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This article presents the report of the Representative to the National Bureau of Economic Research (NBER). Founded in 1920, NBER works toward increasing economic understanding. It achieves this through programs, projects, working papers, books, periodicals, and its Summer Institute. Among the many programs sponsored by the Bureau are those focusing on Aging, Corporate Finance, and Industrial Organization. During 2000 NBER issued a total of 13 books. Periodicals include the monthly "NBER Digest," and the "Reporter."

The article presents commentary from Ananth Madhavan about a paper written by Kumar Venkataraman entitled "Automated Versus Floor Trading: An Analysis of Execution Costs on the Paris and New York Exchanges," which appeared in the August, 2001 issue of the "Journal of Finance." In that paper Venkataraman concluded that automated stock exchanges could not yet match the benefits afforded by floor traders on traditional exchanges. The author of the current paper raises questions about some of Venkataraman's interpretations.

The article presents a report by the American Finance Association representative to the U.S. National Bureau of Economic Research (NBER) concerning the group's activities in programs, projects, and conferences. The article discusses the NBER's programs, which meet twice during the academic year and once at the Summer Institute, covering subjects such as economic fluctuations, labor studies, and industrial organization. The article describes research projects on subjects such as tax exempt debt, Japanese monetary policy, and forecasting business cycles. The article also covers conferences, the Summer Institute, working papers, and books published by the NBER.

This paper estimates the value of tax benefits in 76 management buyouts of public companies completed in the period 1980 to 1986. The median value of tax benefits, estimated at the time the buyout company goes private, has a lower bound of 21% and an upper bound of 143 % of the premium paid to pre-buyout shareholders. The estimated value depends on the rate buyout debt is repaid and the tax rate applied to the interest deductions. The paper also presents evidence on the actual taxes paid and debt repayment rates by these companies after the buyout. The results in this paper suggest that tax benefits are an important source of the wealth gains in management buyouts. [ABSTRACT FROM AUTHOR]

My comments are directed to the paper by Professors Cohn and Lessard, which examines the potential implications for the use of several non-standard forms for residential mortgage instruments in an inflationary economic environment. Overall, the paper represents a modest contribution to the existing literature, containing three especially noteworthy features. First, the paper presents a relatively concise statement about the scope of research activities of the recent MIT-Sloan School Mortgage Market Study. Second, the paper has a relatively careful statement about the design of several "new" alternative non-standard mortgage instruments. Third, the paper discusses in some detail the micro-effects on the borrower in terms of the implied real and nominal payment streams for each of the proposed non-standard mortgages under different long run economic scenarios. [ABSTRACT FROM AUTHOR]

The article discusses the various endeavors of the National Bureau of Economic Research (NBER). Founded in 1920, NBER sponsors and distributes research aimed at furthering economic knowledge. The Bureau maintains several ongoing programs including those specializing in Asset Pricing, Children's Health & Well-Being, and Corporate Finance, among several others. Researchers can explore topics of common interest under the aegis of an NBER Project. Projects ongoing in 1999 focused on such areas as international capital flows, school choice, and Social Security reform. NBER also publishes working papers, periodicals, and books.

The article addresses the democratization of money. The author equates the economic importance of the use of checks or deposit currency with the ability to physically distribute goods through railways. The author considers government intervention into the regulation of deposit currency, as it is beginning to replace the use of currency and coins, which are provided to the public free of charge. The author argues against the criticism that this is a socialization of the banking system by stating that this subsidy would take the place of the costs of generating paper currency and coins, and would strengthen the banking system by the increase in individual bank business.

The article presents commentary from Zhenyu Wang about a paper written by Lubos Pastor and Robert F. Stambaugh (P&S) entitled "The Equity Premium and Structural Breaks," which appeared in the August, 2001 edition of the "Journal of Finance." In that paper P&S combined statistical procedures with economic ideas to estimate the equity premium for stocks in the U.S. The author of the current paper applauds their approach and finds their results sensible. However, he also believes they should incorporate a valuation model based on fundamental economic variables.

