We investigate whether external industry tournament incentives influence the design of executive-compensation contracts. Using staggered negative mobility shocks as exogenous disruptions to tournament incentives, we show that firms treated by these shocks act to restore their executives’ diminished implicit risk-taking incentives by increasing compensation vega. On average, post-shock compensation vegas increase by approximately 10%. These effects are considerably larger for treated executives with strong tournament incentives and high ex ante mobility. Mobility shocks have no impact on compensation delta or total pay. Our results shed light on how explicit risk-taking incentives are optimized with respect to executive career concerns.

The prior literature links cash holdings and returns (Simutin (2010), Palazzo (2012)). Using two signals of aggregate-funding availability, I find that the positive association between cash and returns only exists during constrained funding environments. In unconstrained periods, there is no association between cash and returns. The relation in constrained environments does not appear to be related to capital expenditures, expected return, or distress risk but is more prevalent in firms undertaking research and development (R&D) expenditures. This suggests that the association between cash and returns is more consistent with expanding (or maintaining) future growth opportunities rather than being attributable to differences in capital expenditures or risk.

We document the causal effects of single-name options trading on the absolute level of information content of prices (stock price informativeness) by exploiting the Penny Pilot Program as an exogenous shock to options trading volume. We find that options trading increases underlying stock price informativeness and information acquisition by both option and stock investors, consistent with the framework of Goldstein and Yang (2015). The findings are driven by firms for which options are more important sources of information and firms with more efficiently priced options. Options market introduction in a sample of 25 other economies also leads to higher price informativeness.

This paper demonstrates the strong linkages that exist between currency risk, represented by inflation risk and exchange rate changes, and relative price risk. These linkages affect the optional quantities of forward exchange contracts, nominal debt, and fixed price sales (purchase) contracts to use in hedging against these risks. It is shown that the existence of as many hedging mechanisms as there are forms of price risk allows for the precise targeting of specific price risks with specific hedging instruments. Moreover, even though each hedging mechanism specializes in protecting against a particular form of price risk, the optimal quantitiy of each influences and is influenced by the optimal quantities of the others.

There has developed over the last several years a large and growing literature on the relationship between local bank market structure and performance. Two characteristics of this development are particularly notable. First, a carefully structured microeconomic model of the banking firm is rarely used as the starting point of the analysis. Secondly, the possibility that local market structure may have a differential impact on bank performance in different activities seems to have escaped systematic investigation. Specifically, it is a contention of this study that an empirical investigation of structure and performance in banking must be grounded in the explicit development of a microeconomic model of the banking firm.

The shortcomings of a quadratic utility function are so serious and so widely known that by now one might assume that it would simply have been dropped from consideration. Arrow [1] and Pratt [6] have shown that such a function implies ever increasing absolute risk aversion, that is, reduced risk taking as wealth increases, which contradicts everyday experience. Moreover, the assumption of quadratic utility also implies ultimate satiation with respect to risk taking. This function has a well-defined maximum beyond which the marginal utility of money declines, and as a result the range of admissable returns must be restricted. Wippern [12] has focused attention on the second of the above two shortcomings. Using a rather ingenious device, based on the Sharpe-Lintner market model [8 and 5], Wippern has measured empirically the admissable range of returns implied by the quadratic utility function. Since his empirical findings imply that returns beyond as little as 1.3 standard deviations from the expected return provide negative marginal utility to investors, Wippern concludes that the Sharpe-Lintner market model, and/or the mean-variance portfolio theory upon which it is based, have “inconsistent and implausible properties.”

The determinants of prices of common stocks have been studied extensively by both academicians and practitioners. Differences in points of view between these two groups are evident in their corresponding interpretations of market behavior, which is represented by the assumedly contradictory random walk and intrinsic value “hypotheses.”

