In the applications of mathematical programming to the “pure capital rationing” problem, much of the attention has been focused on the search for an appropriate discount rate to account for the time value of money. The essential difficulty was first observed by Hirshleifer [10] in the classical economics context: “The discount rate to be used for calculating present values…cannot be discovered until the solution is attained, and so is of no assistance in reaching the solution.” Baumol and Quandt [1] showed that this problem persists in the Lorie and Savage [11] and Weingartner [15, Chap. 3] mathematical programming formulation and concluded that: “If there is capital rationing and external rates of interest are irrelevant, we cannot simultaneously insist on a present value formulation of the objective function and have the relevant discount rates determined internally by our program.” They then went on to propose an alternative utility formulation of the objective function.

The basic thesis of this paper can be summarized very briefly. The regulatory structure and set of laws and procedures that have served us well in dealing with the failures of small banks in the past are not optimal in a world in which large banks can fail. The paper suggests some alternative means of improving the situation and stresses that any future discussions concerning reorganization of the regulatory agencies should keep in mind the need to improve our ability to handle the large bank failure.

Consider the following linear programming problem, which is denoted by (S):The various vectors and matrices have the following dimensions:a = an m-vectorAj = (j = 1 … n), an m by njmatrix,bj = (j = 1 … n), an mj-vector,Bj = (j = 1 … n), an mj by nj matrix,Cj = (j = 1 … n), an nj-vector, andxj = (j = 1 … n), a variable nj-vector.

Problems with this decomposable structure have been extensively studied in economics and management science literature, because they arise in several economic contexts and situations. Therefore, (S) lends itself to more than one economic interpretation, but the following one is hereby adopted for the purposes of this paper: (S) models a two-level manufacturing organization, consisting of headquarters and n producing divisions. Let this organization be called simply “the company”. The company can produce and sell a number of different products, thereby obtaining fixed unit contributions. These contributions are given by the vectors c1, c2, … cn. The products are produced by the different divisions. The variable vector xj (j = 1 … n) gives the production program for the jth division.

We study the transmission mechanism of monetary policy through business loans and illustrate subtle aspects of its functioning that relate to the contractual characteristics and the borrower–lender types of loans. We show that the puzzling increase in business loans in response to monetary tightening, documented before the Great Recession, is largely driven by drawdowns from existing commitments at large banks. Spot loans also rise and take a considerable amount of time to adjust. Banks, nonetheless, do curtail credit supply by shortening maturities of new loans. Following the Great Recession, the mechanism has worked differently, with loan responses to monetary tightening displaying a significant downward shift.

Excess control rights by inside shareholders have been documented to hurt minority shareholders. This paper shows that such governance feature may benefit creditors. Using a sample of U.S. dual-class firms, I show that these firms take less operational and financial risk than similar single-class firms, consistent with insiders’ emphasis on long-term survival to access ongoing private control benefits. Such risk avoidance translates into lower borrowing costs for dual-class firms. Further, lenders are able to use specific covenants to prevent potential expropriations by insiders. The overall relationship between excess control rights and firm value may be less negative than previously thought.

This article documents novel large-sample evidence on the informational role of interfirm ownership networks in bank lending. Using comprehensive loan-level data in China, we find that banks’ internal loan ratings at issuance predict subsequent delinquent events more accurately when borrowers are connected to banks’ existing customers via ownership networks. In post-issuance monitoring for delinquent loans, banks with access to ownership networks manage to downgrade their initial ratings before late payments. These findings suggest that ownership networks facilitate the transmission of private information for bank lending. Moreover, ownership networks are more important for transmitting information related to small and medium enterprises.

This article quantifies a new motive of holding cash through the channel of financing risk. We show that if access to future credit is risky, firms may issue long-term debt now and save funds in cash to secure the current credit capacity for the future. We structurally estimate the model and find that this motive explains approximately 24% to 30% of cash holdings in the data. Counterfactual experiments indicate that the value of holding cash is approximately 8% of shareholder value.