The authors respond to comments by Professor Eugene Carter concerning their paper "A Simultaneous Equation Approach to Financial Planning." They state that while matrix inversions are utilized in solving linear simultaneous equations, their own model utilizes nonlinearities that prevent the use of a straight-forward matrix inversion technique. They suggest their own model does a more effective job of portraying financial decision making than other models. They comment on the accuracy of projections for Sears-Roebuck and mention a discussion about if the U.S. Securities and Exchange Commission should permit or require projections in equity prospecti, considering the method for making financial projections is well-developed.

The article comments on the papers "The Changing Role of U.S. Banks in International Financing," by George H. Chittenden, "The International Money Market: Structure, Scope and Instruments," by Fred H. Klopstock, and "The Integration of European Capital Markets," by Oscar L. Altman, all published within the issue. The author looks at changes occurring in European capital markets, international money markets, and commercial bank lending. The movement toward better organized markets for long-term capital in Western Europe is discussed.

The article discusses the important contribution that non-financial institutions make to money markets. The article focuses on the short-term investment practices of non-financial corporations, and outlines any changes in these practices since 1939. The article explains that, because of the significant increase in money-market investment, these investments can have a real impact on the growth of various sectors. The article addresses the determinants of types of securities held by non-financial corporations and trends in corporate short-term investment practices. The author notes that corporate portfolio managers have significant cash for investment, and market growth is evident by the number of companies selling commercial paper directly and sales changes in commercial paper houses.

A discussion of several conference papers that examined monetary policy is presented. The author notes that one of the papers offered a clear argument on the role of monetary policy in international finance. The author also explores the idea of flexible exchange rates and the problems that inflation may present. The author proposes that a deflation of income would actually solve many of the economic problems the U.S. is facing in the postwar period.

Although a number of prior papers have argued the benefits to foreign firms of cross-listing their shares in the U.S., the number of foreign firms exiting U.S. capital markets has been increasing. This has occurred despite the difficulties foreign firms face in deregistering from the Securities and Exchange Commission (SEC). This paper examines the reasons underlying this trend. One of our main findings is that the passage of the Sarbanes-Oxley Act has reduced the net benefits of a U.S. listing and registration, particularly for smaller foreign firms with lower trading volume and stronger insider control. [ABSTRACT FROM AUTHOR]

The article presents a collection of news briefs related to finance in the United States. In 2004 the American Financial Association board authorized a History of Finance project with Stephen Buser named as historian. The 2007 annual meeting of the American Financial Association was held January 5-7 in Chicago, Illinois. Professor Kenneth French was the Program Chair. The American Financial Association and the Department of Finance have entered into a joint venture to maintain and enhance the finance faculty directory on the University's website.

This paper by Kane, Rosenthal and Ljung follows the work of Fama (1975) in examining the adjustment of nominal interest rates to expected inflation. In that piece, Fama presented evidence that was not inconsistent with the joint hypothesis that the real pre-tax rate of interest is constant and nominal interest rates incorporate rational expectations about future inflation. One of the criticisms raised by Nelson and Schwert (1977), among others, about Fama's work has been the low power of his tests. The authors, in this paper, attempt to provide a more powerful test of the Fisher hypothesis using data from six countries, including the U.S. Their main contribution is to shed some light on whether nominal interest rates have fully adjusted to reflect expected inflation for countries other than the U.S. While this provides us with a greater quantity of evidence, the main shortcomings of the paper is that the authors could have provided us with better quality evidence. [ABSTRACT FROM AUTHOR]

A stochastic framework for coordination of macroeconomic policies is introduced in this paper. It is suggested that: (i) measures of policy accountability should allow for the climate of uncertainty that surrounds policy decisions, and (ii) most models of aggregate economic activity impose arbitrary specifications of uncertainty that do not appear to be empirically justifiable. Ambiguities in interpreting the Humphrey-Hawkins reports of policy authorities are sketched in section II; a proposal for maximizing the ex ante prospects of policy objectives is illustrated in section III; finally, nonstationary allocations of uncertainty are discussed in sections IV and V. This paper provides a brief survey of ongoing work by members of the Federal Reserve Board staff on the role of uncertainty in policy forecasts. It suggests that policy discussion could be improved by more explicit consideration of the allocation of uncertainty. [ABSTRACT FROM AUTHOR]

The article comments on a paper published within the issue, "Capital Formation and the Recent Productivity Slowdown," by Peter Clark. The author also discusses results from his own research in "Accounting for United States Economic Growth, 1929-1969," and applies it to Clark's paper. It is suggested that an abrupt rise in energy prices may have affected growth rates during the mid-1970s. The author also looks at a similar analysis made by John Kendrick, who focuses on the U.S. postwar period of 1948-1966.

