Finance and Financial Management Commons^™

Characteristics Of A Full Disclosure, Transaction-Based Index Of Commercial Real Estate, David H. Downs, Barrett A. Slade

Faculty Publications

This study addresses the characteristics of a transaction-based index of commercial real estate as reported in a full-disclosure market. Prior research on transaction-based indices has enumerated various shortcomings for commercial real estate markets. This study circumvents many of these problems by using a large data set of commercial property transactions obtained for the Phoenix, Arizona metropolitan statistical area. The empirical analysis demonstrates that investors stand to gain considerable insight by comparing fulldisclosure, transaction-based indices with voluntarydisclosure, appraisal-based indices. The results suggest that full-disclosure indices avoid some of the institutional biases associated with other benchmarks of commercial real estate performance. In …

Race, Redlining, And Automobile Insurance Prices, Scott E. Harrington, Gregory R. Niehaus

Faculty Publications

Following Becker's (1993) suggestion that tests for discrimination should attempt to infer whether profits differ for products sold to minorities and nonminorities, this article tests the hypothesis that racial discrimination affects market prices of auto insurance in Missouri. Compared with tests for discrimination in lending markets, our results are less susceptible to bias from omitted variables.Controlling for available demographic and coverage- related factors, we do not find that loss ratios at the zip-code level are negatively related to percent minority population. This finding is inconsistent with the hypothesis that racial discrimination increases premiums relative to expected claim costs for minorities.

Generating Needed Modernization Funds: Streamlining The Bureaucracy--Not Outsourcing And Privatizing--Is The Best Solution, Jan P. Muczyk

Faculty Publications

The Department of Defense (DoD) budget, in real dollars, has decreased for a dozen years or so, and will likely continue to do so. Since all the funds necessary for warfighting asset modernization will not come from Congress, DoD must free up existing funds for reallocation to its modernization program. So far, much reliance has been placed on privatization and outsourcing as ways of releasing large sums of money. But it is highly unlikely that these instrumentalities are up to the task, and other sources must shoulder a large part of the load. Although eliminating duplication of mission and roles …

Economic Valuation Models For Insurers, David F. Babbel, Craig B. Merrill

Faculty Publications

Recently much attention has been given to the approaches insurers undertake in valuing their liabilities and assets. For example, in 1994 the American Academy of Actuaries created a Fair Valuation of Liabilities Task Force to address the issue [see Doll et al. (1998), Reitano (1997), Babbel (1997, 1998b), Babbel and Merrill (1996), and Merrill (1997)]. In 1997, the Academy established a Valuation Law Task Force and a Valuation Tools Working Group to investigate the various valuation approaches extant and to recommend the models best suited to the task.

Much of the literature on valuation has focused on the strengths and …

Is Sound Just Noise, Joshua D. Coval, Tyler Shumway

Faculty Publications

This paper analyzes the information content of the ambient noise level in the Chicago Board of Trade's 30-year Treasury Bond futures trading pit. Controlling for a variety of other variables, including lagged price changes, trading volumes, and news announcements, we find that the sound level conveys information which is highly economically and statistically significant. In particular, we find increases in the sound level precede periods of high price volatility and increased trading volumes. Increases in the sound level also presage the placement of block trades and relative increases in customer-driven trading. Our results add to our understanding of the market …

Labor Market Responses To Rising Health Insurance Costs: Evidence On Hours Worked, David M. Cutler, Brigitte C. Madrian

Faculty Publications

Increases in the cost of providing health insurance must have some effect on labor markets, either in lower wages, changes in the composition of employment, or both. Despite a presumption that most of this effect will be in the fonn of lower wages, we document in this paper a significant effect on work hours as well. Using data from the CPS and the SIPP, we show that rising health insurance costs over the 1980s increased the hours worked of those with health insurance by up to 3 percent. We argue that this occurs because health insurance is a fixed cost, …

