Although they did not affect the individual rates of return per inflationary period that were the main concern of our study previously published in the Journal, it has recently come to our attention that there were computational errors in the summary weighted average real returns. Thus, we are taking this opportunity to correct the original errors and also to update the study results for the period from December 31, 1968, through December 31, 1973. In the analysis and discussion which follows it is assumed that the reader is familiar with the previous study and the methodology employed. Therefore, Table 1 is simply a correction of Table 4 in the 1971 article. This is followed by a discussion of the revised results and changes in conclusions prompted by the adjusted results. Table 2 contains nominal and real rates of return for the period from December 31, 1968, to December 31, 1973, nominal and real rates of returns for the full period from December 31, 1965, to December 31, 1973, and finally, a new set of weighted average returns using the figures updated through 1973.

Empirical tests of the Sharpe [36]–Lintner [23]–Black [3] Capital Asset Pricing Model (CAPM) have generally concluded that there is a positive, approximately linear, trade-off between average return and systematic risk (beta) for portfolio returns of common stocks. Most of the empirical studies, however, have reported data for short, usually monthly, time intervals. Exceptions to this rule include Blume and Friend [8] and Sharpe [38, pp. 289–292]. Their data provide evidence that long-term wealth ratios are concave, possibly nonmonotonic, functions of beta. These data are surprising since, if returns are intertemporally independent and the linear return model of CAPM is correct, expected multiperiod terminal wealth is a convex, monotone increasing function of beta. The results of this paper provide a theoretical framework for interpreting the long-term empirical data which does not violate the notion of a monotone increasing expected terminal wealth-beta relationship.

A firm periodically makes three major classes of decisions that determine its structure as reflected on its balance sheet. The first relates to the total amount of investment as well as the distribution of this total amount among different types of assets. This decision determines the size of the firm and the structure of the “assets” side of its balance sheet. The second is concerned with the relative proportion of equity versus debt capital to be used in financing the firm. This decision determines the structure of the “sources” side of the balance sheet by establishing relative sizes of liabilities and stockholders' worth. The third is the choice of the proportion of the equity which should be raised through the retention of earnings and the proportion to be raised through the sale of new stock. This decision determines the dividends that will be distributed and the composition of the stockholders' worth portion of the balance sheet.

I show that an alignment in partisan affiliation, between a firm’s management and the president, is associated with higher levels of investment. Using insider trading data, I find that managers become more optimistic about their companies’ prospects when their preferred party is in power. This optimism-driven increase in investment is amplified by herding and associated with both lower profitability and stock returns. Overall, managers’ political beliefs produce heterogeneous expectations about future cash flows and distort investment decisions.

We present a rationale for bidder termination provisions that considers their effect on bidders’ and targets’ joint takeover gains. The provision’s inclusion can create value by enabling termination when the target becomes less valuable to the bidder than on its own, but creates a trade-off because termination may also occur when the target is more valuable to the bidder than on its own. This trade-off explains why the provision is included in only some deals, and explains variation in termination fees. Inclusion of the provision is associated with larger combined announcement returns, provided that the termination fee is priced appropriately.

We use a random forest model to classify firms’ financial constraints using only financial variables. Our methodology expands the range of classified firms compared to text-based measures while maintaining similar levels of informativeness. We construct two versions of our constraint measures, one using many firm characteristics and the other using a small set of more primitive characteristics. Using our measures, we find that institutional investors hold a lower percentage of shares in equity-focused constrained firms, while retail investors show a preference for them. Equity issuance and investment of constrained firms also increases during periods of high investor sentiment.

We propose a new approach, based on investment data, to determine firms’ return exposure to investment-specific technology (IST) shocks. When applied to U.S. data, we find that, in contrast to the pattern estimated from empirical IST proxies, value firms have higher exposure to IST shocks than growth firms. When applied to simulated data from existing theoretical models, our approach reveals that existing empirical findings may result from measurement errors in the IST proxies. Importantly, our simulation analysis uncovers the key role played by investment data in determining the economic mechanism through which IST shocks affect cross-sectional asset prices.

It Is commonplace within the confines of finance literature to explain variations in the firm's residual income stream via the dichotomy of business risk and financial risk. On an ex-post basis the business risk of the enterprise is a direct result of the firm's investment decision and is, thereby, embodied in its asset structure. It follows that the company's cost structure, product demand characteristics, intra-industry competitive position, and managerial talent all affect its business risk posture.

The world is still recovering from the shock of radically higher energy prices triggered by the October 1973 war in the Mideast. In the months following the oil embargo and the quadrupled price of petroleum, there seemed to be a very real possibility that the strains imposed on world markets and institutions, and indeed on national economies, would cause a fracture in one or another part of the complex linkages that make up the world economic system.

Over the years there has been a growing interest in the over-the-counter (OTC) trading of exchange-listed securities (known as the third market). Although the third market has flourished and its advantages have been expounded, it has not been possible to compare accurately the third market with organized exchanges because of an incomplete quotation system. On April 5, 1971, the National Association of Security Dealers Automatic Quotation (NASDAQ) system began including bid-and-ask quotations for 30 stocks listed on the New York Stock Exchange (NYSE); see Table 1.

