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.

We document that firms that expect their CEOs’ compensation to exceed the median CEO compensation of their Institutional Shareholder Services (ISS) peers influence ISS to revise these peer sets. Controlling for changes in firm characteristics that ISS uses to select peers, we find that ISS applies an abnormally high turnover rate in the members of these peer sets and increases the representation of focal firms’ chosen peers. This turnover results in increases in the medians of the ISS peers’ CEO compensation and size. We find that these firms underperform and conclude that they attempt to camouflage high CEO pay to mitigate outrage costs.

Prior research has suggested that sitting on the board of a poorly performing firm (PPF) can be undesirable to directors. Still, almost 60% of such firms are able to appoint new directors following director departures. Contrary to a quality matching explanation, we do not find that only poorly performing directors join these firms. Upon joining PPFs, directors are more likely to fill leadership positions without necessarily receiving higher pay. These directors subsequently receive career benefits, especially those who are relatively junior in the pool. As such, the evidence is consistent with the leadership positions providing a certification effect.

We confirm prior evidence that bonds on average are offered at prices below their immediate post-offer secondary market prices. However, in cases where banks lead–manage their own bond offerings the underpricing is significantly less as compared with other non-self-marketed offerings. These findings are robust across various matched samples and selection models. Our results suggest that the bond offering process is characterized by substantive agency conflicts between shareholders of corporations (issuers) and underwriters.

We study how the scarcity of committed capital affects the equilibrium distribution of net alphas in the asset management industry. We propose a model of active portfolio management with different sales fee structures where committed capital is in short supply. In the model, a portfolio’s excess return is not fully appropriated by the money manager but shared with long-term investors. Empirically, we show that capital commitment allows funds to hold shares longer and take advantage of slow-moving arbitrage opportunities. Consistent with the model, funds with more committed capital generate higher value added, which, net of fees, accrues to long-term investors.

We document a novel strategic motive for family business groups to utilize their internal capital markets (ICMs) during financial crises. We find that crisis-period group ICM activity is targeted toward exerting product market dominance over standalone rivals. Groups make significant post-crisis gains in market share that are concentrated among affiliates (and industry segments within affiliates) operating in highly competitive product markets, where capturing such gains is difficult in normal times. These patterns are observed only in emerging markets, suggesting that ICMs enable groups to exploit crises to realize long-term competitive advantages only when rivals face chronic financing frictions.

This paper is a pioneering effort in the examination of the workings of rationality and efficiency in capital markets. The central theme of the paper is the notion of informational efficiency in markets for durable assets. In its broadest terms this imposes a behavioral constraint on the intertemporal development of the asset markets; in a perfect market the development of the equilibrium over time must not be self-contradictory. Individual agents' anticipations of future developments determine their current actions and these, in turn, determine equilibrium prices. But, tomorrow the process will be repeated and it is at this second step that the possibility of conflict enters. The future development need not fulfill precisely people's previous anticipations, but in a perfectly functioning market it would be difficult to accept a blatant contradiction. To believe that prices are lognormally distributed, for example, and to have that belief generate the same equilibrium price period after period is such a contradiction.

For some time there has been disagreement among financial economists as to the effect of dividend policy on the valuation of a firm under conditions of uncertainty. On one side of the debate Miller and Modigliani (MM) [11] argue that the capitalization rate on shares is independent of the dividend policy of the firm. Gordon [6], [7], [8], and others, on the other hand, reject this proposition and present theories of valuation where share prices and capitalization rates are very much dependent upon the dividend policies of firms.

First, let me say that I enjoyed Professor Edmister's paper and found his Inquiry into ratio analysis and multiple discriminant analysis (MDA) for small business financing decisions quite interesting.

Recent economic research efforts in rate of return regulation of public utilities have for the most part been couched in a static, steady-state framework, “Averch-Johnson” hypotheses being the most obvious examples [3]. Nevertheless, standard classical microeconomic analysis of rate of return regulation seems to have two important drawbacks: first, it does not address itself to multiperiod relationships; and secondly, it cannot be represented in current-practice financial terms. This paper first outlines rate of return regulation as typically practiced. It then describes the essential features of a model designed to examine intertemporally the financial and capital expansion decision tradeoffs a public utility faces given corporate, institutional, and regulatory constraints. Decision tradeoff questions have assumed substantial policy importance in recent years not only because of the ambiguities in rate of return regulation effects conceptualized in the Averch-Johnson literature but because of the behavioral (occasionally legal) importance of purely financial constraints, such as interest coverage requirements, on corporate investment and financing choices.

