Information Collection and IPO Underpricing

This study provides new evidence that IPO underpricing is economic rents paid for investor to gather costly information. Subrahmanyam and Titman (1999) report that diverse investor information, once aggregated in the public market, could provide a more informative stock price and accurate feedback to firm’s investment decision. I investigate the hypothesis that IPO underpricing as economic rents could be higher, when investor information is diverse. In support of this hypothesis, I find a positive and significant correlation between the extent of underpricing and the information diversity measure proposed by Barron et al. (1998). There is a positive and significant correlation between this information diversity measure and an IPO firm’s subsequent (absolute) change in capital and R&D expenditures. In addition, firms with high information diversity measure and change in subsequent investment exhibit a better subsequent return performance than firms with low diversity and change in investment. This is consistent with the proposition that investor information serves as useful feedback for managers in the IPO market.JEL Classification: G32     

The Informational Role of Option Trading Volume in Equity Index Options Markets

This paper examines the dynamic relations between future price volatility of the S&P 500 index and trading volume of S&P 500 options to explore the informational role of option volume in predicting the price volatility. The future volatility of the index is approximated alternatively by implied volatility and by EGARCH volatility. Using a simultaneous equation model to capture the volume-volatility relations, the paper finds that strong contemporaneous feedbacks exist between the future price volatility and the trading volume of call and put options. Previous option volumes have a strong predictive ability with respect to the future price volatility. Similarly, lagged changes in volatility have a significant predictive power for option volume. Although the volume-volatility relations for individual volatility and volume terms are somewhat different under the two volatility measures, the results on the predictive ability of volume (volatility) for volatility (volume) are broadly similar between the implied and EGARCH volatilities. These findings support the hypothesis that both the information- and hedge-related trading explain most of the trading volume of equity index options.     

Compensation Design and Career Concerns of Fund Manager

We develop an optimal incentive contract for the fund manager with career concerns. Drawing upon the framework of Gibbons and Murphy (1992), we restructure the performance of fund manager with emphasis on the multiplicative effect of previous effort on the latter period, and derive the positive cross-period linkage of fund managers efforts. In particular, our study derives that a greater first-periods effort by the fund manager will induce more second-period effort and greater compensation in either fixed or variable (performance-related) portion of the payment. Though the total performance related pay might increase as the result of greater effort in the previous period, we show that the pay-performance sensitivity in the second period will decline. Moreover, the initial wealth increase will motivate the fund manager to exert more effort and induce better performance, but decrease the pay-performance sensitivity in the second period.JEL Classification: G2, J33, J41     

Real Interest Rate Parity: Long-Run and Short-Run Analysis Using Wavelets

In this article, long-run and short-run relationships among real interest rates in G-7 countries are empirically analyzed. The evidence suggests the existence of long-run relationships among these real interest rates. However, the long-run relationship is not an equality relationship. Short-run relationships are estimated using dynamic simultaneous equation models. They reveal that the real interest rates of non-U.S. G-7 countries react and adjust to long-run disequilibrium conditions. A more detailed analysis based on wavelet transform indicates the existence of both short-run and long-run relationships; however, strict interest rate parity does not seem to hold true.JEL Classification: C22, E43, G15     

Currency Hedging Using the Mean-Gini Framework

The mean-Gini framework has been suggested as a robust alternative to the portfolio approach to futures hedging given its optimality under general distributional conditions. However, calculation of the Gini hedge ratio requires estimation of the underlying price distribution. We estimate minimum-Gini hedge ratios using two widely-used estimation procedures, the empirical distribution function method and the kernel method, for three emerging market and three developed market currencies. We find that these methods yield different Gini hedge ratios. These differences increase with risk aversion and are statistically significant for all developed market currencies but only one emerging market currency. In-sample analyses show that the empirical distribution function method is more effective at risk reduction than the kernel method for developed market currencies, whereas the kernel method is superior for emerging market currencies. Post-sample analyses strengthen the superiority of the empirical distribution function method for developed market and, in several cases, for emerging market currencies.JEL Classification: F31, G15     

