Corporate Finance

We survey the literature analyzing the price formation and trading process, and the consequences of market organization for price discovery and welfare. We offer a synthesis of the theoretical microfoundations and empirical approaches. Within this framework, we confront adverse selection, inventory costs and market power theories to the evidence on transactions costs and price impact. Building on these results, we proceed to an equilibrium analysis of policy issues.

Dispersion in investor beliefs and short-selling constraints can lead to stock market bubbles. This paper argues that firms, unlike investors, can exploit such bubbles by issuing new shares at inflated prices. This lowers the cost of capital and increases real investment. Perhaps surprisingly, large bubbles are not eliminated in equilibrium nor do large bubbles necessarily imply large distortions. Using the variance of analysts?

There are five topics of debate that I will cover today: 1) Does inflation targeting improve economic performance? 2) Is inflation targeting consistent with the dual mandate? 3) Can central bank transparency go too far? 4) Would a price level target be better than an inflation target? 5) Would a point target be better than a target range?

The recent media and political attention on service outsourcing from developed to developing countries gives the impression that outsourcing is exploding. As a result, workers in industrial countries are anxious about job losses. This paper aims to establish what are the hypes and what are the facts. The results show that although service outsourcing has been steadily increasing it is still very low, and that in the United States and many other industrial countries "insourcing" of services is greater than outsourcing.

In this address, I first describe the hallmarks of the Greenspan Fed and the advantages of this strategy that have produced such favorable economic outcomes. Then I look at how well the Fed might do after Greenspan and what challenges it might face. This discussion then leads naturally to suggestions for how the Fed should operate in the future to continue the excellent performance it has achived under Alan Greenspan.

This paper lays out a comprehensive solution to the problem of accounting for claims based the performance of a firm's stock price. The accounting covers employee stock options, stock appreciation rights, put and call options, convertible debt and preferred stock, warrants, and other hybrid securities. This issue has vexed the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) who have approached the problem on a piecemeal basis, leading to inconsistent treatments of claims that in substance are very similar.

We develop a general equilibrium model of a production economy which has a risky production technology as well as a growth option to expand the scale of the productive sector of the economy. We show that when confronted with growth options, the representative consumer may sharply alter consumption rates to improve the likelihood of investment. This reduction in consumption is accompanied by an erosion of the option value of waiting to invest, leading to investment near the zero NPV threshold.

We perform an econometric analysis of the effect of new drug launches on longevity, using data from the IMS Health Drug Launches database and the WHO Mortality Database.

Bayesian learning implies decreasing weights on prior beliefs and increasing weights on the accuracy of the analyst?s past forecast record, as the number of forecast errors comprising her forecast record (its length) increases. Consistent with this model of investor learning, empirical tests show that investors? reactions to forecast news are increasing in the product of the accuracy and length of analysts? forecast records. Moreover, the Bayesian learning predicted by our model is more descriptive of investor reactions than is a static model which predicts that investors?