A considerable amount of scholarly attention has been focused on the area of banking structure. There have been a number of studies of banking costs under differing market structures, with the goal of defining an economically “optimal” banking structure. A second major body of research has been directed at identifying the impact of given market structures on performance variables. Finally, a third group of analyses has sought an explanation of the process by which a specific structural phenomenon in banking develops and matures. It is within this third broad category of banking structure research that the results reported in this paper may be classified.

A great deal has been written about the existence of a multi-tiered stock market while little is known about the effects [8], Elia [16,17,18,19,20,21,22], Freund [25], Farrar [23], Klemkosky [29,30], Loomis [32], Robbins [47], Rosenberg [48], Seligman [5], Smidt [55], Soldofsky [56], West and Tinic [67], and Schultz [50]). More recent discussions have considered the current nature of the tiered market (Welles [65,66], Carson-Parker [11], Ang [1], Marcial [36,37,38], Lurie [34], Janeway [27], Buhl [10], and Loomis [33]). While changes may have occurred, we believe a tiered market exists and will continue to influence trading and relative pricing (Elia [17,18,19], Marcial [37,38], and Reilly [45]). Because a multi-tiered stock market will probably continue, it becomes important to determine the effects of the tiered market on the securities and firms involved. Specifically, this paper examines common stocks in one of three market tiers (based on various measures of size), in terms of trading activity, price volatility, and financing characteristics during the 15-year period 1964–1978. The total period is divided into three subperiods representing periods of increasing trading activity by institutional investors. Specifically, the first period is generally prior to the institutional impact, the second is a transitional period, and the recent period is when institutions havebecome the dominant trading group.

Professor Schwartz's [6] attempt to provide an economic model of trade credit is to be applauded. I am in complete accord with his statement [6, p. 656] that “the aggregate importance of trade credit and the economic effects generated by changes in trade credit flows suggest that greater attention should be given to this source of funds.” For too long, thorough qualitative and quantitative analyses applied to the phenomenon of trade credit have been somewhat neglected. In his attempt to remedy this situation, Schwartz is to be complimented.

Previous research has separately addressed the problem of estimating risk in the presence of infrequent trading and the problem of estimating quality-adjusted returns in markets with quality variation in the observed price series. This paper simultaneously addresses both problems by applying a signal extraction method for unequally spaced data to decompose the observed price series with varying times between transactions into a quality-adjusted, permanent component (which would be observable in the absence of quality variation) plus a stationary, transitory quality variation component. Stamp auction transaction prices provide an application. Auction quality grading is treated in a manner analogous to bond ratings. Almost all of the observed variance is attributed to the auction quality variation. The observed auction returns and stock index returns are not well related.

What happens to the price of a put in a period during which the stock price stays constant? The hedging strategy implicit in the Black-Scholes model would seem to imply that the put goes up in value. Pure arbitrage arguments imply the opposite result. This paper resolves the paradox and uses it to explore the restrictions inherent in the diffusion processes assumed for all option pricing models.

This paper describes ways in which computers can be used to help teach elementary college economics. Most of the methods can be implemented with present-day equipment; the rest will prove feasible within a few years. Examples given here are not intended to provide a full or even a representative menu for a beginning course; they simply illustrate some of the more interesting possibilities.

The value of information to the investor is best described by Samuelson [15] in his prologue to the theory of speculation: “…Suppose my reactions are not better than those of other speculators, but rather one second quicker… in a world of uncertainty, I note the consequences of each changing event one second faster than anyone else. I make my fortune not once, but every day that important events happen…” Furthermore, the role of heterogeneous expectations was emphasized by Hirshleifer [7]: “…Speculation…emerges not from differences in individual risk aversion, but rather solely from differences in individual belief as to what the future will reveal.” Thus, information which is always partial and different to different investors, in imperfect markets, is perfectly consistent with the existence of heterogeneity in investors' expectations.

This paper seeks to document some simple and not-so-simple facts. My thesis is that, to an unprecedented degree, Federal Reserve (F.R.) Board Chairman Arthur Burns has engaged himself and the System in political action. Burns' leadership has contributed to politicizing the monetary control process, the dialogue concerning the nature and effects of that process, and perhaps even F.R. decisions themselves. These tactics have reduced the Federal Reserve's power to resist external political influence, a power that Chairman McCabe “bled” for in 1951 and that over the next two decades Chairman Martin labored assiduously to consolidate. On the other hand, this behavior at least maintained and probably increased Burns' standing with President Nixon.

Security markets in major industrial countries have frequently been referred to as close to perfect markets. Probably the highest quality market for a class of securities is the United States government bill market; however, it is also frequently inferred that the United States listed equity market is also a near perfect market. In a perfect market, no opportunities for profit based upon past price movements or any other past data should exist; stocks in a perfect market are always at their proper price except for purely random fluctuations.

We explore the effects of online customer ratings on financial policy. Using a large sample of Parisian restaurants, we find a positive and economically significant relationship between customer ratings and restaurant debt. We use the locally exogenous variations in customer ratings resulting from the rounding of scores in regression discontinuity tests to establish causality. Favorable online ratings reduce cash flow risk and increase resilience to demand shocks. Consistent with the view that good online ratings increase the debt capacity of restaurants and their growth opportunities, restaurants with good ratings use their extra debt to invest in tangible assets.

