As is shown in the financial literature, the assumption of perfect and costless information often leads to the conclusion that corporate financial decisions are inconsequential to the value of the firm (e.g., Stiglitz [20] and Fama [6]). This conclusion seems to be in direct contradiction with the observed behavior of corporations that allocate real resources to implement financial policies. The gap between theory and observed behavior is bridged by introducing various frictions and market imperfections. A growing number of studies examine the optiraality of financial decisions when the assumption of perfect and costless information is replaced by allowing for informational asymmetry. The asymmetry is assumed to exist between corporate insiders who possess superior information about the firm's future earnings prospects and outside investors. The emphasis in this literature is on the ability of financial instruments to serve as signaling devices through which the true value of the firm can be revealed to the market without moral hazard or disclosure of confidential information. Although the signaling process is typically considered to be costly, it is advocated that firms may be better off if they employ this mechanism rather than reveal reliable, but confidential information, or not disclose at all.

Prior research has examined the firm-level performance implications of “busy” boards. Firm-level analysis, however, masks important heterogeneity in the time constraints and expertise of individual busy directors. We develop and validate shareholder voting as a proxy for shareholders’ satisfaction. Our director-specific tests provide compelling evidence that the potential costs of busy directors outweigh their benefits. At the same time, we uncover new sources of heterogeneity among busy directors. For example, the downsides are more pronounced for directors who sit on boards where fiscal year ends cluster in the same month. Our analysis highlights the role of shareholder voting in board composition research.

We examine the ability of three groups of informed market participants to anticipate the 2007–2008 financial crisis. Institutional investors and financial analysts exhibit some awareness of the impending crisis in their preference for nonfinancial stocks over financial stocks. In contrast, corporate insiders of financial firms appear to be completely unaware of the timing and extent of the financial crisis. Net purchases by managers of financial firms exceed those by managers of nonfinancial firms over the entire 2006–2008 period. Our results add considerable weight to the argument that the financial crisis was more a case of flawed judgment than flawed incentives.

Although venture capitalists (VCs) can choose from thousands of potential syndicate partners, many co-syndicate with small groups of preferred partners. We term these groups “VC communities.” We apply computational methods from the physical sciences to 3 decades of syndication data to identify these communities. We find that communities comprise VCs that are similar in age, connectedness, and functional style but undifferentiated in spatial location. Machine-learning tools classify communities into 3 groups roughly ordered by their age and reach. Community VC financing is associated with faster maturation and greater innovation, especially for early-stage firms without an innovation history.

Recently the standard market model has been used to examine holding period returns of corporate bonds. These studies have involved issues such as: the impact of accounting earnings data on bond price behavior [5]; the relationship of bond betas and ratings [19, 21]; the effect of ratings changes on bond prices [27]; the relationship of bond betas to duration and yield [3, 13, 15]; bond performance of bankrupt and nonbankrupt firms [26]; and tests of the Capital Asset Pricing Model based on bond returns [7]. While the empirical appropriateness of applying the market model to common stock returns has been demonstrated, similar tests have not been conducted with regard to long-term corporate bonds. Section II of this paper will examine the assumptions of the normal error regression model when used in the form of the market model and applied to a sample of long-term corporate bonds during the early years of their lives. The issue of systematic changes in the regression parameters will be addressed in Section III. Lastly, conclusions will be presented in Section IV.

Analysts’ functions are divided into discovery and interpretation roles, but distinguishing between the two is nontrivial. We conjecture that analysts’ interpretation skill can be gauged by their forecast revisions following material unanticipated news, in particular, following nonearnings 8-K reports, which arrive at the market unexpectedly. We establish that unanticipated 8-Ks are informative for analysts and find that analysts who are more likely to revise their forecasts following unanticipated 8-Ks provide more timely and accurate forecasts. We document a positive association between analysts’ tendency to react to unanticipated 8-Ks and market reaction to their recommendation changes, suggesting investors prefer these analysts’ opinions.

We introduce a new holdings-based procedure to identify whether a mutual fund has a benchmark discrepancy, which we define as a benchmark other than the prospectus benchmark best matching a fund’s investment strategy. We find that funds with a benchmark discrepancy tend to be riskier than their prospectus benchmarks indicate. As a result, the funds on average outperform their prospectus benchmarks, before further risk adjustments, despite underperforming the benchmarks that best match their portfolios.

We introduce and test a firm-level innovation-efficiency measure new to the finance literature. The measure, termed the research quotient (RQ), defined as the firm-specific output elasticity of research and development (R&D), was first developed in the management literature. RQ has a low correlation with existing innovation input, output, and efficiency measures. We test RQ in a number of innovation tests common to the finance literature and find that RQ is robust in all tests of firm value, even after controlling for previous innovation measures. The results suggest that RQ may serve as a relevant complementary measure of a company’s innovation.

We examine asset allocation decisions under smooth ambiguity aversion when an investor has a prior degree of belief in the domestic capital asset pricing model (CAPM). Different from a Bayesian approach, the investor separately relies on the conditional distribution of returns and on the posterior over parameters to make decisions, rather than on the predictive distribution of returns that integrates priors and likelihood information. We find that in the perspective of U.S. investors, ambiguity aversion generates strong home bias in equity holdings, regardless of beliefs in the CAPM or risk aversion. Results become stronger under regime-switching investment opportunities.

