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.

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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