Meetings: Summer, 2001

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International Trade and Investment

The NBER's Program on International Trade and Investment met in Cambridge on March 16 and 17. James Harrigan, Federal Reserve Bank of New York, organized this program:

  • Robert Feenstra, NBER and University of California, Davis, and Gordon Hanson, NBER and University of Michigan, "Global Production and Rising Inequality: A Survey of Trade and Wages"
  • James Harrigan, "Comparative Advantage: Do the Data Obey the Law?"
  • Donald Davis and David E. Weinstein, NBER and Columbia University, "The Factor Content of Trade"
  • Robert E. Lipsey, NBER and Queen's College, "Foreign Direct Investment and the Operations of Multinational Firms"
  • James Markusen, NBER and University of Colorado, and Keith E. Maskus, University of Colorado, "Multinationals"
  • Henry Overman, Stephen Redding, and Anthony J. Venables, London School of Economics, "Trade and Geography: A Survey of Empirics"
  • James R. Tybout, NBER and Pennsylvania State University, "Plant and Firm-Level
  • Evidence on 'New' Trade Theories"
  • Bruce Blonigen, University of Oregon, and Thomas Prusa, NBER and Rutgers University, "Antidumping"
  • Kishore Gawande, University of New Mexico, and Pravin Krishna, Brown University, "The Political Economy of Trade Policy"

Feenstra and Hanson argue that trade in intermediate inputs, or "outsourcing," is a potentially important explanation for the increase in the wage gap between skilled and unskilled workers in the United States and elsewhere. They show that trade in inputs has much the same impact on labor demand as does skill-biased technical change: both will shift demand away from low-skilled activities, while raising relative demand and wages of the higher skilled. Thus, distinguishing whether the change in wages is caused by international trade or technological change is fundamentally an empirical rather than a theoretical question. The authors review three empirical methods that have been used to estimate the effects of the outsourcing and technological change on wages, and summarize the evidence for the United States and other countries.

The theory of comparative advantage predicts that countries export goods that would have lower relative prices in the absence of trade. Harrigan reviews recent empirical research on this prediction. Much of this work focuses on output specialization rather than trade, arguing that most of the interest in the comparative advantage theory comes from the production side alone. Starting with the multidimensional generalization of the standard Heckscher-Ohlin model, authors have considered amendments that include unequal numbers of goods and factors, Ricardian technological differences, and multiple patterns of specialization. All of these refinements matter in explaining the sources of comparative advantage, and Harrgian concludes that considerable progress has been made in understanding the causes of specialization.

Davis and Weinstein examine the literature on the factor content of trade. They argue that understanding the factor content of trade is critical to understanding whether our models of general equilibrium "hang together." The last fifteen years have seen wide swings in trade economists' views of models of the factor content of trade. The authors do not want to suggest that all issues about the factor content of trade are settled; future work needs to gather better and more extensive datasets, to more carefully consider the role of traded intermediates, cross-country differences in demand, the role of trade costs, and so on. But the progress made in the last fifteen years surely holds promise that this will continue to be a fertile area for research, they conclude.

Lipsey reviews the changes that have taken place in the concept and measurement of foreign direct investment (FDI) and the differences between what is measured in balance-of-payments stocks and flows of FDI and what is implied by theories of FDI motivations and activities. Measured stocks of FDI are fairly well correlated with the activity of multinationals across countries, but hardly related at all to the distribution of activity among industries or among industries and countries. Thus, stocks of FDI give a misleading picture of what multinationals are doing in their host countries. Early studies for the United States, Sweden, and the United Kingdom all conclude that there was either no relationship between overseas production and parent firm or home country exports or a positive relationship. In recent years there have been similar studies of the effects of overseas production for Japan and several European countries, with basically the same conclusions. Similarly, there seems to be little relation between overseas production and parent or home country aggregate employment. In U.S. counties, greater foreign production is associated with lower home employment per unit of output, or lower labor intensity in home production, but in Swedish and Japanese firms, higher overseas production means more labor per unit of output at home. Within their host countries, the affiliates of foreign firms sometimes introduced entirely new industries and new bases for comparative advantage in exports. Affiliates almost universally appear to pay higher wages than the corresponding host country firms and have higher productivity levels. They also pay higher wages than domestically-owned firms of the same size and other characteristics. In the few cases where characteristics of workers can be examined, foreign-owned firms pay higher wages for what appear to be equivalent workers, a higher price for labor than domestic firms.

Beginning in the early 1980s, theoretical analyses incorporated the multinational firm into the microeconomic, general-equilibrium theory of international trade. Recent advances indicate how vertical and horizontal multinationals arise endogenously as determined by country characteristics, including relative size and relative endowment differences, and trade and investment costs. Results also characterize the relationship between foreign affiliate production and international trade in good and services. Markusen and Maskus survey some of this recent work, and note the testable predictions generated in the theory. They go on to examine empirical results that relate foreign affiliate production to country characteristics and trade/investment cost factors. Finally, they review findings from analyses of the pattern of substitutability or complementarity between trade and foreign production.

Overman, Redding and Venables survey the empirical literature relating trade flows, factor prices, and the international location of production to economic geography. First they present a general theoretical model which incorporates key mechanisms from theoretical research on new economic geography while remaining sufficiently general to provide the basis for empirical work. In the presence of transport costs and with intermediate inputs in production, access to markets and suppliers are important determinants of firm profitability. In general equilibrium, production location decisions will be determined by a combination of the considerations emphasized by traditional trade theory (factor endowments and exogenous technology differences) together with market and supplier access. The remainder of the survey is structured around the model's implications for international trade, the variation in factor prices across geographic space, and production structure. Increased distance raises trade costs with an elasticity between 0.2 and 0.3 and reduces trade volumes with an elasticity between -0.9 and -1.5. Access to markets and sources of supply plays a statistically significant and quantitatively important role in explaining variation in factor prices within and between countries. Access to foreign markets alone explains some 35 percent of the cross-country variation in per capita income. There is a positive relationship between market access and wages across U.S. counties which is robust to controlling for unobserved heterogeneity, human capital, demography, and exogenous amenities. Models of imperfect competition and increasing returns to scale imply a home market or magnification effect, whereby increases in expenditure on a good lead to a more than proportionate increase in production. Home market effects arise in a number of key manufacturing sectors.

