This paper develops a new approach to the problem of testing the existence of a level relationship between a dependent variable and a set of regressors, when it is not known with certainty whether the underlying regressors are trend- or first-difference stationary. The proposed tests are based on standard F- and t-statistics used to test the significance of the lagged levels of the variables in a univariate equilibrium correction mechanism. The asymptotic distributions of these statistics are non-standard under the null hypothesis that there exists no level relationship, irrespective of whether the regressors are I(0) or I(1). Two sets of asymptotic critical values are provided: one when all regressors are purely I(1) and the other if they are all purely I(0). These two sets of critical values provide a band covering all possible classifications of the regressors into purely I(0), purely I(1) or mutually cointegrated. Accordingly, various bounds testing procedures are proposed. It is shown that the proposed tests are consistent, and their asymptotic distribution under the null and suitably defined local alternatives are derived. The empirical relevance of the bounds procedures is demonstrated by a re-examination of the earnings equation included in the UK Treasury macroeconometric model. Copyright © 2001 John Wiley & Sons, Ltd.

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Bounds testing approaches to the analysis of level relationships

This paper surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world.

A Survey of Corporate Governance

This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. CORPORATE GOVERNANCE DEALS WITH the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment. How do the suppliers of finance get managers to return some of the profits to them? How do they make sure that managers do not steal the capital they supply or invest it in bad projects? How do suppliers of finance control managers? At first glance, it is not entirely obvious why the suppliers of capital get anything back. After all, they part with their money, and have little to contribute to the enterprise afterward. The professional managers or entrepreneurs who run the firms might as well abscond with the money. Although they sometimes do, usually they do not. Most advanced market economies have solved the problem of corporate governance at least reasonably well, in that they have assured the flows of enormous amounts of capital to firms, and actual repatriation of profits to the providers of finance. But this does not imply that they have solved the corporate governance problem perfectly, or that the corporate governance mechanisms cannot be improved. In fact, the subject of corporate governance is of enormous practical impor

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This paper documents that strategies which buy stocks that have performed well in the past and sell stocks that have performed poorly in the past generate significant positive returns over 3- to 12-month holding periods. We find that the profitability of these strategies are not due to their systematic risk or to delayed stock price reactions to common factors. However, part of the abnormal returns generated in the first year after portfolio formation dissipates in the following two years. A similar pattern of returns around the earnings announcements of past winners and losers is also documented

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Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency

This paper introduces an ARCH model (exponential ARCH) that (1) allows correlation between returns and volatility innovations (an important feature of stock market volatility changes), (2) eliminates the need for inequality constraints on parameters, and (3) allows for a straightforward interpretation of the "persistence" of shocks to volatility. In the above respects, it is an improvement over the widely-used GARCH model. The model is applied to study volatility changes and the risk premium on the CRSP Value-Weighted Market Index from 1962 to 1987. Copyright 1991 by The Econometric Society.

Conditional heteroskedasticity in asset returns: a new approach

THE RATE of national saving in the United States declined precipitously in the 1980s. From World War II to 1980 the net saving rate averaged 8 percent of national income; today the rate is just 2 percent. While much public discussion has focused on the growth in the federal budget deficit as a source of this decline, a larger part of the drop in saving has come from a falloff in the rate of private saving. The extent of decline in the private saving rate is a surprise for several reasons. The slide comes after several decades in which the saving rate fluctuated within a very narrow range. The narrowness of that range inspired many economists to treat the private saving rate as an uninteresting constant. Second, the largest part of the decline occurred, ironically, after the government made an increase in saving a major objective of economic policy and redesigned the tax system to increase effective after-tax rates of return and promote saving. Finally, the decline coincided with a dramatic increase in real market interest rates, which should have greatly strengthened saving incentives. Economists have no shortage of theories to explain the decline in saving. Given the previous stability of the saving rate and the one-time nature of the decline, however, it is virtually impossible to sort out the

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The Decline in Saving: Evidence from Household Surveys

This paper examines the interactions between tax policy, international capitol mobility, and international competitiveness. It demonstrates that tax policies which stimulate national investment without affecting national savings must inevitably lead to deterioration in a country's trade balance in the short and intermediate run. This conclusion, which contradicts a great deal of popular rhetoric highlights the importance of considering the macroeconomic as well as the microeconomic aspects of tax changes. Yore generally, the effects of tax policies depend critically on the extent of the international capital flows which they generate. The paper examines the issue of international capital mobility both theoretically and empirically. A variety of considerations suggest that while tax policies could generate large capital flows, governments pursue policies which tend to inhibit capital flows following tax changes. This makes the analysis of tax policies difficult.

Tax Policy and International Competitiveness

PRODUCTIVITY GROWTH is the important dimension of long-run economic performance. Yet economists have said relatively little about how policies affect the transcendently important long-run growth rate. Textbook theories of the type pioneered by Robert M. Solow maintain that policies cannot affect growth rates over a sufficiently long run. The growth-accounting tradition of Robert M. Solowl and Edward F. Denison2 has tended to conclude that most of the differences in growth are due not to differences in measured investments, but to a "residual," total factor productivity (TFP). Such models produce what Solow calls "investment pessimism": radical policy changes that have large effects on investment and other resource allocations have little effect on long-run growth.3 Yet economies grow, and grow at very different rates. The TFP "residual" takes on very different values in different economies. It is im-

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Equipment Investment and Economic Growth: How Strong Is the Nexus?

This paper uses British data to examine the effects of dividend taxes on investors' relative valuation of dividends and capital gains British data offer great potential to illuminate the dividends and taxes question, since there have been two radical changes and several minor reforms in British dividend tax policy during the last 30 years Studying the relationship between dividends and stock price movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors' valuation of dividends Using daily data on a small sample of firms, and monthly data on a much broader sample, we find clear evidence that taxes affect the equilibrium relationship between dividend yields and market returns These findings suggest that taxes are important determinants of security market equilibrium and deepen the puzzle of why firms pay dividends FINANCIAL ECONOMISTS HAVE LONG been puzzled by corporate dividend behavior Many individual investors should value a dollar of corporate dividends less than a dollar of corporate retentions, because the former gives rise to greater tax liabilities Corporations, however, face equal costs of paying out dividends and retaining earnings Miller and Modigliani [31] demonstrated that, in the absence of taxes, dividend policy should have no effect on share valuation If dividends are tax penalized, however, a value maximizing firm should pay no dividends Widespread dividend payments to taxable investors are therefore surprising In 1981, dividend tax revenues in the United States were estimated to exceed 20 billion dollars' Indeed, some have interpreted the large volume of dividends paid as evidence against the rational behavior postulates typically used by economists The dividend question has stimulated a large theoretical and empirical literature concerned with the qluestion of investors' valuation of dividends In particular, the question of how taxes affect the market valuation of dividends has generated considerable controversy Numerous studies including Auerbach [2], Litzenberger and Ramaswamy [24, 26], Morgan [34], and Rosenberg and Marathe

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Lawrence H. Summers

Papers

The Decline in Saving: Evidence from Household Surveys

Tax Policy and International Competitiveness

Equipment Investment and Economic Growth: How Strong Is the Nexus?

New Evidence That Taxes Affect the Valuation of Dividends

How strongly do developing economies benefit from equipment investment