Markowitz [12] and Tobin [19] pioneered in the development of a portfolio selection model resting on the assumptions that the investor

1. Chooses among alternative investment opportunities solely on the basis of expected return (E) and standard deviation of return 〈σ〉, and

2. Prefers more expected return to less but will refuse to incur additional risk (measured by standard deviation) unless compensated by increased expected return.

We develop a model of third party guaranteed debt and show that interest rate premiums are multiplicatively related to firm and guarantor risk. We apply the model to thrifts issuing CDs guaranteed by the FSLIC and then estimate firm probabilities of insolvency and guarantor risk across 20 observed months. This time period spans the insolvency of the guarantor followed by two recapitalizations. The relative stability in firm risk across time offers no evidence of generalized risk contagion among firms. We attribute elevated CD premiums and rate spreads to increases in guarantor risk rather than changes in firm risk.

In this study two alternative techniques to analyze pooled time-series and cross-section data are used to test the importance of firm effect and time effect in the financial analysis. These techniques are also integrated with the functional form parameter estimation method to show the importance of appropriate functional form in handling a pooled time-series and cross-section type econometric model. The data on the electric industry show that both the time effect and cross-section effect are of importance in explaining stock price variation. It is also found that linear form (and/or) log-linear form is not always appropriate in testing the importance of both time effect and firm effect in financial analyses.

February and August peaks in the growth rates of the seasonally unadjusted Industrial Production Index follow the stock market peaks documented by Rozeff and Kinney (1976) by one month. Coefficients on one-month lead growth rates in industrial production for small firms are positive and significant in time-series regressions even in the presence of the market factor. Moreover, whereas returns on large firms' stocks unidirectionally Granger cause (i.e., predict) future growth rates in industrial production at least six months in advance, returns on small firms' stocks reflect one-month lead as well as past growth rates in industrial production. For these reasons, we argue that seasonal real growth provides a partial explanation for the January stock seasonal among small firms.

This study examines daily price reactions to initial reviews of securities by the Value Line Investment Survey. The reviews are found to convey information to the market as significant abnormal returns are found over a 3-day period around release of the information. Furthermore, there is no statistically significant subsequent price reation after this 3-day period, consistent with market efficiency.

Markets should be inefficient enough to allow returns to security analysis to adequately compensate the marginal analyst for his efforts. Cross-sectional differences in the costs of analysis therefore imply cross-sectional differences in market efficiency and in before-cost returns to smart investors. Small growth stocks are difficult to analyze and costly to trade. I find that the abnormal returns of mutual fund investments in small growth stocks from 1980 to 2006 averaged 0.76% per month. Large value stocks are easier to analyze and cheaper to trade. Mutual funds earned average monthly abnormal returns of only 0.05% in large value stocks during the same period.

The current merger movement has been characterized by the willingness of the management of some acquiring companies to pay substantial merger premiums. A merger premium exists when the common stockholders of an acquired company receive cash and/or securities possessing a value greater than the company's premerger market value. The rationalization or justification of these “premiums” is based on a merger synergy concept. Contemporary merger literature recognizes two broad forms of merger synergy — the potential for greater operating efficiencies [14] and/or potential financial benefits — with the latter containing instantaneous [12] and real elements [1, 7, 9, 10, 11, 13].

Kothari, Lewellen, and Warner (2006) document that aggregate earnings changes in the United States are negatively related to contemporaneous market returns. In this study we show that this negative aggregate earnings-returns relation is unique to the United States. In 28 non-U.S. markets, aggregate earnings changes are positively associated with contemporaneous market returns. Further evidence shows that the aggregate earnings-returns relation becomes less positive in countries with more transparent financial disclosure that helps investors forecast earnings more precisely. Our result supports Sadka and Sadka’s (2009) argument that predictability of aggregate earnings leads to the negative relation between aggregate earnings and market returns in the United States.

It has been hypothesized that momentum might be rationally explained as a consequence of the cross-sectional variation of unconditional expected returns. Stocks with relatively high unconditional expected returns will on average outperform in both the portfolio formation period and in the subsequent holding period. We evaluate this explanation by first removing unconditional expected returns for each stock from raw returns and then testing for momentum in the resulting series. We measure the unconditional expected return on each stock as its mean return in the whole sample period. We find momentum effects vanish in demeaned returns.

The costs of implementing investment strategies represent a significant drag on the performance of mutual funds and other institutional investors. It is the responsibility of institutional investors, and in the interests of the individual investors they represent, to seek market mechanisms that mitigate trading costs. We investigate an example of one such liquidity provision mechanism whereby liquidity demanders auction a set of trades as a package directly to potential liquidity providers. A critical feature of the auction is that the identities of the securities in the package are not revealed to the bidder. We demonstrate that this mechanism provides a transactions cost savings relative to more traditional trading mechanisms for the liquidity demander as well as an efficient way for liquidity suppliers to obtain order flow. We argue that the cost savings afforded this new mechanism are due to the potential for low cost crosses with the bidder's existing inventory positions and through the longer trading horizon, and superior trading ability, of the bidders. This research suggests that the ability to innovate via new liquidity provision mechanisms can provide market participants with transaction cost savings that cannot be easily duplicated on more traditional exchanges.

The parameters of the return process of a firm are determined by two elements—the natural event structure, i.e., the process by which nature affects the value of the firm, and the information structure, i.e., the process by which information about these events is collected and disseminated to investors. Simple measures of three dimensions of the information structure—the frequency and accuracy of, and the bias in information releases, are derived from the moments of the return distribution.