Empirical evidence documents a tight link between aggregate and firm-level investment and corporate credit spreads. Moreover, it has been shown that credit spreads largely reflect a compensation for bearing macroeconoimc risks. We use a tractable model with recursive preferences and time varying macroeoconomic risk to investigate the link between aggregate risk and corporate policies in a produ...

We construct a time-series model of investment in Israel that incorporates both traditional economic factors derived from a theoretical model of a profit-maximising representative firm and indicators of political instability and unrest. This is used to estimate the extent to which the Intifada has depressed Israeli investment and the size of the corresponding "peace dividend". JEL Classificatio...

Introducing extrapolation bias into a standard one-sector production-based real business cycle model with recursive preferences reconciles salient stylized facts about business cycles (low consumption volatility and high investment volatility relative to output) and financial markets (high equity premium, volatile stock returns, and a low and smooth riskfree rate) with low relative risk aversio...

Based upon an examination of 987 ex-dividend events that took place on the Taiwan Stock Exchange between January 1992 and December 2006, we find that differential taxes are an important factor in terms of their effects on share prices and the behavior of investors around the ex-dividend day. Ex-day price drop ratio increases with the average investor’s preference for dividend relative to capita...

Relying on a present value model with time-varying expected returns, and incorporating a quite general class of processes to model bubble-like stock price deviations from the long-run equilibrium, we provide empirical evidence on the U.S. log dividend–price ratio over the 1871:1–2001:9 period, as well as for several sub-periods. The application of a momentum threshold autoregressive technique d...

This study investigates whether personal taxes are related to asset valuations. The effective tax rate of investment income fluctuated considerably since federal income taxes were introduced. The main result of the paper demonstrates that there is an economically and statistically significant relationship between asset valuations and personal tax rates. Stock valuations tend to be higher when t...

Many economists believe that credit market distortions create a financial accelerator which destabilizes the economy. This paper shows that when credit market distortions arise from adverse selection they sometimes stabilize the economy rather than destabilize it. The stabilizing forces are closely related to forces that cause overinvestment in static models. When investment projects are equity...

This paper shows that monetary policy can have asymmetric effects in a matching model along the lines of D. Mortensen and C. Pissarides [1994. Job creation and job destruction in the theory of unemployment. Review of Economic Studies 61, 397–415]. when a balance sheet channel is at work. When a lender matches an entrepreneur, the investment project is financed and carried out. There is incomple...

We comprehensively examine the effects of stock return volatility on firms’ financial and investment decisions. Consistent with theories of investment with financing frictions, firms with high volatility actively reduce their leverage, cut investment, increase cash holding, cut non-cash current assets such as inventories and account receivables, and cut dividend. The effects of volatility are s...

The part of credit spread that is not explained by corporate credit risk forecasts future economic activity. I show that the link with aggregate business risk and bond liquidity risk explains this finding. Once I project spreads on these two risk factors, which are readily measurable with the daily frequency, in addition to corporate credit risk, the forecasting power of the residual spread red...