We find evidence that labor unions affect chief executive officer (CEO) compensation. First, we find that firms with strong unions pay their CEOs less. The negative effect is robust to various tests for endogeneity, including cross-sectional variations and a regression discontinuity design. Second, we find that CEO compensation is curbed before union contract negotiations, especially when the compensation is discretionary and the unions have a strong bargaining position. Third, we report that curbing CEO compensation mitigates the chance of a labor strike, thus providing a rationale for firms to pay CEOs less when facing strong unions.

This paper tests for seasonal patterns in corporate bond returns using the Dow Jones Composite Bond Average. Each seasonal pattern documented for equities is investigated. For the period 1963–1986, corporate bond returns exhibit January, turn-of-the-year, and weekof-the-month effects, but no significant day-of-the-week or turn-of-the-month effects. In contrast, for the S&P 500 stock index, the turn-of-the-month and day-of-the-week effects are highly significant, but the week-of-the-month effect is less significant, and the January and turn-of-the-year effects are insignificant. The behavior of an equity index constructed using companies in the bond index is similar to that of the S&P, except the turn-of-the-year effect is significant.

Theory on high-frequency traders (HFTs) predicts that market liquidity for a security decreases in the number of HFTs trading the security. We test this prediction by studying a new Canadian stock exchange, Alpha, that experienced the entry of 11 HFTs over 4 years. We find that bid–ask spreads on Alpha converge to those at the Toronto Stock Exchange as more HFTs trade on Alpha. Effective and realized spreads for non-HFTs improve as HFTs enter the market. To explain the contrast with theory, which models the HFT as a price competitor, we provide evidence more consistent with HFTs fitting a quantity-competitor framework.

Schwartz [3] proposed a model to solve for the value of a warrant or an option when a closed-form solution of the valuation equation cannot be obtained. This model is based on a difference approximation of the valuation equation and uses standard numerical methods. We intend to show here that the same methods can be used to derive a difference approximation of the solution of the valuation equation which has a greater level of accuracy than Schwartz's approximation.

There is a generalized conviction that variation in dividend yields is exclusively related to expected returns and not to expected dividend growth, for example, Cochrane’s (2011) presidential address. We show that this pattern, although valid for the aggregate stock market, is not true for portfolios of small and value stocks, where dividend yields are related mainly to future dividend changes. Thus, the variance decomposition associated with the aggregate dividend yield has important heterogeneity in the cross section of equities. Our results are robust to different forecasting horizons, econometric methodology (long-horizon regressions or first-order vector autoregression), and alternative decomposition based on excess returns.

This study investigates the role of corporate boards following large declines in share value surrounding acquisition announcements. The results indicate that firms with independent boards are less likely to complete these value-decreasing bids, suggesting that boards influence corporate responses to information in stock prices. Board independence is also associated with unusually high frequencies of asset restructuring for bids that are completed, suggesting that independent boards promote restructuring in mergers the market believes are difficult to integrate. These results complement existing evidence on the board's exante role in averting bad outcomes by showing that independent boards intervene following value-decreasing events.

The purpose of this paper is to analyze the optimal individual behavior in acquiring information and to determine the amount of information incorporated in a stock at equilibrium, in the presence of a cost schedule in acquiring information. Our paper shows that at equilibrium the cost to acquire information that is not already incorporated in the price depends only on the representative investor's risk preferences. It follows that the marginal information costs are the same across all stocks at equilibrium even though the stock's information costs schedules may differ. This suggests that the prices of small stocks may not incorporate all publicly available information. This paper also provides empirical evidence that newspapers' publication of publicly available information can affect the stock prices.

The objective of this paper is twofold. First, the paper develops a class of models of the term structure of interest rates, in the Heath, Jarrow, and Morton (1992) framework, with dynamics characterized by the evolution of a small set of state variables. Second, the paper exploits this characterization of the dynamics of the term structure in an estimation exercise that makes use of both the time series and cross-section of bond prices. In this way, our class of models bridges the gap between traditional models, such as Cox, Ingersoll, and Ross (1985) and Vasicek (1977), that emphasize the dynamics of interest rates and the models of Heath, Jarrow, and Morton (1992) that stress fitting the cross-section of bond prices.

Assuming that individual investors account for most odd-lot transactions, we examine oddlot purchases and sales around the turn of the year and find a pattern that is related to the well-known January effect in stock returns. A significant change in the ratio of odd-lot sales to odd-lot purchases occurs at the turn of the year, which supports the hypothesis that the January effect results from trading by individual investors. The trading patterns that we find are not due entirely to tax considerations.

The 1986 Tax Reform Act (TRA) replaced non-synchronous tax year-ends with a common October 31 year-end for all mutual funds. After the TRA, we find that funds systematically accelerated the sale of losers prior to October 31. A similar pattern is not present for funds before the TRA, of for other types of institutions either befor or after the TRA. Examining stock returns in the first year the new TRA regulations became fully effective, we find evidence of a strong “November effect” for prior losers in which funds collectively had large holdings. Interestingly, fund managers appear to have learned from this experience. In subsequent years, our resuts suggest that funds were able to mitigate potential price pressures by having the foresight to spread tax-motivated sales over relatively long time horizons.

This paper investigates whether some individuals are prone to behavioral biases in their 401(k) investments. Using demographic data and allocation information for over 73,000 employees, I examine two allocation biases and a participation bias. The findings suggest that higher salaried employees tend to make significantly better choices. Participants who earn $100, 000 hold 12. 7% less in company stock, are 3% less likely to follow the framing 1/n heuristic, and are 37.7% more likely to participate than those earning $46, 000. Women make better choices in two of the three cases and I find evidence of mental accounting.

