We find that capital investment and net debt issuance of large firms are, on average, more sensitive to industry business cycles than those of small firms, in stark contrast to the effect of size on investment sensitivity to macroeconomic cycles. We theoretically examine the role of firm size on firms’ responses to industry shocks. Consistent with our theoretical predictions, we find that large firms exhibit greater sensitivity to industry cycles than small firms in their investment and net debt issuance only in industries with low cyclical variability of markups and production growth, high fixed cost intensity, high market-to-book, and high markups.

Hand-collecting credit line drawdowns that firms classify as long-term debt, we first document how long-term drawdowns rise with high investment needs or weak external capital market conditions. Nearly all drawdown proceeds finance long-term investment, including M&A activity. Unrated and lower-rated firms rely more on long-term drawdowns than high or very poorly rated firms. We further find that credit lines have tighter covenants than terms loans. Drawdowns are repaid fairly quickly and often refinanced with other long-term debt. Our findings support the monitored liquidity insurance theory of credit lines and highlight that long-term drawdowns act as a valuable bridge financing mechanism.

By employing a dynamic model with two limit order books, we show that fragmentation is associated with reduced competition among liquidity suppliers and lower picking-off risk of limit orders. Due to these countervailing channels, the impact of fragmentation on liquidity and welfare differs with asset volatility: When volatility is high (low), liquidity and aggregate welfare in a fragmented market are higher (lower) than in a single market. However, fragmentation always shifts welfare away from agents with exogenous trading motives and toward intermediaries. We empirically corroborate our model’s predictions about liquidity. Our model reconciles the mixed results in the empirical literature.

Using a proprietary data set on international private equity activity, we study the determinants of buyout investments across 61 countries and 19 industries over the period of 1990 to 2017. We find that countries with cyclically strong economies, more active stock and credit markets, and better rule of law experience more buyout activity. Countries also receive more buyout capital following investor protection and contract enforcement reforms. The set of determinants we identify appear somewhat unique to buyout investments, because other forms of investment such as foreign direct investment, gross capital formation, investments in R&D, and M&A activity do not respond similarly to these factors.

Using the 2016 U.S. presidential election result as a shock to the expectations about the future regulatory environment, I find that most regulated firms earned approximately 4% higher cumulative abnormal stock returns than least regulated firms during the first 10 trading days after the election. Exploring economic mechanisms, I find evidence consistent with the explanation that more regulations disproportionately harm high-growth firms and allow incumbent firms to extract rents through lower competition and political favoritism. Stock returns are also followed by a shift in firm fundamentals over 3 years after 2016, consistent with the economic mechanisms.

Short sale constrained stocks are overpriced on average. I show that firms exploit mispricing by selling shares when their stock is short sale constrained and repurchasing shares when their stock is easily shorted. Stocks underperform following seasoned equity offerings (SEOs) if and only if the stock is difficult to short. This suggests that some SEOs are motivated by mispricing, whereas others are not. Short selling costs make it difficult for investors to profit from the poor performance following SEOs. Short selling and SEOs are alternative ways to supply shares to investors, and firms become the low-cost share provider when short selling is costly.

During the first half of 2020, the difference in savings from mortgage refinancing between high- and low-income borrowers was 10 times higher than before. This was the result of two factors: high-income borrowers increased their refinancing activity more than otherwise comparable low-income borrowers and, conditional on refinancing, they captured slightly larger improvements in interest rates. Refinancing inequality increases with the severity of the COVID-19 pandemic and is characterized by an underrepresentation of low-income borrowers in the pool of applications. We estimate a difference of $5 billion in savings between the top income quintile and the rest of the market.

In this paper, we develop a Capital Asset Pricing Model (CAPM) using a mean-lower partial moment framework. We explicitly derive the valuation formulas for the equilibrium value of risky assets and provide a distribution-free testable hypothesis for empirical validation of the new CAPM. We show the invariance of our results to the problem of estimation risk. We also show that when the probability distribution of security rer turns is the normal distribution, the stable Paretian distribution (with the same characteristic exponent between 1 and 2 and the same skewness parameter (not necessarily zero)), or the multivariate t-distribution, our CAPM reduces to the traditional two-parameter CAPM.

There is a standard trade-off in compensation contracts between the provision of incentives and insurance. We hypothesize that this trade-off influences the precision with which firm performance is measured. We find that firm outcomes are measured less precisely when chance plays a large role in these outcomes. Further, this precision is determined through the choice of shares outstanding. This has several novel implications. Nominal stock prices can remain constant over time, and firms with unpredictable cash flows should have more shares and lower stock price levels, all else equal. We find evidence consistent with these implications.