By relaxing the assumption of perfect competition, the "new" trade theory has generated a rich body of predictions concerning the effects of commercial policy on price-cost mark-ups, firm sizes, exports, productivity, and profitability among domestic producers. Tybout critically assesses the plant-and firm-level evidence on these linkages. He finds first that mark-ups generally fall with import competition, but it is not clear whether this reflects the elimination of market power or the creation of negative economic profits. Second, import-competing firms cut back their production levels when foreign competition intensifies, at least in the short run. This suggests that sunk entry or exit costs are important in most sectors. Third, trade rationalizes production in the sense that markets for the most efficient plants are expanded, but large import-competing firms tend simultaneously to contract. Fourth, exposure to foreign competition often improves intra-plant efficiency. Fifth, firms that engage in international activities tend to be larger, more productive, and supply higher quality products. However, the literature is mixed on whether the activities caused these characteristics or vice versa. Finally, the short-run and long-run effects of commercial policy on exports and market structure can be quite different. Both types of response depend upon initial conditions, sunk entry costs, and the extent of firm heterogeneity.

Blonigen and Prusa review the growing literature on the effects of antidumping (AD), a trade policy that has emerged as the most serious impediment to international trade. They show that AD was a rarely used trade law until the mid-1970s. Over the past 25 years countries have increasingly turned to AD in order to offer protection to import-competing industries. Antidumping is a trade policy where the filing decision, the legal determination, and the protective impact are all endogenous. AD can facilitate collusion and can distort market prices even if cases are never filed. Also, the trade impact of macroeconomic shocks, such as exchange rate movements and GNP fluctuations, is complicated by the presence of AD law. The authors discuss the factors that appear to be most important for the determination of injury and also what influences whether domestic and foreign parties participate in the AD investigation process. Finally they assess the market effect of AD protection. AD duties affect both the trade from subject countries and the imports from non-subject countries. Antidumping duties also encourage foreign firms to invest in protected domestic markets. Blonigen and Prusa discuss how the assessment of AD duties complicates the pas-through behavior of sanctioned firms.

Despite a relative consensus on the merits of free trade, trade between nations has never been free. In recent decades, an impressive literature has attempted to answer the question of why this is so. The primary explanation that has been offered is that trade policies are not set by those who seek to maximize economic efficiency; rather, they are set in political contexts where the private incentives of the policymakers differ from aggregate welfare maximization. This study of "endogenous" trade policy determination, which explicitly accounts for the political circumstances under which policy is set, forms the core of the so-called "political economy" of trade literature. Gawande and Krishna attempt to survey its empirical ambitions and accomplishments to date. The early literature mostly involved the examination of correlations between trade policies and various political and economic factors that had been conjectured to be relevant in determining trade policy. This literature often was criticized for employing econometric specifications whose link with the theory that motivated them was tenuous. Later, the empirical literature moved in a somewhat "structural" direction, establishing a much tighter link with the theory than has been traditional in this field. The authors discuss and contrast the early empirical work in this area with more recent approaches, focusing on the unresolved issues and puzzles highlighted in the recent work.


Well-Being of Children

The NBER's Program on the Well-Being of Children, directed by Jonathan Gruber of MIT, met in Cambridge on April 5. The following papers were discussed:

  • Bruce Sacerdote, NBER and Dartmouth College, "The Nature and Nurture of Economic Outcomes" (NBER Working Paper No. 7949)
  • David N. Figlio, NBER and University of Florida, and Maurice E. Lucas, Alachua County School Board, "Do High Grading Standards Affect Students Performance?" (NBER Working Paper No. 7985)
  • Paul J. Gertler, NBER and University of California, Berkeley, and Simone Boyce, University of California, Berkeley, "An Experiment in Incentive-Based Welfare: The Impact of PROGRESA on Health in Mexico"
  • Raghabendra Chattopadhyay, India Institute of Management, and Esther Duflo, NBER and MIT, "Women's Leadership and Policy Decisions: Evidence From a Nationwide Randomized Experiment in India"
  • Joseph G. Altonji and Christopher R. Taber, NBER and Northwestern University, and Todd E. Elder, Northwestern University, "Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools" (NBER Working Paper No. 7831)
  • Anne Case and Christina Paxson, NBER and Princeton University, and Darren Lubotsky, Princeton Unversity, "Economic Status and Health in Childhood: The Origins of the Gradient"

Sacerdote uses data on adopted children to examine the treatment effects of family environment on childrens' educational and labor market outcomes. He uses four datasets containing information on adopted children, their adoptive parents, and their biological parents. In at least two of the four, the mechanism for assigning children to adoptive parents is fairly random and does not match children to adoptive parents based on health, race, or ability. Sacerdote finds that adoptive parents' education and income have a modest impact on child test scores but a large impact on college attendance, marital status, and earnings. In contrast with other work on IQ scores, he does not find that the influence of adoptive parents declines with child age.

Figlio and Lucas explore the effects of high grading standards on student test performance in elementary school. This paper provides the first empirical evidence on the effects of grading standards, measured at the teacher level. Using an exceptionally rich set of data including every third, fourth, and fifth grader in a large school district over four years, the authors match students' gains in test scores and their disciplinary problems to teacher-level grading standards. In models that control for student-level fixed effects, there is substantial evidence that higher grading standards benefit students. But these effects are not uniform: high-achieving students apparently benefit most from high standards when they are in a relatively low-achieving class; low-achieving students benefit most from high standards when they are in a relatively high-achieving class.

Gertler and Boyce investigate the impact on health outcomes of a unique anti-poverty program in Mexico: PROGRESA, which combines a traditional cash transfer program with financial incentives for families to invest in human capital of children (health, education, and nutrition). In order to receive the cash transfer, household members must participate in a series of preventive health and nutrition activities including prenatal care, nutrition monitoring and supplementation programs, preventive check ups, and health education programs. The authors find that the program significantly increased use of public health clinics for preventative care. The program also lowered the number of inpatient hospitalizations and visits to private providers, which suggests that PROGRESA lowered the incidence of severe illness. Also, there is significant improvement in the health of both children and adults. Specifically, treatment children have a 15 percent lower incidence of illness, are 1-3 percent taller, about 3.5 percent heavier, and have about a 28 percent lower incidence of anemia. Adults had far fewer days of difficulty with daily activities because of illness, the number of days in bed, and days incapacitated. Adults also reported a significant increase in the number of kilometers they were able to walk without getting tired.

