Stock market overreactions to bad news in good times: a rational expectations equilibrium model

This article presents a dynamic, rational expectations equilibriummodel of asset prices where the drift of fundamentals (dividends)shifts between two unobservable states at random times. I showthat in equilibrium, investors' willingness to hedge againstchanges in their own 'uncertainty' on the true state makes stockprices overreact to bad news in good times and underreact togood news in bad times. I then show that this model is betterable than conventional models with no regime shifts to explainfeatures of stock returns, including volatility clustering,'leverage effects,' excess volatility, and time-varying expectedreturns.     

National Health Service Boards of Directors and Governance Models

Abstract

This article reports the findings of a year-long research project focused on the activity of boards of directors of twenty-two trusts from the British National Health Service (NHS). The evidence gathered through the use of semi-structured interviews, focus groups, workshops, feedback questionnaires and document analysis indicates that the behavioural dynamics of boards, affected by the dominance of the expert model, act as antecedents of their statutory functions and the implementation of different governance models. Only a portion of the boards involved has effectively incorporated in its modus operandi post-New Public Management (post-NPM) principles of governance.     

Rational panics and stock market crashes

This paper offers an explanation for stock market crashes which focuses on the role of rational but uninformed traders. We show that uninformed traders can precipitate a price crash because as prices decline, they surmise that informed traders received negative information, which leads them to reduce their demand for assets and drive the price of stocks even lower. The model yields several implications, such as that crashes can occur even when the fundamentals are strong, and that the magnitude of the crash depends on the fraction of uninformed investors and the amount of unsophisticated passive investing present in the market.     

Information Acquisition in Financial Markets

Previous work on information and financial markets has focused on a special set of assumptions: agents have exponential utility, and random variables are normally distributed. These assumptions are often necessary to obtain closed-form solutions. We present an example with alternative assumptions, and demonstrate that some of the conclusions from previous literature fail to hold. In particular, we show that in our example, as more agents acquire information, prices do not necessarily become more informative, and agents may have greater incentive to acquire information. Learning can therefore be a strategic complement, allowing for the possibility of multiple equilibria.     

Labor Income and Predictable Stock Returns

We propose a novel economic mechanism that generates stock returnpredictability in both the time series and the cross-section.Investors’ income has two sources, wages and dividendsthat grow stochastically over time. As a consequence the fractionof total income produced by wages fluctuates depending on economicconditions. We show that the risk premium that investors requireto hold stocks varies with these fluctuations. A regressionof stock returns on lagged values of the labor income to consumptionratio produces statistically significant coefficients and largeadjusted R²s. Tests of the model’s cross-sectional predictionson the set of 25 Fama–French portfolios sorted on sizeand book-to-market are also met with considerable support.     

Managing Environmental Risk in Presence of Climate Change: The Role of Adaptation in the Nile Basin of Ethiopia

This study investigates the impact of climate change adaptation on farm households’ downside risk exposure in the Nile Basin of Ethiopia. The analysis relies on a moment-based specification of the stochastic production function. We use an empirical strategy that accounts for the heterogeneity in the decision on whether to adapt or not, and for unobservable characteristics of farmers and their farm. We find that past adaptation to climate change (i) reduces current downside risk exposure, and so the risk of crop failure; (ii) would have been more beneficial to the non-adapters if they adapted, in terms of reduction in downside risk exposure; and (iii) is a successful risk management strategy that makes the adapters more resilient to climatic conditions.     

Patient and Public Participation in the English NHS: An assessment of experimental implementation processes

This article analyses the impact of the implementation of a set of policies introduced after 1997 in the English National Health Service aimed at increasing patient and public involvement in organizational decision-making processes. Adopting the ambiguity/conflict policy implementation model and based on a year-long research project, it shows that patient and public engagement can be more effectively achieved when there is room for interpretation and discretion in selecting the means for involvement. Local initiatives, based on effective leadership governance mechanisms and organizational learning processes, are more likely to generate inclusiveness, shared ownership, and user-centredness than a top-down framework for involvement.     

Organizing professionals and their impact on performance: the case of public health doctors in the Italian SSN

ABSTRACT

Hybrid professional managers have been associated with improvements in the performance of public sector organizations. However, less attention has been given to differences within this category. Drawing on board human capital theory, we focus on an emerging group of ‘organizing professionals’ with earlier and deeper exposure to management training and education: generalist clinical hybrids drawn from public health in the Italian healthcare system. Specifically, we investigate the impact that these hybrid hospital CEOs have on organizational performance in comparison with other backgrounds. The results indicate that this form of generalist hybrid professionalism has distinct, if not dramatic, consequences for performance.     

Board Heterogeneity and Organisational Performance: The Mediating Effects of Line Managers and Staff Satisfaction

Upper echelons (UE) theory posits that organisational performance reflects the personal values and cognitive frames of the top management team (TMT) and, crucially, that greater heterogeneity in individual backgrounds of senior executives leads to better outcomes. However, often missing from this research is a more developed account of how this relationship between the characteristics of TMTs and performance is also mediated by internal conditions within organisations. In this paper we begin to address this deficiency focusing on the mediating impact of employee satisfaction and the styles and practices of line managers. Looking at the empirical case of English National Health Services acute care hospital trusts, we use a multiple mediation model to analyse the relationship between board heterogeneity, performance and these two (internal) organisational factors. A variance-based structural equation modelling approach (partial least square) is applied to a sample of 102 boards of directors. First, the results lend support to the UE hypothesis that there is a positive impact of board heterogeneity and hospital-level performance. Second, the analysis shows that the relationship heterogeneity–performance is positively influenced by: (a) the styles and practices of line managers; (b) the levels of staff satisfaction; and by their mutually reinforcing roles.     

How Does Information Quality Affect Stock Returns?

Using a simple dynamic asset pricing model, this paper investigates the relationship between the precision of public information about economic growth and stock market returns. After fully characterizing expected returns and conditional volatility, I show that (i) higher precision of signals tends to increase the risk premium, (ii) when signals are imprecise the equity premium is bounded above independently of investors' risk aversion, (iii) return volatility is U-shaped with respect to investors' risk aversion, and (iv) the relationship between conditional expected returns and conditional variance is ambiguous.