Health Insurance Portability: The Consequences Of Cobra, Brigitte C. Madrian

Faculty Publications

THE RESPONSE OF THE CLINTON ADMINISTRATION and Congress to the failed attempt at fundamental health care reform in 1993 has been a series of incremental measures that expand the government’s role in the health care system. One recent initiative, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), restricts the ability of insurers to exclude preexisting medical conditions from insurance coverage. It also requires insurance companies to issue or renew coverage for individuals who have been insured but who no longer have access to group health insurance coverage. Those provisions are intended to address the issue of health insurance …

Does Medicare Eligibility Affect Retirement?, Brigitte C. Madrian, Nancy Dean Beaulieu

Faculty Publications

Concern over the lack of portability associated with employer-provided health insurance has precipitated a recent flurry of research activity on the effects of health insurance on labor market outcomes. Several estimates suggest that the costs associated with changing doctors and losing coverage for preexisting conditions are sufficient to deter individuals from changing jobs. These costs may be particularly important for older individuals contemplating retirement because a departure from the labor force may involve not only a change in doctors or lack of coverage for preexisting conditions but a complete loss of access to employer-provided group health insurance.

The Coexistence Of Multiple Distribution Systems For Financial Services: The Case Of Property-Liability Insurance, Allen N. Berger, J. David Cummins, Mary A. Weiss

Faculty Publications

Property-liability insurance is distributed through a direct-writer system, where agents represent one insurer, and an independent- agency system, where agents represent several insurers. Independent-agency insurers have higher costs than direct writers. The market- imperfections hypothesis attributes the coexistence of the two types of insurers to impediments to competition, while the product-quality hypothesis holds that independent-agency insurers provide higher-quality services. We measure cost efficiency and profit efficiency for property-liability insurers and find strong support for the product-quality hypothesis, implying that independent-agency insurers produce higher-quality outputs and are compensated by higher revenues.

Pitfalls In Tests For Changes In Correlations, Brian H. Boyer, Michael S. Gibson, Mico Loretan

Faculty Publications

Correlations are crucial for pricing and hedging derivatives whose payoff depends on more than one asset. Typically, correlations computed separately for ordinary and stressful market conditions differ considerably, a pattern widely termed "correlation breakdown." As a result, risk managers worry that their hedges will be useless when they are most needed, namely during "stressful" market situations. We show that such worries may not be justified since "correlation breakdowns" can easily be generated by data whose distribution is stationary and, in particular, whose correlation coefficient is constant. We make this point analytically, by way of several numerical examples, and via an …

Employment Separation And Health Insurance Coverage, Jonathan Gruber, Brigitte C. Madrian

Faculty Publications

We study the interrelationship between employment separation and insurance coverage. We first document that employment separation is associated with large reductions in insurance coverage, even conditioning on underlying tastes for insurance.We then show that reducing the cost of insurance through state laws mandating continued access to employerprovided health insurance for the non-employed increases the likelihood of having insurance after separating from a job by 6.7%. These mandates also increase the number of individuals who separate and the total amount of time spent jobless. Finally, at least some of this increased non-employment appears to be spent in productive job search as …

Two Paradigms For The Market Value Of Liabilities, Robert R. Reitano, Craig B. Merrill

Faculty Publications

Financial valuation models can be applied to insurance- related claims. In particular, these models are being employed to calculate the market value of insurance liabilities. The goal of this paper is to introduce the various approaches to valuation that are used in the finance literature and show how the valuation of insurance liabilities fits into the financial valuation framework. The theory suggests that securitization of insurance liabilities may lead to better market value calculations.

The Delisting Bias In Crsp Data, Tyler Shumway

Faculty Publications

I document a delisting bias in the stock return data base maintained by the Center for Research in Security Prices (CRSP). I find that delists for bankruptcy and other negative reasons are generally surprises and that correct delisting returns are not available for most of the stocks that have been delisted for negative reasons since 1962. Using over-the-counter price data, I show that the omitted delisting returns are large. Implications of the bias are discussed.

