RYAN D. EDWARDS, City University of New York, CUNY Queens College - Department of Economics
Email: redwards@qc.cuny.edu
RONALD D. LEE, University of California, Berkeley - Department of Demography, National Bureau of Economic Research (NBER)
Email: rlee@demog.berkeley.edu
MICHAEL W. ANDERSON, affiliation not provided to SSRN
SHRIPAD TULJAPURKAR, Stanford University
Email: tulja@mvr.org
CARL BOE, affiliation not provided to SSRN

We present stochastic forecasts of the Social Security trust fund by modeling key demographic and economic variables as historical time series, and using the fitted models to generate computer simulations of future fund performance. We evaluate several plans for achieving long-term solvency by raising the normal retirement age (NRA), increasing taxes, or investing some portion of the fund in the stock market. Stochastic population trajectories by age and sex are generated using the Lee-Carter and Lee- Tuljapurkar mortality and fertility models. Interest rates, wage growth and equities returns are modeled as vector autoregressive processes. With the exception of mortality, central tendencies are constrained to the Intermediate assumptions of the 2002 Trustees Report. Combining population forecasts with forecasted per-capita tax and benefit profiles by age and sex, we obtain inflows to and outflows from the fund over time, resulting in stochastic fund trajectories and distributions. Under current legislation, we estimate the chance of insolvency by 2038 to be 50%, although the expected fund balance stays positive until 2041. An immediate 2% increase in the payroll tax rate from 12.4% to 14.4% sustains a positive expected fund balance until 2078, with a 50% chance of solvency through 2064. Investing 60% of the fund in the S&P 500 by 2015 keeps the expected fund balance positive until 2060, with a 50% chance of solvency through 2042. An increase in the NRA to age 69 by 2024 keeps the expected fund balance positive until 2047, with a 50% chance of solvency through 2041. A combination of raising the payroll tax to 13.4%, increasing the NRA to 69 by 2024, and investing 25% of the fund in equities by 2015 keeps the expected fund balance positive past 2101 with a 50% chance of solvency through 2077.

RICHARD HAUSER, University of Frankfurt - Economics and Business Administration Area
Email: R.Hauser@em.uni-frankfurt.de

EU-SILC will become one of the most important statistical data sources for the Federal Government‘s future Poverty and Wealth Reports, for comparing Germany‘s position with those of the other EU member states in the "open method of coordination", and for the international scientific community and international organisations. Hence this sample needs intensive quality control to ensure data quality. Ex ante quality control must take the form of selecting suitable survey methods, internal control of consistency of the data collected from each household, transparent data editing, reliable imputation methods and compensation for drop-outs by reweighting. Ex post consistency checks are needed in the form of comparison with other similar household samples, with administrative statistics and with macro-economic aggregates of the national accounts.

In this paper the need for intensive ex post quality control is met with consistency checks in the form of a comparison between the results of EU-SILC and the microcensus and SOEP, which reveals significant deviations in the coverage of poorly integrated foreigners, small children and the level of education, as well as the ratio of house/apartment owners and the employment ratio. This causes serious distortions to the Laeken indicators calculated.

PRONITA CHAKRABARTI AGRAWAL, affiliation not provided to SSRN

One of the principal concerns today for the deteriorating quality of water supply and sanitation services in India is the high levels of non revenue water (NRW)-the difference between the amount of water put into the distribution system and the amount of water billed to consumers. High levels of NRW result from huge volumes of water lost through leaks or water not invoiced to customers or both, and this seriously affects financial viability of water providers through lost revenues, increased operational costs and, eventually, increased capital costs. Reducing non revenue water levels does not necessarily compromise on a service provider's ability to subsidize services for the poorer sections of the population; rather, it allows for improved transparency and accountability, and for ensuring better targeting of subsidies such that they are more equitable and actually reach poor people. The approach to reducing NRW includes a set of activities aimed at the optimization of water supply through improved operations, maintenance, and sound management practices of distribution networks as well as governance and management reforms through specific operational and commercial strategies. However, if NRW programs are to remain sustainable in the long run, they must target institutional and organizational reform while encouraging efficiencies through technical and managerial improvements and enhancing human resource capacity. This field note captures the core principles for the effective implementation of non revenue water programs through real world examples of service providers implementing such programs in India and Vietnam. The case studies demonstrate that successful leakage reduction and its effective and sustainable implementation has not been a result of erratic and irregular technical exercises to reduce physical losses.

GAVIN SMITH, University of New South Wales - School of Banking and Finance
Email: gavinsmith@student.unsw.edu.au
PETER L. SWAN, University of New South Wales (UNSW)
Email: peter.swan@unsw.edu.au

We investigate monitoring of CEO incentives and pay levels by institutional investors. Consistent with the microstructural monitoring equilibrium of Noe (2002), we show that option-grant pay-performance sensitivity is positively related to institutional trading intensity. Trading intensity also raises CEO pay. This is to be expected with preservation of reservation CEO utility levels. Institutions with the smallest holdings and highest portfolio turnover rates have the largest positive effects on compensation levels. This is also consistent with Noe's equilibrium. Our OLS results are robust to firm random and fixed firm effects and potential endogeneity problems.

