Change in market assessments of deposit-institution riskiness

Using the Goldfeld and Quandt switching regression method, this article investigates variability over 1975–1985 in the risk components of bank and saving and loan stock. We develop evidence that the market-beta, interest-sensitivity, and residual risk of deposit-institution stock vary significantly during this period. Reassessing previous event studies in light of these findings suggests that event-study methods tend to overreach their data. The Ohio State University University of Maryland     

How to Increase the Odds for Successful Brand Extension

Increasingly, new products are being introduced to the market as line extensions. Chester Kane discusses several ways to improve current practices. He argues that several special steps should be taken to obtain maximum leverage from the value of an existing brand name. Starting with efforts to understand customer's perceptions of the brand, he describes a series of approaches that collectively stress planning, objectivity, and the use of appropriate research tools. The article discusses a variety of both successes and failures, noting that seldom do customer's perceptions match current brand marketing strategies, a fact overlooked by many companies.     

How Country and Safety-Net Characteristics Affect Bank Risk-Shifting

Risk-shifting occurs when creditors or guarantors are exposed to loss without receiving adequate compensation. This paper seeks to measure and compare how well authorities in 56 countries controlled bank risk shifting during the 1990s. Although significant risk-shifting occurs on average, substantial variation exists in the effectiveness of risk control across countries. We find that the tendency for explicit deposit insurance to exacerbate risk shifting is tempered by incorporating loss-control features such as risk-sensitive premiums, coverage limits, and coinsurance. Introducing explicit deposit insurance has had adverse effects in environments that are low in political and economic freedom and high in corruption.     

From Circle of Poison to Circle of Virtue: Pesticides,Export Standards and Kenya’s Green Bean Farmers

In response to growing consumer concerns, developed‐country governments have reduced permissible pesticide residue levels in food. Many food retailers have developed even more stringent private food safety protocols relating to pesticide use, storage and disposal and passed them on to their suppliers. Exporters in developing countries enforce these developed‐country pesticide standards (DC‐PS) by subjecting farmers to close monitoring. This study explores the effects of enforcing compliance with DC‐PS on smallholder farmers’ pesticide‐related health costs. Results suggest that enforcing DC‐PS encourages farmers to use protection that lowers pesticide‐induced morbidity, hence reducing farmers’ health costs from pesticide exposure. The study concludes that there are health benefits to family farmers from complying with DC‐PS beyond the acknowledged income generation from selling fresh produce in premium export markets.     

Financial Economists Roundtable Statement on Reforming the Role of the Rating "Agencies" in the Securitization Process

Assets securitized by private companies reached a peak of nearly $12 trillion in 2008, an amount nearly equal to the entire stock of credit intermediated in traditional ways by the world's banking systems. Failures of care and diligence in the origination, rating, and securitization of subprime mortgages led to a collapse in the prices of securitized assets and the public's confidence in the reliability and integrity of the process by which securities are rated. This decline in confidence has in turn undermined prices and credit flows in every market where investors and regulators rely on the credit ratings provided by Statistical Ratings Organizations (SROs) to certify the quality of debt.
With the aim of rebuilding confidence in the securitization process, this statement drafted and signed by 30 distinguished academic economists recommends three kinds of reform that are designed to improve the incentives faced by the SROs. First, to increase accountability for ratings mistakes, the analytic work of SROs must be made more transparent and their managements must accept liability for errors of negligence. Second, explicit reliance on ratings should be eliminated from risk management regulations issued by government agencies. By effectively "outsourcing" public authority to private firms, such regulations have had the effect of intensifying SRO conflicts of interest. Finally, SROs should be required to calculate and state express margins for error in the ratings for every tranche of securitized instruments. This would help investors appreciate the differences in the degree of leverage embedded in various categories of securitized debt.     

Die Getreidemonopolwirtschaft in der Schweiz 1914 bis 1928

Ohne Zusammenfassung     

The Relationship between Changes in Fixed Plant Investment and the Likelihood of Emergence from Corporate Financial Distress

Companies experiencing financial distress can attempt to mitigate financial distress through changing the investment in the fixed asset base. Management may choose to expand the asset base in hopes of increasing sales. Alternatively, management may choose to contract the asset base in order to eliminate and/or reduce investment in unprofitable or risky ventures, improve liquidity, reduce earnings volatility, and reduce the need for operating capital.In this study, we examined how observed changes in the investment base affect the likelihood of emergence from a financially distressed condition. We find that, when management chooses to contract the investment in property, plant, and equipment, the likelihood of emergence from financial distress is significantly improved. On the other hand, when management chooses to expand property, plant, and equipment in the face of distress, the distress is only intensified. Our explanation is that companies that choose to contract their fixed asset base in times of trouble are taking steps that will most likely improve their financial condition—they are less likely to need working capital, and can better tolerate increased levels of long-term debt. Conversely, increasing the fixed asset base amplifies the need for working capital, and borrowing money to facilitate the expansion simply increases the necessary uses of that working capital because the debt must be serviced. As a result, companies descend even deeper into financial distress and decrease the likelihood that they will emerge therefrom.     

Basel II: A Contracting Perspective

Financial safety nets are incomplete social contracts that assign responsibility to various economic sectors for preventing, detecting, and paying for potentially crippling losses at financial institutions. Basel II forces signatory countries to reopen safety-net bargaining across affected sectors. This paper uses the theories of incomplete contracts and sequential bargaining to interpret the Basel Accords as a framework for endlessly renegotiating minimal duties and standards of safety-net management across the community of nations. Modelling the stakes and stakeholders represented by different regulators helps us to understand that inconsistencies were bound to exist in prior understandings about the range of sectoral effects that the 2004 Basel II agreement might produce. The analysis seeks to explain why, in the U.S., attempting to resolve what turned out to be intolerable inconsistencies spawned an embarrassingly fractious debate and repeatedly pushed back Basel II’s scheduled implementation.