Chattopadhyay and Duflo use the policy of political reservation for women adopted in India to study the impact of women's leadership on policy decisions. In 1998, one third of the positions of chief of the Village Councils of India were randomly selected to be reserved for women: in reserved village councils, only women could be candidates for the position of head. The Village Councils are responsible for the provision of many local public goods in rural areas. Using a dataset on 165 Village Councils, the authors compare the type of public goods provided in reserved versus unreserved Village Councils. They show that women invest more in infrastructure that is directly relevant for rural women (water, fuel, and roads), while men invest more in education. The participation of women in the policymaking process is higher in reserved Village Councils, but there is no evidence of any difference between the level of efficiency and corruption of women and men.

Altonji, Elder, and Taber measure the effect of attendance in a Catholic high school on educational attainment and test scores. They develop certain new estimation methods and a way to assess selectivity bias. They use their methods to estimate the effect of attending a Catholic high school on a variety of outcomes. Their main conclusion is that Catholic high schools substantially increase the probability of graduating from high school and, more tentatively, college attendance. They do not find must evidence for an effect on test scores.

Case, Lubotsky, and Paxson assess the mechanisms that run from income to health by focusing on children. Generally children in the United States do not contribute to the family income, and the correlation between poor health in childhood and low family income therefore cannot be explained by lower earnings of children (although it should be noted that ill children could reduce parental labor supply). By focusing on children, the authors eliminate the channel that runs from health to resources. Using a variety of cross-sectional and panel datasets for the United States from the mid-1980s to 1997, the authors find that the gradient observed in adulthood is present for children from their first year to age 17. Moreover, the gradient of health with respect to income becomes steeper with age. Small but significant differences among 5-year-olds become more pronounced for 10-year-olds, and larger still for 15-year-olds. In addition, the response of health to chronic illnesses is one important mechanism through which income affects the health status of children. Not only are poor children significantly more likely to suffer from asthma (for example) but, among children with asthma, health status is more seriously compromised for poor children than for rich ones. The authors' panel data estimates are consistent with a model in which the effects of low long-run average income are cumulative over a child's life.


Public Economics

The NBER's Program on Public Economics, directed by James M. Poterba of MIT, met in Cambridge on April 6. The following four papers were presented and discussed:

  • Leora Friedberg, NBER and University of Virginia, and Anthony Webb, University of California, San Diego, "The Impact of 401(k) Plans on Retirement"
  • Discussant: Andrew Samwick, NBER and Dartmouth College
  • Mark H. Lang and Edward L. Maydew, University of North Carolina, and Douglas A. Schackleford, NBER and University of North Carolina,
  • "Bringing Down the Other Berlin Wall: Germany's Repeal of the Corporate Capital Gains Tax"
  • Discussant: William M. Gentry, NBER and Columbia University
  • Douglas Holtz-Eakin, NBER and Syracuse University, and Donald Marples, Syracuse University, " Distortion Costs of Taxing Wealth Accumulation: Income versus Estate Taxes" (NBER Working Paper No. 8261)
  • Discussant: William Gale, Brookings Institution
  • B. Douglas Bernheim and Antonio Rangel, NBER and Stanford University, and Luis Rayo, Stanford University, "A Theory of Legislative Policymaking: Part 1, Basic Institutions"
  • Discussant: Stephen Coate, NBER and Cornell University

In 1993, nearly 40 million people were covered by a 401(k) plan, up from about 7 million in 1983. Previous research showed that the spread of defined benefit plans with sharp age-related incentives, first discouraging and later encouraging retirement, contributed to the early retirement trend of past decades. Defined contribution plans differ along several dimensions, especially in their smooth rate of pension wealth accrual. Friedberg and Webb use data from the Health and Retirement Study to show that retirement patterns have begun to change as defined contribution plans have spread. Their estimates indicate that the financial incentives in defined benefit pensions lead people to retire almost two years earlier on average, compared to people with defined contribution plans.

Faced with pressure from increased global competition and capital mobility, Germany's government made a surprise announcement in December 1999 that it would repeal the longstanding capital gains tax on sales of corporate cross-holdings. The repeal was hailed as a revolutionary step toward breaking up Germany's complex web of cross-ownership. When the changes become effective in 2002, Germany will move from having one of the most punitive taxes on corporate capital gains to having the smallest among major industrial countries. Lang, Maydew, and Shackleford use Germany as a natural experiment to study the extent to which taxes present a barrier to the efficient acquisition and divestiture of stakes in other firms. In particular, they examine the stock market response by German firms to the announcement that capital gains taxes on inter-company holdings would be eliminated. They find a positive association between a firm's abnormal stock returns and the extent of its cross-holdings, consistent with taxes acting as a barrier to efficient allocation of ownership and investment. However, the reaction is limited to the largest banks and insurers and their extensive minority holdings in industrial firms, suggesting that taxes are not the binding constraint preventing most firms from divesting their cross-holdings.

Holtz-Eakin and Marples develop a framework for computing the deadweight loss of a revenue-neutral switch from an estate tax to a capital income tax. They focus on the potential lifetime behavioral responses in anticipation of paying the estate tax. They conclude that eliminating the estate tax and replacing its revenue with that from a capital income tax likely will enhance economic efficiency. Specifically, they estimate that the mean decrease in deadweight loss is $.018 per dollar of wealth. However, their estimates are based on data that do not contain the "super rich" who are most deeply affected by the estate tax.

Bernheim, Rangel, and Rayo propose and explore a general framework for modeling legislative institutions. Their analysis reveals a surprisingly robust tendency for a natural class of legislative institutions to produce high concentrations of political power. For the simplest institutions they consider, the authors identify surprisingly weak conditions under which the legislator with the last opportunity to make a proposal is effectively a dictator. Moreover, this outcome is more likely to arise when more legislators have opportunities to make proposals. Thus, seemingly democratic (inclusive) reforms can have the perverse effect of further concentrating political power. Super-majority requirements do little to overcome the dictatorial power of the final proposer. When the rules of the legislature permit members to bring deliberations to a close through collective action, the power of the last proposer may evaporate. However, the particular outcome depends on the details of the closure rules. When legislators are not permitted to bundle policy proposals with closure motions, one can obtain almost anything from inaction to a universalistic outcome, depending on the initial status quo.