The question of "Is there a capital shortage?" has two facets. Are we short of capital now and have we been in the recent past? And will there be a capital shortage over the foreseeable future? The papers delivered today deal mostly with the second question. In fact, the plethora of recent literature--both in journals and in the media--that deals with the question of a capital shortage is overwhelmingly concerned with a possible future shortage. True, references to the past are used as a basis for some of the arguments directed toward the need for "doing something" about the problem. [ABSTRACT FROM AUTHOR]

The common theme running through the three papers prepared for this session is the nature and effectiveness of the international balance-of-payments adjustment process. Klein projects the effect of exchange-rate changes on national balance-of-payments positions. Kenen assumes fixed exchange rates and simulates the effects on the U.S. balance of payments of changes in U.S. monetary and fiscal policy. Adler and Stevens analyze the relationship between foreign direct investment by U.S. firms and U.S. exports, and then use their model to simulate the effect of several kinds of policy measures (exchange-rate, tariff and tax-rate changes) on that key aspect of the adjustment process. [ABSTRACT FROM AUTHOR]

The paper by Messrs. Ho and Saunders rationalizes the determination of the Federal funds rate in the context of a micro theoretic model that is relatively rich in institutional detail. For several reasons, I believe that the line of inquiry developed in the paper is of basic significance for the study and modeling of capital markets. In the first place, because it is the closest thing to an instantaneous spot rate that we observe in the actual capital market, the (overnight) funds rate is pivotal in the term structure if expectations matter. Then too, the particular role played by the funds rate in the conduct and interpretation of monetary policy gives it a unique significance in the capital market. It is therefore important that we thoroughly understand the mechanism whereby this rate is determined. Secondly, the funds rate is typically explained in an aggregative framework—i.e., without explicit reference to the actual market in which Federal funds are traded. The funds rate is used variously, for example, to clear the aggregate "market" for bank reserves, or even the market for "money." But this type of analysis does not embody enough institutional detail to be useful for studying the relationship between the funds rate and other short-term rates or for analyzing interesting variations in monetary policy. Finally, those studies which have looked specifically at the market in which Federal funds are traded have been primarily descriptive rather than analytical in nature. Ho and Saunders are clearly aware of these shortcomings in the existing literature, and their paper represents a constructive effort to fill the gaps. [ABSTRACT FROM AUTHOR]

The underlying premise of the Tucker paper is that institutional arrangements must be made, primarily in the form of regulatory changes, such that thrift institutions can be protected from the vagaries of fluctuating interest rates. This view ignores the more fundamental issue of whether it might be desirable to allow the housing sector to continue to play its role as handmaiden to monetary policy by contracting when monetary conditions are tight and expanding when conditions ease. On this issue Gibson (1) has presented rather convincing argument against buffering the housing sector at all. A stronger case should be made for the opposing view, which seems to limit its analysis to the microeconomics of thrift institutions rather than the macroeconomics of the effectiveness of monetary policy. However, the author avoids the issue and chooses to investigate ways in which the maturity differential can be reduced. [ABSTRACT FROM AUTHOR]

The interrelated model provides a useful framework for a time series econometric study of household behavior. This paper summarizes the discussion in a longer paper scheduled for publication. In addition, a suggested extension and some preliminary results are presented. The interrelated model is a generalization of the familiar partial adjustment model. That model suggests that net investment in any period closes some fixed proportion of the gap between desired and actual stock holdings. In the multi-asset generalization, net investment in each asset is determined by the disequilibrium in all other asset holdings, as well as its own disequilibrium. Therefore, the model explains the allocation of wealth among assets, and also the allocation of income to wealth holding as determined by the desired level of asset holding. The extension of the model discussed below restricts the model to the portfolio allocation problem for a given level of total wealth. [ABSTRACT FROM AUTHOR]

A conference paper is presented that focuses on the pricing of new automobile financing. In his research the author uses the cost of the vehicle's credit as the finance rate and argues against the criticism that this is not a measure of pure interest and opts to use the U.S. Federal Reserve System's method for estimating the finance rate. During 1952-1962 sales finance companies competed more heavily with other financial institutions and the car manufacturers' own lenders.

