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.     

SOME LESSONS FROM THE EAST ASIAN MIRACLE

The rapid economic growth of eight East Asian economies, oftencalled the "East Asian miracle, " raises two questions: Whatpolicies and other factors contributed to that growth? And canother developing countries replicate those policies to stimulateequally rapid growth? This article, based on case studies, econometric data, and economictheory, offers a list of the ingredients that contributed tothat success. But it is the combination of these ingredients,many of which involve government interventions acting together,that accounts for East Asia's success.      

EARLY UNWINDING STRATEGY IN INDEX OPTIONS-FUTURES ARBITRAGE

We first re-examine buy-and-hold arbitrage strategies using both ex-post and ex-ante index options and futures data in Hong Kong. The results show that the arbitrage profit is not large enough to cover the transaction costs for both individual and institutional investors. Second, we find that, when an early unwinding strategy is employed, the arbitrage profit improves significantly under ex-post analysis but only improves slightly under ex-ante analysis. In addition, opportunities for same-day unwinding are limited. Finally, our regression results indicate the magnitude of the arbitrage profit is positively related to the volatility of the stock market.     

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.     

Commodity money inflation: theory and evidence from France in 1350–1436

This paper presents a theory of inflation in commodity money and supports it by evidence from inflationary episodes in France during the 14th and 15th centuries. The paper shows that commodity money can be inflated similarly to fiat money through repeated debasements, which act like devaluations. Furthermore, as with fiat money, demand for commodity money falls with inflation. However, at high rates of inflation demand for commodity money becomes insensitive to inflation, since commodity money has intrinsic value in addition to its transactions value. Finally, we show that anticipated stabilization reduces demand for commodity money.     

Expense preference behavior in mutual life insurers

The effect of alternative ownership structures, stock versus mutual, on the cost of production is studied for firms in the life insurance industry. The effect of differential incentives on the cost structure of both groups of firms is examined by means of a multiproduct cost function. This research shows that despite differences in legal form and incentives of managers, stock and mutual firms in the life insurance industry are similar in terms of the types of products sold, the average cost of production, and the form of the relationship between cost and production.Department of Finance, University of Connecticut     

Integration of law with accouting: A more comprehensive learning experience

Since accounting principles is often a surrogate for an introduction to business course, it is an ideal medium for introducing students to many aspects of commercial, civil, and criminal law. When using the approach suggested in this article, care must be taken not to detract from the accounting course or diminish the course content in any way. The accounting course may, however, be greatly enhanced by the allusions and references made by the accounting professor to the various laws.This approach to instructing accounting offers a number of benefits. Students are not only assisted in their immediate course work, but also throughout their entire business program. The accounting course is enhanced by comprehensive handout materials which are provided to the students and which can be retained by the students as ready references during the course and thereafter. (Examples of such supplemental materials are presented.) Upon conclusion of several terms of accounting, the students have obtained an otherwise unavailable exposure to the interrelationship of accounting and law.