Corporate Finance

Members and guests of the NBER's Program on Corporate Finance met in Cambridge on April 20. Program Director Raghurami G. Rajan chose the following papers for discussion:

  • Raymond Fisman, Columbia University, and R. Glenn Hubbard, NBER and Columbia University, "Endowments, Governance, and the Nonprofit Form"
  • Tobias J. Moskowitz and Annette Vissing-Jorgensen, University of Chicago, "The Private Equity Premium Puzzle"
  • Julie Wulf, University of Pennsylvania, "Do CEO's of Target Firms Trade Power for Premium? Evidence From 'Mergers of Equals'"
  • Alberto Bisin, New York University, and Anriano A. Rampini, Northwestern University, "Exclusive Contracts and the Institution of Bankruptcy"
  • Andrei Shleifer, NBER and Harvard University, and Robert W. Vishny, NBER and University of Chicago, "Stock Market Driven Acquisitions"
  • Owen A. Lamont, NBER and University of Chicago, and Christopher Polk, Northwestern University, "Does Diversification Destroy Value? Evidence from Industry Shocks"
  • Mark J. Roe, Harvard University, "The Quality of Corporate Law Argument and its Limits"
  • Simon Johnson, NBER and MIT, and Todd Mitton, Brigham Young University, "Who Gains from Capital Controls? Evidence from Malaysia"
  • Nicola Cetorelli, Federal Reserve Bank of Chicago, "Does Bank Concentration Lead to Concentration in Industrial Sectors?"

In for-profit enterprises, shareholders are the residual bearers of risk. By contrast, because nonprofits have no residual claimants, something else must absorb financial shocks to the organization. Nonprofit managers often describe the endowment, or fund balance, as serving this function. In this paper, Fisman and Hubbard examine the role of the endowment as a precautionary savings device for nonprofit organizations. They find very strong evidence in support of the role of the endowment in allowing for smoothing of program expenditures. However, providing managers with a large discretionary fund raises significant concerns regarding the governance of the organization. The authors are also concerned with free cash flow in for-profit enterprises when shareholders do not carefully monitor the behavior of managers, and about the possibility of expropriation of discretionary funds by nonprofit managers. Taking advantage of differences in nonprofit oversight across states in the United States, the authors show that organizations in poor governance states, relative to strong governance states: have managerial compensation that is more highly correlated with inflows of donations; derive a smaller percentage of their revenues from donations; and save a smaller proportion of current donations for future expenditures. This provides some evidence of governance problems in the nonprofit form, and suggests an important role for oversight for overcoming these difficulties.

Moskowitz and Vissing-Jorgensen document that investment in private equity is extremely concentrated. Yet despite the very poor diversification of entrepreneurs' portfolios, the returns to private equity are similar to the returns on public equity. Given the large premium required by investors in public equity, it is puzzling why households willingly invest substantial amounts in a single privately held firm with a far worse risk-return tradeoff. The authors examine various explanations and conclude that private nonpecuniary benefits of control must be large and/or entrepreneurs must greatly overestimate their probability of success in order to explain the observed concentration of wealth in private equity.

Wulf studies abnormal returns in a sample of "mergers of equals" transactions in which the two firms are approximately equal in post-merger shareholdings and board representation. Mergers of equals (MOEs) are friendly mergers generally characterized by extensive pre-merger negotiations between firms with comparable bargaining positions resulting in both lower target premiums and greater shared control (board and management) between target and acquiring firms. On average, acquirer shareholders capture more of the gains in MOEs measured by event returns, while target shareholders capture less, in comparison to a matched sample of transactions with unequal board representation ("mergers of non-equals" or MONEs). However, the value created by MOEs measured by combined event returns is not significantly different than the matched sample. Moreover, both the value created and target shareholders' capture of the gains are related systematically to variables representing control fights in the merged firm. The evidence suggests that target CEOs with stronger bargaining positions and incentives negotiate shared control in the merged firm in exchange for lower target shareholder premiums.

Bisin and Rampini suggest a motivation for the institution of bankruptcy: whenever exclusive contracts cannot be enforced ex ante, for example, a bank cannot monitor whether the borrower enters into contracts with other creditors, bankruptcy enables the enforcement of exclusivity ex post, and hence relaxes the incentive constraints. In general, though, while a bankruptcy institution improves on non-exclusive contractual relationships, it is not a perfect substitute for ex ante exclusivity.

Shleifer and Vishny present a model of mergers and acquisitions based on stock market misvaluations of the combining firms. The model explains who acquires whom, whether the medium of payment is cash or stock, what the valuation consequences of mergers are, and why there are merger waves. Some of the key predictions of the model are: 1) acquisitions are disproportionately for stock when market valuations are high, and for cash when they are low; 2) targets in cash acquisitions earn low returns prior to the acquisitions, whereas bidders in stock acquisitions earn high returns; 3) long-run returns to bidders in stock acquisitions are likely to be negative, while those to bidders in cash acquisitions are likely to be positive; 4) despite negative long-run returns, acquisitions for stock serve the interest of long-run shareholders of the bidder; 5) diversification strategies serve the interest of bidding shareholders even when they earn negative announcement returns; 6) such diversifying acquisitions are likely to be for stock; 7) management resistance to cash tender offers is often in the interest of shareholders; and 8) acquisition targets are likely to have managers and shareholders with relatively shorter horizons than the bidders.

Lamont and Polk examine changes in the within-firm dispersion of industry investment, or "diversity." They find that exogenous changes in diversity, caused by changes in industry investment, are related negatively to firm value. Thus diversification destroys value, consistent with the inefficient internal capital markets hypothesis. Measurement error does not cause this finding. Also, exogenous changes in industry cash flow diversity are related negatively to firm value.

Roe notes that strong theory has emerged in recent years that the quality of corporate law determines whether securities markets will arise, whether ownership will separate from control, and whether the modern corporation will prosper. Ownership cannot readily separate from control when managerial agency costs are especially high. Further, the business judgment rule, under which judges do not second-guess managerial mistake, puts the full panoply of agency costs - such as over-expansion, over-investment, and reluctance to take on profitable but uncomfortable risks - beyond any direct legal inquiry. The consequence is that even if corporate law as usually conceived is "perfect," it eliminates self-dealing, not managerial mistake. But managers can lose for shareholders as much, or more, than they can steal from them, and law controls only the second cost, not the first. If the risk of managerial error varies widely from nation to nation, or from firm-to-firm, then ownership structure should vary equally widely, even if conventional corporate law tightly protects shareholders. There is also good reason, and some new data, consistent with this analysis: by measurement, several nations have fine enough corporate law; distant stockholders are well-protected from controlling stockholder and managerial thievery, but uncontrolled agency costs seem to be especially high in those very nations.