This article presents a discussion on several papers that examined postwar economics in the U.S. The author discusses the government bond holdings of life insurance companies and the common stock shares purchased by colleges and universities with money from endowments. The author also discusses a paper that examined some of the philosophical forces that have shaped investment activity in the U.S. The author explores how the purchasing power theory had been applied by investors in their financial decision making. The author also discusses trends in securities prices following the end of World War II.

The article presents a conference paper in response to another paper published in this same issue titled "Cost of the Marshall Plan to the United States," by Seymour E. Harris. The author notes that Harris may not have had the advantage of reading the 240 page report containing the U.S. President Harry Truman's proposals for European recovery. The author considers the role of financial measures in economic recovery, stabilization loans, and the validity of the cost estimates of the Plan.

Several announcements are presented, including an obituary for Shmuel Kandel, professor and dean at Tel Aviv University, a notice of the establishment of the Morgan Stanley-American Finance Association Award for Excellence in Finance and a notice that the 2008 annual meeting of the American Finance Association is to be held in New Orleans, Louisiana from January 4 through 6.

Myron J. Gordon's paper has an ambitious purpose. It attempts to explain the effects of inflation and real factors on the performance of the U.S. stock market, over the years 1960 to 1980. In doing this, it addresses the empirical finding of the absence of a positive short-run correlation between inflation and a share's holding period rate of return in the U.S. There is no widely accepted explanation for the negative correlation observed between stock market values and inflation (anticipated and unanticipated). However, plausible explanations, some of them competing and some complementary, have been offered. Gordon's paper attempts to evaluate several of the more important of these. That he does not successfully resolve the controversies raised does not mean that he has not furthered the debate. [ABSTRACT FROM AUTHOR]

The article comments on a paper published within the issue, "Taxation and the Incidence of Homeownership Across Income Groups," by Robert H. Litzenberger and Howard B. Sosin. The author feels that this paper is a generally sound framework for the analysis of homeownership incentives, but criticizes the its simplifying assumptions and the lackluster attention given to the impact of inflation. The author discusses the implication that a change in the paper's capital gains tax assumption strengthens the conclusions that are not adequately supported by the presented analysis.

The article comments on a paper published within the issue. "Technology, Communication and the Performance of Financial Markets: 1840-1975," by Kenneth D. Garbade and William L. Silber, investigates the effects of innovations in information technology on security markets. The author discusses two points of criticism regarding the paper in question. He feels that the authors exaggerate the policy significance of their findings. He also believes they overstate their case regarding the importance of the consolidated ticker tape, noting that no impact on inter-market price differentials could be observed. The author feels that the automation of the trading processes is the next logical step for market integration, which is currently under active consideration by the U.S. Securities and Exchange Commission.

The paper is a welcome contribution to comparative economic analysis. The authors conclude that (1) general credit restraint is pervasively associated with more or less severe downturns in new construction, (2) financial stringency affects residential building disproportionately compared to other major sectors of the economy such as industrial investment, and (3) cyclical declines occur "almost regardless of prevailing institutional arrangements" for the financing of housing. Thus, the contraction of new building during tight-money periods seems to be rooted in the "nature of the beast"--the particular sensitivity of housing to changes in financial conditions. We have again learned this morning how difficult it is to specify the nature of the beast more precisely and in a form that lends itself to empirical verification. The Fisher-Siegman paper points up the unresolved issue of credit availability versus cost of funds. If this problem has so far proved to be intractable in a single country--our own--, it is compounded for comparative analysis. Professor Fair's paper stresses the failure of most U.S. housing models to separate clearly demand and supply coefficients, including the financial variables operating on the demand for housing or the supply of new construction or, for that matter, on the volume and price of existing housing offered in the market. We have still some distance to travel for a fuller understanding of the interactions between the mortgage market and the housing market, and the interactions between the mortgage market and the general capital market as well. [ABSTRACT FROM AUTHOR]

The article presents commentary from Robert Lindsay about a paper by Donald P. Jacobs and Almarin Phillips (J&P), "The Commission on Financial Structure and Regulation: Its Organization and Recommendations," which appeared in the May, 1972 issue of the "Journal of Finance." He briefly outlines his understanding of the Commission's report as reported by J&P, and then notes several questions it raises. He wonders why the Commission would permit nonbank institutions to encroach upon certain markets that are traditionally the province of banks, but not others. He is also surprised at how little the Commission's report had to say about monetary policy.

