AN EMPIRICAL INVESTIGATION OF ASYMMETRIC BEHAVIOR IN CORPORATE DIVIDEND POLICY

Employing three alternative measures of ability to pay, we find support for the Lintner hypothesis that firms pursue a long-run target payout ratio and also that current earnings better explain long-run dividends than cash flows or stock prices. The evidence further indicates that corporations adjust dividends with a ratchet effect, raising them more readily than they lower them. More specifically, when dividends are below target levels, firms move toward equilibrium by increasing them, but when dividends are above target levels, firms approach equilibrium by restricting dividend increases as earnings rise.     

ASYMMETRIC INFORMATION AND THE EXCESS VOLATILITY OF STOCK PRICES

Evidence suggests the volatility of stock prices cannot be accounted for by information about future dividends. We argue that some of the volatility of stock prices in excess of fundamentals results from fluctuations in the amount of public information over time. Our model assumes that dividends and consumption are constant in the aggregate but that there are good firms and bad firms whose identity may be unknown to the public, as in Akerlof's "lemons" problem. In that case, the collective valuation of the constant dividend stream depends on the degree of informational asymmetry.     

The credit channel of monetary policy transmission: evidence from stock returns

This paper offers a novel test of the credit view of the monetary policy transmission mechanism using stock market returns. We identify Fed policy shocks using newspaper accounts and track daily stock prices immediately following the shocks. If the credit channel is important, then firms that are dependent on bank credit and internal funds should receive a relatively greater benefit (loss) from a Fed easing (tightening) than firms with access to nonbank credit at favorable terms. We identify ten policy shocks during the expansion of 1993-94 and the 'credit crunch' period of the 1990-91 recession and find little evidence supportive of an operative credit channel.     

How age discrimination in employment affects stockholders

We analyze the impact on stock prices, and thus on stockholders, of 84 newspaper announcements regarding corporate age discrimination lawsuits. We find that, on average, initial announcements cause a 2 percent decline in stock price, a $40 million average loss in total stock value for the large firms charged. The stock price decreases are consistent with investor concerns about the firms’ ability to attract and retain good employees given the discrimination charges. Though age discrimination in employment is a pervasive and growing problem, such findings may discourage managers from engaging in discriminatory practices. The authors thank Jane Blank and Malcolm Matthew for helpful comments. This research was supported by a University of Windsor Research Board Grant.     

EMPIRICAL EVIDENCE ON ON VERTICAL FORECLOSURE

Recent papers have shown conditions under which vertical mergers can result in anticompetitive foreclosure of unintegrated rivals. One implication of these models is that a necessary condition for anticompetitive foreclosure is that unintegrated rival firms are less profitable after a vertical merger. We test this hypothesis by examining the stock prices of unintegrated rivals at the time of a vertical merger announcement and at the time of a government antitrust complaint. We find no evidence to support the foreclosure hypothesis.     

IDENTIFYING THE ROLE OF RISK SHOCKS IN THE BUSINESS CYCLE USING STOCK PRICE DATA

I analyze the sources of U.S. business cycle fluctuations in an estimated Dynamic Stochastic General Equilibrium model with a rich set of nominal and real rigidities and various exogenous disturbances. The model includes a shock to the expected risk‐premium, which introduces a time‐varying wedge between the policy rate set by the central bank and the cost‐of‐capital of firms. In the aggregate data, most U.S. corporations finance their investment using internal funds, and stock prices reveal the opportunity cost of this type of financing. I therefore use corporate market value and dividend data in the Bayesian estimation of the model to identify risk shocks. Variance decomposition exercises show that these shocks account for a substantial part of the variation in the stock market, as well as the variation in output and investment, especially at short forecast horizons. The variation of these variables at longer forecast horizons are mainly captured by shocks to investment‐specific technological change. Historical decomposition points to the important role played by risk shocks in the run up of stock prices and output in the late 90s, and in the reversal of these variables in the early 2000s and during the recent recession. (JEL E32, E44)     

