Asymmetric-information and principal-agent problems as sources of value in FSLIC-Assisted acquisitions of insolvent thrifts

This study uses a two-factor market-model to estimate excess returns around 43 announcements of FSLIC-assisted thrift mergers and 66 announcements of unassisted thrift mergers. These estimated excess returns are then used to test hypotheses about asymetric-information and principal-agent problem in the thrift resolution process as sources of value in these mergers. The results show that acquirers in assisted transactions earned positive and statistically significant excess returns of approximately 2 percent, whereas acquirers in unassisted transactions earned excess returns that are not significantly different from zero; however, the excess returns in the assisted mergers are quantitatively small. For the 43 assisted mergers, estimated excess returns imply aggregate wealth transfers of only $13 million as compared with $2.3 billion in FSLIC assistance that were granted in these transactions. These findings suggest that the FSLIC-assisted transactions were reasonably well structured and that the assistance granted did not result in large wealth transfers to acquirers of insolvent institutions. Finally, the study provides evidence that informational asymmetries and principal-agent problems in the thrift resolution process were significant sources of excess returns for the acquirers receiving FSLIC assistance.The views reflected in this paper are those of the authors and do not necessarily represent policies of Board of Governors of the Federal Reserve System or the Federal Housing Finance Board. Helpful comments were recieved from participants in the Finance Workshop at the University of North Carolina at Chapel Hill, George Benston, Richard Brown, Jennifer Conrad, Sally Davies, Mark Flannery, Edward Kane, David Ravenscraft, and Lawrence J. White.     

The Interactive Effect of Product Differentiation and Cost Variability on Profit

It is generally believed that industries with greater product differentiation have higher rates of return. This paper shows that this effect breaks down in the presence of firm-specific cost shocks. Greater substitutability in products generates two opposing effects: (1) it allows a larger increase in demand when a firm has a favorable cost shock, which more than compensates for the reduction in demand when it has an unfavorable cost shock, and (2) it results in more intense price competition. These two countervailing forces result in industry profit being highest in markets with a moderate degree of product differentiation.     

Editorial

Conclusion We keenly feel the loss of our friend, Murray N. Rothbard. We shall strive to follow the path he so ably blazed. Although none of us ever studied formally with Murray, he was our intellectual guide and mentor. He will be sorely missed.Co-editors of theReview of Austrian Economics are: Walter Block, associate professor of economics at The College of the Holy Cross, Hans-Hermann Hoppe, professor of economics at the University of Nevada, Las Vegas, and Joseph T. Salerno, associate professor of economics at the Lubin School of Business, Pace University.     

Bayesian updates using precursor events

It is common practice among technological forecasters to use precursor events to anticipate technological change. However, the information obtained from precursor events is usually qualitative in nature. A previous paper demonstrated that information about prior “similar” innovations can be used to generate a probability distribution of lag times between a precursor event and the event to be forecast, thus making the forecasts more quantitative. This paper presents a method for using Bayes' Equation to update probability distributions of lag time using the occurrence of additional precursor events.     

On Cost Tradeoffs Between Conservative and Market Value Accounting

We identify a cost tradeoff relevant to the comparison of alternative accounting regimes. We compare equilibrium deadweight losses, due to transacting and auditing, across the historical cost, lower-of-cost-or-market, and market value regimes. We provide conditions for each of the regimes to dominate the other two. We show that while market-value accounting is likely to prevail in an inflationary setting, it may also be optimal under deflation. Similarly, lower-of-cost-or-market is likely to prevail in a deflationary setting, though it may also be optimal under inflation. Last, historical cost prevails only if the variation in asset prices is sufficiently high.     

The determinants of exit in an open economy

In this paper the determinants of exit are investigated for the manufacturing sector of the United States economy, which has been subjected to growing international influences. The analysis uses United States cross-sectional data. The results of the exit equation suggest that low profitability, declining industry growth, and displacement of incumbents by entrants foster exit. International influences are also seen to have an impact on U.S. manufacturing exit. Specifically, imports into an industry have a small effect on exit and protection has little influence in stemming exit.I would like to thank John Mayo, Don Clark, Ron Shrieves, Robert Feinberg, Joseph Shaanan and an anonymous referee for their comments on earlier drafts of this paper. The views in this paper do not necessarily reflect those of the Commission. The usual caveat applies.     

Focusing on quality in the pacific rim

American companies that want to sell to the Pacific Rim are missing the point if they focus on pricing or variety. Quality is the key issue—and Japan is the key competitor.     

White collar unions in Switzerland

Swiss trade unionism differs from that of other countries: lower strike incidence, lower trade union density and organisational segregation of blue and white collar employees. The author reviews and explains these differences and reports on the attitudes towards trade unionism of the German-speaking members of Switzerland's biggest white collar trade union organisation.     

RETIREMENT INCOME RIGHTS AS A COMPONENT OF WEALTH IN THE UNITED STATES*

Americans have accumulated a considerable amount of future purchasing power in the form of Social Security and employer pension rights. These rights are a form of wealth. In this paper, we ask how their inclusion alters the wealth portfolios of a sample of Americans at or nearing normal retirement age. Data from the 1973 wave of the longitudinal Retirement History Study suggest that, for many Americans, retirement income rights are the dominant component of wealth, and are often more important than all other entries combined, including home equity. We also find that this wealth can be seriously eroded during times of high inflation. Because of differences in marketability, pension and Social Security rights are not perfect substitutes for more liquid assets. Nonetheless, since they are so large in magnitude, and have been shown to be key determinants of the behavior of older workers, they should not be ignored.