In planning any finance course an important consideration is its economic content. After all, financial decisions are invariably made in the context of both micro and macro uncertainty. The micro issues are often given extensive coverage in the form of models that optimize returns, cash flows, or credit choices, and the techniques needed to produce the required input for those models: ratio analysis, proforma statement preparation, and valuation frameworks such as the capital asset pricing model. Yet, the macro uncertainty is very often assumed away.

We have seen a recent surge in the interest in some revision of the consumer finance laws, the most comprehensive of which has been the Uniform Consumer Credit Code. In the past, there have been many attempts to determine independently the effect one aspect of consumer finance legislation had on the market for consumer loans. However, the different regulatory provisions are not enacted independently. Thus, it may be more appropriate to investigate jointly the effects of several of the features of the laws.

In this paper, a model is developed for deriving the implied fixed cost of a bond flotation. Using a sample of electric utility companies over the 1961–1970 period, implied fixed costs are computed for 318 bond issues. These fixed costs then are evaluated in an effort to cast light on whether companies behave optimally with respect to the size and frequency of bond issues. Regression results are consistent with the adjustment of debt issuing behavior in keeping with: (1) expectations about the future course of interest rates; (2) variable costs increasing at a decreasing rate with the size of individual issue; and (3) differences in the cost of carrying excess liquidity which arise from differences in quality rating. An estimate of the average fixed cost of issuing bonds is evaluated as is the debt issuing behavior of individual companies. Over all, the model and its testing give considerable insight into the implied fixed costs of issuing debt.

Regression analysis is by far the most popular of all the statistical techniques employed in financial research. Almost without exception, the models employed have been additive in both the parameters and the variables (regressors).

In a recent article, Donald R. Hodgman set forth a framework for analyzing commercial bank lending behavior which emphasized the relationship of customers to their banks as both depositors and borrowers. Specifically, Hodgman links the borrower's contract rate of interest to the profitability of his deposit account, i.e., banks compete for profitable deposit customers by offering the customer a rate which is lower than the comparable open market rate (adjusted for risk). Hodgman uses the terms deposit relationship and customer relationship to describe this behavior. He argues that compensating balance requirements, the prime rate convention, and provision of services below cost may be viewed as a systematic, rational attempt by commercial banks to maximize long-run profit under existing institutional arrangements when viewed from the perspective of the customer relationship.

In a recent issue of this journal, Linke and Kim [1], hereafter denoted as L-K, have shown that for finite-time horizons in excess of one period and if, over the same period, the firm's ratio of debt to equity is held constant, the firm's overall required rate of return could be expressed as a weighted average cost of capital. In their proofs L-K distinguish between firms engaging in no financing over the relevant horizon (the nonfinancing case), and those in which such financing is permitted to take place. In the latter case, their procedure is to derive proofs for new debt and equity financing cases separately. In all cases their proofs are correct. However, we wish to draw attention to an implied restriction which must hold in order for their proofs in the financing cases to be valid. Our objective is to set forth a proof which allows both new debt and equity financing simultaneously, and most importantly, which is also free of the implied restriction.

Professor Jennings, in his recent article [2], developed a model to estimate convertible bond premiums. The model incorporates the capital asset pricing model to evaluate convertible bonds. The purpose of this comment is not to criticize the general development of the model but to point out flaws in its implementation which influence Jennings' empirical results.

This study deals with behavioral assumptions that necessarily underlie the theory of asset valuation. Recognized logical and empirical implausibilities associated with the particular set of assumptions that provides the underpinnings of much currently espoused asset theory are reviewed. A valuation model based on a more realistic set of behavioral assumptions is then proposed and tested empirically.

The purpose of this study is to analyze the behavior of the cost of equity capital in the commercial banks by looking at whether there exists an optimal composition of the bank “fund structure” that would maximize bank earnings through the minimization of its cost of funds. The analysis should give an approximate cut-off point for testing such projects as “checking plus,” checkless payment systems, etc.

The dramatic surge of the commodity option market over the past few years may well be illustrated by the growth (before its collapse) of one leading option writer, Goldstein, Samuelson, Inc., whose sales rose from $1 million in 1971 to over $45 million by the end of 1972. The commodity option market is closely related to the commodity futures market, except that options are available only on the so-called “international” commodities.

