Knowledge that Transforms

This paper examines the competitive effects of commercial bank entry into the corporate debt underwriting market, particularly with respect to underwriter spreads, ex-ante yields, and market concentration. We find that underwriter spreads and ex-ante yields have declined significantly with bank entry, consistent with the market becoming more competitive. This effect is strongest among the lower-rated and smaller debt issues of which banks have underwritten a relatively greater share. The early evidence also indicates that bank entry has tended to decrease market concentration. Overall, our results suggest that bank entry has had a pro-competitive effect.

In 1982, Dimensional Fund Advisors launched a mutual fund intended to capture the returns of small-cap stocks. The ‘9–10 Fund’ is based on the CRSP 9–10 Index, an index of small-cap stocks constituting the ninth and tenth deciles of NYSE market capitalization, although the 9–10 Fund incorporates investment rules and a trading strategy that are aimed at minimizing the potentially excessive trade costs associated with such illiquid stocks. As a result, the 9–10 Fund provided a 2.2% annual premium over the 9–10 Index for the 1982–1995 period. We show that both the investment rules and the trade strategy components of the Fund’s design contribute significantly to this return difference.

This paper uses commercial aircraft transactions to determine whether prices obtained from asset sales are greater under Chapter 11 reorganization than under Chapter 7 liquidation. Results indicate that prices obtained under both bankruptcy regimes are substantially lower than prices obtained by non-distressed airlines. Furthermore, there is no evidence that prices obtained by firms reorganizing under Chapter 11 are greater than those obtained by firms liquidating under Chapter 7. An analysis of aircraft sales indicates that Chapter 11 is also ineffective in limiting the number of aircraft sold at discounted prices.

The use of accounting information in conjunction with comparable firm multiples is widely recommended for valuing initial public offerings (IPOs). We find that the price–earnings (P/E), market-to-book, and price-to-sales multiples of comparable firms have only modest predictive ability without further adjustments. This is largely due to the wide variation of these ratios for young firms within an industry. P/E multiples using forecasted earnings result in much more accurate valuations than multiples using trailing earnings.

This paper tests models of mutual fund market timing that allow the manager's payoff function to depend on returns in excess of a benchmark, and distinguish timing based on publicly available information from timing based on finer information. We simultaneously estimate parameters which describe the public information environment, the manager's risk aversion, and the precision of the fund's market-timing signal. Using a sample of more than 400 U.S. mutual funds for 1976–94, our findings suggest that mutual funds behave as highly risk averse, benchmark investors. Conditioning on public information improves the model specification. After controlling for the public information, we find no evidence that funds have significant market-timing ability.

We simulate standard tests of performance persistence using alternative return-generating processes, survival criteria, and test methodologies. When survival depends on performance over several periods, survivorship bias induces spurious reversals, despite the presence of cross-sectional heteroskedasticity in performance. Look-ahead biased methodologies and missing final returns typical of U.S. mutual fund datasets can also materially affect persistence measures. Our results reinforce previous findings that U.S. mutual fund performance is truly persistent. When fund performance is truly persistent, fund attrition affects persistence measures, even when the sample includes all nonsurvivor returns. We also examine the specification and power of the various persistence tests.

Swedish lottery bonds offer a unique opportunity to study ex-day effects in an environment where cash distributions are tax-advantaged relative to capital gains. Thus, in the lottery bond market, we observe a reversal of the preference for capital gains that researchers have cited as an explanation for the ex-day behavior of U.S. equities. Further, in this market there are barriers to short-term arbitrage when prices do reflect the tax preferences of individual investors. We find the bonds are priced around the ex-day to reflect differential tax rates on income and capital gains consistent with the prevailing tax regimes. The bonds consistently experience negative returns over the coupon payment period, and in fact often sell at negative yields prior to the cash distribution, as one would expect given tax-motivated trading between high-tax investors, who buy prior to the distribution, and low-tax investors, who buy after the distribution.

Venture capital limited partnerships are an attractive arena to study cross-sectional and time-series variations in compensation schemes. We empirically examine 419 partnerships. The compensation of new and smaller funds displays considerably less sensitivity to performance and less variation than that of other funds. The fixed base component of compensation is higher for younger and smaller firms. We observe no relation between incentive compensation and performance. Our evidence is consistent with a learning model, in which the pay of new venture capitalists is less sensitive to performance because reputational concerns induce them to work hard.

We find that measures of board and ownership structure explain a significant amount of cross-sectional variation in CEO compensation, after controlling for standard economic determinants of pay. Moreover, the signs of the coefficients on the board and ownership structure variables suggest that CEOs earn greater compensation when governance structures are less effective. We also find that the predicted component of compensation arising from these characteristics of board and ownership structure has a statistically significant negative relation with subsequent firm operating and stock return performance. Overall, our results suggest that firms with weaker governance structures have greater agency problems; that CEOs at firms with greater agency problems receive greater compensation; and that firms with greater agency problems perform worse.