GAVIN SMITH, University of New South Wales - School of Banking and Finance
Email: gavinsmith@student.unsw.edu.au
PETER L. SWAN, University of New South Wales (UNSW)
Email: peter.swan@unsw.edu.au

The present study provides simple tests of both agency and monitoring theory. In doing so it builds on the pioneering contribution of Hartzell and Starks (2003) (HS). Consistent with agency theory, we find that concentrated institutional investing is associated with higher executive compensation. Moreover, we bring into question monitoring theory reliant on concentrated monitors. Concentrated institutional ownership appears unrelated to option grant pay-for-performance (PPS) sensitivity. We reconcile our differences with HS by the indicating the importance of a methodology that does not exaggerate the role of firm size and use of robust firm size controls.

PAUL D. CHILDS, University of Kentucky
Email: PCHILDS@POP.UKY.EDU
DAVID C. MAUER, Edwin L. Cox School of Business
Email: dmauer@mail.cox.smu.edu

In a dynamic continuous-time model, we examine the impact of a manager-shareholder conflict over the choice of investment risk on firm value and optimal capital structure. The manager‘s optimal investment risk policy is substantially different from the policy that maximizes equity or total firm value. The resulting agency costs of equity are many times larger than the agency costs of debt. Among a number of important implications, we find that managerial risk-aversion decreases the agency costs of equity. We also find that when equityholders have control rights over financing decisions, optimal leverage may increase relative to optimal leverage when investment risk is chosen to maximize total firm value. Additionally, greater managerial equity compensation may exacerbate the manager-stockholder conflict over investment policy, and in spite of higher agency costs of equity, may increase optimal leverage. Finally, we find that an increase in risk encourages the manager to pursue a more conservative investment strategy, which increases the agency costs of equity. Managerial risk-aversion, however, acts to mitigate this effect of risk on the agency costs of equity.

AVNER KALAY, Tel Aviv University - Faculty of Management, University of Utah - David Eccles School of Business
Email: KALAY1@POST.TAU.AC.IL
SHAGUN PANT, University of Utah - David Eccles School of Business
Email: shagun.pant@business.utah.edu

We show that derivative markets and other non-voting financial instruments enable separation of ownership of cash flows from ownership of voting rights embedded in a common stock. Shareholders can choose their desired mix of cash flows/votes and vary it through time. In such markets regulators cannot enforce a one share-one vote rule. We demonstrate that shareholders are better off having the technology that enables the separation of the ownership of voting rights from the ownership of cash flows. In other words, a one share-one vote rule is sub-optimal. It is shown that shareholders optimally choose a security voting structure that a) ensures that the socially superior team wins in control contests, and b) enables shareholders to extract the entire surplus from acquirers. Shareholders optimally use non-voting correlated financial instruments as a credible commitment device in control contests. By changing their per vote exposure to cash flows, shareholders reduce the attractiveness of the winning team thereby forcing the winner to pay shareholders her entire surplus. The paper points out that in the presence of a derivatives market rational shareholders will optimally choose to maintain voting ownership proportional to economic ownership when the control contest is only a possibility. However, when the control contest is imminent, shareholders will take optimal positions (short or long) in derivatives to extract the best bid. If the winning team generates higher (lower) cash flows shareholders will sell (buy) synthetic stocks to eliminate the winner's advantage resulting in the payment of her surplus. The ability to optimally choose the cash flow/voting mix and vary it through time is shown to increase the market value of the firm. This increases the expected proceeds to the founding owners of the firm and hence may help encourage entrepreneurial activity.

ITZHAK BEN-DAVID, Ohio State University - Finance Department, Fisher College of Business
Email: bendavid@fisher.osu.edu
DARREN T. ROULSTONE, Ohio State University - Fisher College of Business, University of Chicago - Graduate School of Business
Email: roulstone_1@fisher.osu.edu

We study the long-term performance of acquirers with respect to their size and method of payment. Our results shed new light on why stock acquirers appear to underperform cash acquirers in some studies. We present two main results. First, there is no economically or statistically significant difference between the performance of large stock acquirers and large cash acquirers. Conversely, small stock acquirers underperform small cash acquirers by about 12 in the first 12 months following mergers and up to 18 in the first 36 months. Hence, the previously documented underperformance of stock acquirers is due to the underperformance of small stock acquirers exclusively. Second, we find evidence that this underperformance is likely caused by mispricing related to limits to arbitrage: measures of short-selling constraints, illiquidity, and information uncertainty proxies subsume the size effect in our tests. We find no evidence that underperformance is related to acquirer-target integration problems or to earnings management prior to mergers.

