Effects of the Fiscal Treatment of Tax Losses on the Efficiency of Markets and the Incidence of Mergers

Nous passons en revue dans cette étude les principales questions touchant la transférabilité des pertes fiscales en cas de changement de contrôle d'une entreprise. L'opportunité d'autoriser ou non le transfert des pertes fiscales dépend de l'efficacité du marché des prises de contrôle. Si les prises de contrôle accroissant l'efficacité sont trop peu nombreuses, il convient de les - subventionner - . Si, au contraire, les prises de contrôles sont trop nombreuses (sous l'angle de l'efficacité), il convient de les taxer sous une forme quelconque. Dans un cas comme dans l'autre, le régime de transférabilité des pertes fiscales peut servir à atteindre l'objectif visé. Trois aspects sont abordés ici : (1) l'opportunité d'autoriser le transfert des pertes fiscales en cas de changement de contrôle d'une entreprise; (2) l'opportunité d'autoriser ce transfert uniquement lorsque le type d'activité reste le même; (3) l'opportunité d'autoriser l'utilisation des pertes au même rythme qu'avant la fusion. Ces questions seront analysées dans le contexte du contrôle exercé par les directions d'entreprise, de la concurrence sur le marché des produits, des décisions de financement, ainsi que des décisions d'investissement et de la prise de risque.This paper surveys the major issues regarding the transferability of tax losses upon a change of control. Whether tax losses should be transferable or not depends on whether the market for corporate control is efficient or not. If there are too few efficiency-enhancing takeovers, then takeovers should be - subsidized - . If, on the contrary, there are too many takeovers (from an efficiency point of view), then takeovers should somehow be taxed. In either case, the transferability of tax losses may be an instrument for doing so. Three aspects are considered: (1) whether tax losses should be transferred upon a change of control or not, (2) whether the transfer should be restricted to the same line of business or not, and (3) whether losses should be used at the same speed at which they were (to be) used pre-merger or not. These issues are then discussed in the context of managerial control, product market competition, financing decisions, and investment decisions and risk-taking

Sunk cost accounting and entrapment in corporate acquisitions and financial markets : an experimental analysis

Sunk cost accounting refers to the empirical finding that individuals tend to let their decisions be influenced by costs made at an earlier time in such a way that they are more risk seeking than they would be had they not incurred these costs. Such behaviour violates the axioms of economic theory which states individuals should only consider incremental costs and benefits when executing investments. This dissertation is concerned whether the pervasive sunk cost phenomenon extends to corporate acquisitions and financial markets. 122 students from the University of St Andrews participated in three experiments exploring the use of sunk costs in interactive negotiation contexts and financial markets. Experiment I elucidates that subjects value the sunk cost issue higher than other issues in a multi-issue negotiation. Experiment II illustrates that bidders are influenced by the sunk costs of competing bidders in a first price, sealed-bid, common-value auction. In financial markets their exists an analogous concept to sunk cost accounting known as the disposition effect. This explains the tendency of investors to sell “winning” stocks and hold “losing” stocks. Experiment III demonstrates that trading strategies in an experimental equity market are influenced by a pre-trading brokerage cost. Not only are subjects influenced in the direction that reduces the disposition effect but also trading is diminished. Without the brokerage cost there was a significant disposition effect. JEL-Classifications C70, C90, D44, D80, D81, G1

The Impact of Medical Spending Growth on Guaranteed Renewable Health insurance

I examine the problem of writing guaranteed renewable health insurance in the presence of medical spending growth. Prior research suggests that the growth and difficulty in forecasting future medical costs is an impediment to multiperiod health insurance, where contract reserves are used to pay a portion of the benefits in later years of the contract. Medical spending growth is an input to calculating the magnitude of premiums and reserves, so setting up reserves to pay future claims involves forecasting spending growth. Hedging assets can ameliorate the investment problem by providing assets that automatically adjust to unexpected shocks in spending growth. I expand an existing model of guaranteed renewability in an economy with risk to show the specific ways that medical spending growth enters the premium and reserve functions. I treat stochastic trend as a factor the insurance company can predict with error. I utilize aggregate and individual level insurance spending data and financial returns data to analyze whether medical trend can be hedged with existing assets. I separate trend into predictable and error components and analyze the correlation between the error component and return on assets. I find that medical spending growth is predictable with error over short and medium time horizons. I find that there is no significant correlation between asset returns and forecast errors across several broad asset classes. The combination of partially predictable spending growth and the absence of a hedging asset imply that insurers should be using reserves to manage the macroeconomic risk of spending growth. The load for reserving for trend is an up-front cost in addition to the up-front expense of guaranteed renewability. Insurers should use a diversified investment strategy for reserves rather than one targeted at trying to match spending growth. I conclude by noting the positive and negative effects of the newly passed health reform law (PPACA) on guaranteed renewable health insurance and other health insurance arrangements that require contract reserves and policies that shift health care spending onto public plans

Does media coverage affect governments’preparation for natural disasters?

