How Does Size Affect Mutual Fund Behavior?

If actively managed mutual funds suffer from diminishing returns to scale, funds should alter investment behavior as assets under management increase. Although asset growth has little effect on the behavior of the typical fund, we find that large funds and small‐cap funds diversify their portfolios in response to growth. Greater diversification, especially for small‐cap funds, is associated with better performance. Fund family growth is related to the introduction of new funds that hold different stocks from their existing siblings. Funds with many siblings diversify less rapidly as they grow, suggesting that the fund family may influence a fund's portfolio strategy.     

A Cross‐national Comparison of R&D Expenditure Decisions: Tax Incentives and Financial Constraints*

We provide evidence on the impact of tax incentives and financial constraints on corporate R&D expenditure decisions. We contribute to extant research by comparing R&D expenditures in the United States and Canada, thereby exploiting the differences in the two countries' R&D tax credit mechanisms and generally accepted accounting principles. The two tax incentive mechanism designs are consistent with differing views of the degree of financial constraints faced by firms in these economies. Our sample also allows us to explore the effects of capitalizing R&D on Canadian firms. Employing a matched design, we document relations between tax credit incentives and R&D spending consistent with both Canadian and U.S. public companies responding as though they are not financially constrained. We estimate that the Canadian credit system induces, on average, $1.30 of additional R&D spending per dollar of taxes forgone while the U.S. system induces, on average, $2.96 of additional spending. We also find that firms that capitalize R&D costs in Canada spend, on average, 18 percent more on R&D. Collectively, this evidence is important to the ongoing debates in both countries concerning the appropriate design of incentives for R&D and is consistent with the assumptions found in the U.S. tax credit system, but not those found in the Canadian system.     

Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation

Standard models of informed speculation suggest that traders try to learn information that others do not have. This result implicitly relies on the assumption that speculators have long horizons, i.e., can hold the asset forever. By contrast, we show that if speculators have short horizons, they may herd on the same information, trying to learn what other informed traders also know. There can be multiple herding equilibria, and herding speculators may even choose to study information that is completely unrelated to fundamentals.     

Are Co-integrated Stock Prices Consistent with the Efficient Market Hypothesis?

This paper responds to the unsatisfactory argument that there is no correspondence between co-integration and the efficient market hypothesis. A law of one co-integrating vector of prices is proposed for the exchange rate and domestic and overseas stock prices. Markets must therefore be efficient in long-run equilibrium because no arbitrage opportunities exist. However, arbitrage activity via the disequilibrium error correction allows above-average (risk-adjusted) returns to be earned in the short run. The elimination of these arbitrage opportunities means that stock market inefficiency in the short run ensures stock market efficiency in the long run.     

COMMON PROPERTY AS AN INSTITUTIONAL RESPONSE TO ENVIRONMENTAL VARIABILITY

Relationships between the potential productivity of land and property rights generally are couched in terms of measures of central tendency or means. However, risk or variance as a measure of uncertainty also is critical in relating property rights and organizational arrangements developed within various property regimes. Meteorological and hydrological research results support the appropriateness of risk-spreading property regimes, especially in semi-arid and arid lands. Spatial diversification models indicate that common property regimes can be a rational response to environmental variability. Efforts by the public sector to privatize and fence grazing lands on the extensive margin may have limited appeal to pastoralists throughout the world .     

Social Discount Rates from Stratospheric Ozone Control*

We develop a model of optimal project timing to infer the discount rate US residents attach to investments in stratospheric ozone preservation. In this model, the calendar date at which preservation-related benefits offset costs is shown to be an increasing function of the real social rate of time preference. Estimates of US costs and benefits associated with the original (1987) Montreal Protocol are used to determine a range of discount rates from the US control of stratospheric ozone depletion. From this example the range is about 3.0 to 8.77 per cent.     

What Explains the Stock Market's Reaction to Federal Reserve Policy?

This paper analyzes the impact of changes in monetary policy on equity prices, with the objectives of both measuring the average reaction of the stock market and understanding the economic sources of that reaction. We find that, on average, a hypothetical unanticipated 25‐basis‐point cut in the Federal funds rate target is associated with about a 1% increase in broad stock indexes. Adapting a methodology due to Campbell and Ammer, we find that the effects of unanticipated monetary policy actions on expected excess returns account for the largest part of the response of stock prices.     

Evidence on the Timing and Determinants of Overfunded Pension Plan Termination

This paper examines the factors associated with the timing of overfunded pension plan termination.