This paper investigates the optimal sequencing of debt issues. Our theoretical model suggests that once firms issue debt with one level of seniority, they may have an incentive to alternate seniorities, because of violations of the priced absolute priority rule (APR). When we introduce explicit costs of class conflict, the model yields cases of alternating seniorities and other cases in which firms issue only one class of debt. The implications of the model are consistent with the observed regularities in a large database of debt issues. We test several other implications of our model as well.

We develop 50 indices of state-level economic policy uncertainty (SEPU) based on newspaper coverage frequency using 204 million newspaper articles from Mar. 1984 to Dec. 2019. We assess the validity of our measures. Our SEPU indices vary counter-cyclically with respect to state-specific economic conditions, rise before close gubernatorial elections, and exhibit a large cross-sectional variation. We demonstrate that SEPU indices are associated with the cross-sectional variation in state-level GDP, employment, income as well as industry investment decisions. Our findings highlight the importance of economic policy uncertainty at the state level in addition to the nationwide level.

In a sample of non-U.S. regulatory regime shifts, we find that expanded short selling is associated with stock price declines, reductions in capital expenditure, and lower asset growth. In a reversal of results found for U.S. stocks in a study of Regulation SHO by Grullon, Michenaud, and Weston (2015), our results are stronger for large firms than for small firms. We also show that this investment effect is stronger for firms that previously relied on outside financing. Our results suggest that short-sale policies affect corporate investment and that this effect is not driven by capital constraints.

We study how U.S. manufacturing firms’ investment responds to tariff reductions in supplier industries. Our estimates, based on tariff reductions following multinational trade agreements, suggest that a hypothetical 10% reduction of all upstream tariffs would increase downstream investment by 4% to 6%. This estimate is not explained by decreasing uncertainty and stems from tariff reductions for homogeneous and low-R&D inputs, consistent with the investment response resulting from cost reductions rather than superior foreign technology embodied in imported inputs. Evidence from an instrumental variable estimation using the sudden increase in Chinese import penetration suggests that import competition also increases downstream investment.

We view innovation investments as real options and explore the implications of risk (volatility) as well as a newly defined outcome independent measure of ambiguity (Knightian uncertainty) for innovation decisions. The empirical analysis uses stock returns to compute an implementable measure of ambiguity. We also control for risk and other determinants of innovation. We find a consistently significant negative effect of ambiguity on R&D, patents, and citations, as predicted. The effect of risk on R&D is positive and significant, but the corresponding effect on patents and citations is negative and significant. Ambiguity matters more for high-tech firms, consistent with intuition.

Do limitations on commissions paid to financial advisers reduce prices of financial products and stimulate investment? I examine these questions by estimating the causal effects of regulating commissions for mutual fund distribution. I exploit the unique institutional setting in Israel and the 2013 policy change when the government reduced commissions differently for different fund types. The reform led to a major decline in fund expense ratios and a consequent increase in fund flows. Funds with price-sensitive investors experienced 35% larger inflows. I interpret these results as investor responses to price competition fostered by a reduction in distribution costs.

We examine the role of peer (e.g., Lipper manager indices) versus pure (e.g., S&P 500) benchmarks in fund manager compensation. We model their impact on manager incentives and then test those predictions using novel data. We find that 71% of managers are compensated based on peer benchmarks. Consistent with the model, peer-benchmarked fund managers exhibit higher effort generating higher gross performance and collect higher fee income. Analyzing advisors’ choice between benchmark types, we show that peer-benchmarking advisors cater to more sophisticated and performance-sensitive investors, and are more likely to sell through direct channels, consistent with investor heterogeneity and market segmentation.

Existing studies relate the puzzling low average returns on out-of-the-money (OTM) index call and put options to nonstandard preferences. We argue the low option returns are primarily due to the pricing of market volatility risk. When volatility risk is priced, expected option returns match the realized average option returns. Moreover, consistent with its theoretical effect on expected option returns, the volatility risk premium is positively related to future index option returns and this relationship is stronger for OTM options and at-the-money straddles. Finally, we find the jump risk premium contributes to some portion of OTM put option returns.

This article studies the effects of state minimum wage increase on information technology (IT) adoption at the establishment level in the United States. Our results show that treatment establishments on average allocate between $10,328 and $66,808 more per year to their IT budgets during the first 3 years after experiencing significant state minimum wage increases. Additional evidence shows that state minimum wage increases on average lead to an economically small decrease in employment. The estimated employment effect is larger for establishments that have more incentives to automate labor. Our results suggest that establishments adopt technology to countervail increased labor costs.

We find that mortgage loans originated after the adoption of the inevitable disclosure doctrine (IDD; a mechanism discouraging loan officers’ labor mobility) have a lower default probability, a higher loan modification rate, and a lower foreclosure rate. These effects are unaccompanied by any reduction in loan supply and contribute to more stable housing prices. Using the adoption of the Uniform Trade Secrets Act as an alternative identification generates consistent results. Overall, our findings suggest that restricting loan officers’ labor mobility leads to better ex ante screening and ex post monitoring, improving the origination efficiency for U.S. residential mortgage loans.