Going-Private Decisions and the Sarbanes-Oxley Act of 2002: A Cross-Country Analysis

This article investigates whether the passage and the implementationof the Sarbanes-Oxley Act of 2002 (SOX) drove firms out of thepublic capital market. To control for other factors affectingexit decisions, we examine the post-SOX change in the propensityof American public targets to be bought by private acquirersrather than public ones with the corresponding change for foreignpublic targets, which were outside the purview of SOX. Our findingsare consistent with the hypothesis that SOX induced small firmsto exit the public capital market during the year followingits enactment. In contrast, SOX appears to have had little effecton the going-private propensities of larger firms. (JEL G30,G34, G38, K22)     

Economic Consequences of Limited Technology Transferability

Because technology is often context-dependent and partly tacit, it is much less transferable than conventional 'innovation and market structure' models have long assumed. Technological know-how is represented in this paper as a combination of formal knowledge and informal practice. The balance of these basic components is viewed as an optimisation of R&D investment structure and level within an oligopolistic framework. We analyse the outcomes of this optimisation in terms of R&D production efficiency and social welfare. With regard to R&D investment structure, we find that the equilibrium outcome is neither efficient nor socially optimal, and the stronger competition is, the larger the divergence from efficiency and social optimum. For R&D investment level, the results are less conclusive, but they imply that competition represents the best conditions for stimulating R&D investment     

An Arbitrage-Free Estimate of Prepayment Option Prices in Fixed-Rate GNMA Mortgage-Backed Securities

In an efficient market, the no-arbitrage condition implies that the price difference between any two assets must be the market value of all differences in their cash flows. We use this logic to deduce the price of the prepayment option embedded in fixed-rate Government National Mortgage Association (GNMA) mortgage-backed securities. The option price equals the difference between an observed GNMA price and the cost of a synthetic, nonprepayable GNMA constructed from the least expensive portfolio of Treasury securities that exactly replicates the promised GNMA cash flow stream, assuming prepayment is precluded. We regress the option prices on variables found significant in previous prepayment studies, finding that five key regressors explain more than 90% of the prepayment option value in pooled time-series cross-sectional analysis. We also show that the time value of the prepayment option calculated by our method displays a pattern similar to that produced by the Black-Scholes (1973) option pricing model. An additional empirical result is the existence of negative option prices and negative time value of the option prices. We attribute these to the fact that homeowners sometimes exercise their prepayment options when they are out-of-the-money, and to refinancing transaction costs. Our method is independent of assumptions regarding interest rate processes and the homeowner's prepayment behavior, and it provides a benchmark for testing theoretical prepayment models.     

Decomposition-integral: unifying Choquet and the concave integrals

This paper introduces a novel approach to integrals with respect to capacities. Any random variable is decomposed as a combination of indicators. A prespecified set of collections of events indicates which decompositions are allowed and which are not. Each allowable decomposition has a value determined by the capacity. The decomposition-integral of a random variable is defined as the highest of these values. Thus, different sets of collections induce different decomposition-integrals. It turns out that this decomposition approach unifies well-known integrals, such as Choquet, the concave and Riemann integral. Decomposition-integrals are investigated with respect to a few essential properties that emerge in economic contexts, such as concavity (uncertainty-aversion), monotonicity with respect to stochastic dominance and translation-covariance. The paper characterizes the sets of collections that induce decomposition-integrals, which respect each of these properties.     

ON THE RATIONALITY OF COMMON STOCK RETURN VOLATILITY

This paper derives the relationship between the population unconditional variance of common stock returns and the variance of expected returns conditional on a well-specified information set. As a consequence, a lower bound is obtained for the variance of common stock returns. The sample counterpart of this bound is then empirically tested against the sample variance of returns. The paper's main conclusion can be stated as follows: the observed volatility of real (inflation-adjusted) common stock returns is not “irrationally” large. The paper admits of this conclusion because the point estimate of the lower-bound variance derived in this model is actually larger than the point estimate of common stock return volatility. However, since these point estimates are found to have a statistically insignificant difference, equality of the two variances cannot be ruled out. Hence, “rationality” of common stock returns—as implied by a utility-based valuation conditional on a specified information set—cannot be rejected.     

What restrictions do Bayesian games impose on the value of information?

In a Bayesian game players play an unknown game. Before the game starts some players may receive a signal regarding the specific game actually played. Typically, information structures that determine different signals, induce different equilibrium payoffs. In two-person zero-sum games the equilibrium payoff measures the value of the particular information structure which induces it. We pose a question as to what restrictions Bayesian games impose on the value of information. We provide answers for two kinds of information structures: symmetric, where both players are equally informed, and one-sided, where only one player is informed.     

Debt and market incompleteness

This paper provides a capital structure equilibrium analysis in an environment characterized by market incompleteness and risky debt. Market incompleteness, together with a comparative advantage for corporate borrowing, leads to a Miller (1977)-type capital structure equilibrium wherein each firm within an industry faces an indeterminate debt level. However, at the aggregate-industry level, corporations act as financial intermediaries to generate cross-sectional capital structure patterns across industries, despite the fact that rents associated with financial intermediation services dissipate in equilibrium for any particular firm. Additional implications are drawn for observed cross-sectional and time-series regularities in capital structure.