This paper investigates prices and endogenous research decision for …nancial assets. In rational ... more This paper investigates prices and endogenous research decision for …nancial assets. In rational expectations models with public information, higher order beliefs make the investors to overweight the public information relative to underlying fundamentals. The extent of this mispricing is higher if the of private signals is relatively high. The model presented in this paper extends this setting by incorporating the research cost decision and essentially endogenises the variance of private signals of short-lived investors obtain in each period. It turns out that investors will be less willing to research in periods when there is an alternative with high return available. Furthermore, the optimal research decision will depend on the time left until the maturity of asset. This explains in a rational setting why long lived assets like stocks may be traded based on the public information rather than research on fundamentals.
This paper shows how optimism in the equity market can bring welfare gains at the aggregate level... more This paper shows how optimism in the equity market can bring welfare gains at the aggregate level, despite encouraging negative NPV investments at the …rm level. When equity prices a¤ect incentives to invest in R&D, optimism increases exante optimally the aggregate R&D investment and production. While consumers ex-post realise losses from their equity holdings, they receive gains from higher wages. There are potential welfare gains because the equity contract does not internalise the aggregate productivity gains from the new R&D product. Equity market optimism can generate Pareto improvement, if the R&D productivity is high and optimism is long-lasting.
This paper shows how equity overpricing can increase aggregate welfare. When equity prices a¤ect ... more This paper shows how equity overpricing can increase aggregate welfare. When equity prices a¤ect incentives for R&D investment, overpricing causes short-term negative NPV investments at the …rm level and equity losses for investors. However, it also causes permanent output and wage gains, due to knowledge spillovers in R&D production. When overpricing is su¢ ciently small and lasting, wage gains compensate for losses from equity holdings and cause a Pareto improvement. This is because overpricing, at least temporarily, alleviates underinvestment in R&D at the aggregate level. The market fails to do so otherwise, due to incomplete ownership rights on R&D products. JEL classi…cation: G12, O30, O40
It is commonly accepted that the business environment — encompassing features of the legal, reg... more It is commonly accepted that the business environment — encompassing features of the legal, regulatory, financial, and institutional system of a country — has an impact on the performance of firms. As barriers to doing business appear to vary widely across regions and countries, it has also been asserted that the business environment will affect aggregate performance. The common underlying assumption is that countries and firms facing ‘better’ business environments can be expected to perform better This paper attempts to evaluate the robustness of these conclusions using two types of data. The first comprises a large firm level dataset — the 2002 and 2005 rounds of the Business Environment and Enterprise Performance Survey (henceforth BEEPS) — that includes measures of firm performance, variables relating to ownership, competition and export orientation as well as perceptions of the business environment. The dataset covers between 6–9,000 firms in 26 transition countries. The second — country level — dataset comprises the World Bank’s annual ‘Doing Business’ survey that covers 175 countries. While this survey has relatively few observations over time — data collection only started in 2003 — it has large country coverage and has already been widely used in cross-country analysis. In this paper, the Doing Business measures are primarily used to try and establish whether there is any link from country-level measures of the business environment to country-level performance. Simon Commander — Associate Professor, Department of Public Administration, School of Management, St. Petersburg State University Jan Svejnar — Professor, University of Michigan Katrin Tinn — Assistant Professor, Stockholm School of Economics
This paper investigates prices and endogenous research decision for …nancial assets. In rational ... more This paper investigates prices and endogenous research decision for …nancial assets. In rational expectations models with public information, higher order beliefs make the investors to overweight the public information relative to underlying fundamentals. The extent of this mispricing is higher if the of private signals is relatively high. The model presented in this paper extends this setting by incorporating the research cost decision and essentially endogenises the variance of private signals of short-lived investors obtain in each period. It turns out that investors will be less willing to research in periods when there is an alternative with high return available. Furthermore, the optimal research decision will depend on the time left until the maturity of asset. This explains in a rational setting why long lived assets like stocks may be traded based on the public information rather than research on fundamentals.
This paper shows how optimism in the equity market can bring welfare gains at the aggregate level... more This paper shows how optimism in the equity market can bring welfare gains at the aggregate level, despite encouraging negative NPV investments at the …rm level. When equity prices a¤ect incentives to invest in R&D, optimism increases exante optimally the aggregate R&D investment and production. While consumers ex-post realise losses from their equity holdings, they receive gains from higher wages. There are potential welfare gains because the equity contract does not internalise the aggregate productivity gains from the new R&D product. Equity market optimism can generate Pareto improvement, if the R&D productivity is high and optimism is long-lasting.
This paper shows how equity overpricing can increase aggregate welfare. When equity prices a¤ect ... more This paper shows how equity overpricing can increase aggregate welfare. When equity prices a¤ect incentives for R&D investment, overpricing causes short-term negative NPV investments at the …rm level and equity losses for investors. However, it also causes permanent output and wage gains, due to knowledge spillovers in R&D production. When overpricing is su¢ ciently small and lasting, wage gains compensate for losses from equity holdings and cause a Pareto improvement. This is because overpricing, at least temporarily, alleviates underinvestment in R&D at the aggregate level. The market fails to do so otherwise, due to incomplete ownership rights on R&D products. JEL classi…cation: G12, O30, O40
It is commonly accepted that the business environment — encompassing features of the legal, reg... more It is commonly accepted that the business environment — encompassing features of the legal, regulatory, financial, and institutional system of a country — has an impact on the performance of firms. As barriers to doing business appear to vary widely across regions and countries, it has also been asserted that the business environment will affect aggregate performance. The common underlying assumption is that countries and firms facing ‘better’ business environments can be expected to perform better This paper attempts to evaluate the robustness of these conclusions using two types of data. The first comprises a large firm level dataset — the 2002 and 2005 rounds of the Business Environment and Enterprise Performance Survey (henceforth BEEPS) — that includes measures of firm performance, variables relating to ownership, competition and export orientation as well as perceptions of the business environment. The dataset covers between 6–9,000 firms in 26 transition countries. The second — country level — dataset comprises the World Bank’s annual ‘Doing Business’ survey that covers 175 countries. While this survey has relatively few observations over time — data collection only started in 2003 — it has large country coverage and has already been widely used in cross-country analysis. In this paper, the Doing Business measures are primarily used to try and establish whether there is any link from country-level measures of the business environment to country-level performance. Simon Commander — Associate Professor, Department of Public Administration, School of Management, St. Petersburg State University Jan Svejnar — Professor, University of Michigan Katrin Tinn — Assistant Professor, Stockholm School of Economics
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