Union and public pension funds, the most prolific institutional activists employing low-cost targeting methods, are often accused of pursuing private benefits. Extant literature finds that unions representing workers, as stakeholders, are not aligned with shareholders. Limiting shareholder power may mitigate “special interest” activism but can also exacerbate managerial agency problems. In two different settings, majority approved and withdrawn shareholder proposals, we examine and find supportive evidence that the director labor market as a corporate governance mechanism can selectively mitigate the negative influence that conflicted stakeholder-shareholder union funds have over firms without stifling all influence of low-cost activists.

Liquidity trading following mutual fund outflows creates a potentially powerful empirical setting in which stock price variation is unrelated to changes in firm fundamentals. Instrumental variables (IVs) drawn from this setting impose an additional assumption that managers sell firms in proportion to portfolio weights. I show that this assumption causes selection bias in these IVs. It misallocates large price impacts to poorly performing, illiquid firms with lower growth – firms that managers systematically avoid selling. Simulations show that selection bias doubles the magnitude of regression coefficients and precludes potential fixes. Numerous recent studies exploiting these IVs should be reevaluated.

We model conditional market beta and alpha as flexible functions of state variables identified via a formal variable-selection procedure. In the post-1963 sample, the beta of the value premium comoves strongly with unemployment, inflation, and the price–earnings ratio in a countercyclical manner. We also uncover a novel nonlinear dependence of alpha on business conditions: It falls sharply and even becomes negative during severe economic downturns but is positive and flat otherwise. The conditional capital asset pricing model (CAPM) performs better than the unconditional CAPM, but this does not fully explain the value premium. Our findings are consistent with a conditional CAPM with rare disasters.

This paper treats a problem of stochastic cash management under an average compensating-balance requirement. It develops a dynamic programming formulation of the problem in which the relevant state is a unidimensional quantity equivalent to the forecasted average balance at the end of the averaging period. Under usably broad conditions, it establishes the optimality of a transient policy of simple type, similar to the two-sided inventory type policy familiar from certain earlier studies of stationary cash balance problems having absolute balance requirements. The results apply to cases in which the transactions costs contain both fixed and proportional components. The paper discusses also a numerical example drawn from the literature of the cash balance problem and shows by simulation of the optimal (and simply modified forms of the optimal) policy, that good protection is afforded against negative balances, even though the model does not explicitly constrain the negative-balance probabilities.

Recent models of herding suggest that speculators may rationally trade on information unrelated to fundamentals when their trading horizons are short. This study provides an empirical example where this appears to be the case. Johnson Redbook's weekly retail sales figures predicted bond returns for a short time after a significant number of bond traders began purchasing and trading on the data. The significant relationship between the data and bond returns disappeared just after the Wall Street Journal started to report it. Meanwhile, there was little or no change in the relationship between the data and retailers' stock returns, perhaps because the data have long been followed by retail stock analysts, Johnson Redbook's original investor clientele.

The objective of this paper is to carry out tests of the general hypothesis, most recently urged by Scherer [14, pp. 100–102] and Weston and Brigham [17, p. 689], that the cost-of-equity capital of small industrial corporations is greater than that of large industrial corporations. The paper denotes this cost as ke and defines it as the expected rate of return on the stock of a company when the current price of the stock is in equilibrium. A common designation of ke of course is the equity capitalization rate. It will be noted that this definition of the cost-of-equity capital abstracts from the flotation costs that are usually incurred when companies sell new stock. Archer and Faerber [2] have already shown that these costs are inversely related to the size of companies.

The relationship between the rate of inflation and the interest rate has been a topic of research for quite some time. A breakthrough in the analysis occurred years ago with Irving Fisher's hypothesis that the nominal interest rate fully reflects the available information concerning the possible future values of the rate of inflation. Others have extended Fisher's original insight to explain further the interaction between the rate of interest and inflation. For example, Mundell [26] uses the Pigou real-balance effect to hypothesize that the real rate of interest is inversely related to the rate of inflation.

Given the exogenous price process of some assets, we constrain the price process of other assets that are characterized by their final payoffs. We deal with an incomplete market framework in a discrete-time model and assume the existence of the equilibrium. In this setup, we derive restrictions on the state-price deflators. These restrictions do not depend on a particular choice of utility function. We investigate numerically a stochastic volatility model as an example. Our approach leads to an interval of admissible prices that is more robust than the arbitrage pricing interval.

The personal traits of chief executive officers (CEOs) have been found to influence corporate policy decisions. We examine the impact of CEO past corporate distress experiences on payout policy. CEOs who have experienced a distress event in their career, while working in a non-CEO position at a different firm, subsequently alter corporate payout policy once in the CEO position. They are less likely to pay dividends and repurchase shares, pay out lower levels of dividends, and are less likely to increase dividends. They further exhibit preference toward repurchases. Overall, we report that experience-driven conservatism affects payout policy, a novel finding in the literature.