Stock Market and Aggregate Investment Behavior in Malaysia: An Empirical Analysis

The present paper analyzes the role of stock market, more specifically real stock prices and stock market uncertainty/volatility, on aggregate investment behavior for an emerging market, Malaysia. Employing the autoregressive distributed lags approach to cointegration test, the paper establishes a long run equilibrium that ties the aggregate investment to its determinants—real income, real stock prices, real lending rate and stock market volatility. In the long run, we document a positive relation between aggregate investment and real stock prices and a negative relation between aggregate investment and stock market volatility. These results are further supported by our analyses of their dynamic interactions based on Granger causality and impulse-response functions. Based on the results, the real stock market prices, which has yet reached the level recorded prior to the crisis, may have explained the low investment in Malaysia after the Asian crisis. Moreover, the stock market volatility can also post a threat to the investment performance.     

ACQUISITION AND DISSEMINATION OF INFORMATION IN IMPERFECTLY COMPETITIVE MARKETS

In imperfectly competitive markets, incentives for the acquisition and dissemination of information by prices is significantly affected by strategic considerations. Since prices reveal information, firms possessing market power may choose to set prices which are either biased or not adjusted to all available information so as to distort their information content. Even when information is costlessly available strategic considerations may lead firms to remain uninformed. These results are illustrated in a simple Stackelberg model with price-setting firms where the pricing game is preceded by an information acquisition game.     

RATIONAL BUBBLES IN THE STOCK MARKET: ACCOUNTING FOR THE U.S. STOCK-PRICE VOLATILITY

Can rational stochastic asset bubbles help explain the excess volatility of stock prices? The bubble considered here is treated as an unobserved state vector in the state-space model and is easily estimated using the Kalman filter. I find that the bubble components estimated account for a substantial portion of US. stock prices, and the model does a credible job in fitting the data, especially during several bull and bear markets in this century. Much of the deviation of stock prices from the present-value model are captured by the bubble.     

A common-features analysis of Amsterdam and London financial markets during the eighteenth century

We examine the financial linkage between the London and Amsterdam financial markets using stock prices recorded in each market over the period 1723-94 in conjunction with tests for common trends, cycles, and regime shifts. These tests reveal a surprising degree of integration between the markets as their prices move together in both the short and long run. Moreover, shocks to the assets translate quickly and accurately between markets. It also appears that Dutch investment did not destabilize London markets and stock prices in London were the primary determinant of prices in Amsterdam.     

Catalog competition: Theory and experimental evidence

This paper compares the standard location-then-pricing Hotelling duopoly with a catalog competition game in which firms simultaneously decide locations and prices. We consider a three-location space and continuous pricing and fully characterize the unique symmetric equilibrium. In both games, firms employ mixed strategies, producing a mainstream product more often than a specialized one. In the catalog game, prices are always above the marginal cost of production, whereas in the sequential model, prices converge to the marginal cost when firms produce the same variety. We experimentally test our theoretical predictions in the laboratory, finding strong evidence in favor of most of them.     

HORIZONTAL MERGERS IN THE PRESENCE OF CAPACITY CONSTRAINTS

We examine a merger between two competitors in a Bertrand‐Edgeworth model. We find that the effects of merger depend on the tightness of capacity constraints. The combination of two firms has no price effect if and only if the capacity constraints of all firms are binding both before and after the merger. However, a merger may turn a binding capacity constraint into a slack one, which results in higher prices. In an industry where excess capacity drives the premerger prices of all firms to the marginal cost, a merger may cause prices to rise even though aggregate capacity remains constant. (JEL L13, L40)     

SOME EFFECTS OF OWNERSHIP ON THE WHOLESALE PRICES OF ELECTRIC POWER

Differences in the property rights which distinguish government-owned and privately-owned, government-regulated business firms imply that government-owned electric utilities sell wholesale electric power at lower prices and buy it at higher prices than similarly-situated private firms. The hypotheses were tested using cross-section data. The results are generally favorable and suggest that the approach is fruitful.     

