Selection dynamics and adaptive behavior without much information

This paper uses the experimental method to investigate behavior in a coordination game when the information available to subjects is limited to their feasible choices and their experienced payoffs. In the experiment subjects converge to an absorbing state at rates that are orders of magnitude faster than reinforcement learning algorithms, but slower than under complete information. This state is very close to a mutual best response outcome. All cohorts converged to the market statistic predicted by the interior equilibrium regardless of the information conditions or the stability conditions. Eric Battalio programmed the graphical user interface. The National Science Foundation and Texas Advanced Research Program provided financial support. Any opinions, findings, and conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of the National Science Foundation or the Texas Advanced Research Program.     

Credible assignments in coordination games

This paper uses the experimental method to examine an arbiter's ability to determine the outcome of two-person coordination games. All of the arbiter's assignments in the experiments were strict equilibrium points, but some assignments violated payoff-dominance or symmetry. An assignment that corresponds to the game's outcome is a credible assignment. The experiments test the hypothesis that an assignment to a strict equilibrium is a credible assignment. Our subjects did not find the individual rationality and mutual consistency of an equilibrium assignment to be sufficient reason for implementing the assignment when doing so conflicts with payoff-dominance or symmetry.     

Taxation of shareholder capital gains and the choice of payment method in takeovers

From December 1999, shareholders who disposed of shares in Australian takeovers in exchange for scrip could elect to defer capital gains taxation until the disposal of the shares received. We investigate payment method choice by acquiring firms before and after this regulatory change to assess whether target shareholder capital gains tax liabilities became an important factor considered in choosing the form of payment. The results show that, subsequent to the regulatory change, there is a significantly higher probability that equity will be offered as consideration where target shareholder capital gains are greater. This finding confirms the importance of shareholder level taxation in explaining corporate acquisition structure and adds to previous European and US evidence on factors associated with payment method choice in takeovers.     

Decision usefulness of whole-asset operating lease capitalizations

Monson (2001) and Hepp and Scoles (2012) argue that some leased assets should be capitalized at the assets' purchase price (whole-asset value) rather than at the present value of future minimum lease payments (right-of-use asset value). The argument is based in part on the notion that the assets under lease generate future income not the obligation related to future lease payments. To test the notion we compare associations between capitalizations representing whole asset values and current and future return on assets (ROA) and return on equity (ROE) with capitalizations representing right-of-use asset values and current and future ROA and ROE. Our results indicate that the whole-asset annuity values are incrementally associated with future ROA and ROE over right-of-use asset values. We interpret our results to suggest that the current practice of capitalizing future lease payments does not fully reflect the income generation provided by leased assets.     

The Effects of Ambiguous Information on Initial and Subsequent IPO Returns

Newly public companies must disclose significant risk factors in the offering prospectus. These disclosures are examples of “soft” or ambiguous information. Ambiguity models predict that investors will alter their portfolio weights and react to subsequent signals about such information. We test for these effects in a sample of 1,398 initial public offerings (IPOs) using word count ratios between soft and hard information as measures of ambiguity. We find a significant relationship between the soft information on risk and both initial and ex post measures of returns. These results support the view that soft information embeds ambiguity and that it influences investors’ portfolio choices.     

Credible assignments can improve efficiency in laboratory public goods games

This paper reports an experiment investigating how assignments improve economic efficiency in a modified version of the standard voluntary-contributions mechanism. The experiment uses a non-binding message that makes common information assignments in the repeated game. A credible assignment is one actually followed by the participants. It turns out to be difficult to credibly assign the symmetric efficient outcome in four person cohorts, but we did discover one assignment that was credible in the last match of the evolutionary repeated game.     

Stock market volatility,the news,and monetary policy

The dynamic relationship linking the volatility of equity prices with “the news” and the expected path for monetary policy is investigated. Previous results that link the impact of the news about real activity to changes in current and future interest rates are employed in developing a positive link between changes in volatility and the news. Empirically, our results uncover a positive and statistically significant response of the CBOE volatility index, VIX, to unanticipated changes in employment, but not to inflation. Hence, agents' expectations for the policy response to news have an important influence on the expected volatility of stock prices. (JEL E44, E52)