I welcome the oppostunity to second the analysis of Davies and Ronning [4]. The considerations they raise crop up repeatedly in various contexts of uncertainty analysis and prompt the following remarks dealing with various tonics described in ray title.

This article examines the interest rate risk characteristics of a general class of floating rate securities, which includes Chance's securities as a special case. The calculation of duration for Chance's securities is zero, as it should be. Securities in the broader class can have durations that are negative or longer than the period of time that must elapse before the payments can reflect changes in market interest rates. The effect on duration of changes in the parameters of the function relating interest rate shocks to the payments and changes in the slope of the term structure are examined.

Portfolios of stocks issued by small firms are well known to earn rates of return in excess of those commensurate with their market sensitivities. One common explanation for this phenomenon is that small firm stocks are riskier than large firm stocks because less information is available about the former than about the latter. A necessary condition for such an explanation to be valid is that the information effect not be eliminated by combining the individual stocks into portfolios. This paper uses jump-diffusion return models to gauge the impact of information by firm size. The results show that portfolios of small firm stocks are no more prone to information surprises than are portfolios of large firm stocks. However, portfolios of small firm stocks are found to react more severely than portfolios of large firm stocks when surprises do occur.

The traditional Capital Asset Pricing Model (CAPM) provides a foundation for the estimation of systematic risk that has been applied extensively in studies of investment performance, market efficiency, predictive models, and capital budgeting, to name only a few. Lee [10] considered a special case of nonlinearities occurring in the estimation of systematic risk within the context of the investment horizon problem. His findings, based on a limited sample, provided significant methodological implications for the estimation process and have received wide readership through republication of the study in a readings text [6].

Material private information transmits through social networks. Using manually collected information on networks of alumni reunion cohorts, we show that hedge fund managers connected to directors of firms engaged in merger deals increase call-option holdings on target firms before deal announcements. Effects are larger when reunion events for connected cohorts occur just before announcements. Independent directors, directors with short tenure, and directors with low stock ownership are more likely to transmit information. Our results are robust to confounding factors and alternative specifications. These findings highlight the role of social networks as channels of private-information dissemination.

We examine whether speed is an important characteristic of traders who anticipate local price trends. These anticipatory participants correctly trade prior to the overall market and systematically act before other participants. They use manual and algorithmic order entry methods, but most are not fast enough to be high frequency traders (HFTs). Those anticipating price trends have impacts as if they are informed traders, while the case for anticipatory participants affecting the volume of other traders is rejected. A follow-up sample shows significant attrition in accounts and difficulty maintaining the anticipatory strategies. To identify anticipatory traders, we devise novel methods to isolate local price trends using order book data from the West Texas Intermediate (WTI) crude oil futures market.

We investigate whether incentives to join the Fortune 500 affect corporate decisions. Firms closer to the cutoff appear to take actions to join the list by engaging in more mergers and acquisitions activity, bidding for larger targets, and paying higher takeover premia. Further, the relation is stronger for firms with more-entrenched chief executive officers, and the stock market reaction to bids is worse when bidders are close to the Fortune 500’s cutoff. A 1994 methodological change by Fortune acts as an exogenous shock for identification. Our results suggest that firms try to increase revenues to join the Fortune 500 but that such actions adversely affect shareholders.

Previous investigators have shown that the Sharpe measure of the performance of a managed portfolio may be flawed when the portfolio manager has market timing ability. Herein we develop the exact conditions under which the Sharpe measure will completely and correctly order market timers according to ability. The derived conditions are necessary, sufficient, and observable. We compare these derived conditions to empirical estimates of actual market conditions and find that, under typical market conditions, the practice of using quarterly portfolio return data will frequently result in a failure of the Sharpe measure to order timers according to ability. We show, however, that such failures can be greatly reduced by more frequent sampling of managed portfolio returns.

The current literature or business finance states that debt is a cheaper source of capital than stock (tending to reduce the firm's cost of capital), because interest is deductible for income tax purposes while the return to common stockholders is subject to tax. It is even possible to issue debt without increasing the risk to the owners (the debt is issued to stockholders in proportion to the ownership of stock, or equivalently investors buy a mixture of stocks and bonds on the market). However, it is argued in this paper that if we assume that the present stockholders have no further resources available for investment in the firm, but the enterprise needs additional resources, then the present stockholders have to make a basic decision about whether to issue stock or debt to raise the additional needed capital. The issuance of debt in this situation increases risk, and the issuance of stock dilutes ownership. Even when bondholders require a much lower contractual return than the expected annual return of stockholders, the issuance of more stock may be preferred to the issuance of debt.

Between 2009 and 2013, the Fly on the Wall (FLY) leaked 58% of recommendation revisions with a median delay of 27 minutes relative to the IBES announcement time. We show that FLY improves price discovery, but leaked recommendations hamper brokers’ ability to offer price improvement on trades routed through them. Three major brokers sued FLY; using key court dates, we show significant wealth and real effects to the brokerage industry. Overall, the speed with which analyst recommendations are disseminated has led to more rapid price discovery at the expense of a decline in the scope of the sell-side research industry.

