The original Black-Scholes (BS) [2] European call option pricing model does not take account of divided payments on the underlying stock and does not allow for the possibility of early exercise that may be optimal when the stock pays dividends. Black [1] has suggested that the original BS model can be modified to take account of dividends and Sharpe [14] predicts that this modified or pseudo-American BS approach, “while not exact, is probably sufficient for many listed options.”

The forward bias anomaly implies that currency excess returns are predictable by the forward premium. Yet, recent studies suggest that statistical inference problems may spuriously account for this predictability. This article demonstrates that while currency excess returns are not predictable out of sample using a standard mean square forecast error criterion, the forward premium nonetheless has directional predictability. This directional forecasting accuracy translates into statistically significant profits from trading on the forward bias anomaly.

I model the decision of an informed early-stage venture capital (VC) investor that considers involving an uninformed VC or venture lending (VL) investor to finance the late stage. Early-stage VC investors that own high-quality value companies tend to signal their quality and they frequently turn to VL investors. Early-stage VC investors prefer VC if the proportion of high-quality companies in the population is high, if their companies have a high upside potential, if they can benefit from the value that late-stage VC investors add, or if uncertainty is high. I find empirical evidence consistent with these predictions.

We hypothesize that employee flexibility enhances firm value by helping firms respond to exogenous shocks. We estimate employee-flexibility scores through textual analysis of online job reviews, and we find that a high flexibility score leads to superior stock returns for firms exposed to external risk. During 2011–2017, the value-weighted hedge portfolio formed on employee flexibility earned a 5-factor annualized alpha of 9.5% during periods of high policy uncertainty. Earnings-announcement returns also suggest that investors do not fully value workforce flexibility. These results indicate that employee flexibility is a valuable corporate intangible that helps firms to manage risk during uncertain times.

We develop a theoretical model providing a new rationale for venture capitalist (VC) syndicate formation and empirically test our model predictions. An entrepreneur obtains financing and two different value-adding inputs from a single VC or from two different VCs, each operating in his area of expertise. We characterize the entrepreneur’s equilibrium choice between contracting with a single VC, individually with multiple VCs, or with a VC syndicate. We show that syndicates mitigate VCs’ moral hazard problem in value addition. We also analyze the dynamics of VC syndicate composition. The results of our empirical analysis are consistent with our model’s predictions.

This study examines whether stock returns provide forecasts of changes in interest rates and inflation. In contrast to earlier work that indicated that changes in expected inflation negatively affect stock returns, we find a statistically significant positive relation between stock returns and future inflation rate changes as well as a significant positive relation between stock returns and future interest rate changes. Real estate investment trusts, which are particularly interest- and inflation-sensitive securities, provide better forecasts than a broad market index. Finally, we find that most of the evidence supporting the forecasting ability of stock returns occurs in the October 1979 to October 1982 period when the Federal Reserve Board chose not to counteract interest rate changes.

The problem of bond portfolio selection may be viewed as consisting of two parts. The first is concerned with the maturity profile of the total cash flows (the after-tax coupons and principal repayments) which the investor requires; in general there will be many portfolios of bonds which provide the desired cash flow profile. Accordingly, the second problem is the choice of a particular portfolio of bonds which provides these cash flows in some optimal fashion. If bonds are default free, future taxes are known, and differences in marketability and callability among issues can be ignored, then price is the only relevant criterion in choosing among alternative portfolios. This paper describes a simple linear programming model for this last problem of selecting the portfolio which provides a given pattern of cash flows at minimum cost. This provides a method for improving any initial portfolio, where such improvement is possible, by increasing its yield without reducing any future after-tax cash flows.

In the application of modern portfolio theory, the systematic risk of a security is of central importance. Beta (β), the future regression coefficient of the return of the security on the return of the market, is an index of that risk. Since the future is yet to be revealed, nonclairvoyant practitioners and researchers must rely on estimated rather than actual values of beta and the estimates must be based on data that are currently available.

Consistent with prior literature, we find that average relative effective spreads are higher for venues that pay for order flow (PFOF) than for venues utilizing the maker-taker (MT) model. This relation becomes more nuanced when liquidity fees are incorporated into liquidity cost measures. For the majority of options, PFOF venues offer lower average liquidity costs net of taker fees. Net liquidity costs for the high-priced options, however, are lower for MT venues. Overall, our results suggest that the inclusion of fees and rebates can rationalize the routing of most, but not all, marketable orders to PFOF venues.

Surprisingly few papers have attempted to develop a direct empirical test for overbidding in merger and acquisition contests. We develop such a test grounded on a necessary condition for profit-maximizing bidding behavior. The test is not subject to endogeneity concerns. Our results strongly support the existence of overbidding. We provide evidence that overbidding is related to conflicts of interest, but also some indirect evidence that it arises from failing to fully account for the winner’s curse.

In this study, using data from 46 markets and a 34-year time period, we examine the impact of the illiquidity of U.S. Treasuries on global asset valuation. We find that it predicts equity returns in both developed and emerging markets. This predictive relation remains intact after controlling for various world- and country-level variables. Asset pricing tests further reveal that bond illiquidity is a priced factor even in the presence of other conventional risks. Since the illiquidity of Treasuries is known to reflect monetary and macroeconomic shocks, our results suggest that it can be considered a proxy for aggregate worldwide risks.