This paper analyzes how the daily opening and closing of financial markets affect trading volume. We model the desire to trade at the beginning and end of the day as a function of overnight return volatility. NYSE data from 1933-88 indicate that closing volume is positively related to expected overnight volatility, while volume at the open is positively related to both expected and unexpected volatility from the previous night. We interpret the symmetric response of trading at the open and the close to expected volatility as being due to investor heterogeneities in the ability to bear risk when the market is closed. This desire of investors to trade prior to market closings indicates a cost of mandating marketwide circuit breakers. [ABSTRACT FROM AUTHOR]

This paper analyzes the behavior of stock prices around ex-dividend days after the implementation of the 1986 Tax Reform Act that dramatically reduced the difference between the tax treatment of realized long-term capital gains and dividend income in 1987 and completely eliminated the differential in 1988. We shows that this tax change had no effect on the ex-dividend stock price behaviour, which is consistent with the hypothesis that long-term individual investors have no significant effect on ex-day stock prices during this time period. The results indicate that the activity of short-term traders and corporate traders dominates the price determination on the ex-day. [ABSTRACT FROM AUTHOR]

For homothetic time and state separable preferences, the coefficient of relative risk aversion (CRRA) is equal to the reciprocal of the elasticity of intertemporal substitution (EIS). This paper shows that when the growth rate of consumption is i.i.d., asset pricing models based upon preferences in which the CHRA and the EIS are no longer linked do not have more explanatory power. Further, in these stochastic environments, estimates of the CHRA in the standard preferences are measures of the true CHRA and not the EIS. These results are fairly accurate descriptions of economies calibrated using United States annual data. [ABSTRACT FROM AUTHOR]

In this paper, we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return-inflation regressions. The evidence shows that the negative stock return-inflation relations proxy for the adverse effects of relative price variability on economic activity, particularly during the seventies, when the U.S. experienced oil supply shocks. Hence, it appears that inflation spuriously affects the stock market in two ways: the aggregate output link of Fama (1981) and the supply shocks reflected in relative price variability. [ABSTRACT FROM AUTHOR]

The paper models the domino effect and defines a measurement for the necessity of banking supervision. The effect of several factors, such as the desired stability of the banking system, its size, the amount of negative externalities that are considered by banks, and supervisory costs, on the necessity of supervision are studied. For instance, it was found that, under certain circumstances, supervision becomes less essential if the number of banks increases. The paper has also emphasized that objective difficulties in the supervision of banks, by simply imposing restrictions on their activities, are intrinsic to the operation of the banks themselves. The paper provides some insight into the current debate as to the necessity or redundancy of supervision and regulation. [ABSTRACT FROM AUTHOR]

A number of reforms have recently been proposed to deal with the perceived problems of the current deposit insurance system. Most of these reforms, such as risk-adjusted pricing of insurance, represent changes which would tend to compel the federal system to operate as if it were a private insurance market. Indeed, one of the suggested reforms is to replace or supplement the current system with one that is entirely private. Most serious observers of the deposit insurance system have taken it for granted that it is necessary to have the government involved in the system, at least as a residual guarantor, in order to provide the credibility necessary to avert runs. In this paper we also take it for granted that some form of government participation in the insurance system is essential. The purpose of this paper is to provide some insight into how a deposit insurance system with substantially enhanced private participation might function. The paper focuses on the determinants of an optimal price for insurance and policy for closing insured institutions. The point of view taken in this paper is that the deposit insurance system may be viewed as an alternative legal mechanism for determining when insolvency has occurred. When insurance is competitively priced, the cost of issuing insured liabilities will reflect the cost of the legal mechanism for determining insolvency which is a part of the insurance system. As a result, insured liabilities will be more attractive than uninsured liabilities if the insolvency system sued by the insurers is less expensive than the one which accompanies other forms of borrowing. Hence, the appropriate price and closure policy depend upon the underlying costs of the mechanism for determining insolvency implicit in deposit insurance. These costs are essentially the costs of measuring the real economic value of insured firms. [ABSTRACT FROM AUTHOR]

