The incidence and intensity of wage indexation: an empirical analysis

Variables suggested by theoretical studies of indexation are considered with a view to examining their utility in the context of the decision to index (incidence) and the desired degree of indexation when escalator clauses are put into effect (intensity). The Tobit model, which can address both of these issues, suggests that most of the effects of explanatory variables on the regressand occur by modifying the incidence of indexation, not its intensity. However, the Tobit model is itself rejected in favour of separate Probit and Truncated Regression investigations of incidence and intensity, respectively. The results obtained indicate that the standard list of explanatory variables, which one thinks of in the context of the theoretical literature as dealing primarily with intensity, perform well in explaining incidence but very poorly in accounting for the non-limit observations. The latter are influenced by bargaining power proxies such as the unemployment rate and union density; a very clear trade-off between indexed and non-contingent wage adjustment can also be discerned. These results call for more theoretical attention to the distinction between indexation incidence and its intensity.     

The Information Value of Bond Ratings

We test whether bond ratings contain pricing-relevant information by examining security price reactions to Moody's refinement of its rating system, which was not accompanied by any fundamental change in issuers' risks, was not preceded by any announcement, and was carried simultaneously for all bonds. We find that rating information does not affect firm value, but that debt value increases (decreases) and equity value falls (rises) when Moody's announces better- (worse-) than-expected ratings. We also find that when Moody's announces better- (worse-) than-expected ratings, the volatilities implied by prices of options on the fine-rated issuers' shares decline (rise).     

Why Do Firms Announce Open-Market Repurchase Programs?

Empirically, a price increase accompanies the announcement ofan open-market stock repurchase program, even though the announcementis not a commitment. In fact, for many announced programs noshares are ever actually repurchased. This article exploresthis puzzle. In the single-firm-type version of the model, theoption that a firm grants itself by announcing a program doesnot generate announcement returns. In equilibrium, long-rungains from the informed trading that the option creates areoffset by short-run costs from the market's accounting for thisadverse selection. Based on this trade-off, I construct a signaling(two-type) model that can deliver announcement returns. In theseparating equilibrium, good firms do not incur any cost whenthey announce programs. Their gains from informed trading inthe long run offset the cost of announcement incurred in theshort run. Mimicry is costly, because a bad firm's long-rungains from informed trading cannot compensate for the short-runcost of announcing.     

In search of an evolutionary edge: trading with a few, more, or many

Consider a population of farmers who live around a lake. Each farmer engages in trade with his m adjacent neighbors, where m is termed the “span of interaction.” Trade is governed by a prisoner’s dilemma “rule of engagement.” A farmer’s payoff is the sum of the payoffs from the m prisoner’s dilemma games played with his ^m/₂^m/_2 neighbors to the left, and with his ^m/₂^m/_2 neighbors to the right. When a farmer dies, his son takes over. The son who adheres to his father’s span of interaction decides whether to cooperate or defect by considering the actions taken and the payoffs received by the most prosperous member of the group comprising his father and his father’s m trading partners. Under a conventional structure of payoffs, it is shown that a large span of interaction is detrimental to the long-run coexistence of cooperation and defection, and conditions are provided under which the social outcome associated with the expansion of trade when individuals trade with a few is better than that when they trade with many. Under the stipulated conditions it is shown, by means of a static comparative analysis of the steady state configurations of the farmer population, that an expansion of the market can be beneficial in one context, detrimental in another.     

Research and Development Activity and Expected Returns in the United Kingdom

Fama and French (1992) show that size and book-to-price dominate CAPM betaand other variables such as the price-earnings ratio and dividend yield in explainingthe cross-section of US stock returns. Comparable evidence for the UK points to abook-to-price effect, but not a size effect (Chan and Chui, 1996; Strong and Xu, 1997).In this paper, our first contribution is to show that a measure of research and development (RD) helps explain cross-sectional variation in UK stock returns. Our cross-sectional results on the association between stock returns and RD are consistent with recent US evidence reported by Lev and Sougiannis (1996, 1999) and Chan, Lakonishok and Sougiannis (2001). Fama and French (1993, 1995, 1996) also show that a three-factor model captures a high proportion of the time series variation in portfolio returns, again for the US. Our second contribution is to show, for the UK, that a modification to the three-factor model to take account of RD activity can significantly enhance the explanatory power of the three-factor model. We show that, as a practical matter, estimated risk premia based on the modified three-factor model can differ considerably from risk premia estimated using the CAPM or the three-factor model. In particular, risk premia for industries in whichfew firms undertake RD activities tend to be over-estimated.     

Interest Rates Fluctuations and the Advantage of Long-Term Debt Financing: A Note on the Effect of the Tax-Timing Option

When interest rates fluctuate, issuing long-term debt may implicitly generate a valuable tax-timing option. The holder of long-term debt has an optimal-trading taxtiming option to immediately realize capital losses if an increase in interest rates lowers the price of the bond below the original issue price. In contrast, if interest rates decrease and the bond price is greater than the original issue price, the holder would prefer to defer the realization of capital gains. This tax-timing option confers an advantage for issuing long-term debt. Our formal presentation also highlights how the tax-timing options of long-term debt may increase the debt capacity of the firm.     

Simplicity versus Fairness in Means Testing: The Case of Civil Legal Aid

For most state financial benefits, the making of any payment, or its level, depends upon a means test to assess the applicant's income or wealth. Attempts to make such tests fair often lead to procedures that are complicated to administer and confusing for the applicant. This paper describes the analysis underlying a review of means testing for civil legal aid in England and Wales, to achieve considerable simplification without sacrificing fairness.