Since the early work of Durand (1941), there has been considerable interest in using quantitative models of consumer credit behavior for credit-granting decisions. Most models are based on the concept of “scoring” by use of weights usually determined as statistically significant coefficients of some linear statistical model, frequently the linear discriminant model. It is the purpose of this note, however, to propose maximum likelihood estimation of the logit model as an alternative, and to compare the two models in a “scoring experiment.”

This paper deals with the nature of option interactions and the valuation of capital budgeting projects possessing flexibility in the form of multiple real options. It identifies situations where option interactions can be small or large, negative or positive. Interactions generally depend on the type, separation, degree of being “in the money,” and the order of the options involved. The paper illustrates, through a generic example, the importance of properly accounting for interactions among the options to defer, abandon, contract or expand investment, and switch use. It is shown that the incremental value of an additional option, in the presence of other options, is generally less than its value in isolation, and declines as more options are present. Therefore, valuation errors from ignoring a particular option may be small. However, configurations of real options exhibiting precisely the opposite behavior are identified. Comparative statics results confirm that the value of flexibility, despite interactions, manifests familiar option properties.

The word revolution is entirely appropriate for describing the changes in financial institutions and instruments that have occurred in the past twenty years. The major impulses to successful financial innovations have come from regulations and taxes. The outlook for the future is for a slowing down of the rate of financial innovation, but much growth and improvement are still in prospect.

This paper analyzes the robustness of the day-of-the-week (DOW) and weekend effects to alternative estimation and testing procedures. The results show that sample size can distort the interpretation of classical test statistics unless the significance level is adjusted downward. Specification tests reveal widespread departures from OLS assumptions. Hypothesis tests results are reported using robust econometric methods and a GARCH model. The strength of the DOW and weekend effect evidence appears to depend on the estimation and testing method. Both effects seem to have disappeared by 1975.

A procedure is developed for the valuation of options when there are two underlying state variables. The approach involves an extension of the lattice binomial approach developed by Cox, Ross, and Rubinstein to value options on a single asset. Details are given on how the jump probabilities and jump amplitudes may be obtained when there are two state variables. This procedure can be used to price any contingent claim whose payoff is a piece-wise linear function of two underlying state variables, provided these two variables have a bivariate lognormal distribution. The accuracy of the method is illustrated by valuing options on the maximum and minimum of two assets and comparing the results for cases in which an exact solution has been obtained for European options. One advantage of the lattice approach is that it handles the early exercise feature of American options. In addition, it should be possible to use this approach to value a number of financial instruments that have been created in recent years.

The purpose of this paper is to explain cross-sectional variations in trade credit terms across firms and industries. This study shows that there is a separating equilibrium in which the size of the cash discount conveys information about product quality. The driving forces of this equilibrium outcome are the risk-sharing motives of the producer and buyer as well as asymmetric information about product quality. The empirical implications of the model are derived and discussed in relation to industry practices.

This paper argues that, contrary to the conventional wisdom, stock return synchronicity (or R2) can increase when transparency improves. In a simple model, we show that, in more transparent environments, stock prices should be more informative about future events. Consequently, when the events actually happen in the future, there should be less “surprise” (i.e., less new information is impounded into the stock price). Thus a more informative stock price today means higher return synchronicity in the future. We find empirical support for our theoretical predictions in 3 settings: namely, firm age, seasoned equity offerings (SEOs), and listing of American Depositary Receipts (ADRs).

In a world of heterogeneous investors, a competitive financial market has two major functions. First, it is the mechanism by which ownership of the existing supply of risky assets is distributed among investors. This is the role which is analyzed in detail by the standard Capital Asset Pricing Model (CAPM) and its many extensions. The second important market function is to aggregate the diverse information held by different investors into a single price. Most versions of the CAPM eliminate the information aggregation function by assuming that investors hold homogeneous beliefs with respect to the probability distribution of asset returns. Exceptions which deal with some aspects of the problem are Lintner [7], Grossman [4], Grossman and Stiglitz [5], and Figlewski [1, 3 ].

This paper discusses performance measures for market and limit orders. We suggest two measures: one for precommitted traders (who must trade) and another for passive traders (who are indifferent to trading). We compute these measures for a sample of NYSE SuperDOT orders. The results suggest that the limit order placement strategies most commonly used by NYSE SuperDOT traders do in fact perform best. Limit orders placed at or better than the prevailing quote perform better than do market orders, even after imputing a penalty for unexecuted orders, and after taking into account market order price improvement. Unconditional order submission strategies that use SuperDOT to offer liquidity in competition with the specialist do not appear to be profitable.

Measuring the extent to which a firm is financially constrained is critical in assessing capital structure. Extant measures of financial constraints focus on macro firm characteristics such as age and size, variables highly correlated with other firm attributes. We parse 10-K disclosures filed with the U.S. Securities and Exchange Commission (SEC) using a unique lexicon based on constraining words. We find that the frequency of constraining words exhibits very low correlation with traditional measures of financial constraints and predicts subsequent liquidity events, such as dividend omissions or increases, equity recycling, and underfunded pensions, better than widely used financial constraint indexes.