The greater availability of daily data in the U.S. has led to a number of studies of the seasonality of daily stock (index) returns. While the studies recognized the potential impacts of nontrading and price-adjustment delays in general, no formal analyses of such impacts were presented; in this paper analytic results are presented for the articulation between these phenomena. The implications of the analysis are discussed and shown to be consistent with a sample of U.K. index data. A modified form of the negative weekend effect is found to be present in the U.K. data analyzed. [ABSTRACT FROM AUTHOR]

Much of the past work on the money-stock market relationship centered on the question of whether money is a leading indicator of stock prices. Studies by Sprinkel, Homa and Jaffee, and Hamburger and Kochin supported the view that past increases in money lead to increases in equity prices. The implication of this work was that investors could earn above normal profits by using a trading strategy based on the observed behavior of the money stock. This contradicts the efficient markets hypothesis which asserts that current asset prices reflect all available information so that no such trading strategy can exist. Subsequent research by Cooper, Pesando, Rozeff, and Rogalski and Vinso has shown that past money changes do not contain predictive information on stock prices, upholding the efficient markets view. This paper investigates whether the response of common stock prices to weekly money announcements is consistent with the efficient markets hypothesis. Unlike the above research, therefore, the focus is on the very short-run response of stock prices to both anticipated and unanticipated announced changes in money. Recent work by Berkman, Grossman, Urich and Wachtel, and Roley indicates that short-term interest rates respond only to the unexpected component of the announcement, with short-term rates rising when the announced change in money exceeds the expected change. Berkman also examined the reaction of stock prices, finding that an unanticipated increase in the money supply depressed share prices. Lynge found that positive money announcements lowered stock prices, but since he did not distinguish expected from unexpected money growth, his results do not bear directly on the efficient markets issue. This paper has examined the short-run reaction of stock prices to weekly money supply announcements. Several conclusions emerge from this empirical investigation. First, stock prices respond only to the unanticipated change in the money supply as predicted by t... [ABSTRACT FROM AUTHOR]

The main objective of this paper was to develop a simple valuation formula for the newly established safe harbor Tax Benefit Transfer lease. With the help of this formula, it was shown that tax benefits derived by the lessor depend in a complex way upon the price paid the lessee in purchasing those benefits. It was further shown how the lease should be priced to divide the overall benefit between the two parties based on any desirable sharing formula. The valuation formula was also used to demonstrate that the magnitude of the joint tax benefit--i.e., the loss of tax revenue to the Treasury--is affected by the way in which that benefit is divided, as well as by the choice of the term of the lease and the interest rate charged on the attached wash loan. A closing discussion provided the rationale for inclusion of the wash loan in the TBT lease valuation. [ABSTRACT FROM AUTHOR]

The primary purpose of this paper is to test a discrete time, consumption-based model of prices of GNMA securities and U. S. Treasury bonds in which the specification of preferences is more general than the logarithmic form and in which minimal structure is imposed on the stochastic processes generating consumption and returns. By focusing on the necessary conditions for intertemporal utility maximization, we are able to estimate the parameters characterizing preferences and test restrictions on the temporal behavior of the prices of GNMAs and U.S. Treasury bonds, without having to solve for the stochastic equilibrium. Our estimates of the preference parameters hopefully will provide guidance for structuring analyses of bond pricing models, which require that preferences be specified a priori. In addition, the issue of whether the relative prices of GNMAs and U.S. Treasury bonds are consistent with the equilibrium model considered can be investigated by testing the cross-sectional restrictions on these prices. This issue is of interest, in part, because it is often suggested that GNMAs are not properly priced relative to Government bonds and other investment alternatives. If this is true, then the GNMA mortgage-backed securities program may not have met its objective of providing individuals with the opportunity to compete for mortgage funds in the capital market on the same terms as the U.S. Government and the corporate sector of the economy. Our analysis provides some evidence on this issue in the absence of auxiliary hypotheses about the production technology or the distributions of variables in the model. [ABSTRACT FROM AUTHOR]

