The primary objective of this paper is to derive a multi-factor equilibrium model using a mean-variance approach. The results of this derivation provide greater insight into the nature of the resulting factors than does APT. There are several important implications for empirical tests of any a priori defined multi-factor model.

Using a large and novel data set over the period of 1976 to 2019 tracking inventors’ career paths following mergers and acquisitions, we show that collaboration between acquirer and target inventors post-merger is associated with more path-breaking patents than those filed by either acquirer or target inventor-only teams. We further show that such collaboration is more important in improving acquirers’ innovation capabilities than hiring target inventors and knowledge spillovers. Finally, we show that recombining tacit knowledge embodied in the human capital of acquirer and target inventors is likely the mechanism. We conclude that inter-firm inventor collaboration is one key means for achieving synergies.

One of the remarkable features of the mean-variance capital asset pricing model is its robustness with respect to changes in assumption (Jensen [1]). An example of this property is given by David Mayers [4], who shows that the structure of prices of marketable assets is unaffected by relaxing the assumption that all risky assets are marketable. The result has been used in the analysis of public sector investments by Stapleton and Subrahmanyam [6]. However, although relative prices are unaffected, the general level may be due to the effect of marketability on the market price of risk.

The relationship between capital market equilibrium and firm financial policy has received extensive attention in recent years. Until recently, accepted theory was generally consistent in its view that the diversification effect of new investment on firm earnings is a necessary consideration in project selection. In arguing this position, no distinction was made between the perfect market situation exemplified by the models of Modigliani and Miller (M-M) [9, 10, 11] and those of Sharpe [19], Lintner [6, 7] and Mossin [12] (LSM model) and the traditional case in which firm value is not independent of debt policy, e.g., as might be the case if individual investors cannot lever on terms comparable to those available to firms. In a recent article, Mossin [13] examines the implications of the former case of perfect markets. Using a single period model with riskless rate borrowing and lending by individuals and firms, homogeneous expectations, mean-variance portfolio selection, and no taxes, Mossin shows that the effect on the investing firm's value of a new project is independent of the stochastic properties of the other income earned by the firm. This conclusion and the M-M [10] Proposition I follow from the statistical property of Mossin's model that any income stream has the same value regardless of how that stream is divided into the equity or debt streams of one or more firms; or, equivalently, firm value and financial structure are independent. Schall [18] presents a general proof that firm value and financial structure are independent and that firm investment diversification effects are irrelevant in perfect capital markets.

In the context of dual trading restrictions, we examine whether aggregate liquidity measures are appropriate indicators of trader welfare in multiple dealer markets. Consistent with our theoretical results, we show empirically that dual trading restrictions did not affect market liquidity significantly, but dual traders of above average skills may have quit brokerage and switched to trading exclusively for their own accounts following restrictions. Further, customers of these dual traders had lower trading costs in the period before restrictions relative to the trading costs of all customers after restrictions.

More than twenty years ago the portfolio selection problem was stated as a parametric quadratic programming problem [3]. Since that time there has been an ongoing search for methods that would allow reductions in both the data and the computational effort required to implement the Markowitz formulation. Markowitz himself developed a special algorithm for the problem [4] Sharpe followed with his famous diagonal model [6], a linear programming approximation for the special case of mutual funds [7], and a linear programming approximation for the general problem [0]. And during this period there were substantial advances in quadratic programming computer codes. A very fast code is now widely available [1], but the size of the code itself (a listing of the annotated program runs to more than 3,000 lines) makes its everyday use for portfolio selection somewhat unattractive.

We estimate a model for the term structure of discounted risk-adjusted dividend growth using prices of dividend futures for the Eurostoxx 50. A 2-factor model capturing short-term mean reversion within a year and a medium-term component reverting at the business-cycle horizon gives an excellent fit of these prices. Hence, investors update the valuation of dividends beyond the business cycle only to a limited degree. The 2-factor model, estimated on dividend futures data only, explains a large part of observed daily stock market returns. We also show that the 2 latent factors are related to various economic and financial variables.

