Indivisible Labor and Its Supply Elasticity: Do Taxes Explain European Employment?

We first scrutinize and challenge Prescott's (2002, 2004) quantitative analysis of the role of differences in taxes in explaining cross-country differences in labor market outcomes, and then defend an alternative model that assigns an important role to cross-country differences in social unemployment insurance institutions that Prescott argues can be safely ignored. In the process, we explore how the assumption of indivisible labor interacts with assumptions regarding the (in)completeness of financial markets and any frictions in the labor market, to determine the labor supply elasticity.Employment lotteries, indivisible labor, labor supply elasticity, taxation, unemployment, unemployment insurance

A supply-side explanation of European unemployment

This article offers a supply-side explanation of striking patterns in unemployment rates and duration of unemployment in European countries, compared with other member countries of the OECD (Organization for Economic Cooperation and Development). The rise in long-term unemployment in Europe is attributed to the adverse incentive effects of generous welfare programs in times of economic turbulence.Unemployment - Europe

Does Prospect Theory Explain IPO Market Behavior?

We derive a behavioral measure of the IPO decision-maker’s satisfaction with the underwriter’s performance based on Loughran and Ritter’s (2002) application of prospect theory to IPO underpricing. We assess the plausibility of this measure by studying its power to explain the decision-maker’s subsequent choices. Controlling for other known factors, IPO firms are less likely to switch underwriters for their first seasoned equity offering when our behavioral measure indicates they were satisfied with the IPO underwriter’s performance. Underwriters also appear to benefit from behavioral biases in the sense that they extract higher fees for subsequent transactions involving satisfied decision-makers. Although our tests suggest there is explanatory power in the behavioral model, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns

IPO pricing in the dot-com bubble

IPO initial returns reached astronomical levels during 1999-2000. We show that the regime shift in initial returns and other elements of pricing behavior can be at least partially accounted for by a variety of marked changes in pre-IPO ownership structure and insider selling behavior over the period which reduced key decision-makers’ incentives to control underpricing. After controlling for these changes, there appears to be little special about the 1999-2000 period, aside from the preponderance of internet and high-tech firms going public. Our results suggest that it was firm characteristics that were unique during the “dot-com bubble” and that pricing behavior followed from incentives created by these characteristics

Does Prospect Theory Explain IPO Market Behavior?

We derive a behavioral measure of the IPO decision-maker’s satisfaction with the underwriter’s performance based on Loughran and Ritter’s (2002) application of prospect theory to IPO underpricing. We assess the plausibility of this measure by studying its power to explain the decision-maker’s subsequent choices. Controlling for other known factors, IPO firms are less likely to switch underwriters for their first seasoned equity offering when our behavioral measure indicates they were satisfied with the IPO underwriter’s performance. Underwriters also appear to benefit from behavioral biases in the sense that they extract higher fees for subsequent transactions involving satisfied decision-makers. Although our tests suggest there is explanatory power in the behavioral model, they do not speak directly to whether deviations from expected utility maximization determine patterns in IPO initial returns

Scaling the Hierarchy: How and Why Investments Banks Compete for Syndicate Co-Management Appointments

We investigate the empirical puzzle why banks pressured their analysts to provide aggressive assessments of issuing firms during the 1990s when doing so apparently had little positive effect on their chances of receiving lead-management appointments and ultimately led to regulatory penalties and costly structural reform. We show that aggressively optimistic research can attract co-management appointments and that co-management appointments eventually lead to more lucrative lead-management opportunities. Our results suggest a potential unintended anticompetitive effect of the Global Settlement if forcing greater separation of research and investment banking diminishes co-management opportunities for (and thereby potential competition from) marginal competitors in securities underwriting, especially in the debt markets

Scaling the Hierarchy: How and Why Investment Banks Compete for Syndicate Co-Management Appointments

We investigate why banks pressured research analysts to provide aggressive assessments of issuing firms during the 1990s. This competitive strategy did little to directly increase a bank’s chances of winning lead-management mandates and ultimately led to regulatory penalties and costly structural reform. We show that aggressively optimistic research and even the mere provision of research coverage for the issuer (regardless of its direction) attract co-management appointments. Co-management appointments are valuable because they help banks establish relationships with issuers. These relationships, in turn, substantially increase their chances of winning more lucrative lead-management mandates in the future. This is true even in the presence of historically exclusive banking relationships. If recent regulatory reforms compromise this entry mechanism, they may have the unintended consequence of diminishing competition among securities underwriters