Ex-post Information Research Articles

The Role of Contingent Capital Structure in Signaling and Information Disclosure

This paper advocates two novel advantages of contingent convertible securities in capital structure in (1) signaling, and (2) information disclosure. First, in order to signal his type, the good banker should be punished for poor performance and rewarded otherwise. Since the banker knows better about events occurring in the near future (i.e., the interim states) than final cash flows to be realized in the distant future, the former are better performance indicators, thereby providing contingent securities with additional signaling power. Nevertheless, this advantage needs to be supported by a positive cost of misreporting interim states. Second, even if misreporting is costless, contingent capital structure still has an advantage over non-contingent capital in its ability to mitigate ex-post information asymmetries, since it has more degrees of freedom in setting payoffs to fine-tune the issuer's truth-telling incentives. This paper thus sheds some new light on the design of CoCos and the regulation of contingent capital.

Timing of information acquisition in a competitive environment

This article investigates the impact of timing on sellers' information acquisition strategies in a duopoly setting. Market uncertainty is captured by a representative consumer who has a private taste for the product's horizontal attribute, and both sellers can acquire this information either before (ex-ante acquisition) or after (ex-post acquisition) observing their own product qualities. We identify several conflicting effects of information acquisition that vary significantly in its timing and market characteristics. In the monopoly scenario, information acquisition is unambiguously beneficial and ex-ante acquisition is the dominant option, because it helps a seller not only design the proper product but also craft better pricing strategy. By contrast, when there is competition, information acquisition eliminates the buffer role of market uncertainty and leads to the fiercest production or pricing competition, which makes the subsequent effects of acquisition detrimental, and a seller's payoff is nonmonotonic in terms of its acquisition cost. Moreover, compared with the ex-ante information acquisition, ex-post information acquisition normally generates higher sellers' equilibrium payoffs by postponing the timing of acquisition and maintaining product differentiation. Nonetheless, ex-post information acquisition also provides the seller with greater acquisition incentive and occasionally makes him worse off than that in the ex-ante scenario. Thus, in a competitive environment, having the option of information acquisition and flexibility in its timing can be both detrimental and irresistible. © 2016 Wiley Periodicals, Inc. Naval Research Logistics 63: 3–22, 2016

Ex-post blindness as excuse? The effect of information disclosure on giving

People passing by beggars without leaving a penny are not necessarily pure money-maximizers. In the world of sincere and dishonest recipients, some donors might anticipate the disutility they will suffer at the moment they realize their help is misdirected and reduce their willingness to donate to avoid these psychological costs. I employ a dictator game with ex-ante uncertainty about recipient’s endowment and requests from recipients to study how donors react to ex-post revelation of recipient’s type. I observe no difference in donations with and without ex-post information about recipient’s endowment. However, if donors could choose if they want to receive such information themselves, nearly a third of dictators choose to remain ignorant. Those dictators who choose to ex-post reveal the endowment of the recipient give significantly more.

The Association between Viability Related Factors and Control Package Choices in the Context of Foreign Subsidiaries

This paper examines the implications of factors relevant to the ongoing viability of wholly owned foreign subsidiary operations on the management control choices exercised by multinational corporation headquarters. We focus on two areas important for wholly owned foreign subsidiary viability, first strategic factors, relating to both corporate and competitive positions, and second integration factors, relating to both foreign subsidiary integration within and outside a multinational corporation. The motivation for this study is based on the continued importance of wholly owned foreign subsidiaries and the associated challenged when controlling these entities. To develop a more comprehensive and holistic understanding of the implications of viability related factors, we apply a control package approach, building on the findings of prior literature. Our evidence is based on a cross sectional survey questionnaire we develop and administer for which we received 159 useable responses. Based on transaction cost economics theory, we hypothesise that viability related factors effect control package choices and in particular effect the greater use of all control packages to a greater extent in situations that are less problematic (low uncertainty, asset specificity and ex-post information asymmetry). Our findings indicate that activity sharing corporate strategies, low cost strategies and higher corporate embeddedness do affect the greater use control packages in many cases, consistent with expectations. However differentiation based competitive strategies and external embeddedness appear to have far more distinct and narrow implications on control package choices. A number of alternative regression modelling approaches are run, however the main continuous variable based regression model results, presented in this paper, appear be explain control packages choices to the greatest extent.