NAVEEN KHANNA, Michigan State University
Email: KHANNA@PILOT.MSU.EDU
MARK D. SCHRODER, Michigan State University - The Eli Broad Graduate School of Management
Email: schrode7@msu.edu

We show that optimal debt contracts in the presence of product market competition are typically different from standard debt contracts. We consider a market with two incumbents, one levered (target) and one with deep pockets (competitor). Renewal of target's debt depends on its profits, which are determined by the competitor's pricing strategy. When the competitor benefits from non-renewal of target's debt, it has incentive to price more aggressively. To counter this, bondholders make renewal less profit sensitive, and the optimal debt contract is smooth (nonkinked) and concave, and lies below the standard debt contract. Bondholders leave the limited liability constraint slack in a region of profits, and therefore appear to leave money on the table by failing to collect all profits when they fall short of the debt's face value. But this flattening of the contract results in higher profits for the levered firm for each state of demand, and a higher expected payout for bondholders. The larger the competitor's benefit from non-renewal, the flatter the contract. On the other hand, when the competitor benefits from renewal of the target's debt (say non-renewal results in target's replacement by a more efficient entrant), then the optimal debt contract is nonsmooth (sometimes taking the form of a binary option), and much more profit sensitive for some profit levels than the standard contract. This increased sensitivity amplifies the competitor's incentive to price less aggressively, resulting in higher profits for the levered firm and higher payout to bondholders. In either case, our results demonstrate the optimal contract must be designed accounting for the impact of the contract itself on the profit function of the levered firm. Furthermore, bondholders prefer lending to weaker firms (firms whose competitors benefit from renewal) because the competitor's pricing incentive, amplified by the more profit sensitive contract, results in higher expected payouts.

KRISHNA UDAYASANKAR, NUS Business School
Email: bizku@nus.edu.sg
SHOBHA S. DAS, Nanyang Technological University (NTU) - Nanyang Business School
Email: ASDas@ntu.edu.sg
CHANDRASEKHAR KRISHNAMURTI, Auckland University of Technology
Email: chandra.ck@gmail.com

In this paper we bring together agency, stakeholder, institutional and resource-dependence theories to study the direct and interactive effects of country regulation and competition on two dimensions of corporate governance: the overall quality of corporate governance of firms in a country, and firm-to-firm variations in corporate governance. Interactive conditions are more representative of the real-world context of corporate governance, and the contradictory pressures that firms face in such interactive conditions are better explained through the use of multiple theories of corporate governance. Using a dataset that spans 15 countries and includes 463 firms, we find that firm corporate governance is better in conditions where either regulation or competition is well-developed, by comparison with interactive conditions. We also find that while regulation enhances within- country convergence, it is likely that competition serves to enhance across-country convergence.

CYNTHIA J. CAMPBELL, Iowa State University - Department of Accounting and Finance
Email: campcj@iastate.edu
S. GHON RHEE, University of Hawaii at Manoa - Shidler College of Business
Email: rheesg@hawaii.edu
YAN DU, affiliation not provided to SSRN
NING TANG, Wilfrid Laurier University
Email: ntang@wlu.ca

We examine IPO underpricing, valuation, and wealth allocation in relation to investor sentiment, information asymmetry, and underwriter reputation. We find that underpricing is significantly higher for overvalued IPOs than for undervalued IPOs, and is positively correlated to investor sentiment. Information asymmetry is also positively correlated to the magnitude of underpricing but only for undervalued IPOs. We find no evidence of systematic over or undervaluation of IPOs based on peer firm accounting ratios. Change in market sentiment and information asymmetry is positively correlated to overvalued IPOs but not for undervalued. Better underwriter reputation leads to higher IPO valuation for all IPOs. Further, roughly 70% of the wealth from overvaluing IPOs is retained by the issuers. For overvalued IPOs with positive first day returns, we find the proportion of total overvaluation that occurs in the after market trading, i.e., wealth allocated to IPO subscribers, is negatively correlated to underwriter reputation. We conclude underwriters selectively overvalue some IPOs after observing investor sentiment and take advantage of their information to maximize the benefit for issuers and indirectly themselves.

JARL G. KALLBERG, New York University - Department of Finance
Email: jkallber@stern.nyu.edu
CROCKER H. LIU, Arizona State University
Email: Crocker.Liu@asu.edu
SRIRAM V. VILLUPURAM, Arizona State University - Finance Department
Email: vs@asu.edu

Capital structure theory and empirical analysis has focused almost exclusively on the choice between debt and equity. Preferred stock has received relatively little attention, in contrast, even though this market, in the U.S., represented $868 billion in new capital during the period 1999 to 2005. This empirical study focuses on the reactions of equity holders through an event study analysis and of debt holders through a default spread analysis to the announcement of 427 preferred issues. We find that the equity abnormal announcement returns are positive for straight preferred stock announcements, when they are combined with convertible preferred announcements, the equity abnormal returns are -0.65%, which is much closer to zero than to the magnitude of SEO announcements; furthermore, these returns are higher for firms with greater earnings potential and lower financial distress risk. We also find that credit default swap spreads decrease upon announcement of a preferred issue. These results are consistent with the hypothesis that equity holders interpret the preferred issue, on average, as debt, since the magnitude of the usual negative reaction to seasoned equity issuance is not found and bondholders interpret the preferred issue as equity, since the issuance does not increase the firm‘s default risk.