Exploiting the random assignment of judges to corporate bankruptcy filings, we estimate financial costs of judicial inexperience. Despite new judges’ prior legal experience, formal education, and rigorous hiring process, their public Chapter 11 cases spend 19% more time in bankruptcy, realize 31% higher legal and professional fees, and 21% lower creditor recovery rates. Examining possible mechanisms, we find that new judges take longer to rule on motions and cases assigned to these judges file more plans of reorganization. Conservative estimates suggest that minor policy adjustments could increase creditor recoveries by approximately $16.8 billion for the public firms in our sample.

This paper specifies term structure dynamics by a recursive cascade of heterogeneously persistent factors. The cascade naturally orders economic shocks by their adjustment speeds, and generates smooth interest-rate curves in closed form. For a class of specifications, the number of parameters is invariant to the size of the state space, and the term structure converges to a stochastic limit as the state dimension goes to infinity. High-dimensional specifications fit observed term structure almost perfectly, match the observed low correlation between movements in different maturities, and produce stable interest-rate forecasts that outperform lower-dimensional specifications.

We study the impact of stronger shareholder control on bondholders. We find that the passage of shareholder-sponsored governance proposals causes a decline in credit default swap spreads, indicating a net positive effect on bondholders. Evidence suggests that the direct benefit of stronger shareholder control, through the “management disciplining” channel, is larger than the combined adverse effects of directly escalating shareholder-bondholder conflict and indirectly exacerbating exposure to shareholder opportunism. Results are stronger for firms with existing high levels of shareholder-bondholder conflict and for proposals that mitigate managerial entrenchment without exacerbating risk-shifting. Finally, stronger shareholder control improves credit ratings and operating performance in the long-term.

This project was intended to test the usefulness of the Markowitz-based allocation model of which sampling fluctuations are clearly a possible weakness. Realistic conditions were formulated and a data set was simulated to insure a stable, independent, and normally distributed data set. The methodology was constructed such that the only difference in the portfolio performance results was the number of historical observations to estimate the inputs.

It was found that a minimum of 30 historical observations was required to yield efficient portfolio performance characteristics. It may be argued that this represents a large number of observations, although it is clearly not as large as those of other statistical procedures such as factor analysis or discriminant analysis.

This article addressed only the issue of the number of observations and not the appropriate length, i.e., monthly or quarterly. Dickinson demonstrated that the ratio of variances of two securities influenced the accuracy of the estimates of wi, the proportion of total capital invested in each of the two assets. Changing the length of the observation will change these variance ratios for many assets. A study is currently in progress to trace this effect on subsequent portfolio performance. It is hoped that these results, and those yet to come, will ease the burden of many of the arbitrary assumptions that we are presently forced to make in empirical investigations of efficient portfolio performance.

In a recent article [1], Beedles suggests that the valuation process for cash outflows (or negative benefits using his terminology) is, in some sense, different from the valuation process for cash inflows. This result, however, is not consistent with the assumption of perfect capital markets. Any cash outflow from one firm represents a cash inflow to some other firm(s) or investor(s). Consequently, any difference in the valuation processes for cash outflows and cash inflows will create profitable arbitrage possibilities.

Investment management is a decision-making process which ranges from an individual managing his own small portfolio of securities to institutional investors who manage portfolios valued in millions of dollars. The importance of investment management is readily observed in the increased activity of the securities markets, the close scrutiny given by regulatory agencies to various institutional investors and professional investment managers, the growing market value of pension funds, trust funds, and investment companies, and finally, the increasing number of related research studies which are reported in the financial literature.

This paper is concerned with two decisions facing firms with defined benefit, trusteed pension plans: the amount of funds to contribute to the pension fund in any given period; and the selection of a particular mix of assets for that fund. The pension decision area is of importance for many firms today due to the recent rapid growth in pension costs in absolute terms and as a percent of firm profits. Unfunded liabilities (pension benefits payable net of pension assets) have become a sizable component of the capital structure of many firms. Pension funds (assets) also have grown rapidly due to liberalizationof pension benefits, inflation, the higher funding requirements of the pension reform law (ERISA), and the overall aging of the labor force.

