This paper examines the relation between managerial ownership and the probability of being a target firm, and the impact of managerial ownership on target shareholder returns. The paper finds that targets have lower managerial ownership than either their industry counterparts or randomly selected nontargets. Managerial ownership is significantly lower in contested compared to uncontested offers, and in unsuccessful compared to successful cases. Managerial ownership is significantly related to abnormal returns in contested cases that are ultimately successful. The results are consistent with a positive impact of managerial ownership where it is used to negotiate, but not ultimately block, an acquisition.

We examine the relationship between allegations of corporate misconduct and changes in profitability and risk of the alleged offender. Profitability is measured as reported earnings and analysts’ earnings forecasts. Risk is measured as stock return volatility and concordance among analysts’ forecasts. Decreases in earnings and increases in risk are found to accompany allegations of misconduct, and although the results are somewhat sensitive to the earnings and risk metrics used, the changes are found to be consistently greater for related-party offenses. The importance of reputational penalties is underscored by analysis of the association between allegation-related changes in firm value and changes in earnings and risk.

We document by several methods that trading in Nasdaq stocks is localized, but find little evidence that cloudy weather in the city in which a company is based affects its returns. The first evidence of localized trading is that the time zone of a company's headquarters affects intraday trading patterns in its stock. Second, firms in blizzard-struck cities see a dramatic trading volume drop compared to firms in other cities. Third, the Yom Kippur holiday dampens trading volume in companies located in cities with high Jewish populations. Despite the strong evidence of localized trading, cloudy conditions near the firm's headquarters do not provide profitable trading opportunities.

Ang, Hodrick, Xing, and Zhang (2006a) show that stocks with high idiosyncratic return volatility tend to have low future returns. This paper further documents that idiosyncratic volatility is inversely related to future earning shocks, and more importantly, that the return-predictive power of idiosyncratic volatility is induced by its information content about future earnings. We examine various explanations of the triangular relation among idiosyncratic volatility, future earning shocks, and future stock returns. Our results show that the idiosyncratic volatility anomaly is not a simple manifestation of previously documented market anomalies related to excessive extrapolation on firm growth, over-investment tendency, accounting accruals, or investor underreaction to earnings news. On the other hand, there is evidence that the idiosyncratic volatility anomaly is related to corporate selective disclosure, and the anomaly is stronger among stocks with a less sophisticated investor base.

We consider the problem of pricing an American contingent claim whose payoff depends on several sources of uncertainty. Several efficient numerical lattice-based techniques exist for pricing American securities depending on one or few (up to three) risk sources. However, these methods cannot be used for high dimensional problems, since their memory requirement is exponential in the number of risk sources. We present an efficient numerical technique that combines Monte Carlo simulation with a particular partitioning method of the underlying assets space, which we call Stratified State Aggregation (SSA). Using this technique, we can compute accurate approximations of prices of American securities with an arbitrary number of underlying assets. Our numerical experiments show that the method is practical for pricing American claims depending on up to 400 risk sources.

Chief executive officer (CEO) narcissism affects the takeover process. Acquirer shareholders react less favorably to a takeover announcement when the target CEO is more narcissistic. Narcissistic acquiring CEOs negotiate faster. They are also marginally more likely to initiate deals. Acquirer CEO narcissism and target CEO narcissism are associated with a lower probability of deal completion and reduce the likelihood that the target CEO will be employed by the merged firm. Our findings highlight the importance of both acquirer and target CEO psychological characteristics throughout the takeover process.

In two previous and related papers ([3], [4]), the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on Canadian government bonds for the period 1964 to 1979. This paper reports the results of applying a similar model to the pricing of U.S. government bonds for the period 1958–1979 using data from the CRSP Government Bond File. The paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds: the data reveal a strong relation between price prediction errors and subsequent bond returns.

This paper develops a positive theory of trade credit based on its use as a financial response to deterministic variations in demand. The operating alternatives to trade credit, which include the use of storage or additional capacity, are modeled using results from the peak-load pricing literature. The paper shows that the extension of credit partitions the buyer's inventory cost and permits specialization at incurring the components of this cost. This specialization is economical when the seller has an advantage at incurring the financial cost and does not have an advantage at incurring the operating cost of accommodating variable demand. Conditions that provide these necessary and sufficient cost relationships are described. The paper also shows that a reduction in costs rather than an increase in revenues is the source of both the buyer's and seller's increase in wealth.

This study is concerned with the multiple-factor model of security returns, with its implications for a single-factor, market-index model applied to the same securities, and with statistical methods of estimating the parameters of a multiple-factor model and thereby operationalizing it. This part of the paper sets out the approach. The sequel will present the empirical results. The results show that there are highly significant extra-market components of covariance among security returns; moreover, these risk components are such that the loadings of individual security returns on the factors are determined by observable characteristics of the firm: income statement and balance sheet data, industry membership, and historical behavior of returns on the security. The results also show that the conventional security beta is a function of these same characteristics.

