WHY THE COMPOSITE INDEX OF LEADING INDICATORS DOES NOT LEAD

This paper assesses the real-time performance of the Commerce Department's composite index of leading indicators. The authors find that the composite leading index has failed to provide reliable advance warning of cyclical turning points. One reason for this failure is that the leading index's transition from expansion to contraction generally is not very sharp. Consequently, discerning real-time cyclical peaks in the index is difficult. Transitions from contraction to expansion on average are sharp. However, cyclical troughs in the leading index often precede cyclical troughs in the economy by only a few months. Thus, even timely recognition of troughs in the leading index fails to provide advance warning of turnarounds in the general level of economic activity .     

THE DEFECTIVE DESIGN OF FEDERAL DEPOSIT INSURANCE

Deposit insurance funds, especially the Federal Savings and Loan Insurance Corporation, are currently in visible trouble. Two central defects of the existing deposit insurance system are identified: (1) mispricing of the insurance premiums and (2) incentives for both the industry and the insurance agencies to postpone recognizing and realizing losses.
Insurance premiums are mispriced because they are assessed at the same rate for all institutions, which creates a bias for banks to take greater risks. Practical difficulties of setting an appropriate risk-based premium for each bank are real but not necessarily insurmountable. In particular, the sale by the bank of unsecured and uninsured debt could provide a market measure of default risk, under a given failure rule.
The choice of a failure rule is also a critical matter. Current failure rules are poorly defined and permit insolvent institutions to continue in operation. Specifying a market value test of insolvency in the statutes would be helpful, but it would have to be supported by market-value accounting requirements and stronger pressures on banking authorities not to defer action.     

The Method of Payment in Corporate Acquisitions,Investment Opportunities,and Management Ownership

This article examines the motives underlying the payment method in corporate acquisitions. The findings support the notion that the higher the acquirer's growth opportunities, the more likely the acquirer is to use stock to finance an acquisition. Acquirer managerial ownership is not related to the probability of stock financing over small and large ranges of ownership, but is negatively related over a middle range. In addition, the likelihood of stock financing increases with higher pre-acquisition market and acquiring firm stock returns. It decreases with an acquirer's higher cash availability, higher institutional shareholdings and blockholdings, and in tender offers.     

Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation

Standard models of informed speculation suggest that traders try to learn information that others do not have. This result implicitly relies on the assumption that speculators have long horizons, i.e., can hold the asset forever. By contrast, we show that if speculators have short horizons, they may herd on the same information, trying to learn what other informed traders also know. There can be multiple herding equilibria, and herding speculators may even choose to study information that is completely unrelated to fundamentals.     

Are U.S. Multinational Corporations Becoming More Aggressive Income Shifters?

This paper examines income shifting of U.S. multinational companies over the past two decades. Domestic and foreign policy makers are increasingly concerned with the effect of income shifting on dwindling tax revenues, however, extant research on income shifting by U.S. multinational enterprises is mixed. We address the disconnect between the academic literature and the policy maker's perceptions by examining the extent of multijurisdictional income shifting by U.S. multinational companies. We directly address conflicting results in extant literature and show that using either multiperiod proxies or instrumental variables overcomes weaknesses of annual proxies in this setting. Our tests show that U.S. companies have become more active at shifting income out of the United States as the regulatory costs of shifting have changed. Holding tax rate differences between U.S. and foreign jurisdictions constant, our empirical estimates suggest that our sample of 380 corporations with low average foreign tax rates collectively shifts approximately $10 billion of additional income out of the United States annually during 2005–2009 relative to 1998–2002 due to varying regulatory costs of shifting.     

Evidence on the Timing and Determinants of Overfunded Pension Plan Termination

This paper examines the factors associated with the timing of overfunded pension plan termination.     

What Explains the Stock Market's Reaction to Federal Reserve Policy?

This paper analyzes the impact of changes in monetary policy on equity prices, with the objectives of both measuring the average reaction of the stock market and understanding the economic sources of that reaction. We find that, on average, a hypothetical unanticipated 25‐basis‐point cut in the Federal funds rate target is associated with about a 1% increase in broad stock indexes. Adapting a methodology due to Campbell and Ammer, we find that the effects of unanticipated monetary policy actions on expected excess returns account for the largest part of the response of stock prices.     

CEO Contracting and Antitakeover Amendments

This article examines incentives for adopting antitakeover charter amendments (ATAs) that are associated with compensation contracts. The evidence is consistent with the hypothesis that antitakeover measures such as ATAs help managers protect above-market levels of compensation. Chief executive officers (CEOs) of firms that adopt ATAs receive higher salaries and more valuable option grants than CEOs at similar firms that do not adopt them. Furthermore, the magnitude of this difference increases following ATA adoption. The evidence is inconsistent with the hypothesis that ATAs facilitate the writing of efficient compensation contracts.