The usual formulation of the portfolio selection problem through meanvariance analysis assumes that the variance-covariance matrix of the rate of returns on risky assets is non-singular. In view of the literature discussing the creation of riskless portfolio from carefully balanced quantities of risky securities (e.g., shares and warrants as in Black-Scholes [1]), the assumption of non-singularity may be challenged. Consequently, the proofs of the classical theorems of portfolio management may no longer be developed as originally presented. Buser [2] presents a means of using a singular variance-covariance matrix in the derivation of portfolio weights, which, although slightly flawed by a mathematical error, still provides some interesting insights about the efficient frontier. We present a corrected version of Buser's method in Section II; in Section III, we comment on some of the implications of his presentation and indicate some more precise results.

The elimination in 1975 of fixed minimum brokerage commission rates for agency transactions in equity securities was one of the more highly publicized events in the still-ongoing process of the deregulation of American financial markets. While, prior to that time, commission rates on large stock transactions—that were executed primarily for institutions—had become increasingly subject to negotiation, individual investors effectively faced an industry-wide fixed price schedule for the vast majority of their transactions. At the insistence of the Securities and Exchange Commission, the privilege of negotiation on commission rates was extended to securities trades of all sizes as of May 1, 1975, a date the brokerage industry only half-humorously dubbed “Mayday”.

It is well known that different combinations of investments involve different risks. In recent years the analysis of risk has tended to focus on two moments of the probability distribution of returns, the mean and variance. This paper considers the effect on the variance of an investment fund of adding dependent investments.

Previous studies have found that positive abnormal stock returns are associated with corporate spin-offs and divestitures. Using a simplified model of the process of investor tax trading, we show that an improvement in the value of the tax-timing option component of securities prices is a likely contributing factor to those abnormal returns. The analysis indicates that the same phenomenon also may be part of the explanation for the generally higher returns observed for spin-offs than for divestitures, both when leverage is and is not present in the restructuring transactions.

A fundamental statistical test of serial independence developed by Ashley and Patterson (1986) to examine a possible form of serial dependence in daily stock returns is shown to be improperly constructed. As a consequence, the significance probabilities that they obtain are overstated. This paper presents a corrected version of their test. The test statistic obtained after correction is shown to possess the same limiting distribution as the Kolmogorov-Smirnov test statistic. Applying the corrected test procedure to data identical to that used by Ashley and Patterson, we find that their original null hypothesis can no longer be rejected at conventional significance levels.

We examine the price behavior of the firm's common stock associated with cancelled straight debt offerings. Excluding utilities, we find negative excess returns associated with offering and cancellation announcements. Further, the stronger withdrawal reactions we find, when the funds were to be used for capital expenditures, may signal a decline in profitable investment opportunities. These results are consistent with Miller and Rock's (1985) hypothesis.

We exploit the expiring nature of hedge fund lockups to create a new measure of funding liquidity risk that varies within funds. We find that hedge funds with lower funding risk generate higher returns, and this effect is driven by their increased exposure to equity-mispricing anomalies. Our results are robust to a variety of sampling criteria, variable definitions, and control variables. Further, we address endogeneity concerns in various ways, including a placebo approach and regression discontinuity design. Collectively, our results support a causal link between funding risk and the ability of managers to engage in risky arbitrage.

Does financial development facilitate micro-entrepreneurship? Using randomized surveys of over 1 million Indian households and bank-branch location as predetermined by government policy, we find that access to finance shifts workers from informal micro-entrepreneurship into formal employment. Financial access reduces the likelihood of being self-employed but benefits micro-enterprises with employees, as well as formal firms. Using data on 400,000 firms, we find that in districts with more banks, firms have higher loans, productivity, employment, and wages than firms in less banked districts. This evidence suggests a labor-market mechanism by which financial development facilitates growth: by shifting workers from unproductive micro-entrepreneurship into productive employment.

When a company goes public, it is standard practice that the underwriting syndicate allocates more shares than are issued. The underwriter thus holds a short position that it commonly fills by aftermarket trading when market prices fall or, when prices rise, by executing the so-called overallotment option. This option is a standard feature of initial public offering (IPO) arrangements that allows the underwriter to purchase more shares from the issuer at the original offer price. We propose a theoretical model to study the implications of this combination of short position and overallotment option on the pricing of the IPO. Maximizing the sum of both the profits from their share of the offer revenue and the potential profits from aftermarket trading, we show that underwriters strategically distort the offer price. This results either in exacerbated underpricing when favorably informed underwriters lower prices to secure a signaling benefit, or in informationally inefficient offer prices when underwriters pool in offer prices irrespective of their information.

Intermediation in private equity involves illiquid investments, professional investors, and high information asymmetry. We use this unique setting to empirically evaluate theoretical predictions regarding intermediation. Using placement agents has become nearly ubiquitous, but agents are associated with significantly lower abnormal returns in venture and real estate funds, consistent with investor capture and influence peddling. However, returns are higher for buyout funds employing a top-tier agent and for first-time real estate and venture funds employing an agent, and are less volatile for agent-affiliated funds, consistent with a certification role. Our results suggest heterogeneous motives for intermediation in the private equity industry.