Empirical studies in finance generally use data defined over the shortest return period available. Originally, data bases such as CRSP, tended to have data collected over monthly periods and most analyses tended to use monthly data rather than data compounded over periods greater than a month with the implicit argument that the more data the “better”. Since the development of data bases with data collected over shorter differencing intervals, there has been a growing tendency in finance to use returns data defined over increasingly shorter differencing intervals. This development is desirable, but is not without problems. The problem with using data defined over shorter differencing intervals is that, although greater estimating efficiency will be achieved, nontrading effects could be introduced into the analysis. These will lead to biased beta estimators and biases in tests of capital market efficiency. The purpose of this paper is to investigate, analytically, the interrelation of the intervaling and nontrading effects both in estimating beta factors and in testing capital market efficiency.

Since the early 1960's the European capital market has witnessed rapid growth as a source of short- and long-term dollar denominated funds to international borrowers and as an alternative investment area to potential lenders. While considerable work has analyzed the determinants of short-term dollar denominated Eurorates (Eurodollar yields), less work has concentrated on the determinants of long-term dollar denominated ($Eurobond) yields. In addition, work on the determinants of long-term $Eurobond rates has been conducted on data derived from periods of fixed exchange rates and capital controls and may not be applicable to periods of post-capital controls or floating exchange rates. Theoretically, there should exist a strong relationship between yield levels and yield changes in domestic and foreign securities under a fixed exchange rate system. Under a floating exchange rate system, however, domestic yield levels may move independently of foreign yields with the exchange rate adjusting price differentials. In addition, in a period of capital controls, the $Eurobond market and U.S. bond market may not necessarily be regarded as competing segments of a larger market or dollar denominated financial assets. The existence of a floating rate exchange system and the removal of U.S. capital controls may have, therefore, affected the relative behavior of $Eurobond, U.S., and foreign security yields. While previous studies have analyzed $Eurobond yields under fixed exchange rates and capital controls, in this paper we also have analyzed $Eurobond yields under floating rates and post-capital controls.

Single-period portfolio selection deals with the allocation of an investor's initial wealth to a finite number of risky assets according to his preferences over random final wealth. The purpose of this paper is to study chance-constrained portfolio selection from the point of view of utility theory.

This paper presented a stochastic discounted cash flow model with which mortgage companies can assess the value of a mortgage servicing contract. The model was illustrated with data provided by a group of eight MBC's. Simulation and sensitivity analysis showed the impact of different mortgage amounts, termination distributions, and expected rates of servicing cost increases on the value of a mortgage servicing portfolio. In general, because servicing contracts are long-term fixed revenue arrangements, high rates of servicing cost increases substantially reduce the value of an MBC's servicing portfolio. To the extent that mortgage prepayments are reduced by high inflation rates, the impact of high cost increases on the value of a servicing portfolio is compounded.

Of the many conglomerate studies to date, some have dealt with the risk-return performance of conglomerates in the context of the capital asset pricing model [2,7,10,14], others have considered the motives for the formation of conglomerates [4,5,6,13], and still others have examined the operating characteristics of conglomerates [9,12,15]. Within the last group, Weston and Mansinghka [15, p. 928] argued that the primary motivation for conglomerate formation is defensive diversification, “…defined as diversification to avoid adverse effects on profitability from developments taking place in the firm's traditional product market areas.” Another motivation is provided by Levy and Sarnat [4] and Lewellen [5] who demonstrated that the only economic gain from a purely conglomerate merger may be the increased debt capacity resulting from the combination of entities having imperfectly correlated earnings streams.

This paper has reported on an investigation of the relationship between the external industrial classification of corporations and the statistical groupings that can be found in their corporate financial measurements. It appears that utilities and industrials are quite different in their financial characteristics. Five industrial classes also appear to be quite distinct, although somewhat less distinct than the industrial-versus-utility comparisons. Consequently, it appears that financial variables do tend to distinguish the various industrial classifications and that, with only a corporation's financial characteristics known, its industrial classification may be reliably determined.