Evaluating Forecasts Of Correlation Using Option Pricing, Michael S. Gibson, Brian H. Boyer

Faculty Publications

A forecast of the correlation between two asset prices is required to price or hedge an option whose payoff depends on both asset prices or to measure the risk of a portfolio whose return depends on both asset prices. However, a number of factors make it difficult to evaluate forecasts of correlation. We develop a forecast evaluation methodology based on option pricing, extending a technique that Engle et al (1993) introduced to evaluate volatility forecasts. A forecast of the variance-covariance matrix of joint asset returns is used to generate a trading strategy for a package of simulated options. The most …

On The Information Content Of Calls Of Convertible Securities, Anthony K. Byrd, William T. Moore

Faculty Publications

Negative stock price reactions to conversion-forcing calls of convertible bonds and preferred stocks are reexamined, and most of the sample firms are shown to exhibit full price recovery by the end of the conversion period. In addition, analysts' earnings forecasts, both short-term and long-term, are found to be revised upward following call announcements for convertible bonds and preferred stocks. The combined findings cast doubt on the established belief that such capital structure decisions signal negative information about firm value.

Health Insurance And Early Retirement: Evidence From The Availability Of Continuation Coverage, Jonathan Gruber, Brigitte C. Madrian

Faculty Publications

The dramatic postwar decline in the labor force participation of older men in the United States has motivated a sizable body of literature on retirement behavior. Three factors, in particular, have been studied extensively: the growth of the Social Security program (see, for example, Burtless 1986; Burtless and Moffitt 1984; Diamond and Hausman 1984; Hausman and Wise 1985; Sueyoshi 1989), the increased availability and generosity of private pensions (Stock and Wise 1990a, 1990b), and the expansion of federal disability insurance (Bound and Waidmann 1992). One potentially important factor that until recently has not received much attention is the availability of …

A Note On Internet Resources For The Entrepreneur: A Small Firm Finance Perspective, James C. Brau

Faculty Publications

This article concentrates on internet resources that are available to those interested in entrepreneurial and small firm finance. Specifically, I present web pages that focus on general entrepreneurial issues and different avenues for acquiring capital. The three main areas of external financing that I include are venture capital, going public, and loans. Additionally, the advantages of using electronic mail, distribution lists, and personal web page applications are discussed and several examples presented.

Relationship Lending And Lines Of Credit In Small Firm Finance, Allen N. Berger, Gregory F. Udell

Faculty Publications

This article examines the role of relationship lending in small firm finance. It examines price and nonprice terms of bank lines of credit (L/Cs) extended to small firms. The focus on LICs allows the examination of a type of loan contract in which the hank- borrower relationship is likely to be an important mechanism for solving the asymmetric information problems associated with financing small enterprises. We find that borrowers with longer banking relationships pay lower interest rates and are less likely to pledge collateral.These results are consistent with theoretical arguments that relationship lending generates valuable information about borrower quality.

Default Risk And The Effective Duration Of Bonds, David F. Babbel, Craig B. Merrill, William Panning

Faculty Publications

Basis risk is the risk attributable to uncertain movements in the spread between yields associated with a particular financial instrument or class of instruments, and a reference interest rate over time. There are seven types of basis risk: Yields on

• Long-term versus short-term financial instruments.
• Domestic currency versus foreign currencies.
• Liquid versus illiquid investments.
• Bonds with higher or lower sensitivity to changes in interest rate volatility.
• Taxable versus tax-free instruments.
• Spot versus futures contracts.
• Default-free versus non-default-free securities.

Basis risk makes it difficult for the fixed-income portfolio manager to measure the portfolio's exposure to interest rate risk, heightens the anxiety …

Health Insurance Availability And The Retirement Decision, Jonathan Gruber, Brigitte C. Madrian

Faculty Publications

Because individuals aged 55-64 face large and uncertain medical expenditures without the guarantee of public insurance coverage provided by Medicare, the availability of post-retirement health insurance could be an important detenninant in the retirement decisions of this group. We investigate the effect of health insurance on retirement by focusing on state and federal "continuation of coverage" mandates which grant the retiree the right to continue purchasing health insurance through a previous employer for a specified number of months after leaving the firm. We exploit variation in the timing and generosity of these laws to identify the effect of the availability …

