We examine the potential for management-worker alliances when employees have substantial voting rights, and how such alliances affect the balance of power between managers and shareholders. We find that substantial employee voting rights exacerbate the manager-shareholder conflicts. Specifically, they entrench incumbent managers and allow them to pursue value-destroying acquisitions by undercutting the disciplinary influence of the corporate control market. Importantly, employee support for managers is conditional on favorable treatment of employees. Our findings are consistent with Pagano and Volpin’s theory of worker-management alliances and highlight the potential risks associated with large employee voting power.

This article examines some aspects of the portfolio selection problem when the “no-easy-money-condition” holds and the investor is constrained to stay solvent. The possible presence of a non-capital income is also taken into consideration.

We study whether asset-class risk dynamics can help explain the predominantly negative stock-bond return relation and movements in the term structure’s slope over 1997–2011. Using option-derived implied volatilities to measure risk, we find i) the negative stock-bond return relation largely disappears when controlling for risk movements, at both monthly and weekly horizons; ii) the partial relation between equity-risk changes and 10-year T-bond excess returns (term-slope movements) is reliably positive (negative); and iii) a stronger link between equity risk and stock returns implies a more negative stock-bond return correlation. Our results suggest a flight-to-quality influence between equity-risk dynamics and longer-term Treasury pricing.

Using detailed data on company visits by Chinese mutual funds, we provide direct evidence of mutual fund information acquisition activities and the consequent informational advantages mutual funds establish in local firms. Mutual funds are more likely to visit local and nearby firms both in and outside of their portfolios, but the ease of travel between fund and firm locations can substantially alleviate geographic distance constraints. Company visits by mutual funds are strongly associated with both fund trading activities and fund trading performance. Our results show that geographic constraints and costly information acquisition amplify information asymmetry in financial markets.

Some acquisitions can be viewed as the quickest means to obtain a scarce resource required for restructuring in response to an economic shock. Such acquisitions can give the acquirer a competitive edge and hurt its competitors. In this paper, I first show that if a firm will be adversely affected by a competitor’s acquisition, then it can rationally “overpay” for the target to avoid this outcome within a value-maximizing framework due to industry equilibrium effects. Next, I show that depending on the level of anticipation by the market, the magnitude of the cost of losing, and the competition between bidders, an acquirer can earn negative payoffs at the announcement of such an acquisition. Even though the merger is the best decision given the circumstances, negative returns incorporate the understanding that the target is a necessary resource to survive in this changing environment, losing it to a rival is costly, and there is a positive probability that the bidder may not win or win by paying more than the synergy value of the target. Finally, I extend the model to include 2 targets that become available sequentially to multiple bidders and show that when there are alternatives available for the target’s resources, overbidding subsides.

The purpose of this study was to test empirically the risk and return relationships for a mean-variance (E-V) and a mean-semivariance (E-S) capital asset pricing model (CAPM). To date, virtually all empirical work has focused on the Sharpe-Lintner [28,17] E-V model. In the E-V model, the risk of an efficient portfolio is measured by the standard deviation of return, σp. For individual securities, the appropriate measure of risk is the covariance of return on the security and the market portfolio. The E-V model states that the expected return of any security or portfolio equals the risk-free rate of return plus a risk premium that is η times the difference between the expected return on the market portfolio and the risk-free rate of return, i.e.,

where the tildes denote random variables, and

= expected rate of return on security i,

Rf = risk-free rate of return,

= expected rate of return on the market portfolio, and

.

Derivative warrants typically have higher prices than do otherwise identical options. Using data from the Hong Kong market during 2002–2007, we show that the price difference reflects the liquidity premium of derivative warrants over options. Newly issued derivative warrants are much more liquid than options with similar terms. As a result, long-term derivative warrants are preferred by traders who trade frequently. In spite of their higher prices, short-term returns on long-term derivative warrants are, in fact, higher than the hypothetical short-term returns on options. The differences in price and liquidity measures decline as the contracts get closer to maturity.

The adoption of the incentive-signalling framework gives a reasonably good explanation of the corporate dividend decision. The equilibrium optimal dividend decision under such a framework is presented and analyzed, assuming a reward-penalty managerial incentive scheme is used. It is shown that the size of the declared dividend is an increasing function of expected cash flow. However, there exists a trend that points out that the higher the level of expected cash flow, the lower the marginal effects of cash flow on dividends. A similar relationship is observed with respect to changes in expected cash flows. These conclusions are in harmony with “real world” behavior as reported by several empirical studies. The effects of uncertainty and interest rates on dividends are also analyzed. It is shown, in agreement with observed phenomena, that the higher the uncertainty, the lower the dividend/payout ratio.

We study fragmentation of equity trading using a model of imperfect competition among exchanges. In the model, increased competition drives down trading fees. However, additional arbitrage opportunities arise in fragmented markets, intensifying adverse selection. Due to these opposing forces, the effects of fragmentation are context dependent. To empirically investigate the ambiguity in a single context, we estimate key parameters of the model with order-level data for an Australian security. According to the estimates, the benefits of increased competition are outweighed by the costs of multi-venue arbitrage. Compared with the prevailing duopoly, we predict the counterfactual monopoly spread to be 23% lower.

Using a new variable based on a model of dividend smoothing, we find that dividend growth is highly predictable and that cash flow news contributes importantly to return variability. Cash flow betas derived from this predictability are central to explaining the size effect in the cross section of returns. However, they do not explain the value effect; this is explained by noise betas. We also find that the relative importance of cash flow news in explaining recent stock price run-ups and subsequent declines increases when cash flow news is estimated directly.

