporate Investment and Financing Policies

This paper develops a general framework for analyzing corporate risk management policies. We begin by observing that if external sources of finance are more costly to corporations than internally generated funds, there will typically be a benefit to hedging: hedging adds value to the extent that it helps ensure that a corporation has sufficient internal funds available to take advantage of attractive investment opportunities. We then argue that this simple observation has wide ranging implications for the design of risk management strategies. We delineate how these strategies should depend on such factors as shocks to investment and financing opportunities. We also discuss exchange rate hedging strategies for multinationals, as well as strategies involving “nonlinear” instruments like options.     

What Makes a Good Trader? On the Role of Intuition and Reflection on Trader Performance

Using laboratory experiments, we provide evidence on three factors influencing trader performance: fluid intelligence, cognitive reflection, and theory of mind (ToM). Fluid intelligence provides traders with computational skills necessary to draw a statistical inference. Cognitive reflection helps traders avoid behavioral biases and thereby extract signals from market orders and update their prior beliefs accordingly. ToM describes the degree to which traders correctly assess the informational content of orders. We show that cognitive reflection and ToM are complementary because traders benefit from understanding signals’ quality only if they are capable of processing these signals.     

Market Structure,Internal Capital Markets,and the Boundaries of the Firm

We study how the creation of an internal capital market (ICM) can invite strategic responses in product markets that, in turn, shape firm boundaries. ICMs provide ex post resource flexibility, but come with ex ante commitment costs. Alternatively, stand‐alones possess commitment ability but lack flexibility. By creating flexibility, integration can sometimes deter a rival's entry, but commitment problems can also invite predatory capital raising. These forces drive different organizational equilibria depending on the integrator's relation to the product market. Hybrid organizational forms like strategic alliances can sometimes dominate integration by offering some of its benefits with fewer strategic costs.     

Mutual Fund Flows and Cross‐Fund Learning within Families

We develop a model of performance evaluation and fund flows for mutual funds in a family. Family performance has two effects on a member fund's estimated skill and inflows: a positive common‐skill effect, and a negative correlated‐noise effect. The overall spillover can be either positive or negative, depending on the weight of common skill and correlation of noise in returns. Its absolute value increases with family size, and declines over time. The sensitivity of flows to a fund's own performance is affected accordingly. Empirical estimates of fund flow sensitivities show patterns consistent with rational cross‐fund learning within families.