Knowledge that Transforms

A stochastic valuation model is developed to value a commercial and industrial loan portfolio related to the Mexican bank loan resolution process. Instead of trying to predict the winning bid outright, with this model we determine the underlying probability distribution of the prices offered in a competitive auction. Fairly narrow confidence intervals for the highest bid can be estimated which seem to improve as the number of bidders increases.

The market for angel capital – where individuals provide risk capital directly to small, private, often start-up firms – operates in almost total obscurity. Very little is known about the market's size, scope, the type of firms that raise angel capital, and the types of individuals that provide it. In this paper I present evidence on the angel market gathered from my field research which has involved interviews with more than a dozen angel investors in the Dallas/Fort Worth area. The angel market appears to be a very heterogeneous and localized market. With that qualification in mind, I present some common characteristics of the angels I interviewed, and how they select and monitor their investments. I pay particular attention to how they address adverse selection and moral hazard problems. I compare their behavior with venture capital limited partnerships in the more formal market for venture capital.

This study investigates the announcement effects of offerings of convertible bond loans and warrant-bond loans using data for the Dutch market. The event study analysis shows that announcement effects of convertible bonds are associated with positive but insignificant abnormal returns and that announcements of warrant-bonds are associated with significant positive abnormal returns. These findings are similar to the results for Japanese hybrid debt, as reported by Kang et al. (1995) (Kang, J.K., Kim, Y.C., Park, K.J., Stulz, R.M., 1995. Journal of Financial and Quantitative Analysis, pp. 257–270) and Kang and Stulz (1996) (Kang, J.K., Stulz, R.M., 1996. Review of Financial Studies, pp. 109–139), but they contrast with studies for the United States that generally find significant negative abnormal returns for convertible bond loans and insignificant negative abnormal returns for warrant-bond loans. Our results cannot be attributed to differences in the corporate governance structures of the Netherlands and the United States. We find that the positive abnormal returns for the warrant-bond loans are caused by the packaging of the announcements with other (good) firm-specific news.

Using a market segmentation argument, this paper uses the interest rate derivative's arbitrage-free methodology to value both demand deposit liabilities and credit card loan balances in markets where deposits/loan rates may be determined under imperfect competition. In this context, these financial instruments are shown to be equivalent to a particular interest rate swap, where the principal depends on the past history of market rates. Solutions are obtained which are independent of any particular model for the evolution of the term structure of interest rates.

A number of authors have found that firm size and book-to-market-value capture the cross-sectional variation in average stock returns. More importantly, these variables have been shown to out-perform the CAPM's β coefficient in explaining the cross-section of US stock returns. However, these studies all employ variants of the two-step estimator due to Fama and MacBeth (Fama, E.F., MacBeth, J.D., 1973. Risk, return and equilibrium: Empirical tests. Journal of Political Economy 71, 607–636), which impose implicitly the restriction that idiosyncratic returns are uncorrelated. In this paper we use a one-step estimator due to McElroy et al. (McElroy, M.B., Burmeister, E., Wall, K.D., 1985. Two estimators for the APT model when factors are measured. Economics Letters 19, 271–275) and find a highly significant role for β risk in the UK stock market when we allow for correlation amongst idiosyncratic returns.

This paper surveys the empirical and theoretical literature on the mechanisms of corporate governance. We focus on the internal mechanisms of corporate governance (e.g., corporate board of directors) and their role in ameliorating various classes of agency problems arising from conflicts of interests between managers and equityholders, equityholders and creditors, and capital contributors and other stakeholders to the corporate firm. We also examine the substitution effect between internal mechanisms of corporate governance and external mechanisms, particularly markets for corporate control. Directions for future research are provided.

We provide evidence on the costs and profitability of relationship lending by banks. We derive bank-specific measures of loan rate smoothing for small business borrowers in response to exogenous shocks to their credit risk and to interest rates, and then estimate cost and profit functions to examine how smoothing affects bank costs and profits. Our results suggests that, in general, loan rate smoothing in response to a credit risk shock is not part of an optimal long-term contract between a bank and its borrower, while loan rate smoothing in response to an interest-rate shock is.

This paper presents a condition equivalent to the existence of a Riskless Shadow Asset that guarantees a minimum return when the asset prices are convex functions of interest rates or other state variables. We apply this lemma to immunize default-free and option-free coupon bonds and reach three main conclusions. First, we give a solution to an old puzzle: why do simple duration matching portfolios work well in empirical studies of immunization even though they are derived in a model inconsistent with equilibrium and shifts on the term structure of interest rates are not parallel, as assumed? Second, we establish a clear distinction between the concepts of immunized and maxmin portfolios. Third, we develop a framework that includes the main results of this literature as special cases. Next, we present a new strategy of immunization that consists in matching duration and minimizing a new linear dispersion measure of immunization risk.

This paper measures the impact of option introductions on the return variance of underlying stocks. Past research generally finds a significant reduction in stock return variance following the listing of options through 1986. Using a more extensive sample, I compare changes in the return variance of optioned stocks to changes in the return variance of a control group. Since the average change in the control group is statistically indistinguishable from the average change in the optioned stocks, I conclude that option introductions do not significantly affect stock return variance.