Corporate Finance

This paper examines transfer pricing in multinational firms when individual divisions face different income tax rates. Assuming that a firm decouples its internal transfer price from the arm's length price used for tax purposes, we analyze the effectiveness of alternative pricing rules under both cost- and market-based transfer pricing. In a tax-free world, Hirshleifer (1956) advocated that the internal transfer price be set equal to the marginal cost of the supplying division.

In an environment where trading volume affects security prices and where prices are uncertain when trades are submitted, quasi-arbitrage is the availability of a series of trades that generate infinite expected profits with an infinite Sharpe ratio. We show that when the price impact of trades is permanent and time-independent, only linear price-impact functions rule out quasi-arbitrage and thus support viable market prices. When trades have also a temporary price impact, only the permanent price impact must be linear while the temporary one can be of a more general form.

We model the trade-off between low-asset risk and low leverage to satisfy preferences for low-risk deposits and apply it to interwar New York City banks. During the 1920s, profitable lending and low costs of raising capital produced increased bank asset risk and increased capital, with no deposit risk change. Differences in the costs of raising equity explain differences in asset risk and capital ratios. In the 1930s, rising deposit default risk led to deposit withdrawals. In response, banks increased riskless assets and cut dividends.

Tax evasion, by its very nature, is difficult to observe. We quantify the effects of tax rates on tax evasion by examining the relationship in China between the tariff schedule and the "evasion gap," which we define as the difference between Hong Kong's reported exports to China at the product level and China's reported imports from Hong Kong. Our results imply that a one-percentage-point increase in the tax rate is associated with a 3 percent increase in evasion.

I propose an intertemporal precautionary saving model in which the agent's labor income is subject to (possibly correlated) shocks with different degrees of persistence and volatility. However, he only observes his total income, not individual components. I show that partial observability of individual components of income gives rise to additional precautionary saving due to estimation risk, the error associated with estimating individual components of income. This additional precautionary saving is higher, when estimation risk is greater.

The front-page corporate scandals that erupted in the U.S. economy beginning in 2001—Enron, WorldCom, Tyco, Adelphia, HealthSouth, and others—have undermined confidence in the U.S. business system and raised questions about the effectiveness of corporate governance in the United States.

This paper provides an overview of the regulation of hedge funds and examines the key regulatory issues that now confront regulators throughout the world. In particular, two major issues are examined. First, whether hedge funds pose a systemic threat to the stability of financial markets, and if so, whether additional government regulation would be useful. And second, whether existing regulation provides sufficient protection for hedge fund investors, and, if not, what additional regulation is needed.

We propose an exogenous measure of a country's growth opportunities by interacting the country's local industry mix with global price to earnings (PE) ratios. First, we find that these exogenous growth opportunities strongly predict future changes in real GDP and investment in a large panel of countries. This relation is strongest in countries that have liberalized their capital accounts, equity markets, and banking systems. Second, we re-examine the link between financial development, external finance dependence, investor protection, capital allocation, and growth.

Everyone who has studied international equity returns has noticed the episodes of high volatility and unusually high correlations coinciding with a bear market. We develop quantitative models of asset returns that match these patterns in the data and use them in two quantitative asset allocation analyses. First, we show that the presence of regimes with different correlations and expected returns is difficult to exploit with within a global asset allocation framework focussed on equities. The benefits of international diversification dominate the costs of ignoring the regimes.