On February 1, 1971, the National Association of Security Dealers instituted an automatic quoting system for over-the-counter stocks. Heralded as a major advance in the elimination of market imperfections, the National Association of Security Dealers Automatic Quote System (NASDAQ) allowed bidand- ask prices of different firms in this geographically dispersed market to be centralized. Essentially its operation allowed individual “houses” to obtain the various bid-and-ask prices of market makers for a given unlisted security.

Two methods for deriving efficient sets involve either the Markowitz [3] approach, where every security can be viewed as being related to an index unique to itself, or the Sharpe [4] single-index model, where every security is related to the same index. Given the extreme differences between these models, Cohen and Pogue [1] developed two intermediate models. They found that the efficient set derived from the Sharpe single-index model came closer to approximating the Markowitz model's efficient set than their models when empirically tested on a sample of common stocks. Subsequently a similar test was performed by Wallingford [6] which yielded contradictory conclusions.

Professor Basil Kalymon, in his recent article [1], correctly asserts that the appropriate variance for the portfolio selection model, reflecting portfolio risk, should measure the risks created “not only by the inherent fluctuations of returns, but also by the decision-maker's lack of perfect information about the parameters of his model” [1, p. 560]. He identifies a significant failing of portfolio selection models, that “the question of estimating the required parameters in the models has been largely sidestepped … by assuming that the parameter values are known” [1, p. 559]. By showing that error in estimating security returns is an important component of risk in portfolio selection models, Professor Kalymon has taken portfolio theory an important step forward.

In this paper, a simple model of individual financial decision making is used (1) to construct the market demand curve for common stock, and (2) to question the appropriateness of market value maximization as the objective of corporate financial management.

Motivated by the effect on valuation of stopped or reduced debt coupon payments from a company in financial distress, we value a level-dependent annuity contract where the annuity rate depends on the value of an underlying asset process. The range of possible values of this asset is divided into a finite number of regions, with constant annuity rates within each region. We present closed-form formulas for the market value of level-dependent annuities contracts when the market value of the underlying asset is assumed to follow a geometric Brownian motion. Such annuities occur naturally in models of debt with credit risk in financial economics. Our results are applied for valuing both corporate debt with suspended interest payments under the U.S. Chapter 11 provisions and loans with contractual level-dependent interest rates.

Investment managers connected to plans sponsors are more likely to be hired than not-connected managers. The magnitude of the selection effect is comparable to that of prior performance. Ex post, connections do not result in higher post-hiring returns. Relationships are thus conducive to asset gathering by investment managers but do not generate commensurate pecuniary benefits for plan sponsors.

In theory, financial markets promote innovation by selectively allocating capital to high-quality projects. In this article, I show that equity markets can also inhibit innovation. In public firms, I find that short-term equity market declines cause pharmaceutical companies to abandon early-stage drug developments, irrespective of drug quality or changes in a firm’s stock price. I show that financing constraints drive this behavior, highlighting that even short-term market fluctuations can have long-term effects on pharmaceutical innovation and prevent potentially life-saving drugs from progressing to the market.

Economically insignificant tick sizes encourage undercutting behavior, thus harming market quality. Theoretical work shows that increasing tick sizes in unconstrained markets reduces undercutting and improves market quality. Equity market pricing grids are generally too coarse to test this prediction. We examine a cryptocurrency market with infinitesimal tick sizes where undercutting limit orders acquire price priority without meaningful economic cost. We show that increasing tick sizes reduces undercutting behavior, increases liquidity provision and quoted depth, and reduces transaction costs for institutional and retail-sized trades while decreasing short-term volatility. Tiny tick sizes are suboptimal, supporting increased minimum trading increments in tick-unconstrained markets.

This article shows how structured financing can be used to solve the asset substitution problem in a dynamic setting. Structuring induces the firm’s owner to optimally choose the first best operating strategy even though the owner’s value function might be locally convex (concave), which would ordinarily lead to overinvestment (underinvestment) in risky projects. This result is demonstrated in two different continuous time settings—one that is based on the risk-shifting framework of Leland (1998) and one that generalizes the scaled return model of Green (1984). It is shown that the contractual nature of the structuring is a key determinant of the issuing firm’s dynamic asset volatility. Furthermore, unlike nonstructured financing, the default (conversion) probability of a structured debt security may be increasing (decreasing) in the firm’s total assets. Structured securities are therefore hedge assets, which potentially explains the popularity of structured securities among investors and third-party issuers.

Using a regression-discontinuity design and within lender–borrower variation, we analyze how credit default swaps (CDSs) affect bank incentives and borrower outcomes in renegotiations after covenant violations. While existing studies document an investment decline after covenant violations, we find that covenant-violating firms maintain their investment subsequent to the introduction of CDS trading. Moreover, after CDS introduction, covenant-violating firms are less likely to default. Our results suggest that in the private debt markets, CDSs discipline borrowers, while the empty creditor problem due to CDS is mitigated because of lenders’ reputation concerns and lower coordination frictions.