The stock prices of politically connected Malaysian firms fell disproportionately in the early stages of the Asian financial crisis but rose more than the market once capital controls were imposed in September 1998. Capital controls primarily benefited well-connected firms without access to international capital markets. These results hold for both financial and non-financial firms separately and are robust to controlling for firm size, sector, profitability, pre-crisis growth, and whether a firm is favored because it is officially Bumiputera (with ethnic Malay ownership over 50 percent). Johnson and Mitton's findings are consistent with the view that capital controls provide a screen behind which politicians can support particular firms.

Cetorelli explores the effect of banking market structure on the market structure of industrial sectors. She asks whether concentration in the banking market promotes the formation of industries constituted by a few, large firms, or rather, whether it facilitates the continuous entry of new firms, thus maintaining unconcentrated market structures across industries. From a sample of 35 manufacturing industries in 17 OECD countries, and adopting a methodology that allows controlling for other determinants of industry market structure common across industries or across countries, Cetorelli finds that bank concentration enhances industries' market concentration, especially in sectors highly dependent on external finance. That effect is weaker however in countries characterized by higher overall financial development.


Monetary Economics

The NBER's Program on Monetary Economics, directed by Ben S. Bernanke of Princeton University, met in Cambridge on April 27. The following papers were discussed:

  • George W. Evans, University of Oregon, and Seppo Honkapohja, University of Helsinki, "Expectations and the Stability Problem for Optimal Monetary Policies"
  • Discussant: Bennett McCallum, NBER and Carnegie-Mellon University
  • Eric T. Swanson, Federal Reserve Board, "Optimal Nonlinear Policy: Signal Extraction with a Non-Normal Prior"
  • Discussant: Noah Williams, University of Chicago
  • Susan Athey, NBER and MIT, Andrew Atkeson, NBER and University of California, Los Angeles, and Patrick J. Kehoe, NBER and University of Minnesota, "On the Optimality of Transparent Monetary Policy"
  • Discussant: Jon Faust, Federal Reserve Board
  • Robert J. Barro, NBER and Harvard University, and Sivana Tenreyro, Harvard University, "Closed and Open Economy Models of Business Cycles with Marked Up and Sticky Prices" (NBER Working Paper No. 8043)
  • Discussant: Mark Bils, NBER and University of Rochester
  • Christopher Otrok, University of Virginia, B. Ravikumar, Pennsylvania State University, and Charles H. Whiteman, University of Iowa, "Habit Formation: A Resolution of the Equity Premium Puzzle?"
  • Discussant: John C. Heaton, NBER and University of Chicago
  • Susanto Basu and Miles S. Kimball, NBER and University of Michigan, "Long-Run Labor Supply and the Elasticity of the Intertemporal Substitution for Consumption"
  • Discussant: Robert E. Hall, NBER and Stanford University

A fundamentals-based monetary policy rule, which would be optimal without commitment when private agents have perfectly rational expectations, is unstable if these agents in fact follow standard adaptive learning rules. This problem can be overcome if private expectations are observed and suitably incorporated into the policymaker's optimal rule. These strong results extend to the case in which there is simultaneous learning by the policymaker and the private agents. Evans and Honkapohja show the importance of conditioning policy appropriately, not just on fundamentals, but also directly on observed household and firm expectations.

Swanson offers a possible theoretical explanation for the Federal Reserve's relatively laissez-faire attitude toward historically low unemployment in the late 1990s. In models of optimal monetary policy under uncertainty, assumptions must be made about the structure of the economy and policymakers' beliefs about unobserved and uncertain variables, such as the natural rate of unemployment. Previous studies in the literature have made the simplifying assumption that these beliefs have a normal (Gaussian) distribution. Swanson relaxes this assumption to accommodate beliefs that are more diffuse (uncertain) in a region around the mean. He argues that this is a more plausible model given the possibility of structural change that many argued was occurring in the economy around that time. Swanson demonstrates that it becomes optimal for policymakers to be more open-minded and set interest rates more cautiously in response to observable indicators, such as unemployment, while at the same time becoming increasingly more aggressive at the margin. This model appears to match well statements by Federal Reserve officials, and the historical behavior of the Fed, in the late 1990s.

Athey, Atkeson, and Kehoe analyze the optimal design of monetary rules. They suppose that there is an agreed upon social welfare function which depends on the randomly fluctuating state of the economy and that the monetary authority has private information about that state. They further suppose that the government can constrain the policies of the monetary authority by legislating a rule. Surprisingly, the authors show that for a wide variety of circumstances the optimal rule gives the monetary authority no flexibility. This rule can be interpreted as a strict inflation targeting rule where the target is a prespecified function of publicly observed data. In this sense, optimal monetary policy is transparent.

Shifts in the extent of competition, which affect markup ratios, are possible sources of aggregate business fluctuations. Markups are countercyclical, and booms are times at which the economy operates more efficiently. Barro and Tenreyro begin with a real model in which markup ratios correspond to the prices of differentiated intermediate inputs relative to the price of undifferentiated final product. If the nominal prices of the differentiated goods are relatively sticky, then unexpected inflation reduces the relative price of intermediates and thereby mimics the output effects from an increase in competition. In an open economy, domestic output is stimulated by reductions in the relative price of foreign intermediates and, therefore, by unexpected inflation abroad. The various versions of the model imply that the relative prices of less competitive goods move countercyclically. The authors find support for this hypothesis from price data of four-digit manufacturing industries.

Otrok, Ravikumar, and Whiteman explore how the introduction of habit preferences into the simple intertemporal consumption-based capital asset pricing model "solves" the equity premium and risk-free rate puzzles. While agents with time-separable preferences care only about the overall volatility of consumption, the authors show that agents with habit preferences care not only about overall volatility, but also about the temporal distribution of that volatility. Specifically, habit agents are much more averse to high-frequency fluctuations than to low-frequency fluctuations. In fact, the size of the equity premium in the habit model is determined by a relatively insignificant amount of high-frequency volatility in the U.S. consumption. Further, the model's premium and returns are very sensitive to changes in characteristics of the stochastic process for consumption, changes that have been dramatic during the twentieth century. The model also carries counterfactual implications the equally dramatic changes in the equity premium and risk-free rate observed over the last hundred years.