This paper uses the portfolio theory approach to bank behavior theory in order to examine the effects of two Fed policy variables on bank portfolio riskiness. The policy variables are (1) the level of the reserve requirement against NOW accounts, and (2) the rate of interest paid by the Fed on bank reserves. This second policy variable is currently zero-valued in nominal terms, but in recent years there has been some discussion of raising it, especially now that interest is paid by banks on checkable accounts. (For an early discussion see Tobin [8].)

The purpose of this paper is to consider some problems arising in several applications of the theory of portfolio analysis pioneered by Markowitz [8] and Tobin [13]. This theory of asset choice under uncertainty has been applied to a large and growing set of problems beyond the original application to the selection of the investor's optimal portfolio, e.g., the capital budgeting decision of the firm (Lintner [7]), international capital flows (Grubel [5]), the choice of an export mix for a country (Brainard and Cooper [1] and the flow of direct investment (Stevens [12] and Prachowny [10]). In all applications a common element is the set of efficient portfolios which, in turn, is determined. by the set of moments—means, variances, and covariances—of the returns from the different assets that are. Considered for inclusion in the portfolio.

We have discussed some of the effects of rate regulation in the property and casualty insurance industry. One consequence of the regulatory environment is that an optimal capital structure may clearly exist in this industry. If the rate of return to the insureds is generally deficient, we would expect that property and casualty stock companies would have an incentive to lever themselves to the maximum extent permissible by selling insurance. The classic monopoly of the economic literature finances its lucrative investment opportunities in a competitive capital market. The stock insurance company invests in that market, but the relative distribution of the return earned there may be less than equitable due to the process and standards of rate regulation.

Whenever the firm must borrow funds, it must also decide maturity of the new debt. Yet, the decision models which have dealt with the debt maturity decision have done so almost incidentally, as an extension of the decision to exercise the call provision on outstanding bonds ([6], [10], [23]). There has been little direct examination of the corporate debt maturity decision. In an attempt to fill this gap, this paper is an exploration of the debt maturity decision for a firm which is concerned with minimizing the present value of the expected costs of borrowing. This paper develops a discrete dynamic programming model of the debt maturity decision, in a world where interest rates follow a finite Markov process, and where the yield curve is formed from expectations regarding the future course of interest rates. With this optimization model, the influence on the debt maturity strategy of variables such as flotation costs and liquidity premiums will be explored. There will be no consideration of the risks associated with alternative borrowing strategies.

In so far as the concept of systematic risk is predicated on the Sharpe-Lintner theory of capital market equilibrium [5, 4], the time-horizon of systematic risk must conform with the time-horizon of market equilibrium. Since it has been suggested that market equilibrium is instantaneous [3, p. 188], it would follow that systematic risk should also be instantaneous. This paper is, therefore, concerned with the evaluation and measurement of instantaneous risk. Although Jensen [3] has made a similar attempt in a much larger study, we have reason to believe it is not satisfactory. We shall then begin in Section I by discussing Jensen's approach to the horizon problem. In Section II, an alternative procedure of evaluating systematic risk is suggested. Section III concludes the paper by comparing estimates of instantaneous risks based upon weekly returns of 30 Dow-Jones stocks. The motivation behind the paper is obvious. A correct formulation of instantaneous systematic risk is not only a logical extension of the capital market equilibrium theory but is also a yardstick for measuring portfolio performance in terms of risk and return.

Understanding and predicting various aspects of the financial performance of corporations have been undertaken almost entirely on the basis of assumed one-way statistical relationships which rely on some aspects of internal corporate behavior being exogenous to other aspects of behavior. When financial performance variables involved in such studies are jointly determined as parts of a simultaneous system of financial performance, this approach cannot be expected to produce useful results, because it is well known that obtained statistical results are biased and inconsistent.

As part of an overall investigation of risk and capital adequacy in banks, we have examined the magnitudes by which Interest rate movements may alter reported rates of costs and returns for a typical commercial bank. At the same time, we have attempted to measure the manner in which banks adjust their loans and costs over time in reaction to shifting markets and rates.