Corporations tender for their own shares for a variety of reasons. Some stock tenders are made for strategic purposes—to prevent a take-over, to raise the market price of the stock, or simply because the stock represents ‘a good investment.’ For discussion of tendering in these situations, see the articles of Ellis [2] and Guthart [1]. In addition, there may be tactical reasons for a stock tender; one such reason is to reduce bookkeeping and shareholder servicing costs. In this instance, the argument runs roughly as follows: “The annual cost of servicing a holding is independent of the number of shares; consequently, the cost per share of servicing small holdings is relatively great. Let us reduce these high per-share costs by buying up small holdings.” Typical procedure is to then mail out an offer to buy holdings of less than a certain size directly, thus permitting the shareholder to dispose of his holding without paying the usual brokerage and odd-lot fees. Frequently no premium is offered except for the avoidance of brokerage fees. If one were to consider the premium offered as a controllable variable, it would be surprising to discover that its optimal value were exactly zero. One also recognizes that the maximum shareholding tendered for may be another decision variable available for optimization. See the appendix for data on tenders of this sort made in recent years. The variety of policies seems to indicate an almost complete absence of systematic application of the ideas presented here.

Theory suggests that controlling shareholders can influence firm value through both shared benefits creation and private benefits consumption. Using negotiated control-block transfers from 31 countries, we look beyond ownership concentration and investigate how controlling shareholder heterogeneity influences the relative importance of these two effects. We document that a control transfer precipitates positive firm outcomes particularly when the vendor has maintained control over an extended period and the acquirer displays a strong incentive to engage in restructuring. In such cases, we observe a sustained positive price reaction, more focused corporate investments, lower leverage, higher operating efficiency, and superior long-term performance.

There is a standard trade-off in compensation contracts between the provision of incentives and insurance. We hypothesize that this trade-off influences the precision with which firm performance is measured. We find that firm outcomes are measured less precisely when chance plays a large role in these outcomes. Further, this precision is determined through the choice of shares outstanding. This has several novel implications. Nominal stock prices can remain constant over time, and firms with unpredictable cash flows should have more shares and lower stock price levels, all else equal. We find evidence consistent with these implications.

Disequilibrating macro shocks affect different firms’ prospects differently, increasing idiosyncratic variation in forward-looking stock returns before affecting economic growth. Consistent with most such shocks from 1947 to 2020 enhancing productivity, increased idiosyncratic stock return variation forecasts next-quarter real GDP growth, industrial production growth, and consumption growth both in-sample and out-of-sample. These effects persist after controlling for other leading economic indicators.

During the first half of 2020, the difference in savings from mortgage refinancing between high- and low-income borrowers was 10 times higher than before. This was the result of two factors: high-income borrowers increased their refinancing activity more than otherwise comparable low-income borrowers and, conditional on refinancing, they captured slightly larger improvements in interest rates. Refinancing inequality increases with the severity of the COVID-19 pandemic and is characterized by an underrepresentation of low-income borrowers in the pool of applications. We estimate a difference of $5 billion in savings between the top income quintile and the rest of the market.

This study employs variance ratios (VRs) to assess the roles of regulation and liquidity on cryptocurrency market efficiency, focusing on crypto-assets subject to varying degrees of regulation. Our findings reveal that cryptocurrencies supervised by FinCEN-licensed exchanges (IEO-L) exhibit market efficiency similar to SEC-regulated traditional stock offerings (IPOs). Conversely, noncompliant crypto-assets display higher market inefficiency. We also establish a connection between regulatory compliance and issuing entity reputation mechanisms. Our results indicate that compliance with existing regulatory norms enhances efficiency and reduces investor risks in crypto-assets. Furthermore, assets voluntarily adhering to regulatory norms can attain efficiency akin to government-regulated assets.

Conventional collateral requirements for derivatives are conservative, but not explicitly designed to buffer systemic risk. I explore collateral adequacy against systemic risk in the Canadian futures market during the 2008 crisis. I find that conventional collateral levels adequately absorb systemic risk, even allowing for an implausibly high level of stress, and that systemic risk spillovers do not exceed the effect of an approximately 1% downward stock price move. I also document that the largest systemic risk contributors are buffered relatively less than the rest, and that there is a large cross-country difference in the behavior of U.S. and Canadian institutions.

In a general equilibrium framework, we show that banks may “buy” political influence at a discount: They offer disproportionately small campaign contributions compared to the influence they exert, thus generating abnormal returns. We distinguish between the direct effect of contributions which, as a cost, reduce bank returns, and the indirect effect of contributions which boost returns via inducing bank-favoring policies. Therefore, abnormal returns may or may not increase with the amount of contributions, depending on which effect dominates: Stricter capital requirements decrease contributions and abnormal returns. When politicians attach more weight to households’ welfare, contributions increase and abnormal returns decrease.