Professor Melicher has conducted an interesting study of the effects of financial factors on beta coefficients and their variations. He reduced the perennial multicollinearity problem by using a factor analysis to screen the financial variables used in the statistical analysis. This study is another in the growing body of literature concerned with beta coefficients as measures of risk. My comments on this paper will consider separately (1) the research design (i.e., what the study directly covered), and (2) the inferences drawn by the author versus what the beta coefficients and their variation really do measure.

In a recent paper published in this journal [1], Bierman and Hass (BH) developed a model in which the risk differential that an investor would require to compensate him for the risk of default is stated as a function of the following variables: the probability of default on annual interest payments, (1-P1); the probability of default on the principal payment at the end of the maturity of the bond, (1-P2); the default-free rate, i, and the maturity, N.

In recent years, large commercial banks in the United States have turned to so-called “liability management” as a way to acquire additional funds. The use of Certificates of Deposit (CD's), Eurodollar balances, debentures, and recently the issuing of commercial paper through their holding companies represent an extension of the more traditional secondary reserve asset management approach to bank liquidity and reserve adjustment.

The recent experience of increased volatility of exchange rates among major currencies coupled with highly unstable price levels necessitates a more fundamental understanding of exchange risk. This necessity is further enhanced by the increased internationalization of consumption, investment, and other aspects of economic activity.

Recent literature, as it has been developing in this journal and others, suggests that a significant change has taken place in the field of finance. The “new finance” has broader and deeper analytic and empirical content. Its relevant characteristics are: (1) a weakening of the traditional distinction between security analysis and corporation finance; (2) an increased emphasis upon financial management as an integral part of the overall management function; (3) greater emphasis upon the relevance of economic theory in the analysis of financial relations; and (4) more attention to the measurement and testing of hypotheses.

The arithmetic formulas appearing in the mathematics of finance are practically useless unless one has available either excellent tables and infinite patience, or working computer programs, a machine, and a budget. The present article shows how a number of useful topics in this area can be dealt with effectively by the more tractable mathematics of continuous processes. The methods yield approximate answers of high quality, and in some cases exact answers as well, with small effort, and have obvious applications in “truth in lending” investigations.

It has been suggested that information has the three following uses:

1. Information can be employed to earn trading profits.

2. Information can improve the operating decisions of a firm or group of firms and thereby increase the stock price.

3. Information can reduce the risk of a firm or group of firms and thereby increase the stock price.

While the value of listing equity securities has been researched extensively, no studies have examined the market reaction to the decision to list corporate debt. Since the listing of corporate bonds on the major exchanges is a significant corporate activity, this study examines the impact of bond listing on shareholder wealth. Using a variety of possible announcement dates as well as cumulative abnormal returns between dates, no detectable market reaction to debt listing is found. Therefore, the listing of corporate bonds does not appear to be valued by the common shareholders of those same firms.

We examine liquidity-related characteristics of U.S. firms with cross-listed shares in 20 foreign markets in the 1950–2013 period. We find that firms after foreign-market listing exhibit lower liquidity sensitivity and lower liquidity beta and suffer less from transitory price shocks. These results are stronger when firms are listed on multiple exchanges and in larger and more liquid markets. The liquidity enhancement is associated with firms’ increased foreign ownership postlisting and is effective for firms with high levels of volatility, foreign income, and foreign trading and a high probability of informed trading. Our findings provide support for global markets providing liquidity and reducing liquidity risk to U.S. firms.

We examine compensation for endowment Chief Investment Officers (CIOs) overseeing portfolios with significant allocations to alternatives. We find widespread use of bonuses and that large endowments with high alternative allocations hire CIOs with stronger backgrounds, pay them more, and have higher pay-for-performance sensitivity. We find weak evidence of a relationship between compensation and future performance. Our results align with contract theory predictions but differ from empirical findings on pension funds. Endowments pay CIOs more, rely more on bonuses, attract more experienced professionals, and have lower turnover than pensions. This suggests more effective talent management compared to politically influenced public pensions.

I document a new stylized fact: The higher the degree of institutional ownership (IO) in a portfolio, the more time-varying expected returns rather than changes in expected cash flows drive changes in its valuation. Empirical evidence suggests that institutions’ time-varying sensitivity to the risk of holding stocks translates into time-varying expected returns on high-IO stocks. In my model, imperfect risk sharing between different types of investors generates cross-sectional differences in return predictability based on ownership, even among a priori identical stocks. My findings suggest an economic rationale for weak return predictability of small stocks and predictability reversals of stocks and real estate investment trusts.