Information Contagion and Systemic Risk

We examine the effect of ex-post information contagion on the ex-ante optimal portfolio choices of banks and the welfare losses due to joint default. Because of counterparty risk and common exposures, bad news about one bank reveals valuable information about another bank, thereby triggering information contagion. Systemic risk is defined as the ex-ante probability of joint bank default ex post. We find that information contagion increases systemic risk when banks are subject to common exposures since portfolio adjustments are small. In contrast, when banks are subject to counterparty risk, information contagion induces a large shift toward more prudential portfolios and therefore reduces systemic risk.

MONITORING REGISTRIES AT ITALIAN MEDICINES AGENCY: FOSTERING ACCESS, GUARANTEEING SUSTAINABILITY.

The AIFA (Agenzia Italiana del Farmaco--Italian Medicines Agency) Monitoring Registries track the eligibility of patients and the complete flow of treatments, guaranteeing appropriateness in use of pharmaceutical products, according to approved indications. This study describes the Italian pharmaceutical context and the aims and functioning of AIFA Monitoring Registries, focusing on the applications to the Managed Entry Agreements (MEAs) and HTA approaches. The AIFA Monitoring Registries System has been operational in Italy since 2005. In 2012, the system became part of the NHS Information Technology system, aiming at enhancing appropriate use of pharmaceuticals and efficiency of the administrative activity. Currently, seventy-six medicines are monitored through the system, corresponding to fifty-eight therapeutic indications; individual treatments recorded are more than 515,000, for a population of approximately 505,000 patients. For each monitored product, patients eligible for treatment are registered in the specific therapeutic indication dynamic monitoring database to collect epidemiologic and clinical data, including data on the safety profile, and ex-post information missing at first evaluation stage. AIFA Monitoring Registries allow the evaluation of the pharmaceuticals' performance in clinical practice and may promote innovation and quicker access to medicines at affordable prices, for the benefit of patients.

Unintended Consequences of the Credit Card Act

This paper asks first why consumers seek financing through credit cards. It then evaluates the impact on consumer welfare of the constraints on increasing interest rates present in the Credit Card Act. We model consumer financing in a setting where consumers do not commit to borrow from a given lender and where information asymmetry between a consumer and a lender arises over time. The existence of ex-post information asymmetry coupled with the lack of commitment leads to adverse selection of consumers which, in turn, prompts lenders to offer credit terms that are inefficient relative to a setting with perfect information. This inefficiency is alleviated if credit contracts have some of the features that we observe in credit cards, and we show that these features arise in the competitive equilibrium credit contract. Specifically, in a competitive equilibrium the issuer charges an up-front fee and commits to an interest rate before a loan is taken; the issuer retains an option to change the interest rate upon new information, and consumers have an option to repay the loan at any time. We also show that restrictions on increasing the interest rate, as in the Credit Card Act, are welfare decreasing. They lead to lower up-front fees, higher credit card interest rates for low credit-quality consumers, and lower credit limit for high credit-quality consumers. This paper contributes to the literature by providing a new model of credit cards, and offers predictions of relevance for policy makers.

Acquisition of Ex-Post Travel Information: A Matter of Balancing Regrets

This paper presents a formal model of the acquisition of ex-post travel information concerning nonchosen alternatives. It is argued that this decision is fundamentally different from the decision to acquire pre- or in-trip information, because the reception of ex-post information on nonchosen alternatives can trigger regret. Psychological theories of regret regulation suggest that when provided with ex-post information, the traveler will make a tradeoff between wanting to ignore information to avoid regret associated with the already executed choice, and wanting to learn from information to minimize regret in future decisions. The presented model captures this tradeoff and predicts under what circumstances ex-post information is likely to be acquired or ignored. An illustrative example, based on parameter estimates from a stated choice experiment, shows how model predictions are in line with intuition and with theories of regret regulation.

The (un)reliability of real-time output gap estimates with revised data

This paper investigates the differences between real-time and ex-post output gap estimates using a newly-constructed international real-time dataset over the period from 1973:Q1 to 2012:Q3. We extend the findings in Orphanides and van Norden (2002) for the United States that the use of ex-post information in calculating potential output, not the data revisions themselves, is the major cause of the difference between real-time and ex-post output gap estimates to nine additional OECD countries. The results are robust to the use of linear, quadratic, Hodrick–Prescott, Baxter–King, and Christiano–Fitzgerald detrending methods. By using quasi real-time methods, reliable real-time output gap estimates can be constructed with revised data.

How to Yield an Unbiased Estimate of the Speed of Adjustment to Target Capital Structure

Recent studies show that a standard partial adjustment model with the debt ratio as the dependent variable cannot distinguish between mechanical mean reversion and adjustment to target capital structure. I propose a new approach that uses the net increase of debt as the dependent variable and uses only ex-post information to estimate the target capital structure. Simulation experiments show that this approach is mainly unaffected by mechanical mean reversion and hence able to provide a meaningful test for the target adjustment hypothesis. I estimate a speed of adjustment to target capital structure of 28% per year.

