Corporate Finance

The actions of different agents sometimes reinforce each other. Examples are network effects and the threshold models used by sociologists as well as Harvey Leibensteins's "bandwagon effects." We model such situations as a game with increasing differences, and show that tipping of equilibria, cascading and clubs with entrapment are natural consequences of this mutual reinforcement. If there are several equilibria, one of which Pareto dominates, then the inefficient equilibria can be tipped to the efficient one, a result of interest in the context of coordination problems.

This paper explores the link between financial conditions and economic activity. We first review existing measures, including both single indicators and composite financial conditions indexes (FCIs). We then build a new FCI that features three key innovations. First, besides interest rates and asset prices, it includes a broad range of quantitative and survey-based indicators. Second, our use of unbalanced panel estimation techniques results in a longer time series (back to 1970) than available for other indexes.

Although established money managers operate in an environment which seems competitive, they also seem to be very profitable. The present value of the expected future profits from managing a collection of funds is equal to the value of the assets under management multiplied by the profit margin, assuming that the managed funds will remain in business forever, and that there will be zero asset flow into and out of the funds, zero excess returns net of trading costs, a fixed management fee proportional to the assets under management and a fixed profit margin for the management company.

We study the economic sources of stock-bond return comovements and their time variation using a dynamic factor model. We identify the economic factors employing a semistructural regime-switching model for state variables such as interest rates, inflation, the output gap, and cash flow growth. We also view risk aversion, uncertainty about inflation and output, and liquidity proxies as additional potential factors.

Prices are typically used as proxies for countries' export quality. I relax this strong assumption by exploiting both price and quantity information to estimate the quality of products exported to the U.S. Higher quality is assigned to products with higher market shares conditional on price. The estimated qualities reveal substantial heterogeneity in product markets' scope for quality differentiation, or their "quality ladders." I use this variation to explain the heterogeneous impact of low-wage competition on U.S. manufacturing employment and output.

The preferred risk habitat hypothesis, introduced here, is that individual investors select stocks whose volatilities are commensurate with their risk aversion. The data, 1995-2000 holdings of over 20,000 clients at a large German broker, are consistent with the predictions of the hypothesis: the portfolios contain highly similar stocks in terms of volatility, when stocks are sold they are replaced by stocks of similar volatilities, and the more risk averse customers indeed hold and trade into less volatile stocks.

The so-called Fed model postulates that the dividend or earnings yield on stocks equals the yield on nominal Treasury bonds, or at least that they should be highly correlated. Indeed, there is a strikingly high time series correlation between the yield on nominal bonds and the dividend yield on equities. This positive correlation can be traced to the fact that both bond and equity yields comove strongly and positively with expected inflation.

Recent theoretical work predicts that an important margin of adjustment to deregulation or trade reforms is the reallocation of output within firms through changes in their product mix. Empirical work has accordingly shifted its focus towards multi-product firms and their product mix decisions. Existing studies have however focused exclusively on the U.S.

New goods play a central role in many trade and growth models. We use detailed trade and firm-level data from India to investigate the relationship between declines in trade costs, imports of intermediate inputs and domestic firm product scope. We estimate substantial gains from trade through access to new imported inputs. Moreover, we find that lower input tariffs account on average for 31 percent of the new products introduced by domestic firms.