Building on the managerial entrenchment literature, we develop and test a novel perspectiveon payout policy that integrates the influence of internal governance mechanisms, investment opportunities, management compensation, and monitoring by large shareholders. Our study incorporates both dividend payments and share repurchases, and examines the determinants of the likelihood and the level of payouts. Our model performs well in both in-sample and out-of-sample predictions on a sample of 2,081 firms during 1992–2000. We find that both the likelihood and the level of payouts are significantly and positively (negatively) related to factors that increase (decrease) executive entrenchment levels, even when controlling for size, leverage, and the proportion of tangible to total assets. We identify factors that significantly affect the likelihood but not the level of payouts (or vice versa), and show that entrenchment has an asymmetric influence on dividend vs. shares repurchase policy.

This paper performs specification analysis on the term structure of variance swap rates on the S&P 500 index and studies the optimal investment decision on the variance swaps and the stock index. The analysis identifies 2 stochastic variance risk factors, which govern the short and long end of the variance swap term structure variation, respectively. The highly negative estimate for the market price of variance risk makes it optimal for an investor to take short positions in a short-term variance swap contract, long positions in a long-term variance swap contract, and short positions in the stock index.

This study investigates the relation between the method of payment in acquisitions, earnings management, and operating performance for a large sample of firms that conducted acquisitions between 1985 and 1997. Prior to their acquisitions, acquirers exhibit levels of operating performance that exceed that of their respective industry peers. We find no evidence that acquirers manage their earnings prior to acquisitions, despite the possible incentives of managers who plan stock-based acquisitions to temporarily inflate their stock's purchasing power. Subsequent to acquisitions, acquirers continue to exhibit superior performance relative to their industry and experience significantly higher levels of operating performance than control firms with similar pre-event operating performance. Although the extant literature documents significant relations between the form of acquisition payment, announcement returns, and the post-acquisition excess return of acquirers, we find no evidence that the method of payment conveys information about the acquirer's future operating performance.

We identify and characterize a class of term structure models where bond yields are quadratic functions of the state vector. We label this class the quadratic class and aim to lay a solid theoretical foundation for its future empirical application. We consider asset pricing in general and derivative pricing in particular under the quadratic class. We provide two general transform methods in pricing a wide variety of fixed income derivatives in closed or semi-closed form. We further illustrate how the quadratic model and the transform methods can be applied to more general settings.

We examine the behavior of common stock prices after a large change in price occurs during a single trading day and find evidence that the stock market appears to have overreacted, especially in the case of price declines; however, the magnitude of the overreaction is small compared to the bid-ask spreads observed for the individual stocks in the sample. We interpret this finding as being consistent with a market that is efficient after transactions costs are considered.

This study analyzes the effect of second-hand information on the behavior of security prices and volume using analysts' recommendations published in the monthly “Dartboard” column of the Wall Street Journal. For the two days following the publication of the recommendations, average positive abnormal returns of 4 percent—nearly twice the level of abnormal returns documented in previous research on analyst recommendations—and average volume double normal volume levels on the two days following publication of the recommendations are documented. The positive abnormal return on announcement is partially reversed within 25 trading days. The authors conclude that the positive abnormal return on announcement of the recommendations is a result of naive buying pressure as well as the information content of the analysts' recommendations.

This paper suggests a modification to the explicit finite difference method for valuing derivative securities. The modification ensures that, as smaller time intervals are considered, the calculated values of the derivative security converge to the solution of the underlying differential equation. It can be used to value any derivative security dependent on a single state variable and can be extended to deal with many derivative security pricing problems where there are several state variables. The paper illustrates the approach by using it to value bonds and bond options under two different interest rate processes.

This paper studies the high frequency reaction of the DEM/USD exchange rate to publicly announced macroeconomic information emanating from Germany and the U.S. By using data sampled at a five-minute frequency, we are able to identify significant impacts of most announcements on the exchange rate change in the 15 minutes post-announcement, although the significance of these effects decreases rapidly as the interval over which the post-announcement change in exchange rates is increased. The direction of the exchange rate response conforms, in general, with a reaction function interpretation whereby reactions to macroeconomic news are driven by the likely operations of monetary authorities in domestic money markets. Further, we detect influences of German monetary policy decisions on the reaction of the exchange rate, and also differences between U.S. and German announcements in the exchange rate reaction time pattern.

This paper employs recent developments in agency theory to study the impact that compensation contracts have on portfolio management investment decisions in a restricted mean-variance world. Two types of incentive contracts for mutual fund managers are analyzed and compared. The results show that the “symmetric” contract, while not necessarily eliminating agency costs, dominates the “bonus” contract in aligning the manager's interests with those of the investor.

We study the effect of antitakeover provisions (ATPs) on innovation. To establish causality, we use a regression discontinuity approach that relies on locally exogenous variation generated by shareholder proposal votes. We find a positive, causal effect of ATPs on innovation. This positive effect is more pronounced in firms that are subject to a larger degree of information asymmetry and operate in more competitive product markets. The evidence suggests that ATPs help nurture innovation by insulating managers from short-term pressures arising from equity markets. Finally, the number of ATPs contributes positively to firm value for firms involved in intensive innovation activities.

We demonstrate theoretically and empirically that strategic considerations are important in shaping the cash policies of innovative firms. In our model, firms compete in product markets with uncertain structure using cash as a commitment device to invest in innovation. We show that firms’ equilibrium cash holdings are related to the expected intensity of competition. The sign and magnitude of this relation depends on firms’ financial constraints. Consistent with the strategic motive for hoarding cash, we show that firms’ cash holdings are negatively affected by their rivals’ cash-holding choices, even more so when competition is expected to be intense.