EVALUATING TAX REFORMS IN THE PRESENCE OF EXTERNALITIES

According to the double-dividend hypothesis, revenue-neutralgreen tax reforms are expected both to improve the quality ofthe environment and to reduce the existing tax distortions.This paper develops welfare measures which are used to estimatethese dividends separately. It is shown that the existing taxsystem and the choice of the tax rate cuts which accompany anincrease in green taxes have considerable impact on the magnitudeof the environmental dividend. Even a negative impact cannotbe ruled out. Furthermore, the welfare measures allow us toanalyse the trade-off between the two dividends and to identifywelfare-improving tax reforms.     

Aggregate Earnings and Asset Prices

A principal-components analysis demonstrates that common earnings factors explain a substantial portion of firm-level earnings variation, implying earnings shocks have substantial systematic components and are not almost fully diversifiable as prior literature has concluded. Furthermore, the principal components of earnings and returns are highly correlated, implying aggregate earnings risks and return risks are related. In contrast to previous studies, the correlation we report between the systematic components of earnings and returns is stable over time. We also show that the earnings factors are priced, in the sense that the sensitivities of securities' returns to the earnings factors explain a significant portion of the cross-sectional variation in returns, even controlling for return risk. This suggests earnings performance is an underlying source of priced risk. Our evidence that the information sets of returns and earnings are jointly determined implies cash flow risk and return risk are not fully separable, and raises the possibility that it is the common variation of earnings and returns that is priced.     

Race, Ethnicity, Union Attitudes, and Voting Predilections

The research reported here investigates, in a sample of approximately 500 persons, the relationship between individuals' race and/or ethnicity and their union-related attitudes and union vote propensity. As measured by scores on union instrumentality, big labor image, and union governance questions, blacks have the most favorable attitudes toward unions, Hispanics the least favorable. Logistic multiple regression results indicate no difference in union-joining propensity attributable to ethnicity, although several other variables are found to be significantly related to joining predilections.     

Intraday Patterns in the Cross‐section of Stock Returns

Motivated by the literature on investment flows and optimal trading, we examine intraday predictability in the cross‐section of stock returns. We find a striking pattern of return continuation at half‐hour intervals that are exact multiples of a trading day, and this effect lasts for at least 40 trading days. Volume, order imbalance, volatility, and bid‐ask spreads exhibit similar patterns, but do not explain the return patterns. We also show that short‐term return reversal is driven by temporary liquidity imbalances lasting less than an hour and bid‐ask bounce. Timing trades can reduce execution costs by the equivalent of the effective spread.     

Analyst Disagreement,Mispricing, and Liquidity*

This paper documents a close link between mispricing and liquidity by investigating stocks with high analyst disagreement. Previous research finds that these stocks tend to be overpriced, but that prices correct downwards as uncertainty about earnings is resolved. Our analysis suggests that one reason mispricing has persisted through the years is that analyst disagreement coincides with high trading costs. We also show that in the cross‐section, the less liquid stocks tend to be more severely overpriced. Additionally, increases in aggregate market liquidity accelerate the convergence of prices to fundamentals. As a result, returns of the initially overpriced stocks are negatively correlated with the time series of innovations in aggregate market liquidity.     

Welfare Stigma Re‐Examined

We dissect welfare stigma into two types: traditional and statistical, and show that the latter can be employed as a desirable form of a welfare ordeal, as its costs are positively correlated with ability.     

Understanding Stock Price Volatility: The Role of Earnings

In an efficient capital market, asset prices vary when investors change their expectations about cash flows, discount rates, or both. Using dividends to measure cash flows, previous research shows that the aggregate dividend‐price ratio varies due to changes in expected discount rates (returns) rather than expected cash flows. In contrast, using accounting earnings instead of dividends as a measure of cash flows, this paper shows that as much as 70% of the variation in the dividend‐price ratio can be explained by changes in expected earnings. Moreover, the paper documents a significant negative correlation between expected returns and expected earnings, suggesting that variations in a common factor to both may generate significant price volatility. The results are consistent with the dividend‐policy irrelevance hypothesis.     

Tax Progression under Collective Wage Bargaining and Individual Effort Determination

We study the impact of tax policy on wage negotiations, workers’ effort, employment, output, and welfare under imperfectly observable effort. A higher degree of tax progression always leads to wage moderation, but the well‐established result from the wage bargaining literature that a revenue‐neutral increase in the degree of tax progression is good for employment does not carry over to the case with wage negotiations and imperfectly observable effort. Introducing tax progression increases employment and output, but we cannot rule out that the negative effort effect of increasing tax progression will lead employment to fall when tax progression is already high.