The field of investment analysis provides an example of a situation in which individuals or corporations make inferences and decisions in the face of uncertainty about future events. The uncertainty concerns future security prices and related variables, and it is necessary to take account of this uncertainty when modeling inferential or decision-making problems relating to investment analysis. Since probability can be thought of as the mathematical language of uncertainty, formal models for decision making under uncertainty require probabilistic inputs. In financial decision making, this is illustrated by the models that have been developed for the portfolio selection problem; such models generally require the assessment of probability distributions (or at least some summary measures of probability distributions) for future prices or returns of the securities that are being considered for inclusion in the portfolio (e.g., see Markowitz [11] and Sharpe [19]).

We examine the relative prices of sibling American Depositary Receipts (ADRs). These ADRs are issued against classes of shares with different voting rights that are issued by the same foreign firm. Though superior and inferior voting siblings begin trading in the U. S. at nearly equal values, prices quickly separate. For non-Mexican issues, superior voting ADRs command a premium. For Mexican issues, superior voting shares trade at a discount. The Mexican discount is inconsistent with the benefits of U. S. listing discussed in other recent studies and cannot be explained by differences in cash flow rights, systematic risk, liquidity, voting control of major blockholders, or ownership restrictions. Our analysis suggests, however, that control for our Mexican firms has shifted to creditors and competitors, thus, eroding equity voting premiums.

Investment analysis, both for purposes of capital expenditures and for financial investments, is based on an evaluation of cash flows. This evaluation involves the application of interest rates in order to determine whether a given option–a series of cash flows–is profitable or not. For numerous reasons, primarily that of simplicity, it has been traditional to assume that the rates of interest used to measure the worth of an investment are constant. With this assumption it is possible to equate the two familiar investment criteria when investments are independent and outlays are not subject to expenditure constraints, i.e., when capital markets are taken to be perfect in the usual sense. An investment is profitable if its net present value is positive when discounting of cash flows uses the (assumed constant) cost of capital, or if its (assumed unique) internal rate of return is greater than the cost of capital. Equivalence of these two criteria is historically most frequently identified with Irving Fisher [3, 4], and his two-period analysis, portrayed graphically, is generally utilized to establish the correctness of the equivalence of the criteria.

In this paper, we examine the behavior of the bid-ask spreads of initial public offerings of common stocks (IPOs) in the over-the-counter market. We find that, in the initial aftermarket, the quoted percentage bid-ask spreads for IPOs are, on average, about threefourths as large as those for seasoned stocks. A cross-sectional and time-series simultaneous equations analysis indicates that significant differences in the IPO and seasoned spreads persist for eight weeks in the aftermarket. Further, we find that the lower IPO spreads stem from their differential elasticities with respect to the determinants of bid-ask spreads and volume as well as from significant differences in the levels of these determinants.

To sign option trades as buys and sells, researchers often employ stock trade classification rules including the quote, the Lee and Ready (1991), the Ellis, Michaely, and O'Hara (2000), and the tick methods. Using a proprietary CBOE dataset that reports trade direction, we find that these four rules sign correctly 83%, 80%, 77%, and 59% of all classifiable trades, respectively. These rates are based on separate classifiable samples because each of the four rules fails to classify some trades (e.g., the quote rulecannot classify midspread trades). Outside-quote and reversed-quote trades are highly misclassified by all four rules. The probability of such trades is related to trading frequency, trade size, moneyness, and maturity. Underlying asset price changes around the time of the trade improve classification precision. We find that the components of index option complex trades not executed on the Retail Automated Execution System are misclassified almost 50% of the time by any method. The elimination of these trades (15% of the sample) results in a success rate of over 87% for the quote rule.

We study the role of financial strength on product market competition by examining exogenous shocks to a firm’s liability structure arising from asbestos litigation. We find that exogenous increases (decreases) in asbestos liabilities are interpreted by the market as negative (positive) news for a firm’s close competitors. These reactions are magnified in events in which one asbestos-tainted firm goes bankrupt and other asbestos-tainted stocks fall on the news of the bankruptcy. For smaller competitors, market reactions are more pronounced in more concentrated industries. Our findings support the general hypothesis that increases in fixed liabilities lead to more aggressive product market interactions.

We propose a new approach based on a generalization of the logit model to improve prediction accuracy in U.S. bank failures. Mixed-data sampling (MIDAS) is introduced in the context of a logistic regression. We also mitigate the class-imbalance problem in data and adjust the classification accuracy evaluation. In applying the suggested model to the period from 2004 to 2016, we show that it correctly classifies significantly more bank failure cases than the classic logit model, in particular for long-term forecasting horizons. Some of the largest recent bank failures in the United States that had been previously misclassified are now correctly predicted.

This paper has discussed the importance of stationary data in statistical applications and has at the same time suggested one method for testing for stationarity. An application of the testing procedure is made to common stock prices. The results indicate that these data could be nonstationary in the usual sense of stability of the mean and mean-square values despite efforts to transform the data into a stationary form using first differences.

Banks open more branches and make more lending near their CEOs’ childhood hometowns. The effects are stronger among informationally opaque borrowers and among CEOs who spend more time in their childhood hometowns. Furthermore, loans originated near CEOs’ hometowns contain more soft information and have lower ex post default rates, implying that hometown loans are more informed. Hometown lending does not affect aggregate bank outcomes, suggesting that credit is being reallocated from regions located farther away to regions proximate to bank CEOs’ hometowns.