Economic Growth and Tax-Competing Leviathans

Is tax competition good for economic growth? The paper addresses this question by means of a simple model of economic growth in which a wasteful Leviathan state sets taxes and provides a productive input. Wasteful behaviour is restricted by the voter, who reduces political support if her income is reduced. The intensity of tax competition is modelled via variation of a parameter measuring the mobility of the tax base. It is shown that the effects of increased mobility of the tax base on economic growth are ambiguous and that the elasticity of intertemporal substitution, which in this model equals the rate of intratemporal substitution between the government’s own consumption and its political support, is a decisive variable in this context.     

Dynamic Effects of Extending the 2001 and 2003 Income Tax Cuts

This paper focuses on the impact of permanently extending most of the provisions in EGTRRA and JGTRRA, coupled with potential legislative changes to the AMT, on the federal deficit, the distribution of after-tax income, and economic growth. The paper shows that including moderate behavioral responses offsets 16 percent of the static revenue loss estimate from 2005 to 2014. In addition, including behavioral responses implies that the percentage change in after-tax income from permanently extending the 2001 and 2003 income tax cuts would be largest for taxpayers with incomes ranging from $20,000 to $40,000. Finally, the simulation results suggest that extending the 2001 and 2003 income tax cuts and reducing the growth rate of government spending (excluding Social Security and Medicare), assuming that government expenditures are cut to avoid dramatic increases in government consumption relative to GDP in comparison to historical norms, would increase investment, employment, and output. However, postponing the implementation of tight spending controls would more than offset the positive benefits of lower tax rates on the size of the economy and leave future generations with fewer resources for private consumption and production.JEL Code: E62, H20, H30, H60The views expressed are those of the author and do not reflect those of the Baker Institute for Public Policy or any other organization. This paper was partially written while the author was employed by the Joint Committee on Taxation.     

Tax Principles,Product Differentiation and the Nature of Competition

We analyze the choice between the origin and destination principles of taxation when there is product differentiation and Bertrand competition. If taxes are redistributed to consumers and demand is linear the origin principle dominates the destination principle whatever the degree of product differentiation and extent of economic integration. With nonlinear demand the origin principle dominates if there is sufficient economic integration. When the social value assigned to tax revenue is higher than the private value, the destination principle dominates for intermediate values of product differentiation and economic integration. The same results are also shown to hold with Cournot competition. JEL Code: F12, H20     

Growth Effects of Economic Integration: Evidence from the EU Member States

After compiling an index of economic integration that accounts for global (GATT) as well as regional (European) integration of the EU member states we test for permanent and temporary growth effects in a growth accounting framework, using a panel of fifteen EU member states over the period 1950–2000. While the hypothesis of permanent growth effects is rejected, the results—though not completely robust to controlling for time-specific effects—suggest sizeable level effects: GDP per capita of the EU would be approximately one-fifth lower today if no integration had taken place since 1950. JEL no. C33, F15, F43, O52     

Location Choice and Employment Decisions: A Comparison of German and Swedish Multinationals

Using data on German and Swedish multinational enterprises (MNEs), this paper analyzes determinants of location choice and the degree of substitutability of labor across locations. Countries with highly skilled labor strongly attract German but not necessarily Swedish MNEs. In MNEs from either country, affiliate employment tends to substitute for employment at the parent firm. At the margin, substitutability is the strongest with respect to affiliate employment in Western Europe. A one percent larger wage gap between Germany and locations in Central and Eastern Europe (CEE) is associated with 760 fewer jobs at German parents and 4,620 more jobs at affiliates in CEE. A one percent larger wage gap between Sweden and CEE is associated with 140 fewer jobs at Swedish parents and 260 more jobs at affiliates in CEE. JEL no. F21, F23, J21, J23