Big data on job postings reveal multiple facets of the impact of COVID-19 on corporate hiring. Firms disproportionately cut new hiring for high-skill positions, with financially constrained firms reducing skilled hiring the most. Applying machine learning methods to job-ad texts, we find that firms have skewed their hiring toward operationally-core functions. New positions display greater flexibility regarding schedules and tasks. While job posting levels show signs of recovery starting in late-2020, changes to job descriptions and skill profiles persist through early-2022. Financial constraints amplify these changes, with constrained firms’ new hires witnessing greater adjustments to job roles and employment arrangements.

We study the dynamics of cash-and-carry arbitrage using the U.S. crude oil market. Sizable arbitrage-related inventory movements occur at the New York Mercantile Exchange (NYMEX) futures contract delivery point but not at other storage locations, where instead, operational factors explain most inventory changes. We add to the theory-of-storage literature by introducing two new features. First, due to arbitrageurs contracting ahead, inventories respond to not only contemporaneous but also lagged futures spreads. Second, storage-capacity limits can impede cash-and-carry arbitrage, leading to the persistence of unexploited arbitrage opportunities. Our findings suggest that arbitrage-induced inventory movements are, on average, price stabilizing.

We study a financial market where risk-neutral traders are endowed with a signal that perfectly reveals the direction (but not the exact amount) of the liquidation value of a normally distributed risky asset. The impact of order flow on prices is nonlinear with a bullish/bearish information structure, which is broadly consistent with empirical evidence. Also, private information is revealed quicker than in a strategic oligopoly.

In this paper, we propose a nonparametric estimator of the short rate diffusion process using observations of a panel of yields. The proposed estimator can greatly reduce the bias of the nonparametric estimator proposed in Stanton (1997) that uses a single time series of short rate observations. Simulations confirm that the new method significantly attenuates the spurious nonlinearity of the drift function as documented in Chapman and Pearson (2000). We apply the method to estimate the U.S. short rate process using a panel of six Treasury yields. With 42 years’ daily observations of the panel of yields, the proposed drift function estimator achieves the same efficiency as the Stanton (1997) estimator based on 145 years of daily short rate observations. Finally, we show that the proposed estimator also has significant economic implications on the pricing of bonds and interest rate derivatives.

Using the mean-variance model, Sharpe [5] and Lintner [4] have derived an equilibrium model for price determination under uncertainty. Jean [2] has tried to generalize this model so that other moments of the distribution will be taken into account. The purpose of this note is to show that unlike the Sharpe-Lintner model, Jean's results make no economic sense.

The implicit contract theory explored by Azariadis [2] suggests that wage rigidity and underemployment are explained by the microeconomic optimizing behavior of each agent in the labor market. In this theory, the former phenomenon is interpreted as risk-sharing arrangements between firms and workers, whereas the latter may occur when workers have the opportunity to use leisure or unemployment insurance benefits.

In recent years, corporations have repurchased increasing amounts of their own common shares. The dollar value of repurchases increased from approximately $600 million in 1960 to $1.7 billion in 1964. To put these figures in better perspective, corporate repurchases were more than 50 percent of the net purchases of pension funds and twice the net purchases of mutual funds. From the viewpoint of the individual company, General Motors is a. striking example. Repurchases by General Motors accounted for over 20 percent of the total trading volume in that stock in 1963.

Historically, preferred stock ranks well below common stock and bond issues as a source of financing in the private capital market. Relative to issuance of bonds, the issuance of preferred stock burdens the issuer with a fixed financing cost without benefitingthe issuer with the tax deductability associated with interest payments.

Retail order imbalance positively predicts returns, but on average retail investor trades lose money. Why? Order imbalance tests equal-weighted stocks, but retail purchases concentrate on attention-grabbing stocks that subsequently underperform. Long–short strategies based on extreme quintiles of retail order imbalance earn dismal annualized returns of −14.8% among stocks with heavy retail trading but earn 6.6% among other stocks. Our results reconcile the literatures on the performance of retail investors, the predictive content of retail order imbalance, and attention-induced trading and returns. Smaller retail trades concentrate more on attention-grabbing stocks and perform worse.

Using establishment-level data, we examine the impact of the Indian government’s employment guarantee program on labor and firm behavior. We exploit the staggered implementation of the program for identification and find that the program led to a 10% reduction in the permanent workforce in firms. Firms responded to the adverse labor-supply shock by resorting to increased mechanization. This significantly increased the firms’ cost of production, leading to a decline in net profits and productivity. These effects manifested primarily in firms paying low wages, firms having low labor productivity and greater sales volatility, and firms located in states with pro-employer labor regulations.

When managing risk, frequently only imperfect hedging instruments are at hand. We show how to optimally cross-hedge risk when the spread between the hedging instrument and the risk is stationary. For linear risk positions we derive explicit formulas for the hedge error, and for nonlinear positions we show how to obtain numerically efficient estimates. Finally, we demonstrate that even in cases with no clear-cut decision concerning the stationarity of the spread, it is better to allow for mean reversion of the spread rather than to neglect it.