Using data on the universe of U.S. based mutual funds, we find that two out of five fund families hold corporate bonds of firms in which they also own an equity stake. We show that the greater the fraction of debt a fund family holds in a given firm, the greater its propensity to vote in line with the interests of firm debtholders at shareholder meetings, even when against Institutional Shareholder Services (ISS) recommendation. Voting has direct policy consequences as firms that receive more votes in favor of creditors make corporate decisions more in line with the interests of debtholders.

In a recent study, Tinic and West (1986) empirically reexamine the risk-return relationship posited by the traditional mean-variance CAPM. They find a positive nonlinear relationship between risk and return, except during January when the market rewards bearing nonsystematic risk. This study examines the hypothesis that nonnormality of return distributions may account for some of these anomalous results. We compare Shalit and Yitzhaki's (1984) mean-extended Gini CAPM—an equilibrium asset pricing relation that is independent of the form of the underlying asset distribution—with the traditional CAPM. Our results indicate that the nonlinear risk-return relationship and the size and January effects are robust to nonnormality of return distributions.

The theoretical desirability of stochastic dominance (SD) as a decision rule is well established [1, 3, 4, 7, and 11]. However, implementation of SD as a decision rule has been hindered seriously by the lack of an optimal search algorithm [8]. An optimal search algorithm is desirable since it takes the distribution of returns for a group of assets and determines the optimal proportion of each asset which should be combined to provide efficient combinations. For example, for a given expected value (variance) the mean-variance (EV) algorithm builds the portfolio with the smallest (largest) variance (expected value). The EV algorithm determines which assets should be combined and the proportion of the total investment that should be invested in each asset. An analogous algorithm does not exist for SD.

Using data that contain bid and ask quotes for both options and stocks, the analysis investigates the constant volatility assumption of the Black-Scholes model. The analysis adjusts for bid-ask spreads and finds evidence that is inconsistent with the constant volatility assumption. Instead, the results reveal a strong negative correlation between volatility and stock price, and they suggest that using a nonconstant volatility model such as the CEV model would be more appropriate to price long-term options. Finally, transaction costs associated with the dynamic hedge tend to increase with an option's maturity, but decrease as a percentage of the option's price.

Based on the theory of the pricing of capital assets developed by Sharpe [12], Lintner [9] and Mossin [11], Professor Jensen formulated a return-generating model to measure portfolio performance [5]. In a subsequent paper, Professor Jensen [6] investigated the impact of the investment horizon on the functional form of the model. Lee [8] has proposed a generalized specification of the model to resolve this problem. Alternative estimation methods for testing the linearity of the model in terms of time-series data have also been suggested by Lee. Moreover, the stability of the beta coefficient over time and the impact of the market's condition on both the alpha (or, Jensen's measure of performance [5]) and beta of the model have come under scrutiny in financial research.

Over the past decade, a number of papers [1, 2, 3, 6, 7, 9] have explored the relative merits of negotiation versus competitive bidding in the underwriting of corporate bonds, particularly bonds issued by public utilities. Interest in this subject has been stimulated principally by an important public policy issue—namely, the SEC's posture vis a vis its Rule U–50. Originally promulgated in 1940, this rule required competitive bidding on certain classes of utility bonds. In 1974, however, it was “temporarily” suspended on the grounds that chaotic conditions in the market for these securities called for more flexibility in the way issues could be underwritten. While this suspension continues in effect, Rule U–50 could be reinstated at any time by the SEC.

Following Markowitz's [11] pioneering work on portfolio selection, it is customary to consider an individual's choice among several risky assets as a two-step procedure. First, given some general characteristics concerning his preferences, the decision maker chooses an efficient set of portfolios independent of his specific preference assessment. Secondly, an optimal portfolio is chosen from the efficient set given the individual's specific preferences.

The role of fiduciaries with conflicting interests has received considerable attention recently. The purpose of this paper is to analyze the role of a fiduciary casting votes under conflicting interests in proxy contests that seek to control the corporation and those waged solely for the purpose of deciding an issue. By deriving comparisons across types of contests, we provide implications concerning differences in success probabilities and resolution effects for the two types of contests. The empirical verification (refutation) of such effects would provide insight regarding the (ir)relevance of fiduciary conflict-of-interests in proxy contests.

The purpose of this paper is to construct a model for the computation of an optimal cash balance for a bank, although it could be adapted to any organization. By a bank we mean to include both commercial banks and savings banks (mutual savings banks and savings and loan associations). One might also be able to adapt the model to an “international bank” such as the United States holdings of gold and foreign exchange.

This article introduces the impact of debt misvaluation on merger and acquisition activity. We show the potential for debt misvaluation to help explain the shifting dominance of financial acquirers (private equity firms) relative to strategic acquirers (operating companies). Fundamental differences in governance and project coinsurance between the two types of acquirer would interact with debt misvaluation, resulting in variation in how assets are owned that depends on debt market conditions. We find support for our theory in merger data using a novel measure of debt misvaluation.

