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.

This paper utilizes a two-parameter model of segmented securities markets to develop equilibrium implications concerning the impact of statutory investment restrictions upon the market prices and allocation of risky securities. The distinguishing feature of the model is the existence of a subset of securities common to the opportunities of all investors and therefore said to “span” the investor population. These common opportunities are shown to permit intersubset security transactions which integrate the various market segments and lead to the following theorem and tendency concerning equilibrium prices and portfolios:

Theorem: In the absence of active barriers against short positions, the equilibrium expected return for any security spanning the investor population is an exact linear function of its contribution to total market risk, irrespective of the number of distinct investor segments that may exist.

Tendency: The economic characteristics of the equilibrium risky portfolio for any investor, irrespective of the market segment to which he or she may belong, will approximate the characteristics of the market portfolio of all risky assets in the economy in all relevant risk dimensions.

In this paper, we develop a Capital Asset Pricing Model (CAPM) using a mean-lower partial moment framework. We explicitly derive the valuation formulas for the equilibrium value of risky assets and provide a distribution-free testable hypothesis for empirical validation of the new CAPM. We show the invariance of our results to the problem of estimation risk. We also show that when the probability distribution of security rer turns is the normal distribution, the stable Paretian distribution (with the same characteristic exponent between 1 and 2 and the same skewness parameter (not necessarily zero)), or the multivariate t-distribution, our CAPM reduces to the traditional two-parameter CAPM.

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.

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.

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.

In their paper Messrs. Reilly and Slaughter set out two questions, namely:

1. Prior to the introduction of technological advance in the securities market was there any difference in the market making between the NYSE and OTC on a sample of 30 stocks?

2. Following that introduction what was the effect on the market making of these securities listed on the NYSE?

The authors clearly stated the basic economic theory that underlies this exchange of assets and the price setting mechanism, and then concentrated on the empirical study. Their findings are inconsistent with their a priori expectations. This empirical study is well done; the methodology is sound and well presented. However, the authors appear to have overlooked one vital aspect of this type of study, i.e., institutional effects. I shall concentrate upon this area.

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 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.

There are seven academic finance associations in the United States; two are considered to be national and five are identified as regional. The national organizations are the American Finance Association (AFA) and the Financial Management Association (FMA), and the regional associations are the Eastern Finance Association (EFA), Midwest Finance Association (MFA), Southern Finance Association (SFA), Southwestern Finance Association (SWFA), and the Western Finance Association (WFA).

Models of security markets invariably assume that market participants act intelligently since any other assumption generally leads to absurd results. Schaefer's Comment makes the incorrect assumption that one market participant, namely the government, acts unintelligently by allowing investors to reap tax arbitrage profits. Consequently, the conclusions in the Comment are erroneous. As I will show below, a government can (and the U.S. Government does) prevent tax arbitrage and any resulting disequilibrium in the bond market through two simple tax rules. My earlier paper [1] primarily showed that bond price must be a linear function of coupon for any maturity under the assumption of constant tax brackets for all investors, and then suggested that a linear relationship will also hold with investors in different tax brackets. I will prove this last result below.

A student of financial theory must always assume that managers will follow a course of action that will lead to a higher value of the firm rather than a lower value, given a choice between two courses of action. Yet, Lewellen and Racette (hereafter LR) in a recent paper [1] comparing the sale of convertible debentures with the sale of straight debt assumed that managers will behave in a way that will lead to submaximal firm value. The purpose of this paper is to correct the LR error.

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.

Economists have long been creating models by which to describe optimum behavior for firms to maximize profits. The rigor and inclusiveness of such models have increased steadily in recent years. In the field of commercial banking, however, this has not generally been the case. Concerning the topic of asset management, the typical analyst discusses the decisions to be faced by the bank manager, the reasons for the problems involved, and considerations to include in the solution of such problems. Often, specific rules-of-thumb for the handling of individual asset accounts are advocated.

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).

Pástor and Stambaugh (2012) find that from a forward-looking perspective, stocks are more volatile in the long run than they are in the short run. We demonstrate that when the nonnegative equity premium (NEP) condition is imposed on predictive regressions, stocks are in fact less volatile in the long run, even after taking estimation risk and uncertainties into account. The reason is that the NEP provides an additional parameter identification condition and prior information for future returns. Combined with the mean reversion of stock returns, this condition substantially reduces uncertainty on future returns and leads to lower long-run predictive variance.