Using Monte Carlo Simulation to Calculate Match Importance: The Case of English Premier League

This paper presents a new method of calculating match importance (a common variable in sports attendance demand studies) using Monte Carlo simulation. Using betting odds and actual results of 12 seasons of English Premier League, it is shown that the presented method is based on realistic predictions of match results and season outcomes. The Monte Carlo method provides results closest to Jennett’s approach; however, it does not require ex-post information and can be used for any type of season outcome.

Ex-Post Evaluation of Monetary Policy

We employ a model-based approach in an ex-post evaluation of monetary policy decisions taken by the Bank of Israel during the years 2001-2010. Using ex-post information, we test, for each individual year, whether there could have been a Pareto improvement in inflation and output volatilities. This involves simulating counterfactual scenarios under alternative monetary policy shocks, where for each such simulation we compute the Root Mean Squares (RMS) of the inflation and output gaps during and following the evaluated year. We then examine the deviation of actual RMS from simulation-based frontiers. We also compare the actual RMS to a counterfactual RMS which would have been obtained for the case of no policy shocks. In other words, we test whether actual policy shocks were efficient. The exercise reveals several distinct sets of years: years in which actual RMSs were close to the efficient frontier (2001 and 2009) and years in which they were far away (2003, 2004 and 2006); years in which monetary policy shocks led to an absolute improvement in economic outcomes (2004 and 2008) or an absolute worsening (2003, 2006); and years characterized by aggressive policy shocks (2002, 2008 and 2009), which were usually aimed at narrowing the output gap at the expense of more volatile inflation.

Modeling HIV/AIDS Drug Price Determinants in Brazil: Is Generic Competition a Myth?

BackgroundBrazil became the first developing country to guarantee free and universal access to HIV/AIDS treatment, with antiretroviral drugs (ARVs) being delivered to nearly 190,000 patients. The analysis of ARV price evolution and market dynamics in Brazil can help anticipate issues soon to afflict other developing countries, as the 2010 revision of the World Health Organization guidelines shifts demand towards more expensive treatments, and, at the same time, current evolution of international legislation and trade agreements on intellectual property rights may reduce availability of generic drugs for HIV care.Methods and FindingsOur analyses are based on effective prices paid for ARV procurement in Brazil between 1996 and 2009. Data panel structure was exploited to gather ex-ante and ex-post information and address various sources of statistical bias. In-difference estimation offered in-depth information on ARV market characteristics which significantly influence prices. Although overall ARV prices follow a declining trend, changing characteristics in the generic segment help explain recent increase in generic ARV prices. Our results show that generic suppliers are more likely to respond to factors influencing demand size and market competition, while originator suppliers tend to set prices strategically to offset compulsory licensing threats and generic competition.SignificanceIn order to guarantee the long term sustainability of access to antiretroviral treatment, our findings highlight the importance of preserving and stimulating generic market dynamics to sustain developing countries' bargaining power in price negotiations undertaken with originator companies.

Collateralization, Bank Loan Rates and Monitoring: Evidence from a Natural Experiment

Collateral is one of the most important features of a debt contract. A substantial theoretical literature motivates the use of collateral as a means to alleviate ex-ante and ex-post information asymmetries between borrowers and lenders and the incidence of credit rationing. Through its seniority effect, collateral may also affect banks’ incentives to monitor borrowers. There is little empirical evidence, however, on the precise workings of collateral, its interaction with other contract terms, and its impact on banks’ monitoring incentives. We study a change in the Swedish law that exogenously reduced the value of all outstanding company mortgages, i.e., a type of collateral that is comparable to the floating lien. We explore this natural experiment to identify how collateral determines borrower quality, loan terms, access to credit and bank monitoring of business term loans. Using a differences-in-differences approach, we find that following the change in the law and the loss in collateral value borrowers pay a higher interest rate on their loans, receive a worse quality assessment by their bank, and experience a substantial reduction in the supply of credit by their bank. Consistent with theories that consider collateral and monitoring to be complements, the reduction in collateral precedes a decrease in bank monitoring intensity and frequency of both collateral and borrower.