We find the financial condition of states impacts bank credit supply through their municipal bond holdings. In particular, we treat sudden political and statutory actions during the 2011 union bargaining rights debates in Wisconsin and Ohio as exogenous shocks to state solvency. We show bank valuations and municipal bond spreads adjust to the announcements, and, over longer horizons, a new lending channel linked to state solvency emerges, whereby banks supply credit as municipal bond appreciations free up capital.

This article investigates spillovers from foreign economies to the U.S. through changes in long-term Treasury yields. We document a decline in the contribution of U.S. domestic news to the variance of long-term Treasury yields and an increased importance of overnight yield changes, a proxy for foreign shocks’ contribution to U.S. yields. A model that identifies U.S., Euro area, and U.K. shocks that move global yields suggests that foreign shocks account for at least 20% of the daily variation in long-term U.S. yields in recent years. We also document the predictability of long-term U.S. yields by the U.S.–foreign yield spread.

Executives in a wide variety of formal organizations frequently face decisions involving changes in capacity of service capabilities. Usually these changes mean increases in manpower and/or capital expenditures for new facilities, but due to seasonality, or a decline in business, a decision may also involve the determination of whether to reduce the available capacity. These decisions generally are made by comparing the cost (or savings, which is a negative cost) of changing the service capability with the corresponding costs or risks of not being able to properly meet service requirements. In this paper, the problem described is one in which services are provided, and the cost, or risk, of not being able to meet service requirements is expressed by means of a queuing equation.

This paper presents the results of a simulation study of the dynamic characteristics of the model built by Professor Chow whose purpose was to study statistically the relevance of the multiplier, accelerator, and liquidity preference as determinants of the national income of the United States.

Professor Wu, in his recent article [8], investigated the trading activities of odd-lotters and their market impact. The purpose of this note is to update the data examined by Wu since recent trends are extremely significant and to question the use and interpretation of some of Wu's original data. In addition, some errors in Wu's article will be discussed.

Prior to 1952 there was no analytical theory available that would satisfactorily explain the well-known phenomenon of asset diversification by investors. Although the portfolio selection criteria of Markowitz [3] and that of Roy [5] both explain diversification, they are based on very different objectives. The objective of Markowitz's approach is to select the portfolio of securities that maximizes the expected utility of the investor, i.e., the EV criterion. The objective of Roy's approach is economic survival through selection of the portfolio that minimizes the probability of disaster, i.e., the safety-first (SF) criterion.

The coefficient of variation (CV) in investment returns is often presented in introductory finance texts as a measure of project risk [7, 9, 13, 15]. Curiously, the resulting mean-coefficient of variation (MCV) efficiency criterion is usually casually proposed as an alternative to the more widely recommended mean-standard deviation (MSD) definition of efficiency, as if MCV possessed an obvious intuitive appeal for some investors or some investment situations. The pervasiveness of references to CV as a risk measure is perplexing in light of the absence of utility theoretic underpinnings, especially by contrast with the substantial theoretical effort underlying the MSD notion of efficiency [3, 6, 8, 10, 11, 12].

In a series of recent articles ([2], [3], [4], [5]) R. B. Porter and his associates have conducted empirical comparisons of the Mean-Variance (EV) and Stochastic Dominance portfolio choice criteria. The basic methodology of all these studies was first to compute the set of EV-efficient portfolios by an optimizing algorithm, then to find through heuristic methods “stochastically dominant” portfolios, and finally to compare the two. A major finding of these studies was that most EV-efficient portfolios survived the second-degree stochastic dominance (SSD) test against the randomly generated portfolios. The purpose of this note is to show that, for all cases of practical interest, a portion of the EV frontier is a subset of the SSD-efficient set. In other words, we offer here an exact theoretical justification of some empirical results of the aforementioned studies.