In recent theoretical research, the idea that market returns endogenously affect liquidity has received attention. For example, in Brunnermeier and Pedersen (2005), market makers obtain significant financing by pledging the securities they hold as collateral. A large decline in aggregate market value of securities reduces the collateral value and imposes capital constraint, leading to a sharp decrease in the provision of liquidity. Liquidity dry-ups arise when the worsening liquidity leads to call for higher margins, and feedback into further funding problems. Since this supply of liquidity effect affects all securities, Brunnermeier and Pedersen also predict larger commonality in liquidity following market downturns. Anshuman and Viswanathan (2005), on the other hand, present a slightly different model where investors are asked to provide collateral when asset values fall and decide to endogenously default, leading to liquidation of assets. Simultaneously, market makers are able to finance less in the repo market leading to higher spreads, and possibly greater commonality in liquidity.
Several other recent papers link changes in asset value to liquidity. In Morris and Shin (2003), traders sell when they hit price limits (which are correlated across traders) and liquidity black holes emerge when prices fall enough (the model in analogous to a bank run). Their model emphasizes the feedback effect of one trader’s liquidation decision on other traders. According to Kyle and Xiong (2001), a drop in stock prices leads to reduction in holdings of risky assets because investors have decreasing absolute risk aversion, resulting in reduced market liquidity (see also Gromb and Vayonos (2002) for a model of capital constraints and limits to arbitrage). In Vayanos (2004), investors withdraw their investment in mutual funds when asset prices (fund performance) fall below an exogenously set level. Consequently, when mutual fund managers are close to the trigger price, they care about liquidity, especially during volatile periods. Hence, these theoretical models also emphasize shifts in demand for liquidity with changes in asset prices as liquidation of assets generates more selling pressure. Additionally, some of the above models also suggest cross-sectional differences in the liquidity effects: a drop in asset value has a greater impact on the liquidity of stocks with greater volatility exposure, a phenomenon related to flight to liquidity (see e.g. Anshuman and Viswanathan (2005), Vayanas (2004) and Acharya and Pedersen (2004)).
The last three decades had shown drastic changes in unemployment worldwide. In the US unemployment was low till the early 1970s, it has increased dramatically during the early 1980s, and, more recently, has gone down back almost to the level of the 1960s. This low frequency pendulum is the cradle of a faster moving swing - the business cycle. Business cycles, of course, are not a new phenomenon and not specific to the US. Whether measured by unemployment, employment, output, or by more complex measures, they are present at least throughout the documented economic history of the last century.
This work documents a new set of evidence on cyclical unemployment, employment, and on the cyclicallity of wages, and provides a simple interpretation for these facts. While this work shed new light on the role of education over business cycles the new set of evidence is mainly concerned with the direct effect of parents’ education on the cyclicallity of wages and unemployment within each education group.
How do firms allocate capital? Do units with better investment opportunities receive larger capital allocations and invest more? Are units run by more powerful or better connected managers favored with higher investment budgets? To empirically address these questions, we use a unique and proprietary five-year business-unit panel database on planned and actual capital allocations inside a world-wide conglomerate with 5 divisions and 22 business units.
The efficient internal capital markets view holds that capital allocation inside a conglomerate follows a process by which the firm pools internally generated cash flows and subsequently allocates funds to their best use across units (e.g., Weston, 1970, Williamson, 1975, Matsunaka and Nanda, 2002, Maksimovic and Phillips, 2002). Through winner-picking methods, internal capital markets may add value as the firm gives larger allocations to those units with the highest investment opportunities (e.g., Stein, 1997). In these models, capital allocation is mainly determined by the investment prospects (e.g., marginal Tobin’s Q) of a unit.
