This paper serves as an intuitive companion piece to a more technical paper in which Forsythe and Suchanek (F–S) introduce a model which demonstrates “the impossibility of efficient decision rules for firms in competitive stock market economies.” F–S are to be commended for undertaking this effort. The major theme of this paper appears to be that “inefficient equilibria are generic to competitive stock market economies.” This is contrary to the general belief that not only do complete financial markets but also a wide variety of incomplete financial markets guarantee efficient financial equilibria. The F–S model claims to demonstrate otherwise.

Professor Stevens has attempted to determine whether or not a consistent financial basis for merger exists as measured by premerger financial characteristics of the acquired firms. He suggests that results of his study are useful in identifying merger motives and in relating such motives to a general framework for analysis of merger movements.

We investigate whether long-term and short-term components of typical conditioning variables in asset pricing studies, such as the dividend yield or yield spread, have different implications for optimal asset allocation. We argue that short-term components relate mostly to momentum, and long-term components relate mostly to mean-reversion effects, respectively. Therefore, they may have a different information content for investors with different horizons. We obtain improvements in terms of out-of-sample Sharpe ratios and expected utilities for decomposed state variables that directly reflect information related to the stock market, such as the dividend yield and stock market trend.

Looking back over the last two decades, financial economists can find considerable cause for pride and self-congratulation in the development of their discipline. From the earliest steps toward a rigorous theory of capital budgeting, through the Modigliani-Miller theorems on corporate financing and cost of capital, to the development of the capital asset pricing theory, the field of finance has garnered a well-deserved reputation for rigor, analytic sophistication, and pace of intellectual growth.

Informal risk sharing within social networks and formal financial contracts both enable households to manage risk. We find that financial contracting reduces participation in social networks. Specifically, increased crop insurance usage decreased local religious adherence and congregation membership in agricultural communities. Our identification utilizes the Federal Crop Insurance Reform Act of 1994 that doubled crop insurance usage nationally within a year, although changes in usage varied across counties. Difference-in-difference and Spatial First Difference tests confirm that households substituted insurance for religiosity. This substitution was associated with reductions in crop diversification and crop yields, indicating an increase in moral hazard.

Commercial bank portfolio models developed by Hester [6], Porter [11], and Kane and Malkiel [7], among others, relate the structure of an asset portfolio to variation in the level of deposits. Similarly, in a recent application of linear programming to asset management, Cohen and Hammer [3] specify a liquidity constraint based upon deposit fluctuations. However, there have been few empirical studies of the determinants of demand deposit fluctuations. The purpose of this paper is to extend the work of Gramley [4], Rangarajan [12], and Wilkerson [14] on the determinants of deposit variability. In this paper, the analysis will be confined to demand deposit variability.

The cross section of options holds great promise for identifying return distributions and risk premia, but estimating dynamic option valuation models with latent state variables is challenging when using large option panels. We propose a particle Markov Chain Monte Carlo framework with a novel filtering approach and illustrate our method by estimating index option pricing models. Estimates of variance risk premiums, variance mean reversion, and higher moments differ from the literature. We show that these differences are due to the composition of the option sample. Restricting the option sample’s maturity dimension has the strongest impact on parameter inference and option fit in these models.

We study the drift and cyclical components in U.S. Treasury bonds. We find that bond yields are drifting because they reflect the drift in monetary policy rates. Empirically, modeling the monetary policy drift using demographics and productivity trends, plus long-term inflation expectations, leads to cyclical deviations of bond prices from their drift that predict bond returns in- and out-of-sample. These bond cycles can be interpreted as term premia or/and temporary deviations from rational expectations in a behavioral framework. Through the lens of our model, we detect a significant role of the latter in determining the cyclical properties of yields with short maturities.

Post-earnings-announcement drift (PEAD) is one of the most solidly documented asset pricing anomalies. We use the controlled conditions of the experimental lab to investigate whether earnings autocorrelation is the driving cause of this anomaly. We observe PEAD in settings with uncorrelated and correlated earnings surprises, confirming that earnings autocorrelation is not a necessary condition for PEAD. Instead, it acts as an accelerator: PEAD is stronger when earnings surprises are correlated. We further show that market prices underadjust to fundamental value changes, and that trading strategies can profitably exploit the PEAD.

