I examine whether local bank finance facilitated the transition to a service-based economy in the U.S. I identify a causal role for local finance in service job creation. I use county-level changes to alcohol laws as demand shocks to service employers across a subsample of U.S. counties. Counties with more local finance experience more service job creation. This leads to labor market transitions that reflect shifts in the broader economy. Information asymmetry and collateral constraints connect local finance to service sector employment. The findings identify a unique role for local finance in the evolution to a postindustrial service-based economy.

We investigate the dynamics of observed and target leverage ratios and deviations from the targets. The cross-sectional persistence in leverage ratios is driven by persistent targets, whereas time-series variation is driven by transitory deviations from targets. Consistent with dynamic trade-off theories, persistence is higher when the costs of deviating from targets are lower and when the adjustment costs are higher. Deviations are less persistent for firms that are over-levered and firms that are smaller, younger, or more focused or that have lower credit ratings. In recessions, excess leverage is less persistent for larger firms and is more persistent for smaller firms.

There are significant differences among sell-side analysts in how frequently they revise recommendations. We show that much of this variation is an analyst-individual trait. Analysts who change recommendations more slowly make recommendations that are more influential and generate better portfolio returns. Slower-revising analysts tend to change recommendations following corporate news that are harder to interpret by nonstock experts, and our evidence suggests that their investment value derives from their ability to better interpret hard-to-assess information. On average, analysts change recommendations less frequently as their career progresses; however, recommendation speed-style is the dominant predictor of their recommendation value.

I find that short-maturity Treasury-bill yields have unique information about risk premiums that is not spanned by long-maturity Treasury-bond yields. I estimate 2 components of risk premiums: long term and short term. The long-term component steepens the slope of yield curves and has a forecastability horizon of longer than 1 year. In contrast, the short-term component affects Treasury-bill yields but is almost invisible from Treasury bonds, has a forecastability horizon of less than 1 quarter, and is related to bond liquidity premiums.

Firms with greater shareholder rights have a greater risk-shifting incentive, requiring more lender monitoring. Thus, a reduction in shareholder rights implies more diffused (less monitoring-intensive) loan syndicates. Using the passage of U.S. second-generation antitakeover laws as an exogenous shock that reduces shareholder rights as a natural experiment, we find that loan syndicates become significantly more diffuse after the passage of these laws. These results are confirmed in a large sample of bank loans made during the 1990–2007 period when the loan syndicate market matured. Our results show how corporate governance causally affects financial contracting and creditor control in firms.

Increasing attention has been focused, as of late, on the relatively low rate of rental housing starts and the increase in apartment conversions to condominium ownership. By some estimates, additions to owner–occupied housing stock since 1970 have occurred at twice the rate of addition to the rental stock, a pattern that has caused concern to some policymakers.

In recent years a substantial number of empirical studies have been conducted concerning aggregate commercial bank behavior [2, 8, 11, 14, 15, 17, 18]. Although the scope of these studies has varied widely, none has included an adequate treatment of the relationship between commercial bank liability management and earning asset adjustments. The importance of the relationship between liability management and commercial bank asset behavior has been alluded to in the literature [3, 5, 6, 13, 18]; but there has been very little empirical investigation of the subject. Moreover, little is known about which assets and liabilities are primarily involved. By increasing or decreasing earning assets, the commercial banking system can create or eliminate deposits, thus affecting the supply of both money and bank credit. Since liability management and asset behavior are very closely related, it seems that an adequate understanding of this relationship is essential to understanding the money supply process.

In attempting to analytically discover or test economic relationships, econometricians have available many computational techniques by which to estimate the parameters of their models. But different solution methods may give unbiased and consistent, biased and consistent, or biased and inconsistent estimates under varying assumptions. The model builder is vitally interested in how each of these procedures reacts under varying conditions that may impinge on his model, but which are conditions not assumed by the estimation technique.

In a recent issue of the Journal of Financial and Quantitative Analysis, Bernhard [2] has pointed out and discussed the seemingly paradoxical possibility that P < 0 even though there is a unique r in the [0, ∞) interval, and that r > it for all t. He showed that this can happen when there are one or more additional values of r in the (−1, 0) interval or when the unique r in the [0, ∞) interval consists of multiple coinciding roots. The further point to be shown here is that it can also happen even when r is unique and simple in the (−1, ∞) interval. Thus the phenomenon is considerably more general than Bernhard had implied.

