Final Offer Arbitration: Better Theory Than Practice

The theory of final offer arbitration promises more than its actual performance delivers, based on admittedly limited experience. There is no showing that fewer negotiations reach impasse than would occur under conventional arbitration. There is evidence, however, that final offer arbitration does tend to produce awards less equitable than warranted by the positions and strengths of the parties, particularly when there are multiple issues at impasse and when arbitrators may select only one overall package or another. This tendency is built-in to the process, since the whole point of final offer arbitration is deterrence, with little or no concern for getting a good settlement through arbitration. “Bad” awards cannot fail to generate irritation and to have a corrosive effect on responsible contract administration. It is possible that such awards, and their effects, will be accepted as the necessary price of a final offer selection system. What seems more likely, however, is that the system will be modified along the lines of those in Eugene and Michigan. Those modifications can be expected to have two effects. First, they will make it more likely that the parties will be able to reach their own agreement by encouraging mediation and further negotiations, even after arbitration has been invoked. Second, they will increase the possibility of an acceptable arbitrated settlement by allowing the arbitrator greater flexibility in making an award. By doing these things, however, the deterrent effect of final offer selection will be substantially weakened, and what will be left will be a useful form of mediation-arbitration but not a substitute for the strike which contains an equivalent incentive to negotiate.     

Does the Specialist Matter? Differential Execution Costs and Intersecurity Subsidization on the New York Stock Exchange

This article tests for differences in execution costs among specialist firms for New York Stock Exchange listed securities. Execution cost differences provide a measure of the relative performance of specialist firms. We find a substantial difference in effective spreads and order processing costs across specialist firms, controlling for stock characteristics. While economically significant, the differences in execution costs between specialist firms are much smaller than the cross-market differences reported by Huang and Stoll (1996). Within a specialist firm, there is a positive relation between order processing costs and trading activity that is consistent with the hypothesis that active stocks subsidize inactive stocks.     

DETERMINANTS OF CHILD SUPPORT: A PILOT SURVEY OF ABSENT PARENTS

The proportion of children living in single-parent households has risen dramatically during the past two decades. Approximately half of these children live in poverty. A major factor in this impoverishment is non-custodial parents'failure to provide child support. Much is known about child support behavior from the custodial parent's perspective, but little research has focused on the noncustodial parent's perspective. The Survey of Absent Parents (SOAP) was initiated to remedy this gap. This paper describes the results of the SOAP pilot survey of linked custodial and non-custodial parents in three counties in Florida and three counties in Ohio. It reports the results of multivariate analyses of the predictors of (i) child support award levels, (ii) child support payments as reported by custodial and non-custodial parents, and (Hi) compliance with child support awards as reported by custodial and non-custodial parents. The results indicate that custodial and non-custodial parents have very different perspectives on how much child support is paid. The main factors predicting payments across these two populations are (i) the non-custodial parent's situation measured by his current income and marital status, (ii) the custodial parent's situation measured by her current income–excluding child support payments–and marital status, (Hi) program interventions such as formulas used to set award levels, payment through the court, and wage withholding, and (iv) the warmth of the relationships between the former partners and between the father and the child.     

THE NEW DISCLOSURES OF EXECUTIVE PAY

The Shadow SEC, founded three years ago, is a group of prominent Financial economists (and a token economically-oriented lawyer) whose mission is to bring economic analysis to bear on the regulatory policies of the U.S. Securites and Exchange Comminsion, and on Financial market regulation in general. The fire "Commissioners" of the Shadow SEC are:     

On the Determinants of Corporate Hedging

Finance theory indicates that hedging increases firm value by reducing expected taxes, expected costs of financial distress, or other agency costs. This paper provides evidence on these hypotheses using survey data on firm's use of forwards, futures, swaps, and options combined with COMPUTSTAT data on firm characteristics. Of 169 firms in the sample, 104 firms use hedging instruments in 1986. The data suggest that firms which hedge face more convex tax functions, have less coverage of fixed claims, are larger, have more growth options in their investment opportunity set, and employ fewer hedging substitutes.     

Predictable Stock Returns: The Role of Small Sample Bias

Predictive regressions are subject to two small sample biases: the coefficient estimate is biased if the predictor is endogenous, and asymptotic standard errors in the case of overlapping periods are biased downward. Both biases work in the direction of making t-ratios too large so that standard inference may indicate predictability even if none is present. Using annual returns since 1872 and monthly returns since 1927 we estimate empirical distributions by randomizing residuals in the VAR representation of the variables. The estimated biases are large enough to affect inference in practice, and should be accounted for when studying predictability.     

On the Number of Factors in the Arbitrage Pricing Model

Recent theory has demonstrated that the Arbitrage Pricing Model with K factors critically depends on whether K eigenvalues dominate the covariance matrix of returns as the number of securities grows large. The purpose of this paper is to test whether sample covariance matrices can be characterized as having K large eigenvalues. Using all available data on the 1983 CRSP tapes, we compute sample covariance matrices of returns in sequentially larger portfolios of securities. Analyzing their eigenvalues, we find evidence that one eigenvalue dominates the covariance matrix indicating that a one-factor model may describe security pricing. We also find that, for values of K larger than one, there is no obvious way to choose the number of factors. Nevertheless, we find that while only the first eigenvalue dominates the matrix, the first five eigenvalues are growing more distinct.