According to Basu and Kimball, the fact that permanent increases in the real wage have very little effect on labor supply implies a parameter restriction in the consumption Euler equation augmented by predictable movements in the quantity of labor. This parameter restriction is confirmed with aggregate U.S. data. The implied estimate of the elasticity of intertemporal substitution is around .35, and is significantly different from zero. This estimate is robust to different instrument sets and normalizations. After accounting for the effects of predictable movements in the labor implied by the restriction, there is no remaining evidence in aggregate U.S. data of excess sensitivity of consumption to current income.


Higher Education

The NBER's Working Group on Higher Education, directed by Charles T. Clotfelter of Duke University, met in Cambridge on May 10 to discuss these papers:

  • Charles T. Clotfelter and Jacob L. Vigdor, Duke University, "Retaking the SAT"
  • Discussant: Christopher Avery, Harvard University
  • A. Abigail Payne, University of Illinois, "The Impact of State Governance Structures on Research Productivity at Public Universities"
  • Discussant: Michael Rothschild, NBER and Princeton University
  • Orley C. Ashenfelter, NBER and Princeton University, and David Card, NBER and University of California, Berkeley,
  • "How Did the Elimination of Mandatory Retirement Affect Faculty Retirement?"
  • Discussant: Ronald G. Ehrenberg, NBER and Cornell University
  • Peter Arcidiacono, Duke University, "Affirmative Action in Higher Education: How do Admission and Financial Aid Rules Affect Future Earnings?""
  • Discussant: Jill Constantine, Williams College
  • Sarah Turner, University of Virginia, and John Bound, NBER and University of Michigan,
  • "Closing the Gap or Widening the Divide: The Effects of the G.I. Bill and World War II on the Educational Outcomes of Black Americans"
  • Discussant: Susan Dynarski, NBER and MIT
  • Jennifer Ma, TIAA-CREF Institute, "The Differential Impact of College Cost on the Enrollment of Students from the Different Socioeconomic Backgrounds"
  • Discussant: Bruce Sacerdote, NBER and Dartmouth College

Clotfelter and Vigdor analyze a college applicant's decision to retake the SAT. Nationwide, roughly half the college applicants take the test more than once; among applicants to selective institutions, the frequency of retaking is significantly higher. This analysis uses data on applicants to three selective universities and a numerical simulation in which the process of receiving draws from a distribution of possible test scores is likened to an optimal search problem. The authors show that the most common test score ranking policy, which focuses on the highest of all submitted scores, provides large incentives to retake the test, since applicants always expect to receive positive benefits upon retaking. Current policy places certain applicants at a disadvantage: those with high costs of taking the test, low values attached to college admission, or "pessimistic" prior beliefs regarding their own ability. These disadvantaged applicants are disproportionately likely to come from low-income African-American families.

Payne examines the role of state governing boards on research productivity at public universities in the United States. Using a panel dataset that covers 1982 to 1998, she explores the relationship between research funding and research activities for three types of governance structures: centralized governing board; a coordinating board with some regulatory authority; and a decentralized coordinating board or planning agency. This paper demonstrates, on average, that fewer articles are published and there are fewer citations per article published with an additional dollar of research funding at universities in states with a highly centralized state governing board. The highest level of productivity with respect to publications is seen at universities in states with a coordinating board with regulatory authority over program approval and some oversight of universities' budgets. Additional research funding increases citations per article at these universities, on average, by between 1.5 and two times the amount for universities in states with a decentralized governance structure. These results suggest that while centralized oversight reduces productivity, decentralization may not be the solution.

Ashenfelter and Card use information on retirement flows from 1986-96 for older faculty at a large sample of four year colleges and universities to measure the effect of the elimination of mandatory retirement. Comparisons of retirement rates before and after 1994, when most institutions were forced to stop mandatory retirement, suggest that the abolition of compulsory retirement led to a dramatic drop in retirement rates at ages 70 and 71. Comparisons of retirement rates in the early 1990s between schools that were still enforcing mandatory retirement and those that were forced to stop by state laws lead to the same conclusion. In the era of mandatory retirement, fewer than 10 percent of 70-year-old faculty were still teaching two years later. After the elimination of mandatory retirement, this fraction has risen to 50 percent. These findings suggest that most U.S. colleges and universities will experience a significant rise in the fraction of older faculty in the coming years.

Arcidiacono addresses how changing the admission and financial aid rules at colleges can affect future earnings. He estimates a model that includes decisions by individuals about where to submit applications, which school to attend, and what field to study, as well as decisions by schools as to which students to accept and how much financial aid to offer. Throughout, individuals have rational expectations and maximize the present value of lifetime utility, recognizing the dependence of future utility on choices made today. By estimating the whole process, it is possible to see how the decision-making behavior, and the corresponding future earnings associated with these decisions, would be affected by changing the admission and financial aid rules.

Turner and Bound ask whether black Americans responded similarly to white men to the G.I. Bill and World War II. There are good reasons to believe that the effects of the G.I. Bill may have differed for black Americans because of differential returns to education in the labor market and differences in opportunities at educational institutions, with men in the South facing explicit segregation in educational institutions. The question of whether black veterans from segregated and unsegregated parts of the country demonstrated similar educational adjustments is significant for the overall evaluation of the G.I. Bill and for the contemporary policy debate on the effectiveness of federally sponsored aid to education. The empirical evidence suggests that World War II and the availability of G.I. benefits had a substantial and positive impact on the educational attainment of those likely to have access to colleges and universities outside the South. However, for those black veterans more likely to be limited to the South in their collegiate choices, the G.I. Bill had little effect on educational outcomes, resulting in the exacerbation of the economic and educational differences between blacks and whites.

While numerous studies have estimated the impact of college cost on enrollment rates, very few have used the duration of enrollment or completed schooling as an outcome measure. Ma examines the impact of public in-state tuition cost and state grant aid on the enrollment rates and duration of enrollment, paying particular attention to the differential impact of cost on students from different income and race groups. Her results suggest that public in-state two-year tuition has a strong impact on enrollment rates while public in-state four-year tuition generally has a negligible impact on enrollment rates. Further, the enrollment rates of low-income and middle-income students are more sensitive to public two-year tuition costs than the enrollment rates of high-income students. The enrollment rate of black students is more sensitive to tuition cost than that of white and Hispanic students. Further, the enrollment rates of middle-income students and Hispanic students appear to be the most sensitive to state grant aid. Results from enrollment duration models suggest that tuition cost and financial aid in general have a small or negligible impact on the duration of enrollment. This is consistent with the argument that there is a barrier to college entry. Once students cross that barrier, tuition does not seem to matter much to completed schooling.