We test the hypothesis that low-visibility shocks to text-based network industry peers can explain industry momentum. We consider industry peer firms identified through 10-K product text and focus on economic peer links that do not share common Standard Industrial Classification (SIC) codes. Shocks to less visible peers generate economically large momentum profits and are stronger than own-firm momentum variables. More visible traditional SIC-based peers generate only small, short-lived momentum profits. Our findings are consistent with momentum profits arising partially from inattention to economic links of less visible industry peers.

In this article, we examine the extent to which firm fundamentals can explain the cross-sectional variation in credit default swap (CDS) spreads. We construct a fundamental CDS valuation by combining the Merton distance-to-default measure with a long list of firm fundamentals via a Bayesian shrinkage method. Regressing CDS quotes against the fundamental valuation cross-sectionally generates an average R2 of 77%. The explanatory power is stable over time and robust in out-of-sample tests. Deviations between market quotes and the valuation predict future market movements. The results highlight the important role played by firm fundamentals in differentiating the credit spreads of different firms.

This paper examines the determinants of commodity futures hedging and of risk premia arising from covariation of the futures price with stock market returns, and with the revenues of producers. Owing to supply shocks that stochastically redistribute real wealth (surplus) between producers and consumers, and to limited participation in the futures market, the total risk premium in the model is not proportional to the contract's covariance with aggregate consumption. Stock market variability interacts with the incentive to hedge, causing the producer hedging component of the risk premium to increase (decrease) with income elasticity, for a normal (inferior) good. Production costs that depend on output raise the premium. We argue that output and demand shocks will typically be positively correlated, raising the premium. High supply elasticity reduces the absolute heding premium by reducing the variability of spot price and revenue.

This paper examines how culture affects information asymmetry in financial markets. We extract firms traded in the United States but headquartered in regions sharing Chinese culture (“Chinese firms”), and we manually identify a group of U.S. analysts of Chinese ethnic origin (“Chinese analysts”). We find that Chinese analysts issue more accurate forecasts on Chinese firms than non-Chinese analysts. The effect is stronger among firms with less transparent information environments. Further evidence suggests that cultural proximity can go beyond language commonality and analysts’ pre-existing channels for information. Market reaction is stronger when Chinese analysts issue favorable forecast revisions or upgrades about Chinese firms.

The slope of the implied volatility term structure is positively related to future option returns. I rank firms based on the slope of the volatility term structure and analyze the returns for straddle portfolios. Straddle portfolios with high slopes of the volatility term structure outperform straddle portfolios with low slopes by an economically and statistically significant amount. The results are robust to different empirical setups and are not explained by traditional factors, higher-order option factors, or jump risk.

As demonstrated by Boyce and Kalotay (1979) and Brick and Ravid (1985), the use of long-term debt may be preferred because of tax-related advantages. Brick and Ravid show that if there exists a tax advantage to debt and nonstochastic interest rates, long-term debt will increase the present value of the tax benefits of debt if the term structure of interest rates, adjusted for risk of default, is increasing. A decreasing term structure, on the other hand, calls for short-term debt. The present paper extends the tax-induced argument of Brick and Ravid to allow for the presence of stochastic interest rates. Once interest rates are uncertain, pricing even under risk neutrality becomes a complex issue. We analyze the debt maturity decision under two competing pricing equations: the return to maturity expectations hypothesis and the local expectations hypothesis. (This terminology is used in Cox, Ingersoll, and Ross (1981) and Campbell (1986).) Under uncertainty, a debt capacity factor will create an additional incentive to issue long-term debt. Our other results may be interpreted to indicate that if the term premium, the difference between the implied forward interest rate and the future expected spot rate, is positive (sufficiently negative) then long-term (short-term) debt maturity strategy is optimal.

This paper examines problems in the use of divergence of analyst opinion as a proxy for estimation risk in empirical studies of security returns and asset pricing models. We demonstrate that diversity of opinion can increase even though the amount of private information increases, and we show that diversity of opinion may overstate estimation risk if the capital market aggregates the information held by investors. We produce empirical results consistent with our conclusions. Specifically, we find that divergence of opinion can produce measures of estimation risk that are inconsistent with a received proxy for estimation risk and with observed common stock returns.

The composite measures of investment performance: the reward-to-variability index, by Sharpe ([29], [30]) and Lintner [23], and the reward-to-volatility index, by Treynor [33], were developed after Markowitz ([24], [25]) and Tobin [32] popularized the mean-variance framework of analyzing the problems of certain investments. Since these are ex ante measures they are not directly applicable to the evaluation of ex post performance. A theoretical basis for doing so has been provided by Jensen ([17], [18]) who also developed another composite performance measure, the predictability index. In practice, these composite measures have been found to have problems. Foremost, they have been observed to exhibit systematic biases. Various causes of the biases have been proposed. These are: the existence of unequal lending and borrowing rates, the failure to consider higher moments of return distributions, and the elusive “true” holding period.

The search for a distribution which accurately describes the behavior of stock price returns has generated a considerable amount of controversy. While it is well known that the traditionally used assumption of lognormality deviates in systematic ways from the empirically observed—the latter has fatter tails and a larger concentration of mass near zero—none of the alternatives that have been proposed over the years (Stable Paretian—Mandelbrot [5], Poisson mixture of; lognormal distributions—Press [10], scaled T distribution—Praetz [9], lognormal with nonstationary variance—Rosenberg [11], subordinate stochastic process—Clark [2]) has gained general acceptance.