The Pricing Effects of Interfirm Cash Tender Offers

The tools provided by option-pricing theory are used to examine the wealth effects of interfirm cash tender offers. The analysis provides evidence consistent with the “synergy” theory of corporate takeovers and has implications concerning the economic effects of regulations of cash tender offers. The analysis further suggests that the market prices information uncertainty in a manner not captured by the standard Capital Asset Pricing Model. The study introduces a technique for unbundling the prices of a primary asset and a contingent claim when only the prices of the combination are observed.     

The Limits of Investor Behavior

Many models use noise trader risk and corresponding violations of the Law of One Price to explain pricing anomalies, but include a storage technology in perfectly elastic supply or unlimited asset liability. Storage allows aggregate consumption risk to differ from exogenous fundamental risk, but using aggregate consumption as a factor for asset returns can make noise trader risk superfluous. Using (i) limited asset liability and limited storage withdrawals, or (ii) an endogenous locally riskless interest rate eliminates violations of the Law of One Price. Our main results use only budget equations and market clearing, and require virtually no assumptions about behavior.     

Beyond Time Discounting

The intertemporal tradeoffs made by most persons appear inconsistent when viewed through the lens of the standard time-discounting model. At different times and in different decision contexts, the same individual will often display behavior suggestive of a wide range of discount rates, from strongly positive (indicative of a lack of concern of future consequences) to strongly negative (implying greater concern for the future than the present). We argue that many of these apparent inconsistencies can be attributed to three aspects of time preference that are not part of the conventional model: decreasing impatience, a preference for sequences of outcomes that improve over time, and preference interactions between consumption and payments.     

PREDATORY PRICING: THE CASE OF THE RETAIL GASOLINE MARKET

Allegations of predatory pricing by large refiners have been made repeatedly by dealers' representatives, who have advocated retail divorcement as a solution. The states of Maryland and Connecticut and the District of Columbia have passed strong divorcement laws, while a host of other state legislatures have considered such laws. Using a special set of price data on refiner-operated stations, and on their competitors in Maryland, this paper tests the hypothesis that refiners have preyed on dealers. The findings, which do not support the hypothesis, deny the validity of the predatory-pricing allegations.     

Large Stakes and Big Mistakes

Workers in a wide variety of jobs are paid based on performance, which is commonly seen as enhancing effort and productivity relative to non-contingent pay schemes. However, psychological research suggests that excessive rewards can, in some cases, result in a decline in performance. To test whether very high monetary rewards can decrease performance, we conducted a set of experiments in the U.S. and in India in which subjects worked on different tasks and received performance-contingent payments that varied in amount from small to very large relative to their typical levels of pay. With some important exceptions, very high reward levels had a detrimental effect on performance.