Ron Giammarino

Market valuation of bank assets and deposit insurance in Canada

The authors examine a sample of Canadian banks and use option pricing theory to infer the market value of a banks assets from the observed market value and volatility of its equity. They find that market value estimates are significantly different from corresponding book values. These differences vary significantly across banks, suggesting that market values provide bank-specific information not found in book values. They also derive the risk-adjusted deposit insurance premia for these banks. The results suggest that the current flat-rate deposit insurance premium system has resulted in significant cross subsidization among banks.

Leaders, Followers, and Risk Dynamics in Industry Equilibrium

We study the distinct impacts of own and rival actions on risk and return when firms strategically compete in the product market. Contrary to simple intuition, a competitor’s options to adjust capacity reduce own-firm risk. For example, if a rival possesses a growth option, an increase in industry demand directly enhances profits but also encourages value-reducing competitor expansion. The rival option thus acts as a natural hedge. Within the industry, we obtain endogenous differences in expected returns. In a leader-follower equilibrium, own-firm and competitor risks and required returns move together through contractions and oppositely during expansions, providing testable new predictions.

Corporate Financing Decisions and Anonymous Trading

This study considers a model in which a corporate manager has private information and engages in i) anonymous trading on personal account in the secondary market, and ii) the corporate issuance of new shares in the primary market. The paper examines the equilibrium tradeoff of insider trading profits against the managers share of the corporate consequences of the primary issue. In the resulting equilibrium, managers, acting in their own best interests, seem to behave according to differing objective functions. In some cases, they seem to maximize intrinsic value, in others, insider trading profits seem to dominate, and still others seem to be concerned with both. Hence, the presence of anonymous trading around corporate financings brings into question the use of corporate objective functions with exogenously fixed weights.

Loggers Vs. Campers: Compensation for the Taking of Property Rights

Governments often have the power to take property rights from private citizens but their responsibility to pay compensation is typically not well specified. In this paper we examine how the compensation rule adopted by a country affects both private investment decisions and takings decisions. We build on a widely accepted argument that any lump sum compensation, including zero, is the socially optimal compensation scheme. The lump sum compensation result hinges critically on the assumptions that the government maximizes social welfare and that the level of private investment does not affect the alternative use of the property rights. We find that when either of these assumptions is relaxed, the optimal compensation scheme will generally depend upon market values.

Wage Smoothing as a Signal of Quality

The authors provide an explanation for firms smoothing wages over the business cycle that is based on asymmetric information about the quality of a firms management team and does not depend upon the workers being risk averse. When firms pay their workers the full information profit maximizing wage, higher quality firms will attract more workers and earn greater profits than lower quality firms. This provides a rationale for wage smoothing when quality is not observable to workers: lower quality firms will resist cutting wages to the full information level in an economic downturn in an attempt to convince workers that they are of higher quality.