Liquidity and Autocorrelations in Individual Stock Returns

This paper documents a strong relationship between short‐run reversals and stock illiquidity, even after controlling for trading volume. The largest reversals and the potential contrarian trading strategy profits occur in high turnover, low liquidity stocks, as the price pressures caused by non‐informational demands for immediacy are accommodated. However, the contrarian trading strategy profits are smaller than the likely transactions costs. This lack of profitability and the fact that the overall findings are consistent with rational equilibrium paradigms suggest that the violation of the efficient market hypothesis due to short‐term reversals is not so egregious after all.     

CONTRACTING FOR GOVERNMENT SERVICES: THEORY AND EVIDENCE FROM U.S. CITIES*

Local governments can provide services with their own employees or by contracting with private or public sector providers. We develop a model of this ‘make‐or‐buy’ choice that highlights the trade‐off between productive efficiency and the costs of contract administration. We construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions. Our analysis suggests an important role for economic efficiency concerns, as well as politics, in contracting for government services.     

ARE LONGER SCHOOL SESSIONS A GOOD INVESTMENT?

Educational reform for elementary and secondary schools has become a major industry in the past three years. At the national and state levels, commissions and legislatures have begun to act (e.g., National Commission on Excellence in Education 1983; Task Force on Education for Economic Growth 1983; Griesemer and Butler 1983; U.S. Department of Education 1984). One central recommendation of these reports is to adopt longer school days and longer school years. The most publicized of the reports, "A Nation at Risk," called for seven-hour school days in place of the present five to six hours, and 200-to-220-day school years in place of the typical 180 days at present (National Commission on Excellence in Education 1983, 29). In response, some states have increased already both daily and annual school sessions (U.S. Department of Education 1984). For example, California appropriated $257 billion in 1984 to increase the amount of instruction by about 5 percent.     

Labor Force Participation and Monetary Policy in the Wake of the Great Recession

This paper provides compelling evidence that cyclical factors account for the bulk of the post‐2007 decline in the U.S. labor force participation rate (LFPR). We then formulate a stylized New Keynesian model in which the LFPR is practically acyclical during “normal times” but drops markedly following a large and persistent aggregate demand shock. These considerations have potentially crucial implications for the design of monetary policy, especially when interest rate adjustments are constrained by the zero lower bound; specifically, monetary policy can induce a more rapid recovery of the LFPR by allowing the unemployment rate to fall below its natural rate.     

The Labor Market for Directors and Externalities in Corporate Governance

This paper studies how directors' reputational concerns affect board structure, corporate governance, and firm value. In our setting, directors affect their firms' governance, and governance in turn affects firms' demand for new directors. Whether the labor market rewards a shareholder‐friendly or management‐friendly reputation is determined in equilibrium and depends on aggregate governance. We show that directors' desire to be invited to other boards creates strategic complementarity of corporate governance across firms. Directors' reputational concerns amplify the governance system: strong systems become stronger and weak systems become weaker. We derive implications for multiple directorships, board size, transparency, and board independence.     

QUALITY DISCLOSURE AND COMPETITION*

We analyze costly quality disclosure with horizontally differentiated products under duopoly and a cartel, and characterize the effect of competition on disclosure and welfare. We show that expected disclosure is higher under a cartel than under duopoly, and the welfare comparison depends on the level of disclosure cost: when the disclosure cost is low, welfare is higher under a cartel than duopoly, but when the disclosure cost is high, welfare is higher under duopoly. In either market structure, disclosure is excessive in terms of total surplus, but insufficient in terms of consumer surplus.     

Nonbinding Voting for Shareholder Proposals

Shareholder proposals are a common form of shareholder activism. Voting for shareholder proposals, however, is nonbinding since management has the authority to reject the proposal even if it received majority support from shareholders. We analyze whether nonbinding voting is an effective mechanism for conveying shareholder expectations. We show that, unlike binding voting, nonbinding voting generally fails to convey shareholder views when manager and shareholder interests are not aligned. Surprisingly, the presence of an activist investor who can discipline the manager may enhance the advisory role of nonbinding voting only if conflicts of interest between shareholders and the activist are substantial.     

Words Speak Louder without Actions

Information and control rights are central aspects of leadership, management, and corporate governance. This paper studies a principal-agent model that features both communication and intervention as alternative means to exert influence. The main result shows that a principal's power to intervene in an agent's decision limits the ability of the principal to effectively communicate her private information. The perverse effect of intervention on communication can harm the principal, especially when the cost of intervention is low or the underlying agency problem is severe. These novel results are applied to managerial leadership, corporate boards, private equity, and shareholder activism.     

The Impact of Surplus Schooling on Worker Productivity

Human capital theory suggests that education enhances worker productivity and is reflected in higher individual earnings. We use data from the 1969 Survey of Working Conditions and the 1973 and 1977 Quality of Employment Surveys, and a model derived from the industrial psychology literature, to test the proposition that workers' education in excess of what their jobs require can have adverse effects on job satisfaction and other correlates of worker productivity. Our results support earlier studies that have found surplus schooling has a negative effect on job satisfaction. Our findings also indicate that the negative impact of surplus schooling on job satisfaction and turnover is more significant for workers with a higher level of surplus education. Finally, the negative effects of surplus schooling appear to change over time.