We model and test the relations between the team management of mutual funds, managers’ ability, performance, and holdings. Our model predicts that team-managed funds perform better and behave more conservatively than single-manager funds. However, the effect of team management is masked in equilibrium because high-ability managers rationally self-select into single-manager funds. Consistent with the model’s prediction, we find that team-managed funds perform better and deviate less from their benchmark allocations than single-manager funds with the same characteristics. These differences are marked after we control for the endogenous self-selection of managers.

This article examines the effectiveness of cooperation among bank supervisors using novel data on supranational agreements signed by 93 countries. Exploiting that globally operating banks are differently covered by these agreements, we show that supervisory cooperation generally improves bank stability. The magnitude of the effect is higher for smaller global banks, and when supervisors are more stringent and have access to higher quality information. We also show that actual supervisory cooperation varies across countries consistent with differences in economic costs and benefits of cooperation. This suggests that cooperation is not always desirable, despite being effective in reducing bank risk.

We use the introduction and subsequent removal of the flash-order functionality from NASDAQ as a natural experiment to investigate the impact of voluntary disclosure of trading intent on market quality. We find that flash orders significantly improve liquidity in NASDAQ. Furthermore, overall market quality improves (deteriorates) when flash functionality is introduced (removed). This result can be attributed to increased competition among liquidity suppliers across competing trading venues. Alternatively, flash orders attract responses from reactive traders immediately after the announcement, attracting more “hidden liquidity” and lowering risk-bearing costs for the overall market.

The literature of Index numbers contains much discussion of the relative merits of geometric and arithmetic averages of prices and quantities. The controversy on this subject dates from the middle of the nineteenth century and is fully described by Crowe [2], In recent times both types of averages have been applied to security price relatives to measure the performance of groups of securities over time. The purpose of this paper is to demonstrate the properties of these security indexes and to show the relationships between them and an index based upon a more general type of average called the power mean. The concluding section of this paper contains the proof of an interesting and important limit property which provides the conceptual link between geometric and arithmetic security indexes.

Our analysis explains how vulture investors (vultures) can maintain and exploit their reputations for toughness. Vultures leverage their reputations to extract concessions from stockholders in debt restructurings. To profit from these concessions, vultures must first acquire debt from incumbent bondholders. Buying only the tranches most likely to render them marginal creditors maximizes vulture leverage in debt-purchase negotiations. Vulture profits are proportional to the degree of uncertainty regarding the identity of the marginal debt class.

In Japan, it has long been a common practice among corporations to issue new shares at par value and offer them to shareholders without underwriting agreements. However, in January 1969, Nihon Gakki (a musical instrument maker) successfully offered new shares at the market price through underwriting agreements. Other corporations followed suit and the capital raised through this method in fiscal year 1972 amounted to ¥861 billion, accounting for more than 65 percent of the total capital raised during the year. At present, over 70 percent of Japanese corporations raise new equity capital at the market price via the negotiated underwriting method. Almost all underwriters employ a “firm commitment” agreement, in which the underwriter agrees to purchase the whole issue from the firm at a particular price for resale to the public. The agreement is normally signed on the day before the issue announcement, at which time the offering price to the public is specified. As soon as the offering price is filed with the Tokyo Stock Exchange, the underwriter is precluded from selling the shares above this price. Though the offering price initially was highly discounted, between 1970 and 1980 this discount rate gradually decreased from 15 percent to 5 percent of the daily stock price (see Table 1). The final settlement with the underwriter usually takes place fourteen to nineteen days after the registration statement becomes effective. At that time, the company receives the proceeds of the sale, minus the underwriter's fee. This fee, which is usually fixed at 3.5 percent of the money to be raised, consists of a compensation fee, a managing fee, a sales fee, and a brokerage fee, none of which can be separated on the contract.