An analysis of the dual problem described by Ronn (1987) reveals that it provides a powerful and easily interpretable test for the hypothesis of a single class of marginal investors, including models of equilibrium based on a “representative tax bracket.” When Ronn's empirical tests are interpreted via the dual, they lend additional support to his conclusions in providing a strong rejection of the representative tax bracket hypothesis. A valid dual LP used to test the hypothesis can be obtained with fewer assumptions than Ronn's primal; in addition, a minor error in Ronn's presentation of the dual is corrected.

The simultaneity of security price determination has been recognized for many years. Lintner [6], Lerner and Carleton [5], Mossin [9], Sharpe [10], Tobin [15], and others have all advocated that securities be treated in a portfolio sense implying security prices are determined simultaneously. The empirical work in finance is just beginning to deal formally with this simultaneity.

Indexes are frequently used for a basis of comparison of the performance of different types of assets, such as mutual funds and common stocks. Sharpe [6] studied the performance of mutual funds over the period 1944 to 1963 and compared their performance to the Dow-Jones Industrial Average (DJIA) using the capital-asset pricing model. For this period he concluded that mutual funds were relatively inferior investments. Joy and Porter [2], using the stochastic dominance approach, reached conclusions similar to those of Sharpe for the 1954–1963 period.

Bond Risk Premia, or synonymously, yield spreads have been the subject of numerous theoretical and empirical studies. These studies always measured the difference yield spread (DYS hereafter), usually in terms of U. S. Treasury Bonds, as shown in equation (1).

The purpose of this paper is to investigate the performance of propertyliability insurance companies' stock portfolios from 1952 to 1968, and to show how that performance compared to the general stock market and investment company performance.

In a recent article in this journal [6], Clement G. Krouse and Wayne Y. Lee (hereafter K-L) presented a model of optimal equity financing of a corporation based on Pontryagin's maximum principle. In this note the basic assumption of a constant internal rate of return of the K-L model is relaxed. As a result, the financial implications of the K-L results remain essentially unchanged, but their applicability is extended considerably, and some undesirable solution characteristics are eliminated.

Announcements of mergers very often discuss the immediate impact of the deal on the acquirer’s earnings per share (EPS). We argue that the focus on EPS reflects the difficulty of evaluating and communicating deal synergy in mergers and acquisitions (M&A) practice and provide supporting evidence. We show that the acquirer’s EPS focus affects how deals are structured, the premium that is paid, and the types of deals that are done. EPS-driven M&A decisions are also associated with costly distortions in the acquirer’s financial and investment policies.

Managers’ incentives to round up reported earnings per share (EPS) cause an underrepresentation of the number 4 in the first post-decimal digit of EPS, or “quadrophobia.” We develop a novel measure of aggressive financial reporting practices based on a firm’s history of quadrophobia. Quadrophobia is pervasive, persistent, and successfully predicts future restatements, Securities and Exchange Commission enforcement actions, and class action litigation. It is more pronounced when executive compensation is more closely tied to the stock price and when the firm anticipates violating debt covenants. Quadrophobia is especially strong when rounding-up EPS allows firms to meet analyst expectations, and investors seem not to see through this behavior.

The importance of an explicit consideration of uncertainty in evaluating the economic desirability of investment propositions is generally recognized in contemporary literature on capital budgeting. The emphasis has been on analyzing the effects of uncertainty of future cash-flows which result from an investment on the economic desirability of that investment. However, although future cash-flows are one important source of uncertainty, it should be recognized that other factors may contribute to uncertainty in a significant way. Uncertainty regarding alternate future investment opportunities is of obvious importance in the capital budgeting context. Thus, an investor who makes the best possible investment decision at a given point in time may deplore such a decision a short time afterward simply because his commitment prevents him from exploiting a better opportunity. While it might be assumed implicitly that an investor, in considering his alternatives, ought to include in such deliberations all the courses of action that may become available in the future, this aspect seems important enough to warrant explicit attention.

Livingston contends that short futures/long cash traders can eliminate the potential costs of the quality option through use of a dynamic trading strategy. It is proposed here that if this is possible then futures prices will never reach a stable equilibrium. Alternatively, if Livingston's argument is flawed, then no risk-free arbitrage opportunities are likely to be available to either short cash/long futures or long cash/short futures traders. Under such conditions, futures prices will reach an equilibrium when the expected return and risk of each type position are equally attractive.

Using intraday data, we find that bank announcements of changes in the prime rate have significant effects on Dow Jones stock price indexes and yields in the Treasury bill futures market. We find comparable effects using daily data for indexes of share prices of banks and financial firms as well as interest rates on various maturities of government securities. Our evidence is consistent with the view that banks have a comparative advantage in processing private information gained through bank-borrower relations and the regulatory supervision process.