Brian D. Kluger

Measuring Residential Real Estate Liquidity

There are many factors, other than price alone, that may affect the liquidity of real estate. This study develops a liquidity measure based on the Cox proportional hazard technique, a statistical model widely used in the epidemiologic and social sciences. The odds ratio, along with an estimate of market value for a home, are used to construct a liquidity measure. This measure can extract from the data a rich statistical profile of the variables that affect liquidity.

Alternative Liquidity Measures and Stock Returns

Abstract. This article compares the properties of several common liquidity measures including the bid-ask spread, the liquidity ratio and firm size. We also use the proportional hazard model to develop a new measure, the relative odds ratio, based on the volume necessary to move prices by a predetermined amount. Although each measure displays a liquidity premium, a composite measure better explaims expected returns, suggesting that liquidity is a multidimensional phenomenon.

Integrating Auction and Search Markets: The Slow Dutch Auction

The issue of choosing to sell property by auction or by traditional negotiated search markets is addressed in this article. A general selling institution called the slow Dutch auction is introduced. This general selling mechanism reduces to either a conventional auction, a posted offer, or some time dependent mix of these selling institutions depending on the pricing rule chosen by the seller. We model search by having potential buyers whose private valuation for the property is unknown to the seller arrive randomly over time. With this general framework the sellers problem is to choose a selling mechanism that maximizes expected wealth. Surprisingly, we find that the optimal selling institution is always a posted offer market. The seller chooses an optimal posted price and waits until a buyer arrives who is willing to pay this price. Auctions are never optimal.

Managerial moral hazard and auditor changes

Abstract In many situations, an auditor change is in the best interests of both shareholders and managers. However, management may also initiate an audit firm change in an attempt to suppress or delay the release of unfavourable information. In this paper, we present the results of three separate tests of “Over the Counter” companies, which relate to managerial attempts to withhold information from the market. In the first who tests, we show that companies that change auditors shortly before bankruptcy appear to have done so because they were unable to suppress unfavourable information. The first of the tests shows a significantly better bankcruptcy prediction model for auditor changers than for non-changers. The second test rules out the major competing rationale for the results observed in the first test: that the auditor change firms had an early warning, or longer lead-time, before bankcruptcy. The remaining explanation, that managers were attempting to switch to more cooperative auditors, is thus indirectly supported. In the third test we show that the market takes the possibility of managerial moral hazard into account. Abnormal returns in the month of auditor change announcement are significantly negative in all cases except for changes from non-Big Eight to Big Eight auditors. Furthermore, abnormal returns were significantly more-negative when managers held more than 50 percent of the companys common stock, thus removing any effective method of managerial discipline by outside shareholders. Taken together, the results indicate that in periods of financial distress, managers seem to attempt to suppress unfavourable information from the market. This suppression cannot be accounted for as the result of a longer lead-time between distress and bankcrupty for firms that change auditors than for firms that do not. Finally, the market seems to be aware of the potential for managerial moral hazard, in that the share price response is unambigously negative, except in likely “good news” situations.

Probability Judgment Error and Speculation in Laboratory Asset Market Bubbles

In 12 sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is the probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. We establish that aggregate irrationality measured in one dimension (probability judgment error) is associated with aggregate irrationality measured in another (bubble formation).

Preferencing, Internalization of Order Flow, and Tacit Collusion: Evidence from Experiments

This paper examines preferencing arrangements and tacit collusion in laboratory asset markets. In the experiments, dealers may internalize by matching the best quote or by passing orders to the dealer posting the best quote. Although some markets were highly competitive, several markets reached a collusive equilibrium with wide spreads and near complete internalization of order flow. The paper further examines the role of market transparency and passed order flow on quote-setting behavior and suggests that these affect the mechanism leading to tacitly collusive equilibria.

The Origins of Bubbles in Laboratory Asset Markets

In twelve sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. When these tests indicate the presence of probability judgment error and speculation, bubbles are more likely to occur. This finding suggests that both factors are important bubble drivers.

Incentive commissions in residential real estate brokerage

Abstract Previous academic literature on residential real estate brokerage finds that a conflict of interest exists, at least in theory, between the seller and his broker under the prevailing fixed-percentage commission. This suggests a potential for slightly more complex “incentive commissions” to improve this principal-agent relationship. As noted by Anglin and Arnott, (1991), real world contracts are usually simpler than what is optimal according to principal/agent theory, and the reason for this discrepancy remains somewhat of a puzzle. The present paper attempts to shed light on this puzzle by using simulation analysis to quantify the magnitude of the effect of incentive contracts on both the seller and his broker under typical operating conditions. We find that time-incentive contracts offer negligible gains over the status quo fixed percentage commission. Price-incentive contracts, on the other hand, do appear to offer potential improvements for both the seller and broker, assuming symmetric information about the market for the house. However, with asymmetric information the price-incentive contract may be worse for the seller than the status quo fixed-percentage contract.

Cost uncertainty and budget overspending: A safety-first perspective

Abstract In this study we model a cost center managers decision about how to achieve a required level of output. The spending plan that the manager adopts is expected to result in successful performance, but at an uncertain cost. The uncertainty associated with the spending plan is inversely related to the expected cost. The analysis presented in this article suggests that a manager who exhibits Safety-First behavior and wishes to avoid large budget deviations is more likely to exceed what he or she perceives to be the overspending limit rather than the underspending limit. That manager will tend to incur costs in excess of the budget. This mathematical result has an intuitive appeal; a manager is willing to pay a certain “risk premium” to avoid the risk of large budget deviations and accompanying adverse consequences. This result has implications for both performance evaluation and budget setting, particularly in the public sector. Under the circumstances that we describe, using budgets in evaluating managerial performance may be misleading. Another application of our study relates to the “budget creep” phenomenon and how, under particular circumstances, its size can be reduced.

Trading Patterns and Market Integration in Overlapping Experimental Asset Markets

This paper examines trading patterns and market integration using laboratory asset markets. Our markets are designed to approximately correspond to the trading day for stocks cross-listed in markets in Europe and North America. Some of our markets feature timing restrictions so that participants cannot trade across markets except during a fully integrated overlap period. Comparison of markets with and without timing restrictions shows that restrictions reduce trading activity and shift transactions to the overlap period. When asset values are extreme, price discovery can be impeded when trading restrictions exist. The measurement of liquidity suggests that trading restrictions increase overall spreads.