We find that 43% of firms that make payouts also raise capital during the same year, resulting in 31% of aggregate payouts being externally financed, primarily with debt. Most financed payouts cannot be explained by payout smoothing in response to volatile earnings or investment (rather, they are the result of firms persistently setting payouts above free cash flow). In fact, 25% of aggregate payouts could not have been paid without the firms simultaneously raising capital. Profitable firms with moderate growth use debt-financed payouts to jointly manage their leverage and cash, thus highlighting the close relationship between payout and capital structure decisions.

This article empirically analyzes the effect of foreign block acquisitions on U.S. target firms’ credit risk as measured by their credit default swap (CDS) spreads. Foreign block purchases lead to a greater increase in the target firms’ CDS premia post-acquisition compared to domestic block purchases. This effect is stronger when foreign owners are geographically and culturally more distant, and when they obtain majority control. The findings are consistent with an asymmetric information hypothesis, in which foreign owners are less effective monitors due to information barriers.

We examine the effects of a severe climate event on local firms. Our data include 8,218 business credit reports and a detailed survey of 273 businesses in the area affected by Hurricane Harvey. Delinquent credit balances doubled in areas with the worst flooding, although nonflooded areas also had significant credit impairments. Only independent businesses showed signs of distress; subsidiaries of larger firms did not. Firms were largely uninsured and often were denied credit postdisaster. Many funded recovery informally, such as through friends and family. Our findings suggest that several financial frictions compound the challenges posed by a severe climate event.

How synchronized are short sellers? We examine a unique data set on the distribution of profits across a stock’s short sellers and find evidence of substantial dispersion in the initiation of their positions. Consistent with this dispersion reflecting “synchronization risk,” that is, uncertainty among short sellers about when others will short sell, more dispersed short selling signals i) greater stock overpricing and ii) longer delays in overpricing correction. These effects are prevalent even among stocks facing low short-selling costs or other explicit constraints. Overall, our findings provide novel cross-sectional evidence of synchronization problems among short sellers and their pricing implications.

This paper examines empirically the relationship among the stability of security and portfolio betas and (1) the length of the sample period used to calculate betas, (2) beta adjustment techniques, and (3) beta magnitudes. Beta values are forecast using four models: (1) a naive model which assumes the beta value in period t + 1 is the same as in period t, (2) Blume's regression model, (3) a regression model used by Merrill Lynch, Pierce, Fenner and Smith, and (4) a Bayesian procedure suggested by Vasicek.

The focus of our study concerns the information effect of newly reported data. Our time frame of reference is the period after the data become available. The information we analyze is generated by a multivariate model which utilizes publicly available data. We concentrate on an extremely poor performing group of companies where the new information indicates a change in status from a going concern to a potential bankruptcy; i.e., the firms possess characteristics similar, to other firms which were bankrupt in the past. Our sample, however, is comprised only of firms which, in fact, did not fail.

This article examines the severity of the 2008 arbitrage crash in the convertible bond market by estimating how expensive it would have been to liquidate portfolio securities immediately. We consider whether funds actually demanded immediate liquidity or were able to delay trades. Our results indicate that the cost of immediacy was high, but that convertible bond sellers could largely avoid selling at fire sale prices. These results can be explained by dealers recognizing when trades are liquidity-motivated rather than information-based and by a shift to riskless principal trading, allowing dealers to avoid taking bonds into inventory.

In a dynamic economy with a sequence of markets over time, there are generally goods or securities that will be traded in the future at currently unknown prices. Individuals require some notion of what these future prices will be since knowledge of future investment opportunity sets is relevant when making current portfolio allocation decisions.

Changes in the Japanese financial system over the coming decade will play a significant role in the functioning of U.S. financial markets and, indeed, of the entire U.S. economy. From World War II through at least the mid–1970s, the United States was a major exporter of investment capital in the form of foreign direct and portfolio investment. More recently, low U.S. savings rates, recurring federal budget deficits, reduced sovereign lending by U.S. banks, and, possibly, high real returns on domestic investment have combined to make the United States a major importer of capital. At the same time, large trade surpluses and very high savings rates in Japan have more than offset increases in government borrowing to make Japan the world's principal capital exporter, a position it is likely to hold for some time. These are fundamental changes.

While access to financial data and information about the performance of Japanese companies remains less than ideal, it is now possible to get much more of the information necessary to test research questions in Japanese finance than was possible even a few years ago. Data sources once available only in Japan have now become available to U.S. -based researchers as well.