Commonly defined, a market is efficient if prices always fully reflect available information. That market might be viewed as consisting of two major segments: an information market and pricing mechanism. The efficiency has been amply documented elsewhere. The information market, however, should be afforded increased attention. In particular, the efficiency of the information market may vary across securities and with respect to particular securities, across time. Stated another way, the degree of imperfection in the information market may vary across securities and across time, resulting in a relative efficiency phenomenon. The presence of such a phenomenon would offer research opportunities yielding a greater understanding of the functioning of the information market and the pricing of securities.

By examining the annual data from 1937-1967, we found that odd-lot volume has become loss important in the market in recent years. Although the odd-lot trading volume has increased steadily in the absolute term since the end of World War II, the share of odd-lot trading in relation to total round-lot volume has been declining. By 1967, the percentage of odd-lot volume to round-lot total sales was down to 11.6 percent. The same data also indicate that odd-lot short sales have increased moderately since 1962; however, the volume is quite insignificant. The average of odd-lot short sales to total round-lot short sales for the 31-year period is only 1.9 percent. Odd-lotters were also found to be net purchasers during this period (1937-1967); however, odd-lotters have turned into net sellers in recent years. The total net sales from 1961 to 1967 amounted to 22.2 million shares, which is approximately 25 percent of the total net purchases of the entire period (1937-1967).

Using supervisory data on operational losses from large U.S. bank holding companies (BHCs), we show that BHCs with socially responsible workforce policies suffer lower operational losses per dollar of total assets. The association significantly varies by the type of workforce policies and the type of operational losses. It is driven not only by small frequent losses but also by severe tail operational risk events. Further, the risk-reducing effects of the socially responsible workforce policies are stronger for larger BHCs with more employees. Our findings have important implications for banking organization performance, risk, and supervision.

Rogalski-Tinic have reported a monthly pattern in ex post stock return variances that differs between small and large market capitalization firms. Maloney-Rogalski find that option prices reflect these monthly patterns ex ante. This study extends Maloney-Rogalski's work by devising an expiration-specific weighted implied standard deviation (WISD). It is found that: i) the monthly patterns in one-month WISDs are basically similar to the monthly patterns in ex post variances detected by Rogalski-Tinic for both large and small size firms, and ii) use of expiration-specific WISDs, as opposed to standard composite WISDs, results in improved performance of option pricing models.

A capital asset-pricing model which relates risk and return under conditions of changing price levels has been developed in this paper. The resulting model implies that price-level changes do not affect the expected real returns on individual assets except through their impact on the return of the market portfolio. If real market returns are independent of price-level movements, the model is very much like the standard capital asset-pricing model expressed in real returns. This version of the capital asset-pricing model does not, however, resolve all the difficulties associated with changing price levels, since we have assumed that the nominal default-free rate is determined outside the model and that relative prices do not change. These limitations, however, also apply to all other single-period capital asset-pricing models.

In addition, the model was converted into nominal returns by assuming that price-level changes and the real market returns are uncorrelated. The resulting equation illustrates the difficulty involved in using nominal returns to test a model expressed in real returns. The same equation also provides a possible explanation for the noted discrepancies between the empirical' evidence found by Black, Jensen, and Scholes [3] and the prediction of the traditional capital asset-pricing model.

Where rates of return are perfectly correlated, risk reduction through diversification cannot be achieved. Where rates of return are less than perfectly correlated, however, then, to the extent that these interrelationships can be known, modern portfolio theory provides a framework in which risk reduction through diversification can be achieved. Markowitz was the first to give rigorous content to the concept of portfolio diversification [14], and to introduce a formulation for treating portfolio selection as a mathematical optimization problem. In order to facilitate application of his own covariance approach, Markowitz first suggested [15, pp. 96–101], and Sharpe later developed a market model formulation according to which it is assumed that the rates of return on various securities “are related only through common relationships with some basic underlying factor” [18, p. 281]. More than 25 years have passed since Markowitz introduced his original formulation, and the literature dealing with the portfolio selection problem that he identified has grown considerably since then. Unfortunately, many problems remain which prevent full and effective implementation of this framework for investment analysis.