The Nation's Private Wealth -Some New Calculations for Australia*

This paper has two related purposes. The first is to bring together and review a number of earlier studies which have attempted to estimate the value of Australia's privately held wealth stock. The second is to present new estimates covering the 1980s. based partly on these earlier studies, which value all major components of the nation's private wealth at their market value, or a close approximation. The calculations reported here represent the first aggregate Australian wealth series for which comprehensive market valuation can be claimed. Australia's aggregate non-human private wealth was found to be $794 billion at 30 June 1985. The series as a whole suggests that previous estimates have significantly under-valued Australia's wealth. At 30 June 1981 the Helliwell-Boxall (1978) study. updated by the Reserve Bank, reported a value of $294.7 billion, while Williams (1983) gave a value of $360.5 billion. The corresponding estimate for the new series is $532.5 billion. Because the new calculations presented here value wealth by component. it is possible to identify omissions and valuation differences which account for most of the variation between these estimates.     

Fair Value Accounting and Debt Contracting: Evidence from Adoption of SFAS 159

We examine how fair value accounting affects debt contract design, specifically the use and definition of financial covenants in private loan contracts. Using SFAS 159 adoption as our setting, we find that a small but significant proportion of loans (14.5%) modify covenant definitions to exclude the effects of SFAS 159 fair values. Only a limited number of these modifications exclude assets elected at fair value (less than 7%), while all exclude liabilities elected at fair value. Notably, we document that covenant definition modification is unassociated with ex ante fair value elections. We find that covenant definition modification positively varies with common incentive problems attributed to fair value accounting and negatively varies with benefits attributed to fair value accounting. Our results suggest that fair value accounting is not uniformly detrimental for debt contracting and fair value adjustments are included when they are most likely to improve performance measurement.     

ARE THERE ADVERSE INFLATION EFFECTS ASSOCIATED WITH NATURAL GAS DECONTROL?

The Natural Gas Policy Act (NGPA) will decontrol gas prices in 1985, and there is concern about its inflation and output effects. In this investigation of these concerns, two misapprehensions are remedied. First, inflation is primarily a monetary phenomenon so that a rise in energy prices affects the price level, but any impact on inflation is temporary. Second, while analyses of NGPA have assumed that the price of gas will achieve parity with petroleum, they have neglected decontrol's effect on OPEC's optimal price, Our estimates of the decontrol effect demonstrate that energy prices will fall, not rise     

Presidential Address: Discount Rates

Discount‐rate variation is the central organizing question of current asset‐pricing research. I survey facts, theories, and applications. Previously, we thought returns were unpredictable, with variation in price‐dividend ratios due to variation in expected cashflows. Now it seems all price‐dividend variation corresponds to discount‐rate variation. We also thought that the cross‐section of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discount‐rate theories based on central ingredients and data sources. Incorporating discount‐rate variation affects finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics.     

Do Managers of U.S. Defined Benefit Pension Plan Sponsors Use Regulatory Freedom Strategically?

We use historical particularities of pension funding law to investigate whether managers of U.S. corporate defined benefit pension plan sponsors strategically use regulatory freedom to lower the reported value of pension liabilities, and hence required cash contributions. For some years, pension plans were required to estimate two liabilities—one with mandated discount rates and mortality assumptions, and another where these could be chosen freely. Using a sample of 11,963 plans, we find that the regulated liability exceeds the unregulated measure by 10% and the difference further increases for underfunded pension plans. Underfunded plans tend to assume substantially higher discount rates and lower life expectancy. The effect persists both in the cross‐section of plans and over time and it serves to reduce cash contributions. We further show that plan sponsor managers use the freed‐up cash for corporate investment and that credit risk is unlikely to explain the finding.     

An Experimental Study of Bond Market Pricing

An important feature of bond markets is the relationship between the initial public offering (IPO) price and the probability that the issuer defaults. On the one hand, the default probability affects the IPO price; on the other hand, the IPO price affects the default probability. It is a priori unclear whether agents can competitively price such assets. Our paper is the first to explore this question. To do so, we use laboratory experiments. We develop two flexible bond market models that are easily implemented in the laboratory. We find that subjects learn to price the bonds well after only a few repetitions.     

Does Weak Governance Cause Weak Stock Returns? An Examination of Firm Operating Performance and Investors' Expectations

We investigate Gompers, Ishii, and Metrick's (2003) finding that firms with weak shareholder rights exhibit significant stock market underperformance. If the relation between poor governance and poor returns is causal, we expect that the market is negatively surprised by the poor operating performance of weak governance firms. We find that firms with weak shareholder rights exhibit significant operating underperformance. However, analysts' forecast errors and earnings announcement returns show no evidence that this underperformance surprises the market. Our results are robust to controls for takeover activity. Overall, our results do not support the hypothesis that weak governance causes poor stock returns.