We introduce a novel application of machine learning to compare pooling and servicing agreements (PSAs) that govern commercial mortgage-backed securities. In contrast to the view that the PSA is largely boilerplate text, we document substantial variation across PSAs, both within- and across-underwriters and over time. A part of this variation is driven by differences in loan collateral across deals. Additionally, we find that differences in PSAs are correlated with ex post loan and bond performance. Collectively, our analysis suggests the importance of examining the entire governing document, rather than specific components, when analyzing complex financial securities.

How should the lender of last resort provide liquidity to banks during periods of financial distress? During the 2008–2010 crisis, banks avoided borrowing from the Fed’s long-standing discount window but actively participated in its special monetary program, the Term Auction Facility, although both programs had the same borrowing requirements. Using an adverse selection model with endogenous borrowing decisions, we explain why the two programs suffer from different stigma costs and how the introduction of TAF incentivized banks’ borrowing. We discuss the empirical relevance of the model’s predictions.

We show theoretically that the usual estimated investment strategies will not achieve the optimal Sharpe ratio when the dimensionality is high relative to sample size, and the $ 1/N $ rule is optimal in a 1-factor model with diversifiable risks as dimensionality increases, which explains why it is difficult to beat the $ 1/N $ rule in practice. We also explore conditions under which it can be beaten, and find that we can outperform it by combining it with the estimated rules when $ N $ is small, and by combining it with anomalies or machine learning portfolios, conditional on the profitability of the latter, when $ N $ is large.

Combining experimental data sets from seven individual studies, including 255 asset markets with 2,031 participants, and 36,326 short-term price forecasts, we analyze the role of heterogeneity of beliefs in the organization of trading behavior by reproducing and reconsidering earlier experimental findings. Our results confirm prior evidence that price expectations affect trading behavior. However, heterogeneity in beliefs does not seem to drive overpricing and asset market bubbles, as suggested by earlier studies, and we find no indication of short-term beliefs being better determinants of trading behavior than longer-term beliefs.

The most conspicuous deficiency of my study of underwriting compensation is my failure to examine the determinants of underwriting spreads on tax-exempt bond issues. That deficiency has now been remedied by Richard West. Unfortunately, my study was not published very long before West's and there was little opportunity for him to compare his results and speculation with my own. Although a few of the comments below are critical of West, and I point out some alternative interpretations of his statistical findings, this note should be considered a supplement to, rather than a critique of, West's paper.

Among the topics that have been subjected to intensive research by businessschool scholars over the past two decades, few have received more attention than those which collectively comprise the field of investments. What is more important, even fewer have witnessed the plethora of important research findings that has been forthcoming in the investments field. Indeed, it seems reasonable to argue that in recent years no other business field's research accomplishments have been either as impressive or as generally reinforcing.

Yes. We show that aggregate stock returns predict aggregate U.S. employment, despite the industrial composition of publicly traded firms differing markedly from that of all firms, and the representativeness of public firms declining over time. We also show that appropriately reweighted stock returns predict industry and local labor market outcomes. We find the strongest evidence of an alignment of interests between shareholders and workers in the manufacturing sector, despite its declining labor share of output. Our findings suggest that at quarterly frequencies, product demand shocks are more important drivers of industry- and city-level stock returns than technology shocks.

In [1, p. 999] I wrongly stated that “the solution locus generated by the chance-constrained problem is efficient (for the class of utility function implied by the expected wealth-probability of ruin criterion) if the assets follow a multinomial distribution with means above the survival level.” In support of this statement footnote 6 of [1] attempted to establish the quasiconcavity of the expected utility function

in the (μ, σ) plane, where F is the normal distribution, z = (s-μ)/σ < 0, s is the survival level, μ is the mean of the portfolio, σ is the standard deviation, and c is a positive constant. The condition

was claimed to hold for any two assets (μ1., σ1) and (μ2., σ2) on any given indifference curve of (1), where zi. = (s-μi.)/σi., i = 1,2, and zγ = (s−μγ)/σγ corresponds to the convex combination μγ = γμ1 + (1−γ) μ2, σγ = γσ1+ (1−γ) σ2, in the (μ, σ) plane. (Note that this is not the same as asserting that F(z) is a convex function of μ and σ, which it is not as an examination of its Hessian determinant would readily show.)

We show that the similarity of a firm’s technological expertise with that of other firms affects managerial labor market outcomes. Using each firm’s patent portfolio to estimate its technological expertise, we find that its similarity in technological expertise with other firms is strongly related to the benchmark group used for CEO compensation and job transitions. Furthermore, we show that a firm’s CEO pay is positively associated with the CEO compensation levels of technologically similar firms. Our results thus demonstrate the crucial role of technological similarity in determining the value of outside options and the boundaries of the managerial labor market.