Cost Overrun Optimism: Fact Or Fiction, David D. Christensen

Faculty Publications

Program managers are advocates by necessity, When taken to the extreme, program advocacy can result in the suppression of adverse information about the status of a program gram. Such was the case in the Navy's A-12 Program. In A-12 Administrative inquiry, Beach (1990) speculates that such abiding cultural problems were not unique to the Navy. To test that assertion, this paper examines cost overrun data on 64 completed acquisition contracts extracted from the Defense Acquisition Executive Summary database. Cost overruns at various contract completion points are compared with projected final cost overruns estimated by contractor and government personnel. 17 comparison …

The Effect Of Health Insurance On Retirement, Brigitte C. Madrian

Faculty Publications

FOR DECADES health insurance in the United States has been provided to most nonelderly Americans through their own or a family member's employment. This system of employment-based health insurance has evolved largely because of the substantial cost advantages that employers enjoy in supplying health insurance. By pooling large numbers of individuals, employers face significantly lower administrative expenses than do individuals. In addition, employer expenditures on health insurance are tax deductible, but individual expenditures are generally not.¹

Despite these cost advantages, there is widespread dissatisfaction with this system of employment-based health insurance. Many people are excluded because not all employers …

Employment-Based Health Insurance And Job Mobility: Is There Evidence Of Job-Lock?, Brigitte C. Madrian

Faculty Publications

This paper assesses the impact of employer-provided health insurance on job mobility by exploring the extent to which workers are "locked' into their jobs because preexisting conditions exclusions make it expensive for individuals with medical problems to relinquish their current health insurance. I estimate the degree of job-lock by comparing the difference in the turnover rates of those with high and low medical expenses for those with and without employer-provided health insurance. Using data from the 1987 National Medical Expenditure Survey, I estimate that job-lock reduces the voluntary turnover rate of those with employer-provided health insurance by 25 percent, from …

Basic Concepts In Forest Valuation And Investment Analysis, Steven H. Bullard, Thomas J. Straka

Faculty Publications

The current edition 3.0 can be found at the following location:

Bullard, Steven H. and Straka, Thomas J., "Basic Concepts in Forest Valuation and Investment Analysis" (2011) eBooks http://scholarworks.sfasu.edu/ebooks/21

This book was originally intended to supplement lectures in forestry economics at the undergraduate level. At Mississippi State University, for example, these materials are currently used in one of the eleven major topics included in a one-semester course titled 'Forest Resource Economics.' It is also intended, however, that the book will serve as a basic reference for foresters with experience in valuation concepts and terminology. It has proven to be a …

Some Evidence On The Empirical Significance Of Credit Rationing, Allen N. Berger, Gregory F. Udell

Faculty Publications

This paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988. While commercial loan rates are "Sticky," consistent with rationing, this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory. In addition, the proportion of new loans issued under commitment does not increase significantly when credit markets are tight, despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing. Overall, the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon.

Liquidity Costs And Stock Price Response To Convertible Security Calls, Michael A. Mazzeo, William T. Moore

Faculty Publications

Firms' announcements to call in-the-money convertible securities for redemption essentially force their conversion into common stock, and such announcements are generally met with significant reductions in the calling firms' equity values. An explanation based on liquidity costs is advanced and tested. The explanation implies that investors who choose to sell their shares early in the conversion period bear liquidity costs by selling at reduced prices. Consistent with the explanation, the average share price decline is short-lived, lasting most of the conversion period. Thus, a component of the call announcement effect appears to be due to liquidity costs.

A Note On Equivalence In Ranking Investments, Steven H. Bullard

Faculty Publications

Present net worth, benefit/cost, and internal rate of return are considered for ranking investments. In some cases, rankings can be contradictory, and the investment criterion can influence inter-project allocations. There are situations, however, when ranking equivalence is assured. In this article, conditions for equivalence in ranking investments are presented using simple graphics and algebra. The conditions are restrictive, and can be effective in demonstrating the need for discretion in selecting an economic criterion for evaluating investments.

Interdependence Of Market Risk Measures, Philip L. Cooley, Rodney L. Roenfeldt, Naval K. Modani

Faculty Publications

No abstract provided.

On The Net Present Value Rule For Educational Investments, Elchanan Cohn

Faculty Publications

Focuses on the net present value rule for educational investments. Profitability of investment in education; Omission of direct educational costs from the benefit-cost calculations; Standards on the applicability of the net present value rule.