Bankruptcy costs are the deadweight economic costs of firms going bankrupt. They include both ex post bankruptcy costs incurred after a firm's bankruptcy filing, such as transactions costs, and ex ante bankruptcy costs incurred before the filing, such as those resulting from creditors' attempts to reduce their losses if bankruptcy occurs and/or managers' attempts to raise the expected return to equity by increasing the firm's risk. This paper has two purposes. First it proposes a model of bankruptcy costs which focuses on the costs of inefficient decision making before the firm's actual bankruptcy filing. The model implies upper bound expressions for total bankruptcy costs. Second, the new U.S. Bankruptcy Code went into effect late in 1979 and made important changes in bankruptcy reorganization procedures. The paper poses the question of whether the changes made under the new Code tend to raise or lower aggregate U.S. bankruptcy costs. We approach this question by calculating the upper bound expressions suggested by the model, using parameter values from both before and after the new Code took effect. From an economic standpoint, the most important changes instituted under the new Bankruptcy Code had the effect of making it more difficult to reorganize firms in bankruptcy. Previously, it was common for failing firms to file for bankruptcy, but for prior management to continue to operate the firm in much the same form as before. The bankruptcy filing prevented unpaid creditors from suing the firm while a reorganization plan was arranged which cut back most debts. From an economic standpoint, such a procedure was anomalous, since we learn in basic economics that competition in the long-run should cause inefficient firms to go out of business. As long as failing firms are more likely to be inefficient than firms in general, it would seem to be rewarding inefficiency and offsetting the beneficial effects of competition systematically to aid the survival of fai... [ABSTRACT FROM AUTHOR]

The article presents commentary about three papers that were published in the May, 1982 issue of the "Journal of Finance," including "Valuation Model Bias and the Scale Structure of Dividend Discount Returns" by Richard O. Michaud and Paul L. Davis (M&D), "Factor-Related and Specific Returns of Common Stocks: Serial Correlation and Market Inefficiency" by Barr Rosenberg and Andrew Rudd (R&R), and "Risk Adjusted Equity Performance Measurement" by John Nagorniak. The author notes the different conclusion each paper reaches concerning the efficiency of capital markets, and believes all constitute a basis for further research.

Individuals in the United States consistently do most of their saving through financial intermediaries, but over time there have been and continue to be major shifts in people's reliance on specific kinds of intermediary institutions. This paper assesses the potential effects on interest rates, and via interest rates (and asset prices and yields more generally) on nonfinancial economic activity, of four specific shifts in saving behavior: additional pension contributions financed by individuals, additional pension contributions financed by businesses, additional purchases of life insurance by individuals, and additional deposits in thrift institutions by individuals. The paper's results indicate that such shifts, in plausible magnitudes, would have significant effects not only on interest rates and asset-liability flows but also on both the level and the composition of nonfinancial economic activity. In particular, although the specific effects differ from one shift to another, each would disproportionately stimulate capital formation in comparison to other forms of spending. [ABSTRACT FROM AUTHOR]

This paper provides an appropriate framework to evaluate the impact of the universal reserve requirements called for by the new DIDMC Act of 1980. We derived the optimal reserve ratios for a dual banking system under the objective of controlling the monetary aggregates and the level of output. Then optimal reserve requirements were calculated from illustrative money market and macroeconomic parameters since the usual comparative statics were not useful. The results, generally, suggested optimal reserve ratios which were significantly higher than the old dual or the new universal reserve regimes for all targets. However, the calculation of values for the loss functions under various reserve regimes suggests that attainment of r1*, r2*, and t* may not be imperative, since the discrepancy between losses for optimal and various nonoptimal reserve schemes were not large. A major result of this paper, observed for both monetary and real targets, was that the differences in the instability of the targets for the old dual reserve ratios and the Fed's new universal reserve scheme were small. This result clearly suggests that although the DIDMC Act may solve the Federal Reserve's membership problem, it will not significantly enhance the Fed's effectiveness in controlling monetary or real sector aggregates. [ABSTRACT FROM AUTHOR]