Transition choice probabilities and welfare analysis in additive random utility models

We study the descriptive and the normative consequences of price and/or other attributes changes in additive random utility models. We first derive expressions for the transition choice probabilities associated to these changes. A closed-form formula is obtained for the logit. We then use these expressions to compute the cumulative distribution functions of the compensating variation (CV) conditional on ex-ante and/or ex-post choices. The unconditional distribution is also provided. The conditional moments of the CV are obtained as a one-dimensional integral of the transition choice probabilities. This framework allows us to derive a stochastic version of Shephard’s lemma, which relates the expected conditional CV and the transition choice probabilities. We compute the CV for a simple binary linear in income choice model and show that the information on the transitions leads to better estimates of the CV than those obtained when only ex-ante or ex-post information on individual choices is used. For the additive in income logit, we compute the conditional distribution of CV, which generalizes the logsum formula. Finally, we derive a new welfare formula for the disaggregated version of the representative consumer CES model.

Financial Development and Economic Growth: A Theoretical and Empirical Overview

The present survey aims to summarize the most relevant findings of the theoretical models on finance and growth and to relate them to the empirical evidence. Since it is too ambitious to provide a complete understanding of the existing debate, this survey describes the most relevant contributions. More specifically, it focuses on the theoretical contributions that analyze the role of competitive financial intermediaries and stock markets in (i) providing risk diversification, (ii) reducing liquidity risk and (iii) mitigating both ex-ante and ex-post asymmetric information between the borrower and the lender. From an empirical point of view, the classification adopted in reviewing the literature emphasizes the innovative aspects without ignoring the fact that the same contribution can be relevant also for different concerns. Both theoretical and empirical evidence find a positive and strong link between financial development and economic growth, thereby suggesting that policy makers should take into account the role of the financial system to sustain growth.

Information Projection: Model and Applications

People greatly exaggerate the extent to which their information is shared with others. I present a general model of such information projection, and apply it to a variety of settings. When assessing an expert's competence using ex-post information, jurors overweigh how much they learn from failed and underweigh how much they learn from successful predictions, and they underestimate the competence of experts on average. In turn, even risk-neutral experts are too reluctant to base predictions on ex-ante information that complements, and too eager to base predictions on ex-ante information that substitutes, for what jurors independently learn ex-post. Greater scrutiny decreases the reputation of physicians and the productivity of the medicine practiced at the same time. An expert's fear of information projection reduces her incentives to exercise care, and negligence schemes that tie her compensation too closely to effort often backfire. Optimal monitoring is coarser and career incentives are typically weaker than under fully Bayesian assumptions. Communication protocols that nudge experts to talk, but restrict the use of messages that complement the speaker's expertise, reduce favoritism and strictly improve welfare.

Do Firms Have Unique Target Debt Ratios to Which They Adjust?

The estimates of the speed of adjustment to target leverage tend to be significant but low. One interpretation for the slow adjustment is that firms fully adjust to target only infrequently, when the benefits of adjustment exceed its costs. Using both ex-ante and ex-post information to identify situations when the adjustment should be full, we find no evidence of full adjustment. We find that adjustments to target are rarely full, with many firms adjusting beyond or away from the target. The results imply that firms may have target ranges but no unique target debt ratios to which they ever want to fully adjust. One implication of this is that empirical analyses, such as partial adjustment regressions, that rely on the existence of a well-defined target debt ratio may be ill-suited for quantifying the importance of dynamic tradeoff behavior vis-a-vis alternative theories.

Chorzów’s Standard Rejuvenated: Assessing Damages in Investment Treaty Arbitrations

Whereas damages in treaty arbitration disputes are usually valued at the date when the measures trigger a violation, Chorzów’s compensation standard provides the alternative to value as of the date of the award. The latter is critical when investors continue to operate the business, such as in indirect expropriation as well as unjust and inequitable treatment cases. Implementing Chorzów’s standard to indirect takings allows the use of ex-post information to capture any elevated value due to improved business conditions. In addition, it deters states from acting opportunistically, by not allowing them to profit from foreign investors when business conditions are expected to improve. Arbitration panels should properly implement Chorzów’s standard with renovated thrust.

A practical approach to credit scoring

This paper proposes a DEA-based approach to credit scoring. Compared with conventional models such as multiple discriminant analysis, logistic regression analysis, and neural networks for business failure prediction, which require extra a priori information, this new approach solely requires ex-post information to calculate credit scores. For the empirical evidence, this methodology was applied to current financial data of external audited 1061 manufacturing firms comprising the credit portfolio of one of the largest credit guarantee organizations in Korea. Using financial ratios, the methodology could synthesize a firm's overall performance into a single financial credibility score. The empirical results were also validated by supporting analyses (regression analysis and discriminant analysis) and by testing the model's discriminatory power using actual bankruptcy cases of 103 firms. In addition, we propose a practical credit rating method using the predicted DEA scores.