We investigate whether short sellers contribute toward the informational efficiency of market prices by trading on their private information or destabilize market prices by trading on rumors and false information. We find that short-selling activities are considerably informative about future stock returns when there is a higher likelihood of private information in stocks, as measured by insider-trading activities. Short sellers also bring considerable additional information to the market that is not fully captured by contemporaneous insider trading. Overall, these results suggest that on average, short sellers bring informational efficiency to market prices rather than destabilize them.

To explain post-earnings announcement drift, we construct a risk factor related to unexpected earnings surprise, and propose a four-factor model by adding this risk factor to Fama and French's (1993), (1995) three-factor model. This earnings surprise risk factor provides a remarkable improvement in explaining post-earnings announcement drift when included in addition to the three factors of Fama and French. After adjusting raw returns for the four risk factors, the cumulative abnormal returns over the 60 trading days subsequent to quarterly earnings announcements are economically and statistically insignificant. Furthermore, except for the first two days after the earnings announcement, the cumulative abnormal returns and the arbitrage returns from our four-factor model are relatively stable over the testing period and never significant on any day of the testing period. On the other hand, the arbitrage returns from the other models increase over the 60-day testing period. We argue that most of the post-earnings announcement drift observed in prior studies may be a result of using misspecified models and failing to appropriately adjust raw returns for risk.

Commercial banks have been the subjects of a large body of empirical research employing regression and econometric models and discriminant analysis. The purpose of this paper is to empirically identify and describe relationships, including hedging behavior, between the asset side and the liability/capital side of the balance sheets of a cross-section of large U.S. banks. Canonical correlation analysis is the statistical technique that is employed. Unlike regression analysis which explains the behavior of a single dependent variable as a function of a set of independent variables, canonical correlation analysis relates two sets of variables. In the present case, one set of variables is the composition of the lefthand side of the balance sheet and the other set is the right-hand side. The variables used in this study are asset and liability/capital categories expressed as a proportion of total bank assets (i.e., a percentage breakdown of the balance sheet or a common size statement). These proportions are used in lieu of the more usual financial ratios and no information exogenous to the bank is employed.

We propose a simple metric to measure two aspects of market integration, namely, economic integration (defined as a common cash-flow dynamic) and financial integration (defined as a common risk-pricing dynamic) and then examine their evolution through time while controlling for volatility. We find that developed (DEV) countries exhibit greater degrees of financial and economic integration than emerging (EMG) markets. Although the financial integration gap between these markets remains large throughout the sample period, the EMG economies are catching up with their DEV counterparts in recent years; their level of economic integration has reached that of DEV countries.

Does a financial system architecture anchored on banks perform better than one centered on markets in fostering technological innovations as engines of growth? In a panel of industrial sectors across a large cross section of countries, I find that while market-based systems have a general positive effect on innovations in all economic sectors, bank-based systems foster more rapid technological progress in more information-intensive industrial sectors, suggesting a heterogeneous impact of financial architecture. Thus, the relative performance of bank-based systems vis-à-vis market-based systems depends on the industrial structure of the economy.

In this article, we propose two asymmetry measures for stock returns. Unlike the popular skewness measure, our measures are based on the distribution function of the data rather than just the third central moment. We present empirical evidence that the greater upside asymmetries calculated using our new measures imply lower average returns in the cross section of stocks. In contrast, when using the skewness measure, the relationship between asymmetry and returns is inconclusive.

A number of recent papers have shown that it is possible for an investor to immunize a portfolio of default and option-free coupon bonds so that the return realized over a given planning period will never be less than that promised at the time the bonds were purchased. In this way, a future fixed dollar liability may be discharged with certainty by acquiring an asset portfolio with a market value equal to the present value of the liability and setting its appropriate duration equal to the time remaining to the date of discharge. However, most investors have more than one liability to discharge. In his seminal article in 1952, F. M. Redington showed that a stream of liabilities may be immunized if an asset portfolio having the same present value as the liabilities is selected so that:

1. its duration is equal to the duration of the liabilities; and

2. “the spread of the value of asset-proceeds about the mean term (duration) should be greater than the spread of the value of the liability” ([16], p. 191).

This paper proposes an alternative characterization of the early exercise premium that is valid for any Markovian and diffusion underlying price process as well as for any parameterization of the exercise boundary. This new representation is shown to provide the best pricing alternative available in the literature for medium- and long-term American option contracts, under the constant elasticity of variance model. Moreover, the proposed pricing methodology is also extended easily to the valuation of American options on defaultable equity and possesses appropriate asymptotic properties.

We document significant differences in the financing structures of small firms with managers of diverse cultural backgrounds. To isolate the effect of culture, we exploit cultural heterogeneity within a geographical area with shared regulations, institutions, and macroeconomic cycles. Our findings suggest significant cultural differences in the preference toward debt funding and in the use of formal and informal sources of financing (bank loans and trade credit). Our results are robust to alternative explanations based on potential differences in credit constraints and in the distribution of cultural origins across industries, trading partners, and headquarters locations.

Within the past decade, considerable progress has been made in measuring ex post portfolio performance. The two parameter risk-return dimension of investment performance as pioneered by Markowitz has been reduced to a single parameter which incorporates measures of both risk and return. Several different but related one-parameter measures of performance have been developed, notably by Sharpe [8], Treynor [11], and Jensen [3], and are commonly referred to as composite performance measures. Theoretically, the composite measures allow portfolios with different risks and returns to be compared directly.