Recent financial literature has discussed how a creditor should determine its investigation and extension policy. Mehta [8,9] has developed a sequential process for credit extension, and others [1,2,4,7,10,12,14] have used credit-scoring functions to develop decisions rules. Instead of discussing the use of a particular system or the development of a new system, this paper shifts the focus to selection of the best of alternative systems. Different creditors face different profit-loss ratios on loans, business volume, and prior probabilities of good and bad customers. Furthermore, since the alternative systems have different initial costs, effectiveness, and investigation costs per application, no one system is optimal for all creditors. Finally, any credit-scoring alternative declines in effectiveness over time. Measurement of the overall effectiveness of a system requires that the optimal time between updating the system be known.

Krouse and Lee [5] have formulated an optimal financing problem of a firm in the dynamic setting of optimal control theory. Specifically, the problem is to find a financing mix of retained earnings and external equity over time in a way that maximizes the present value of the entire future dividends stream accruing to the firm's initial stockholders subject to a given maximum allowable growth rate for the firm.

The operation and characteristics of the American securities markets have long been major preoccupations of financial research, especially during the last decade. Particular attention has been devoted to the question of whether there exist investment strategies, or investing entities, capable of producing consistently superior investment performance. The general consensus to date is that few, if any, such success stories are observable. Examinations of the value of professional investment research and counsel ([7] [8] [9] [24]), of the payoff from technical trading rules ([11] [13] [18] [20] [26] [34]), and of the investment results of institutional money management ([15] [29] [25] [28]) have, in almost every instance, provided little indication of performance better than that attainable from a simple passive strategy of buying and holding a randomly selected, well-diversified portfolio of securities, after appropriate adjustments for portfolio risk levels are taken into account. The intensive competition in, and rapid information-digesting properties of, the capital market environment have been cited as explanations ([2] [5] [12]).

This paper develops an exact theoretical test of the presence or absence of a filter effect for a portfolio of securities and a general number of different filter sizes. It is a natural development from Praetz [8], which obtained exact expressions for the mean and variance of rates of return of the investment strategies under filter tests assuming the underlying stochastic process is a random walk. These expressions showed that expected returns from filter strategies are, in fact, less than the return from a buy-andhold alternative with which filter returns are usually compared.

Financial studies examining stock price behavior have principally relied on end-of-day data. This paper illustrates a bias in closing prices by reexamining the when-issue pricing anomaly with intraday data. With intraday data, major portions of the pricing anomaly can be explained by: a nonsynchronous matching of trades; a difference in the settlement procedures (labeled time value of money in Choi and Strong (1983)); a mismatching of market purchases with market sales (first proposed by Lamoureux and Wansley (1989)); and a higher frequency of market purchases relative to market sales. In addition, the small remaining portion of the anomaly cannot be arbitraged. The remaining premium is attributed to a lower level of limit order competition and an order imbalance in the when-issued shares.

In this paper, the models utilized in earlier studies were applied to a larger sample with greater size and geographic dispersion. For those functions that account for the largest proportions of direct operating cost and employment, the scale coefficients increased from 1965 to 1968 so that they were not significantly different from unity. For activities requiring more skilled human resources than the “factory” operations of the typical bank, there were significant economies of scale of magnitudes similar to those in the 1965 Northeast sample. A test of overall scale economies assuming proportional expansion of all facilities showed a decrease in scale economies since 1965.

One-period expected returns on futures contracts with different maturities differ because of risk premia in the spreads between futures and spot prices. We analyze the expected returns for futures contracts with different maturities using the information that is present in the current term structure of futures prices. A simple affine one-factor model that implies a constant covariance between the pricing kernel and the cost-of-carry cannot be rejected for heating oil and German Mark futures contracts. For gold and soybean futures, the risk premia depend on the slope of the current term structure of futures prices, while for live cattle futures, the evidence is mixed.

This paper derives closed-form solutions for values of debt and equity in a continuous-time structural model in which the demands of creditors to be repaid cause a firm to be put into bankruptcy. This allows discussion of the effect of creditor coordination in recovering money on the values of debt, equity, and the firm, as well as on optimal capital structure. The effects of features of bankruptcy codes that prevent coordination failures between creditors, such as automatic stays and preference law, are also considered. The model suggests that such features, while preventing coordination failures, can decrease welfare.

We develop a financial market trading model in the tradition of Glosten and Milgrom (1985) that allows us to incorporate nontrivial volume. We observe that in this model price volatility is positively related to the trading volume and to the absolute value of the net order flow (i.e., the order imbalance). Moreover, higher volume leads to higher order imbalances. These findings are consistent with well-established empirical findings. Our model further predicts that higher trader participation and systematic improvements in the quality of traders’ information lead to higher volume, larger order imbalances, lower market depth, shorter duration, and higher price volatility.

Well-performing default predictions show good discrimination and calibration. Discrimination is the ability to separate defaulters from nondefaulters. Calibration is the ability to make unbiased forecasts. I derive novel discrimination and calibration statistics to verify forecasts expressed in terms of probability under dependent observations. The test statistics’ asymptotic distributions can be derived in analytic form. Not accounting for cross correlation can result in the rejection of actually well-performing predictions, as shown in an empirical application. I demonstrate that forecasting errors must be serially uncorrelated. As a consequence, my multiperiod tests are statistically consistent.