TRACKING CUSTOMER SEARCH TO PRICE DISCRIMINATE

The electronic technologies of the Internet make it possible for sellers to track potential customers and discriminate between the informed and uninformed. In this article, we report an experiment that investigates the market impact of firms tracking customers and offering discriminatory prices based on search history. We find that consumers, on average, face the same prices when sellers have the ability to track customers and price discriminate as when sellers post a single price for all buyers. However, informed buyers receive lower prices when sellers can detect buyer search, whereas uninformed buyers receive lower prices when firms cannot track customers. (JEL D43 , L13 , C92 )     

Stock Market Wealth and Consumer Spending

This article investigates the effects of stock market wealth on consumer spending. Traditional macroeconometric models estimate that a dollar's increase in stock wealth boosts consumption by three to seven cents. With the substantial 1990s rise in stock prices, the nature and magnitude of this "wealth effect" have been much debated. After describing the issues and previous research, I present new evidence from a well‐known consumer survey. The results are broadly consistent with life‐cycle saving and a modest wealth effect: most stockholders reported no appreciable effect of stock prices on their saving or spending, but many mentioned "retirement saving" in explaining their behavior.     

PRICE COMPETITION UNDER COST UNCERTAINTY: A LABORATORY ANALYSIS

We study the relation between the number of firms and price-cost margins under price competition with uncertainty about competitors' costs. We report an experiment in which two, three, and four identical firms repeatedly interact in this environment. In line with the theoretical prediction, market prices decrease with the number of firms, but on average stay above marginal costs. Pricing is more aggressive than in equilibrium. Absolute and relative surplus increases with the number of firms. Total surplus is close to the equilibrium level, because enhanced consumer surplus through lower prices is counteracted by occasional displacements of the most cost-efficient firm. (JEL C90 , C72 , D43 , D83 , L13 )     

How unions affect shareholder wealth in firms announcing layoffs

We investigate whether investor anticipation of future performance differs between union and nonunion firms following corporate layoff announcements. Using event-study methodology and multivariate regression analysis, we find that the stock market reaction to layoff announcements is negatively related to nonunion firms and positively related to union firms.     

STOCK PRICE EFFECTS OF PERMANENT AND TRANSITORY SHOCKS

This paper exploits the long-run equilibrium relationship between stock prices and dividends, implied by the present value model, to structurally identify a dynamic model that governs the behavior of stock prices. The innovations to the data are dichotomized into those that leave a permanent imprint on both series and those that have only transitory effects. Unlike previous studies, however, we do not impose arbitrary identifying restrictions to decompose the joint process, restrictions that may not be consistent the data. ( JEL C12, C32, E24)     

IMPERFECT COMPETITION AND BASING-POINT PRICING

This article investigates the relationship between imperfect competition and basing point pricing. Basing-point pricing can emerge if firms at the base site are Bertrand competitors, firms at non-base locations are less than perfectly competitive with each other and are von Stackleberg leaders with respect to base site production, and the products produced at the base and non-base locations are perfect substitutes. Basing-point pricing is associated with competitive prices by base site firms but with markups by non-base site firms equal to their phantom freight charges.     

Automated Pricing Rules in Electronic Posted Offer Markets

Internet markets are heralded as enhancing efficiency by providing buyers and sellers with an abundance of information. In these electronic markets, firms have the opportunity to employ "pricebots," computerized algorithms that automatically adjust prices to prevailing market conditions. This article uses laboratory methods to examine the potential market impact of the endogenous selection of three automated pricing algorithms: undercutting, low-price matching, and trigger pricing. We find that the undercutting algorithm leads to prices similar to the game-theoretic prediction. Low-price matching generates significantly higher prices, and trigger pricing results in market prices below the game-theoretic prediction.