Loan Commitment Contracts,Terms of Lending,and Credit Allocation

This paper analyzes the structure of loan commitment contracts and the interrelationships among their component parameters. Lenders offer borrowers a set of loan “packages,” from which the latter may choose that “package” found to be most appealing. Borrowers may “trade off” changes in any loan parameter in exchange for other adjustments. The borrower, at this time, may “purchase” a larger credit ration for a price. Supporting empirical evidence is presented.     

Should Investors Bet on the Jockey or the Horse? Evidence from the Evolution of Firms from Early Business Plans to Public Companies

We study how firm characteristics evolve from early business plan to initial public offering (IPO) to public company for 50 venture capital (VC)-financed companies. Firm business lines remain remarkably stable while management turnover is substantial. Management turnover is positively related to alienable asset formation. We obtain similar results using all 2004 IPOs, suggesting that our main results are not specific to VC-backed firms or the time period. The results suggest that, at the margin, investors in start-ups should place more weight on the business ("the horse") than on the management team ("the jockey"). The results also inform theories of the firm.     

CONTRACTING FOR GOVERNMENT SERVICES: THEORY AND EVIDENCE FROM U.S. CITIES*

Local governments can provide services with their own employees or by contracting with private or public sector providers. We develop a model of this ‘make‐or‐buy’ choice that highlights the trade‐off between productive efficiency and the costs of contract administration. We construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions. Our analysis suggests an important role for economic efficiency concerns, as well as politics, in contracting for government services.     

PRODUCT QUALITY AND MARKET SIZE*

Do larger markets offer better products? The question has implications for theories of cities and theories of market organization. We document that in the restaurant industry, where quality is produced largely with variable costs, the range of qualities on offer increases in market size. In daily newspapers, where quality is produced with fixed costs, the average quality of products increases with market size, but the market does not offer much additional variety as it grows large. These results are consistent with IO theories of endogenous product quality and with theories that emphasize the consumption advantages of cities.     

Animal Spirits,Margin Requirements,and Stock Price Volatility

A simple overlapping generations model is used to characterize the effects of initial margin requirements on the volatility of risky asset prices. Investors are assumed to exhibit heterogeneous preferences for risk-bearing, the distribution of which evolves stochastically across generations. This framework is used to show that imposing a binding initial margin requirement may either increase or decrease stock price volatility, depending upon the microeconomic structure behind fluctuations in economy-wide average risk-bearing propensity. The ambiguous effect on volatility similarly arises when the source of heterogeneity is noise trader beliefs.     

Factors Related to Employees’ Desire to Join and Leave Unions

Regression analyses based on a sample of 3372 nonunionized and unionized employees showed that, while the desire to join a union is associated with a wide range of work attitudes, perceived company performance, and facets of satisfaction, one's desire to leave one's union is associated with a narrow range of economic concerns. Implications of the findings are discussed in light of the declining unionization rate in the United States.     

Rents and Quasi Rents in the Wage Structure: Evidence from Hostile Takeovers

We test whether industry-related variation in wage premium and slopes of wage profiles reflects payments of rents or quasi rents, taking our cue from the wealth-transfer hypothesis, which argues that hostile takeovers target such rents. If these wage structure characteristics reflect extramarginal payments, then hostile takeover attempts that sought to transfer wealth from workers to shareholders should have targeted firms with the highest wage premia or the steepest wage profiles. We find that the likelihood of being a hostile takeover target between 1979 and 1989 was generally unrelated to these industry-related characteristics of the wage structure.     

Delayed Reaction to Good News and the Cross-Autocorrelation of Portfolio Returns

We document a directional asymmetry in the small stock concurrent and lagged response to large stock movements. When returns on large stocks are negative, the concurrent beta for small stocks is high, but the lagged beta is insignificant. When returns on large stocks are positive, small stocks have small concurrent betas and very significant lagged betas. That is, the cross-autocorrelation puzzle documented by Lo and MacKinlay (1990a) is associated with a slow response by some small stocks to good, but not to bad, common news. Time series portfolio tests and cross-sectional tests of the delay for individual securities suggest that existing explanations of the cross-autocorrelation puzzle based on data mismeasurement, minor market imperfections, or time-varying risk premiums fail to capture the directional asymmetry in the data.