This paper addresses both how best to incorporate forecasts of future excess market returns into a market-timing strategy and what additional return to expect as a consequence. In contrast to the work of Jensen [8] and Grant ([4], [5], and [6]), the results specifically consider and measure the attractiveness to a risk-averse investor of the positively skewed distribution of portfolio returns expected from a market-timed portfolio. The usual mean and variance characterization of a risky portfolio is not sufficient in the case of a markettimed portfolio, and a simple utility model is employed to measure the incremental value of a market-timing strategy. The results are given as a function of the relative volatility of the market, the quality of available forecasts, and the risk attitude of the investor.

This paper (1) constructs a signaling model with a weaker existence condition than in most signaling models, (2) demonstrates that, using a popular model of innovation under uncertainty, an equilibrium signaling schedule exists for a broad range of boundary conditions and parameter values. These results are derived in a model of a firm possessing private information about an investment opportunity, where the firm issues new equity to finance the investment. The proprietary information cannot be explicitly disclosed to potential investors without also disclosing it to potential competitors, but if investors are unaware of the firm's prospects, shares will have to be issued at a price less than their “intrinsic” value.

This paper provides an explanation for the widespread use of traditional securities by well-established firms. Standard moral hazard models predict that equity, debt, and warrants are almost never optimal financing instruments. I show that issuing these securities is, nevertheless, nearly optimal: the issuer would gain very little by using non-traditional securities instead. Combined with equity, one debt issue (without multiple layers of seniority) and one warrant issue (without multiple exercise prices) suffice to achieve near optimality. The near optimality of traditional financing depends crucially on the issuer's ability to use warrants in addition to debt and equity.

In capital budgeting when the net present value method (NPV) is used and future cash flows are uncertain, the measurement of the standard deviation of the project's net present value (σNPV) is unusually difficult. Typically the investment life of the project is more than one year, and the cash flows of each period are correlated with each other. The difficulty in determining the exact inter-temporal correlation (ρt, t+l) of cash flows creates special problems in estimating the overall variance of the investment project. For example, see [5, pp. 125–131]. This paper attempts to isolate the possible impact of the inter-temporal correlation of cash flows upon the total risk of the project under the assumption that the standard deviations of cash flows for each time period of the project are known. It also provides upper and lower bounds of σNPV for a multi-period investment project where the degree of the inter-temporal correlation is not exactly known.

Empirical studies and much marketplace opinion have it that the spread between private money market rates and the U.S. Treasury bill rate of comparable maturity is due to differential default risk, liquidity risk, and relative supplies. This paper presents an argument and empirical evidence that the bulk of the systematic and medium-term differential between privates rates—in this case, domestic CDs, commercial paper, bankers' acceptances, and Eurodollar CDs—and the T-bill rate is due to the exemption of interest on Treasury securities from state and local taxation. In the case of Eurodollar CDs, the additional and major systematic factor explaining the spread (vis a vis T-bills) is the exemption of Eurodollar CDs from the Federal Reserve's “tax” via reserve requirements. An empirical section confirms the role of standard default risk, liquidity risk, and market “absorption” variables in determining short-term deviations from tax-adjusted parity. The taxadjusted parity condition, however, remains the major systematic and medium-term determinant—certainly more important than has been suggested previously in the literature.

This paper develops an equilibrium asset pricing model to explain the equity premium puzzle and the risk-free rate puzzle by allowing for both market frictions and informational asymmetry. The paper argues that much of the high equity premium in the Mehra and Prescott (1985).sample period can be explained by informational asymmetry among investors and the inability of many investors to diversify their portfolios. With admissible relative risk aversion coefficient γ, the model matches various key statistics quite well. The paper implies that with the development of mutual funds, the equity premium should decline as has been the case since the 1950s.

Using a Monte Carlo simulation, this study addresses the question of how traditional risk measures and immunization strategies perform when the term structure evolves in a Heath-Jarrow-Morton (1992) manner. The results suggest that, for immunization purposes, immunization strategies and portfolio formation strategies are more important than interest rate risk measures. The performance of immunization strategies depends more on the transaction costs and the holding period than on the risk measures. Moreover, the immunization performance of bullet and barbell portfolios is not very sensitive to interest rate risk measures.