Royal African Company Share Prices during the South Sea Bubble

Price bubbles provide a unique opportunity to test whether investors act rationally and have sufficient knowledge of the economic environment in which they trade. We focus our attention on the 1720 South Sea bubble episode as experienced by a company not involved in governmental debt financing—the Royal African Company. Following the example of the South Sea Company, the Royal African Company lent its funds to equityholders at a preferential rate. Recognizing this benefit along with the announced dividends explains a large portion of the bubble. Furthermore, the unexplained residual does not behave like an exploding bubble, casting doubt that speculative excess motivated market participants in 1720. Our findings are indeed consistent with investor rationality, and the unexplained residual suggests that we are missing information that was available to the British financial market in 1720.     

Frontiers of Non-Financial Performance Reporting in New Zealand

In 1989, legislation in New Zealand introduced requirements for non-financial performance information in the public sector to be reported and audited. This paper describes the initial responses of the Institute of Chartered Accountants of New Zealand and the Audit Office to this challenge and examines their further development following a decade of experience.     

GOVERNMENT SPENDING IN DEVELOPING COUNTRIES: Trends, Causes, and Consequences

Throughout the twentieth century governments have been spendingever larger proportions of national income. Three issues arisein discussions about the growth of such spending as it pertainsto developing countries: How does it compare with expenditurein industrial nations? What explains the growth in spendingby developing country governments? And what are the effectson economic growth? Government expenditure as a share of GDPin low- and middle-income countries, on average, is lower thancomparable shares in industrial market economies and, with fewexceptions, is growing. Many factors, including ideology, demographics,a positive income elasticity for public goods, the rising costof public goods relative to private goods, and perhaps developmenttheory and practice, explain this growth. As for the relationshipbetween government expenditure and economic growth, the empiricalevidence does not reveal any strong correlation. The size ofgovernment may engender strong ideological debate, but the positionthat the aggregate level of government expenditure is a significantdeterminant of growth rates receives little support.      

Natural Language in Banking

The purpose of this paper is to investigate the use of natural language technology in banking applications. The paper provides a brief review of natural language systems and technologies and then a summary of some of the banking systems that use natural language. The integration of natural language into broader-based bank information systems is also discussed.     

The Tax Consequences of Long‐Run Pension Policy*

A firm's pension fund is legally separate from the firm. But because pension benefits are normally independent of fund performance, pension assets impact the firm very much as if they were firm assets. Because they are worth more when times are good and less when times are bad, common stocks in the pension fund add to the sponsoring firm's leverage. They cause contributions to a pension fund to be high just when the firm can least afford to pay them. Conversely, bonds in the pension fund will make it easier for the firm to avoid default on its own bonds when times are bad all over: The more bonds a pension fund buys, the more the firm can borrow. The tax treatment accorded the pension fund differs notably from that accorded the firm. Some have argued that a firm can capitalize on the difference by accelerating the funding of its pension plan. The benefits of full funding are wasted, however, unless the added contributions to the fund are invested in bonds; higher pension contributions now mean lower contributions later, hence higher taxes later. The benefits come from earning, after taxes, the pretax interest rate on the bonds in the pension fund. If the firm wants to take advantage of the differing tax treatment of bonds without altering the level of its current pension contributions, it can (1) sell stocks in the pension fund and then buy bonds with the proceeds while (2) issuing debt in the firm and buying back its own shares with the proceeds. An investment in the firm's own stock creates no more tax liability than an investment in stocks through the pension fund.     

Wealth Accumulation and Distribution in the Midwest in the Late Nineteenth Century

It is well known that early settlers on the frontier reaped the benefits of development as population grew, especially through capital gains on real estate. But population turnover—so pervasive in the rural north in the nineteenth century as well as in contemporary settlement economies—also afforded early settlers an advantage: they knew local soil and market conditions better than those who settled later. Such location-specific human capital augmented the incomes, and therefore the wealth, of early settlers. Early settlers in Missouri had higher rates of wealth accumulation than later arrivals, and the contribution of location-specific human capital was at least equal to the contribution of capital gains.