Market Microstructure

Members of the NBER's Working Group on Market Microstructure met in Cambridge on May 11. Organizers Bruce Lehmann, University of California, San Diego, Andrew Lo, NBER and MIT, Matthew Spiegel, Yale University, and Avanidhar Subramanyam, University of California, Los Angeles, chose these papers to discuss:

  • Amber Anand and Daniel G. Weaver, Baruch College, "The Value of the Specialist: Empirical Evidence from the CBOE"
  • Discussant: Kumar Venkataraman, Southern Methodist University
  • Alex Boulatov and Dirk Hackbarth, University of California, Berkeley, "A Model of Liquidity Risk in Dynamic Economies"
  • Discussant: Harry Mamaysky, MIT
  • Malay K. Dey, University of Massachusetts, Amherst, and B. Radhakrishna, University of Minnesota, "Institutional Trading, Trading Volume, and Spread"
  • Discussant: Jennifer Koski, University of Washington
  • Mark Coppejans, Duke University, Ian Domowitz, Pennsylvania State University, and Ananth Madhavan, ITG, Inc., "Liquidity in an Automated Auction"
  • Discussant: Chester Spatt, Carnegie-Mellon University
  • Pankaj Jain, Indiana University, "Institutional Design and Liquidity on Stock Exchanges"
  • Discussant: Venkatesh Panchapagesan, Washington University
  • Amy K. Edwards, Securities and Exchange Commission, and Jeffrey H. Harris, University of Notre Dame, "Stepping Ahead of the Book"
  • Discussant: Simon Gervais, University of Pennsylvania

Using proprietary data and an event unique in the history of financial markets, Anand and Weaver study the value that a specialist system adds vis-à-vis a multiple market maker system. Specifically, they analyze the "natural experiment" of the institution of a specialist system for equity options on the Chicago Board Options Exchange (CBOE) in the second half of 1999. The literature predicts a decrease in spreads and an increase in depth attributable to the change to a specialist system on the CBOE; their findings support these hypotheses. The changes are more pronounced for lower volume securities and smaller trades. There is also limited evidence that the market share of the CBOE increases in the period after the option class moves on to the specialist system, suggesting increased competitiveness for the CBOE. The authors also analyze the implications of the move arising from single listing of certain options and the lack of a national market system for options during the sample period.

Boulatov and Hackbarth analyze a continuous auction model of liquidity risk in asset markets with symmetrically informed agents. Buyers and sellers maximize their expected payoffs in the presence of liquidity shocks when they participate in an auction where different sellers have different reservation prices. The heterogeneous initial distribution of reservation prices across the agents may originate from different prior expectations of bargaining outcomes. The authors endogenously derive bargaining shares and optimal expected holding periods for markets with homogeneous and heterogeneous sellers where bidders encounter a tradeoff between the winners' curse and choosing to deal with higher reservation price sellers. For buyers and sellers solving a dynamic programming problem, the authors derive a set of partial differential equations for the optimal trading strategies of both types of agents. They then analyze how the optimal bargaining strategies lead to the steady-state equilibrium and show that this equilibrium is characterized by equal expected payoffs across the agents with different priors. After linearizing around the equilibrium, they perform a stability analysis and provide a closed-form solution for competing buyers and sellers. The optimal holding period in this case occurs because of the option of "early trading" when trading takes place before the equilibrium is established. In particular, this real option entails a tradeoff between selling to a distressed buyer versus the liquidity risk resulting from immediate disposal of the asset under unfavorable terms.

Besides its academic interest, the effect of institutional trading on the bid-ask spread is of interest to regulators and market makers. It is often (casually) argued that greater institutional participation results in increased volatility in the market. On the other hand, some argue that greater liquidity trading by institutions reduces spread. There is no direct empirical evidence and little theoretical knowledge to suggest a convincing relationship between institutional trading and spread. In this paper, Dey and Radhakrishna present some evidence on the nature and effect of institutional trading on spreads. They argue that institutional trading is not completely information driven; part of it is liquidity trading in nature. The authors find that information induced institutional trading increases the adverse selection component. However, large volume (liquidity) trading reduces the order processing costs. The net effect of institutional trading on spread is consistently negative. Moreover, institutional buys have differential information from sells. Institutional trades per se reduce spreads, but only sells increase the adverse selection component. Both effective and relative spreads impound the differential nature of institutional buys and sells.

The use of automated auctions to trade equities, derivatives, bonds, and foreign exchange has increased dramatically in recent years. Trading in automated auctions occurs through an electronic limit order book without the need for dealers. Automated auctions offer advantages of speed and simplicity, but depend on public limit orders for liquidity. To the extent that liquidity varies over time, it affects trading costs, volatility, and induces strategic behavior by traders. Time variation in liquidity is also of considerable importance because liquidity affects expected returns. Coppejans, Domowitz, and Madhavan use data from an automated futures market to analyze the dynamic relationship between market liquidity, returns, and volatility. They find that there is wide intertemporal variation in aggregate market liquidity, measured by the depth of the limit order book at a point in time. Discretionary traders trade in high liquidity periods, reinforcing the concentration of volume and liquidity at certain points in time. These results are consistent with models where liquidity is a factor in expected returns, but also suggest more complicated dynamics consonant with supply and demand imbalances in the market. While increases in liquidity substantially reduce volatility, volatility shocks reduce liquidity over the short run, impairing price efficiency. These effects dissipate quickly, however, and their magnitudes are small, indicating a high degree of market resiliency.

Jain analyzes the impact of various institutional features of stock exchanges on their performance in a unified framework. He assembles the institutional design features including organizational structure, trading mechanism, trade-execution system, transparency, degree of market fragmentation, age, and ownership for 51 major exchanges around the world. For these exchanges, representing over 90 percent of the world's market capitalization, their institutional features are linked with various performance measures, namely quoted bid-ask spreads, effective spreads, realized spreads, volatility, and trading turnover. Jain uses a simultaneous-system-of-equations model to explain linkages between the different measures of performance. He finds that hybrid systems have lower spreads and volatility than pure limit order systems, which in turn have lower spreads and volatility than pure dealership systems. Stock exchanges with bid-ask spreads have narrower tick sizes, competitive market makers, electronic limit order books, automatic execution of trades, centralized trading, and enforcement of insider trading laws. These results do not support theories that predict better liquidity for a monopolistic specialist system, or an electronic open limit order book with no dealers. Spreads are directly related to return volatility but inversely related to market capitalization on a global basis. The analysis has important policy implications for security lawmakers implementing fairness and transparency, companies seeking global listings, investors forming trading strategies, and stock exchanges altering their institutional design to increase competitiveness.

