Playing the synthesizer with Canadian data: Adding polls to a structural forecasting model

Election forecasting has become a fixture of election campaigns in a number of democracies. Structural modeling, the major approach to forecasting election results, relies on ‘fundamental’ economic and political variables to predict the incumbent’s vote share usually a few months in advance. Some political scientists contend that adding vote intention polls to these models—i.e., synthesizing ‘fundamental’ variables and polling information—can lead to important accuracy gains. In this paper, we look at the efficiency of different model specifications in predicting the Canadian federal elections from 1953 to 2015. We find that vote intention polls only allow modest accuracy gains late in the campaign. With this backdrop in mind, we then use different model specifications to make ex ante forecasts of the 2019 federal election. Our findings have a number of important implications for the forecasting discipline in Canada as they address the benefits of combining polls and ‘fundamental’ variables to predict election results; the efficiency of varying lag structures; and the issue of translating votes into seats.     

Exploring the Double‐Sided Effect of Information Asymmetry and Uncertainty in Mergers and Acquisitions

We examine the joint effect of bidder and target information asymmetry and uncertainty on the payment consideration and subsequent wealth effects in a large sample of acquisitions with both listed and private targets. In line with a risk‐sharing argument, we find that acquisitions of targets characterized by higher uncertainty are more likely to be settled with stock. In contrast, higher target information asymmetry increases the likelihood of a cash payment, consistent with bidders strategically exploiting superior information. Acquirers of more opaque targets obtain a larger fraction of total acquisition gains and avoid sharing these gains with target shareholders by offering cash.     

How Might Companies Value ESOs?

There has been a steady growth in the use of employee equity compensation plans, and in the use of executive stock options (ESOs) in particular, along with a rise in shareholder and public perceptions that the values of compensation plans are not always fully disclosed. The IFSA of Australia recently called for separate reporting in financial statements of numbers and values of ESOs. Companies, when negotiating employment contracts, frequently agree to compensate an executive if a share option plan is subsequently not approved by shareholders. These facts suggest that reporting the value of an ESO plan is a useful and important exercise. We outline a model for the valuation of ESOs typically issued by Australian listed companies and illustrate the application of the model with a case study.     

A New Strategy Against Hostile Takeovers: A Model of Defense in Participations

This article examines the efficacy of a ‘defense in participations’ policy consisting of competitors acquiring cross‐equity participations within the same industry to prevent hostile takeovers. This defense in participations strategy provides disincentive for raiders as partial ownerships increase market power of competitors and then reinforce the ‘outsider effect’. Also, we find conditions for a general result, which state that takeovers are less profitable in an industry with participations rather than in an industry without any capital links. We provide information to regulators about the positive social impact of cross participations in the context of mergers and expose an economic dilemma between a ‘laissez‐faire’ and an interventionist approach. Copyright © 2016 John Wiley & Sons, Ltd.     

Forecasting another’s enjoyment versus giving the right answer: Trust, shared values, task effects, and confidence in improving the acceptance of advice

In two experiments, participants received advice from another participant on a task either with a correct answer (intellective tasks) or without a correct answer (judgmental task), in which the participant had to make a forecast. In both experiments, the level of trust in the advisor and a perception of the advisor having similar values were important predictors of the acceptance of advice for a judgmental, taste forecast task, whereas advisor confidence was a more important predictor of the acceptance of advice on the intellective task. In Experiment 2, the face-to-face interactions between the decision-maker and the advisor were videotaped and coded. Advisors provided more information to decision-makers for the taste forecast than for the intellective task. Further, whether the advisor provided information to supplement their recommendation or not was a significant predictor of the acceptance of advice on the taste forecast, but not on the intellective task. The results are discussed in the context of previous research on advice, which has predominately used intellective tasks.     

How much does household collateral constrain regional risk sharing?

We construct a new data set of consumption and income data for the largest US metropolitan areas, and we show that the extent of risk-sharing between regions varies substantially over time. In times when US housing collateral is scarce nationally, regional consumption is about twice as sensitive to income shocks. We also document higher sensitivity in regions with lower housing collateral. Household-level borrowing frictions can explain this new stylized fact. When the value of housing relative to human wealth falls, loan collateral shrinks, borrowing (risk-sharing) declines, and the sensitivity of consumption to income increases. Our model aggregates heterogeneous, borrowing-constrained households into regions characterized by a common housing market. The resulting regional consumption patterns quantitatively match those in the data.     

Partisanship and the effectiveness of oversight

We examine the welfare effects of partisanship in a model of checks and balances. An executive makes a policy proposal and an overseer then decides whether or not to veto the executive's proposal. Both the executive and the overseer have private information as to the correct policy to pursue, and both are motivated by the desire to appear competent. A partisan overseer is one who, in addition to seeking to promote her own reputation, cares how her decision will impact the executive's reputation. Our main result is that partisanship can improve the efficacy of an oversight regime, as the distortions caused by a partisan overseer's desire to affect the executive's reputation can offset the distortions caused by her desire to enhance her own. Our results provide a new rationale for divided government, as partisan considerations are often necessary to prevent the overseer from rubber stamping all executive proposals.     

Valuing the implicit guarantee of the Federal National Mortgage Association

The paper analyzes the guarantee of the Federal National Mortgage Association (FNMA). Rather than try to price the guarantee, we used time-series estimates of its value from Kane and Foster to infer the behavior of FNMA in exploiting the guarantee. The results are consistent with a model that predicts that FNMA does not take as much risk as it might. Rather, it trades off risk and return, but it does increase risk and exploit the guarantee when it gets in trouble (as it did in 1981).We have received helpful research assistance from Peter Carr and Bruno Gerard.     

Loan Loss Severity and Optimal Mortgage Default

This paper tests the contingent claims model of mortgage default in its ruthless or frictionless form. The principal tests of the model are based on an unconventional source of data, namely, loan loss severities on defaulted mortgages. The frictionless model has well-defined predictions about loss severities which we test in detail. The data analyzed include a random sample of all mortgages originated during the period 1975–90 and purchased by Freddie Mac, as well as the loss severities on all mortgages purchased by Freddie Mac which defaulted during the period. The frictionless model does not do well in these tests.