Abstract A theoretical model of the borrower–lender relationship predicts that increased competitive threats lead to a reduction in loan covenant restrictiveness that is stronger for groups of borrowers who face constraints to their ability to raise external financing or compete in the product market. These predictions arise because competition impacts the dynamics of borrower performance so that lenders must trade off the benefit of controlling agency problems against a heightened cost of lost product market opportunities for the borrower, ultimately lowering the optimal use of covenants. We find strong empirical support for these predictions, highlighting an important role of competition for optimal financial contracting rooted in underlying agency problems.

Abstract We consider mean-variance portfolio choice of a robust investor. The investor receives advice from J experts, each with a different prior for expected returns and risk, and follows a min-max portfolio strategy. The robust investor endogenously combines the experts' estimates. When experts agree on the main return generating factors, the investor relies on the advice of the expert with the strongest prior. Dispersed advice leads to averaging of the alternative estimates. The robust investor is likely to outperform alternative strategies. The theoretical analysis is supported by numerical simulations for the 25 Fama-French portfolios and for 81 European country and value portfolios.

This paper examines the effect of several factors on the market share of investment banks that act as book managers in initial public offerings (IPOs) between 1984 and 1995. For established banks, IPO first-day returns, one-year abnormal performance, abnormal compensation, industry specialization, analyst reputation, and association with withdrawn offers have a significant impact on changes in market share. These factors have a more significant effect on market share changes in low-volume IPO markets. These factors have a less significant effect on market share, statistically and economically, for less established banks, consistent with the notion that less reputation is placed at risk.

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.

On November 17, 1988, the board of directors of Nestlé AG decided to allow foreign investors to hold Nestlé registered stock, reversing a longstanding practice. This decision had a tremendous impact on the prices of the firm's three classes of common stock, as well as on the prices of several other corporations traded on the Zürich stock exchange. These price changes can be explained by the hypothesis that demand curves slope down.

Turner Broadcasting illustrates how organizational mechanisms can be adapted to prevent a majority owner from imposing costs on minority shareholders through inept management or opportunistic behavior. These mechanisms involve issuing preferred stock with unusual features, concentrating its ownership among a small group of investors, allowing the new preferred shareholders to elect several directors, and requiring supramajority approval of major management decisions by a reconstituted board of directors. The alienability of the preferred stock is restricted to help insure that its ownership stays concentrated and in the hands of those with the specific knowledge and incentives to be effective monitors.

In a multivariate regression model relating individual returns to the market return, CAPM implies non-linear restrictions on the parameters. Several asymptotically valid tests of these restrictions have been suggested. The existing Monte Carlo evidence shows that some of these tests are unreliable for reasonable sample sizes, but does not indicate well which tests are reliable. This paper reports the results of an extensive Monte Carlo experiment. Shanken's CSR test and Jobson and Korkie's corrected likelihood ratio test are quite accurate in all cases we consider.

This study documents that the market's responsiveness to earnings announcements declines significantly after the issuance of qualified audit reports for a sample of ‘subject to’ qualifications and consistency qualifications. The results are consistent with a hypothesis that audit qualifications reduce the market's responsiveness to earnings announcements by altering the market's perception of earnings noise or the persistence of earnings, or both. Alternatively, a decline in earnings response coefficients may be observed because audit qualifications are more likely in firms that have undergone economic or structural changes and these changes, rather than the qualification per se, lead to decreased persistence or increased noise.

Prior studies of discretionary accounting choices have generally relied on one or more proxy variables to measure closeness to debt covenant restrictions without actually examining the existence or extent of restrictive covenants. This study tests the validity of the most commonly used proxy, the debt–equity ratio, by examining its relation to actual debt covenant restrictions for a random sample of U.S. firms. The results indicate that several versions of the debt–equity ratio capture the existence and tightness of retained earnings restrictionsand the existence of net tangible asset and working capital restrictions, but are unrelated to four other covenant restrictions.

This paper documents the empirical distributions of daily trading volume prediction errors for several commonly used volume measures and expectation models for individual firms and for portfolios. The prediction errors for raw volume measures are significantly positively skewed, with thin left tails and fat right tails. However, natural log transformations of the volume measures are approximately normally distributed. For longer than one-day prediction intervals, recognition of autocorrelation in daily trading volume is advantageous for detecting abnormal trading. Results of analysis for clustering of events and for different size firms are also presented.