Stepping-ahead occurs when specialists trade at prices incrementally better than the best prices in the limit order book. Stepping ahead benefits market orders that receive a better price but it delays or prevents limit order executions. Edwards and Harris find that limit orders incur higher costs when the specialist steps ahead. As U.S. markets trade in decimals, market orders receive less price improvement, and the cost of stepping ahead decreases. Smaller ticks magnify the agency problems between specialists and the limit orders they represent. Specialists rarely step ahead of limit orders (less than 2 percent of the time), but they step ahead more often after the tick size changes from $1/8 to $1/16. The cost to individual limit orders is actually lower with smaller ticks, but since specialists step ahead more often, aggregate limit order costs have risen. More importantly, the price improvement benefit to market orders falls significantly. Market orders benefit on net with a $1/8 tick but this benefit is eliminated with $1/16 ticks.


Behavioral Finance

The NBER's Working Group on Behavioral Finance, organized by Robert J. Shiller, NBER and Yale University, and Richard H. Thaler, NBER and University of Chicago, met in Chicago on May 25. The following papers were discussed:

  • Dilip J. Abreu and Markus K. Brunnermeier, Princeton University, "Bubbles and Crashes"
  • Discussant: Ming Huang, Stanford University
  • Shlomo Benartzi, University of California at Los Angeles, and Richard H. Thaler, "How Much is Investor Autonomy Worth?"
  • Discussant: Andrew Metrick, NBER and University of Pennsylvania
  • Randolph B. Cohen, Harvard University, and Paul A. Gompers and Tuomo O. Vuolteenaho, NBER and Harvard University,
  • "Who Underreacts to Cash-Flow News? Evidence from Trading Between Individuals and Institutions"
  • Discussant: Kent Womack, NBER and Dartmouth College
  • Kent D. Daniel, NBER and Northwestern University, and Sheridan Titman, NBER and University of Texas, "Market Reactions to Tangible and Intangible Information"
  • Discussant: Nicholas C. Barberis, NBER and University of Chicago
  • Jeffrey Pontiff, University of Washington, and Michael J. Schill, University of California at Riverside, "Long-Run Seasoned Equity Offering Returns: Data Snooping, Model Misspecification, or Mispricing? A Costly Arbitrage Approach"
  • Discussant: William N. Goetzmann, NBER and Yale University
  • Wesley S. Chan, MIT, "Stock Price Reactions to New and No-News Drift and Reversal After Headlines"
  • Discussant: Jay Ritter, University of Florida

Abreu and Brunnermeier present a model in which an asset bubble can persist despite the presence of rational arbitrageurs. The resilience of the bubble stems from the inability of arbitrageurs to coordinate their selling strategies temporarily. This synchronization problem, together with the individual incentive to time the market, results in the persistence of bubbles over a substantial period of time. The model provides a natural setting in which public events, by enabling synchronization, can have a disproportionate effect relative to their intrinsic informational content.

There is a worldwide trend towards increasing autonomy among investors; investors increasingly are able to pick their own portfolios. But how good a job are they doing? Bernartzi and Thaler present individuals who are saving for retirement with information about the distribution of outcomes they could expect from the portfolios they picked and also about the median portfolio selected by their peers. A majority of these survey participants actually prefer the median portfolio to the one they picked for themselves. Furthermore, a majority of investors who preferred to form their own portfolio rather than to accept one that was picked for them by a professional investment manager also preferred the distribution of returns implied by the suggested portfolio to the one they had selected on their own. The authors investigate various alternatives to these findings and offer some evidence to support the view that some of the results are attributable to the fact that investors do not have well-defined preferences.

A large body of literature suggests that firm-level stock prices "underreact" to news about future cash flows. Cohen, Gompers, and Vuolteenaho examine the joint behavior of returns, cash-flow news, and trading between individuals and institutions. They find that institutions buy shares from individuals in response to good cash-flow news, thus exploiting the underreaction phenomenon. Institutions are not simply following price momentum strategies: when price goes up in the absence of positive cash-flow news, institutions sell shares to individuals. The response of institutional ownership to cash-flow news is weaker for small stocks. Since small stocks also exhibit the strongest underreaction patterns, this finding is consistent with institutions facing exogenous constraints in trading small stocks.

Previous empirical studies suggest a negative relationship between fundamental performance over the past 3-5 years and future returns: distressed firms outperform more profitable firms. In fact, Daniel and Titman show that, after controlling for past stock returns, firms with higher past fundamental returns actually outperform weaker firms. These results are consistent with investors reacting appropriately to tangible information (that is, information that can be extracted from financial statements), but overreacting to intangible information. The authors explain these observations with a simple model based on the behavioral finding that investors are more overconfident about their ability to interpret intangible information than tangible information. Finally, Daniel and Titman reconcile their results with previous studies and show that firms which grow through share issuance experience low future returns, while firms that grow through increased profitability do not.

Pontiff and Schill use a new approach and assess the behavior of returns after seasoned equity offerings. They recognize that sophisticated investors are motivated to correct mispricing, although the magnitude of that activity is influenced by the costs of arbitrage. Their evidence supports the contention that firms that conduct seasoned equity offerings are overpriced. This implies that because mispricing associated with seasoned equity offerings is persistent in the long run, holding costs play an important role but transaction costs do not. In fact, holding costs dominate the size effect that is documented in earlier research.

Chan examines returns to a subset of stocks after public news about them is released. He compares them to other stocks with similar monthly returns, but no identifiable public news. There is a major difference between return patterns for the two sets. The evidence suggests post-news drift, which supports the idea that investors underreact to information. This underreaction is strongest after bad news. Chan also finds some evidence of reversal after extreme price movements unaccompanied by public news. The patterns exist even after Chan excludes earnings announcements, controls for potential risk exposure, and makes other adjustments. However, they appear to apply mainly to smaller stocks. Chan also finds that trading frictions, such as short-sale constraints, may play a role in the post-bad-news drift pattern.