Changes in the Financial Market: Welfare and Price
Effects and the Basic Theorems of Value Conservation
Nils H. Hakansson
The Journal of Finance, 37, September 1982, 977-1004.
Abstract
This paper analyzes the impact, on both welfare and equilibrium prices, of changes
in the financial market in a general equilibrium, two-period context. Previous
papers have focused on the "securities effect," tending to essentially ignore the
equally important "endowment effect" that arises when market structure changes are
implemented. Two forms of endowment neutrality and market structure changes which
either preserve, expand, or shift allocational feasibility differentiate the main
theorems, which are based on arbitrary preferences and beliefs and substantially
extend and modify extant results; in particular, earlier statements identified with
value conservation are sharply moderated. Very roughly, the paper yields the following
implications for some of the more common changes in the market: nonsynergistic
corporate spinoffs and the opening of option markets have, on balance, strongly
positive welfare effects; nonsynergistic mergers tend to have strong negative welfare
effects, while the welfare effects of alternative risky debt structures tend to be
ambiguous. All of the preceding, however, may under plausible conditions be
redistributive.
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