While natural hazards have never been so frequent in modern history, the political economy of disaster preparation remains largely understudied. To prepare for natural disasters, local governments can adopt mitigation measures (e.g., infrastructure elevation, retrofitting, shelter construction, etc.). However, in doing so, there is a trade-off between risk reduction and risk disclosure as these initiatives may signal latent dangers of a place to unsuspecting homebuyers. Increased media coverage may ease this trade-off by revealing these dormant risks. I develop a measure of newspaper coverage of storms using data on newspapers’ circulation and occurrence of storms at the ZIP code level in the United States. Using the variation in this measure, I identify the effects of heightened media attention on local governments’ mitigation efforts under the Hazard Mitigation Grant program managed by FEMA. I find that when newspaper coverage is high, jurisdictions that have experienced severe storms tend to implement significantly more mitigation projects. Conversely, when coverage of storms is low, jurisdictions do not undertake mitigation projects after being hit by a storm (...

Research on the influence of behavioral forces that motivate trader behavior and sentiment- a prospect theory exegesis

This study focuses on empirical investigations and seeks implications by utilizing three different methodologies to test various aspects of trader behavior. The first methodology utilizes Prospect Theory to determine trader behavior during periods of extreme wealth contracting periods. Secondly, a threshold model to examine the sentiment variable is formulated and thirdly a study is made of the contagion effect and trader behavior. The connection between consumers\u27 sense of financial well-being or sentiment and stock market performance has been studied at length. However, without data on actual versus experimental performance, implications based on this relationship are meaningless. The empirical agenda included examining a proprietary file of daily trader activities over a five-year period. Overall, during periods of extreme wealth altering conditions, traders satisfice rather than choose the best alternative. A trader\u27s degree of loss aversion depends on his/her prior investment performance. A model that explains the behavior of traders during periods of turmoil is developed. Prospect Theory and the data file influenced the design of the model. Additional research included testing a model that permitted the data to signal the crisis through a threshold model. The third empirical study sought to investigate the existence of contagion caused by declining global wealth effects using evidence from the mining industry in Canada. Contagion, where a financial crisis begins locally and subsequently spreads elsewhere, has been studied in terms of correlations among similar regions. The results provide support for Prospect Theory in two out of the three empirical studies. The dissertation emphasizes the need for specifying precise, testable models of investors\u27 expectations by providing tools to identify paradoxical behavior patterns. True enhancements in this field must include empirical research utilizing reliable data sources to mitigate data mining problems and allow researchers to distinguish between expectations-based and risk-based explanations of behavior. Through this type of research, it may be possible to systematically exploit irrational market behavior

Basis Risk, Uptake And Impacts Of Index Based Livestock Insurance In Northern Kenya

Index insurance is a promising tool for fighting poverty where households face climactic uncertainty and incomplete financial markets. Although index insurance products avoid many of the costs that prohibit supply of conventional loss-indemnifying insurance for small holders in developing countries, index products expose insured households to basis risk because they can only insure covariate losses and indices are inevitably imperfect. Until now, no empirical study has examined the magnitude of basis risk in the context of the developing world. Nor have direct estimates of basis risk been included in demand analyses. Furthermore, the impacts of index based insurance on household welfare have been unknown. This dissertation looks closely at basis risk, demand, and impacts of index insurance. The Index Based Livestock Insurance (IBLI) product, available to pastoralists in northern Kenya since 2010, provides an ideal setting for such an analysis. The IBLI index was constructed using methods explicitly designed to minimize basis risk and implementation included an in-depth longitudinal household survey. The first paper finds that basis risk is substantial due to the high degree of variability between households and inaccuracies in the index. Although the existence of design risk is expected, the great deal of idiosyncratic risk is surprising in a region where large covariate droughts are known to be the major cause of livestock mortality. The second paper finds that product-related factors are at least as important as demographic and financial related characteristics in determining demand for IBLI. Both idiosyncratic risk and households' observed design risk play a large role in determining demand. In addition, a simplified premium schedule generated significant spatiotemporal adverse selection. The third paper finds that IBLI coverage reduces precautionary savings held in livestock and increases investments in productivity through mobility and livestock veterinary services. These adjustments to production strategies are associated with increases in income from milk and income per adult equivalent. When compared to the costs and impacts of the Hunger Safety Net Program, an ongoing cash transfer program in the same region, IBLI performs quite well and may become even more cost effective as the initial costs are spread across more clients