To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation

Data on corporate governance and disclosure practices reveal wide within‐country variation that decreases with the strength of investors' legal protection. A simple model identifies three firm attributes related to that variation: investment opportunities, external financing, and ownership structure. Using firm‐level governance and transparency data from 27 countries, we find that all three firm attributes are related to the quality of governance and disclosure practices, and firms with higher governance and transparency rankings are valued higher in stock markets. All relations are stronger in less investor‐friendly countries, demonstrating that firms adapt to poor legal environments to establish efficient governance practices.     

What Shapes Assessment of Ability to Pay for Children's College Education?

Many parents have concerns about the cost of their child's college and lack information about preparing for those expenses. Parents' assessment of ability to pay for college are likely to influence their investments in a child's education, and may in turn affect the child's educational commitment and attainment. These potential outcomes lead us to investigate what accounts for parents' assessment. We use logistic regression to analyze data collected from mothers with newborn children (N = 2,566). The findings demonstrate that the mother's assessment of ability to pay for the child's education are significantly associated with material hardship experiences, financial management skills, educational expectations, and her education level. We discuss research and policy implications of promoting positive financial assessment for college early.     

ESTIMATING PRODUCTIVITY GROWTH IN THE KOREAN ECONOMY WITHOUT RESTRICTIVE ASSUMPTIONS

This study eliminates the effects of markup, returns to scale, and capital utilization from the Solow residual (SR) for Korea to derive an alternative measure for productivity. Empirical results show that markup generates significant bias in the SR, and that the alternative productivity measure is greater than the residual. Furthermore, money supply Granger‐causes the SR but does not Granger‐cause the alternative measure, suggesting that the new productivity measure is consistent with the neutrality of money. The results contradict the presumption that the SR with variable capital utilization represents true technology shocks because it is orthogonal to demand shocks.(JEL C32, E32, O47)     

Disappearing Dividends: Implications for the Dividend–Price Ratio and Return Predictability

The conventional dividend–price ratio is highly persistent, and the literature reports mixed evidence on its role in predicting stock returns. We argue that the decreasing number of firms with a traditional dividend‐payout policy is responsible for these results, and develop a model in which the long‐run relationship between the dividends and stock price is time varying. An adjusted dividend–price ratio that accounts for the time‐varying long‐run relationship is considerably less persistent. Furthermore, the predictive regression model that employs the adjusted dividend–price ratio as a regressor outperforms the random‐walk model. These results are robust with respect to the firm size.     

Sticks or Carrots? Optimal CEO Compensation when Managers Are Loss Averse

This paper analyzes optimal executive compensation contracts when managers are loss averse. We calibrate a stylized principal‐agent model to the observed contracts of 595 CEOs and show that this model can explain observed option holdings and high base salaries remarkably well for a range of parameterizations. We also derive and calibrate the general shape of the optimal contract that is increasing and convex for medium and high outcomes and that drops discontinuously to the lowest possible payout for low outcomes. Finally, we identify the critical features of the loss‐aversion model that render optimal contracts convex.