Overconfidence,Compensation Contracts,and Capital Budgeting

A risk‐averse manager's overconfidence makes him less conservative. As a result, it is cheaper for firms to motivate him to pursue valuable risky projects. When compensation endogenously adjusts to reflect outside opportunities, moderate levels of overconfidence lead firms to offer the manager flatter compensation contracts that make him better off. Overconfident managers are also more attractive to firms than their rational counterparts because overconfidence commits them to exert effort to learn about projects. Still, too much overconfidence is detrimental to the manager since it leads him to accept highly convex compensation contracts that expose him to excessive risk.     

STRIKE BEHAVIOUR WHEN MARKET SHARE MATTERS

This paper analyses the dynamics of strike incidence when afirm's market share affects its future profitability. Inventoryaccumulation is assumed to be impossible, so during a strikesales are zero, thereby reducing future demand. Anticipationof the future effects of a strike leads to lower wage settlementsand a lower probability of disagreement. Thus strike incidenceis reduced. Furthermore a recent strike may make a further oneless or more likely, depending on the union's reservation wageand the precise way that market share evolves. This may helpto explain some conflicting empirical results.     

A CONCEPTUAL FRAMEWORK FOR CORPORATE RISK DISCLOSURE EMERGING FROM THE AGENDA FOR CORPORATE GOVERNANCE REFORM

During the last decade an implicit conceptual framework for internal control and corporate risk management has arisen from risk management practice and policy within UK companies. An explicit conceptual framework for risk management is now emerging and is expressed in the Turnbull Report. In this paper, we develop a diagrammatic representation for the conceptual framework for internal control, risk management and risk disclosure. We consider the recent practical and policy developments in the disclosure of risk-related information in order to establish the current state of the art of corporate risk disclosure. Thus, we focus only on the disclosure aspect of the conceptual framework for internal control. We use a questionnaire survey to canvas the attitudes of UK institutional investors towards risk disclosure in relation to their portfolio investment decisions. Our empirical findings indicate that institutional investors do not generally favour a regulated environment for corporate risk disclosure or a general statement of business risk. The respondents agree that increased risk disclosure would help them in their portfolio investment decisions. However, for other aspects of the risk disclosure issue they are more neutral in attitude. Further, we found that the variation in the attitudes of institutional investors appears to be associated with the characteristics of the funds they manage as well as with their investment horizons. Further, we find that institutional investors’ perceptions of corporate governance are related to their investment horizons, among other factors.     

Durable-Goods Monopoly with Varying Demand

This paper solves for the profit-maximizing strategy of a durable-goods monopolist when incoming demand varies over time. We first characterize the consumers' optimal purchasing decision by a cut-off rule. We then show that, under a monotonicity condition, the profit-maximizing cut-offs can be derived through a myopic algorithm, which has an intuitive marginal revenue interpretation. Consumers' ability to delay creates an asymmetry in the optimal price path, which exhibits fast increases and slow decreases. This asymmetry creates an upward bias in the level of prices, pushing them above the price charged by a firm facing the average level of demand. The optimal policy outperforms renting and can be implemented by a time-consistent best-price provision.     

Industry Self‐Regulation: A Game‐Theoretic Typology of Strategic Voluntary Compliance

We analyse the possibility of successful industry self‐regulation in terms of the strategic interactions between industry members and government. In particular, this article presents a game‐theoretic typology of generic self‐regulatory scenarios and evaluates these in terms of the resulting likelihood of collective compliance. We discuss the advertising, press and life insurance industries in the UK as examples of the scenarios. Conclusions for corporate and public policy are offered.     

COMPETITION CAN HARM CONSUMERS*

Duopolists selling differentiated products can generate less consumer surplus than a monopoly selling one of the products. In a Hotelling‐type model where a monopoly supplies more than half of potential consumers, but not all, entry by a rival leads to a duopoly price that is higher than the monopoly price. Consumers in aggregate will be made worse off by such entry when the effect of the price increase outweighs the benefit of extra variety. When consumers have continuous demand functions and firms use two‐part tariffs, duopoly can also result in lower aggregate consumer surplus than monopoly.     

The Cost of Capital and the Relevance of Non-diversifiable Risk

The conventional solutions to the corporate investment decision have been seriously challenged by recent developments in portfolio theory. In this paper, the author argues that, assuming the security market is composed of efficient diversifiers, there is no need, in the evaluation of investment projects, to adjust the time value of money to take account of risk. He concludes that the appropriate cut-off rate for any investment is equal to the yield on a 'risk-free' security such as undated or long-dated Government Stock.