Financial Distress in the Great Depression

We use firm‐level data to study corporate performance during the Great Depression era for all industrial firms on the NYSE. Our goal is to identify the factors that contribute to business insolvency and valuation changes during the period 1928‐1938. We find that firms with more debt and lower bond ratings in 1928 became financially distressed more frequently during the Depression, consistent with the trade‐off theory of leverage and the information production role of credit rating agencies. We also document for the first time that firms responded to tax incentives to use debt during the Depression era but that the extra debt used in response to this tax‐driven “debt bias” did not contribute significantly to the occurrence of distress. Finally, we conduct an out‐of‐sample test during the recent 2008‐2009 Recession and find that higher leverage and lower bond ratings also increased the occurrence of financial distress during this period.     

Can broker-dealer client surveys provide signals for debt investing?

We use a novel data set to study return predictability in debt markets. The data are collected from J.P. Morgan’s periodic surveys on its clients’ outlook for changes in US Treasury yields and corporate credit spreads. We document that simple signals constructed from such surveys predict excess returns on debt portfolios formed on the basis of duration (2-years minus zero) or credit quality (BBB minus AAA). A linear trading strategy placing equal weight on Treasury and Credit signals has an annualized Information Ratio equal to 1.18, before transaction costs. We also show that predictability is likely to stem from private information possessed by survey respondents rather than from risk premia.     

The dark side of financial innovation: A case study of the pricing of a retail financial product

The offering prices of 64 issues of a popular retail structured equity product were, on average, almost 8% greater than estimates of the products' fair market values obtained using option pricing methods. Under reasonable assumptions about the underlying stocks' expected returns, the mean expected return estimate on the structured products is slightly below zero. The products do not provide tax, liquidity, or other benefits, and it is difficult to rationalize their purchase by informed rational investors. Our findings are, however, consistent with the recent hypothesis that issuing firms might shroud some aspects of innovative securities or introduce complexity to exploit uninformed investors.     

GDSS research: An overview and historical analysis

Group Decision Support Systems (GDSS) is a relatively new area of Information Systems research, but some patterns have begun to emerge in the focus of this research and in the approaches to conducting it. This article represents a substantial review of a large body of GDSS literature and an analysis of that literature according to a specific classification scheme. The dimensions of the classification scheme include the age of the research publication, the general research approach, the philosophy underlying the data collection, the type of GDSS support, whether the research is longitudinal, and the primary focus of the research, as well as a few demographic variables such as author and source. The results of the literature analysis lead to recommendations to GDSS researchers by the authors of a need for greater use of the available research approaches and other data analysis philosophies, a greater emphasis on field work, more longitudinal research, and some changes in the focus of the research.     

Institutional change,property rights and economic performance in post‐apartheid in South Africa

This article examines redistributive institutional change in South Africa within the theoretical framework provided by North (1979; 1981; 1991) and Eggertsson (1990). By drawing a distinction between the productive potential of an economy and institutionally feasible production possibilities, we can develop an analytical structure for evaluating how alternative systems of property rights can affect productive activity in South Africa. Although this exercise cannot predict actual outcomes in South Africa, it does accord property rights a central role in a specific theory of institutional change, and accordingly may assist in determining how certain forms of institutional change can influence economic performance in a transitional democracy.     

Futures Trading Activity and Commodity Cash Price Volatility

Abstract:   This paper examines the lead‐lag relationship between futures trading activity (volume and open interest) and cash price volatility for major agricultural commodities. Granger causality tests and generalized forecast error variance decompositions show that an unexpected increase in futures trading volume unidirectionally causes an increase in cash price volatility for most commodities. Likewise, there is a weak causal feedback between open interest and cash price volatility. These findings are generally consistent with the destabilizing effect of futures trading on agricultural commodity markets.     

Using Job Rotation to Extract Employee Information

This article provides an incentive-based explanation for thepractice of job rotation. When agents privately learn aboutthe productivity of tasks on which they work, job rotation canbe an efficient means of eliciting their information. Each agentfreely communicates his information since the switch in tasksguarantees his report will not subsequently be used againsthim; the report is used primarily in evaluating the new agentwho moves into the task. Another benefit is that an agent rotatedinto a job holds less task-specific information and is thuseasier to motivate. Job rotation also comes with a cost—agentsmust be compensated for the disutility of working on new tasks.We study this trade-off and identify conditions under whichjob rotation and specialization are each optimal.     

The Market and Efficient Resource Allocation

Graham Dawson, a very experienced teacher of economics at Bedford High School, gives the second in the series of Model Answers for 'A' Level economics.     

Forecasting employment : The role of forward-looking behaviour

Manufacturing output per head rose at an unprecedented rate in the UK in 1981/2, and conventional econometric relationships failed to forecast the associated falls in employment. In this paper we estimate manufacturing employment equations in which output expectations play a central role. These compare fabourably with alternative models, and are able to predict most of the large falls in employment over this period.