Congress and activists recently proposed giving shareholders a say (vote) on executive pay. We find that when the House passed the Say-on-Pay Bill, the market reaction was significantly positive for firms with high abnormal chief executive officer (CEO) compensation, with low pay-for-performance sensitivity, and responsive to shareholder pressure. However, activist-sponsored say-on-pay proposals target large firms, not those with excessive CEO pay, poor governance, or poor performance. The market reacts negatively to labor-sponsored proposal announcements and positively when these proposals are defeated. Our findings suggest that say-on-pay creates value for companies with inefficient compensation but can destroy value for others.

Three major motives have been suggested for takeovers: synergy, agency, and hubris. Existing empirical evidence is unable to clearly distinguish among these motives probably due to the simultaneous existence of all three in any sample of takeovers. This paper suggests a way of distinguishing among these competing hypotheses by looking at the correlation between target and total gains. It is argued that this correlation should be positive if synergy is the motive, negative if agency is the motive, and zero if hubris is the motive. The empirical results show that synergy is the primary motive in takeovers with positive total gains even though the evidence is consistent with the simultaneous existence of hubris in this sample. It is also found that agency is the primary motive in takeovers with negative total gains.

This paper empirically contrasts the Jensen Measure, the Positive Period Weighting Measure, developed in Grinblatt and Titman (1989b), and a measure developed from the Treynor-Mazuy (1966) quadratic regression on a sample of 279 mutual funds and 109 passive portfolios, using a variety of benchmark portfolios. The study finds that the measures generally yield similar inferences when using the same benchmark and that inferences can vary, even from the same measure, when using different benchmarks. This paper also analyzes the determinants of mutual fund performance. Tests of fund performance that employ fund characteristics, such as net asset value, load, expenses, portfolio turnover, and management fee are reported. These tests surprisingly suggest that turnover is significantly positively related to the ability of fund managers to earn abnormal returns.

This paper examines the association between block ownership and market liquidity. Blockholders are believed to have access to private, value-relevant information via their roles as monitors of firms' operations. consistent with this, we find that firms with greater blockholder ownership, either by managers or external entities, have larger quoted spreads, effective spreads, adverse selection spread components, and smaller quoted depths.

The low (high) abnormal returns of stocks with high (low) beta, which we refer to as the beta anomaly, is one of the most persistent anomalies in empirical asset pricing research. This article demonstrates that investors’ demand for lottery-like stocks is an important driver of the beta anomaly. The beta anomaly is no longer detected when beta-sorted portfolios are neutralized to lottery demand, regression specifications control for lottery demand, or factor models include a lottery demand factor. The beta anomaly is concentrated in stocks with low levels of institutional ownership and it exists only when the price impact of lottery demand is concentrated in high-beta stocks.

I examine the relation between corporate debt ownership structure and several firm characteristics suggested by recent theory. The results demonstrate the importance of monitoring and information costs, the likelihood and costs of inefficient liquidation, and borrowers' incentives in affecting firms' debt source preferences. Several theoretical predictions receive support, while others do not. The results also suggest important differences between bank and private non-bank debt, which contrasts with most theoretical models. Additionally, I find evidence of systematic use of bank debt by firms with access to public debt, suggesting the benefits attributed to bank debt in theoretical models remain important after firms gain access to public debt markets. Although different lenders appear to have different maturity preferences, the results also suggest debt maturity and debt ownership decisions may be separable.

While theoretical models predict a decrease in the cost of capital from depositary receipt offerings, the economic benefits of this liberalization have been difficult to quantify, Using a sample of 126 firms from 32 countries, we document a significant decline of 42% in the cost of capital. In addition, we show the decline is driven by the ability of U.S. investors to span the foreign security prior to cross-listing. Our findings support eh hypothesis that financial market liberalizations have significant economic benefits.

We examine the role of algorithmic traders (ATs) in liquidity supply and demand in the 30 Deutscher Aktien Index stocks on the Deutsche Boerse in Jan. 2008. ATs represent 52% of market order volume and 64% of nonmarketable limit order volume. ATs more actively monitor market liquidity than human traders. ATs consume liquidity when it is cheap (i.e., when the bid-ask quotes are narrow) and supply liquidity when it is expensive. When spreads are narrow ATs are less likely to submit new orders, less likely to cancel their orders, and more likely to initiate trades. ATs react more quickly to events and even more so when spreads are wide.

We apply an event-study methodology on over 10,000 Morningstar star rating changes and find that Morningstar has subsantial independent influence on the investment allocation decisions of retail mutual fund investors. It is the discrete change in the star rating itself and not the change in the underlying performance measures that drives frow. We document econnomically and statistically significant positive abnormal flow following rating upgrades, and negative abnormal flow following rating downgrades. In contrast to the cross-sectional flow performance literature, we find evidence of investor punishment of performance declines, some of which is evident immediately in the month of the rating change.

We examine whether climate change news risk is priced in corporate bonds. We estimate bond covariance with a climate change news index and find that bonds with a higher climate change news beta earn lower future returns, consistent with the asset pricing implications of demand for bonds with high potential to hedge against climate risk. Moreover, when investors are concerned about climate risk, they are willing to pay higher prices for bonds issued by firms with better environmental performance. Our findings suggest that corporate policies aimed at improving environmental performance pay off when the market is concerned about climate change risk.