I report evidence that shareholders holding a combined 15% of shares are inattentive or partially inattentive when confronted with the decision to receive cash or stock for their shares in acquisitions. The average cost of such inattention is 2%, and it increases to 6% for the tertile of transactions with the greatest difference between the cash and stock values. Most interestingly, I show that inattention affects stock prices because attentive shareholders bid up the stock price in anticipation of a wealth transfer from inattentive shareholders.

In planning any finance course an important consideration is its economic content. After all, financial decisions are invariably made in the context of both micro and macro uncertainty. The micro issues are often given extensive coverage in the form of models that optimize returns, cash flows, or credit choices, and the techniques needed to produce the required input for those models: ratio analysis, proforma statement preparation, and valuation frameworks such as the capital asset pricing model. Yet, the macro uncertainty is very often assumed away.

A student of financial theory must always assume that managers will follow a course of action that will lead to a higher value of the firm rather than a lower value, given a choice between two courses of action. Yet, Lewellen and Racette (hereafter LR) in a recent paper [1] comparing the sale of convertible debentures with the sale of straight debt assumed that managers will behave in a way that will lead to submaximal firm value. The purpose of this paper is to correct the LR error.

This paper utilizes a two-parameter model of segmented securities markets to develop equilibrium implications concerning the impact of statutory investment restrictions upon the market prices and allocation of risky securities. The distinguishing feature of the model is the existence of a subset of securities common to the opportunities of all investors and therefore said to “span” the investor population. These common opportunities are shown to permit intersubset security transactions which integrate the various market segments and lead to the following theorem and tendency concerning equilibrium prices and portfolios:

Theorem: In the absence of active barriers against short positions, the equilibrium expected return for any security spanning the investor population is an exact linear function of its contribution to total market risk, irrespective of the number of distinct investor segments that may exist.

Tendency: The economic characteristics of the equilibrium risky portfolio for any investor, irrespective of the market segment to which he or she may belong, will approximate the characteristics of the market portfolio of all risky assets in the economy in all relevant risk dimensions.

In their paper Messrs. Reilly and Slaughter set out two questions, namely:

1. Prior to the introduction of technological advance in the securities market was there any difference in the market making between the NYSE and OTC on a sample of 30 stocks?

2. Following that introduction what was the effect on the market making of these securities listed on the NYSE?

The authors clearly stated the basic economic theory that underlies this exchange of assets and the price setting mechanism, and then concentrated on the empirical study. Their findings are inconsistent with their a priori expectations. This empirical study is well done; the methodology is sound and well presented. However, the authors appear to have overlooked one vital aspect of this type of study, i.e., institutional effects. I shall concentrate upon this area.

Regression analysis is by far the most popular of all the statistical techniques employed in financial research. Almost without exception, the models employed have been additive in both the parameters and the variables (regressors).

The purpose of this study is to analyze the behavior of the cost of equity capital in the commercial banks by looking at whether there exists an optimal composition of the bank “fund structure” that would maximize bank earnings through the minimization of its cost of funds. The analysis should give an approximate cut-off point for testing such projects as “checking plus,” checkless payment systems, etc.

There are seven academic finance associations in the United States; two are considered to be national and five are identified as regional. The national organizations are the American Finance Association (AFA) and the Financial Management Association (FMA), and the regional associations are the Eastern Finance Association (EFA), Midwest Finance Association (MFA), Southern Finance Association (SFA), Southwestern Finance Association (SWFA), and the Western Finance Association (WFA).

This study deals with behavioral assumptions that necessarily underlie the theory of asset valuation. Recognized logical and empirical implausibilities associated with the particular set of assumptions that provides the underpinnings of much currently espoused asset theory are reviewed. A valuation model based on a more realistic set of behavioral assumptions is then proposed and tested empirically.

Considerable attention has been focused in the past two decades on the substitutability of the liabilities of private nonmonetary financial intermediaries for money, narrowly defined as the sum of currency and demand deposits adjusted. Discussion concerning this topic related to the United States, and most of the empirical work has been confined to that country. The essential folklore of that discussion crossed the border into Canada and is now even reflected in its textbooks on Canadian money and banking. However, very little empirical work has been done in Canada to examine this lore.