In recent years, an increasing interest has been shown in pure discount bonds. A number of papers have looked at corporate capital structure in an option pricing framework, assuming the issuance of pure discount bonds by corporations. Merton has presented a theoretical discussion of the impact of default risk upon pure discount bonds. Racette and Lewellen have argued that long-term pure discount bond issues could present special tax advantages to corporations. Fisher and Weil have suggested that long-term pure discount bonds would be very attractive to holders of bond portfolios in order to immunize these portfolios against changes in interest rates. A similar position is taken by Caks. In spite of the claimed advantages of pure discount bonds from the viewpoint of both potential bondholders and stockholders, in the United States long-term pure discount bonds are not issued by corporations or governments. This paper will provide an explanation of this non-issuance by showing that the tax treatment of original issue pure discount bonds is highly disadvantageous to potential bondholders and firms. U.S. tax law requires the original purchaser of a long-term pure discount bond to amortize as regular income over the bond's life the difference between the purchase price and the face value (to be received at maturity). One purpose of this paper is to show that this tax law implies that, in equilibrium, pure discount bond issue prices would have to be negative for a wide spectrum of tax rates. Corporations would never issue bonds at negative prices, since the corporation would never receive any cash inflows. Secondly, it will be shown that pure discount bonds initially issued at positive prices can subsequently have negative prices if interest rates were to rise. Consequently, such bonds would be very risky to potential purchasers. [ABSTRACT FROM AUTHOR]

Organized futures markets in financial securities were first established in the U.S. on October 20, 1975 when the Chicago Board of Trade opened a futures market in Government National Mortgage Association 8% Pass-Through Certificates. This was followed in January, 1976 by a 90 day Treasury Bill futures market on the International Monetary Market of the Chicago Mercantile Exchange. In terms of trading volume both have been clear commercial successes and this has led to the establishment, in 1977, of futures markets in Long Term Government Bonds and 90-day Commercial Paper and, in 1978, of a market in One-Year Treasury notes and new GNMA markets. The classic economic rationale for futures markets is, of course, that they facilitate hedging—that they allow those who deal in a commodity to transfer the risk of price changes in that commodity to speculators more willing to bear such risks. The primary purpose of the present paper is to evaluate the GNMA and T-Bill futures markets as instruments for such hedging. Obviously it is possible to hedge by entering into forward contracts outside a futures market, but, as Telser and Higinbotham point out, an organized futures market facilitates such transactions by providing a standardized contract and by substituting the trust-worthiness of the exchange for that of the individual trader. [ABSTRACT FROM AUTHOR]

The article comments on three papers within the issue: "Long-Term Effects of Government Deficits on the U.S. Output Potential," by George von Furstenburg, "Capital Formation and the Recent Productivity Slowdown," by Peter Clark, and "U.S. Productivity Growth Recession: History and Prospects for the Future," by Michael McCarthy. The author discusses each article and criticizes their shortcomings. He looks at von Furstenburg's use of the Phelps-Shell model of dynamic economic growth and notes the usefulness of neoclassical growth theory. The author feels that his discussion on the effects of government deficits on output growth or productivity represent a fruitful economic analysis innovation.

This paper presents the results of simulation experiments of an econometric model specifically designed to evaluate the short-run impact of these agencies. The model incorporates, in particular, four features that we feel are critical for evaluating the short-run stabilization activities of these agencies: (i) The model is monthly. To our knowledge, all previous econometric studies in this area have used quarterly or annual models. Since the relevant time span is less than a year, the timing patterns observed on a monthly basis are key. (ii) The model distinguishes carefully between the commitment and mortgage purchase activity of the agencies. We presume that the commitment activity of the agencies provides an initial and powerful stimulant to the housing market, whereas their mortgage purchase activity may substantially offset this initial stimulus. Since the time lag between commitment and purchase can be over a year, this distinction may explain why the agencies can stabilize short-run activity, but without any continuing long-run effect. (iii) The structure of the model differentiates between periods of equilibrium and disequilibrium in the mortgage market. Previous studies have observed that the mortgage interest rate may not at times adjust to clear the market, leading to credit rationing. Our model is specified to include credit rationing effects in both the mortgage and housing markets. This is important because agency interventions may be much more powerful when undertaken during disequilibrium episodes. (iv) The model allows for capital market feedback effects whereby debt issues of the agencies (to finance mortgage purchases) impact capital market interest rates. As a result, rising capital market interest rates will offset a portion of the initial positive impact of agency commitments. The agenda for the paper is as follows. Section II reviews the theoretical foundations of the model, with special emphasis on the features just listed. Section ... [ABSTRACT FROM AUTHOR]