The paper develops the net proceeds maximization theory explaining how the spread and offering price are determined in all underwritten offerings in the U.S. The theory yields solutions for the optimal spread and offering price for all underwritten securities and it yields comparative statics that explain the cross-sectional variation in actual spreads and initial returns across different types of underwritten securities. The theory also suggests two alternative explanations to the ones offered by Chen and Ritter (J. Finance 55 (2000) 1105) for the clustering of unseasoned equity offerings spreads at 7%.

CalFed Bancorp is one of 126 S&Ls suing the U.S. government for breach of contract related to supervisory goodwill, a form of goodwill created by the acquisition of insolvent thrifts during the early 1980s. Before a determination of damages in its lawsuit, CalFed announced and issued a litigation participation security giving shareholders a proportional claim on recovered damages, if any. This announcement generated a positive excess return in part because it made CalFed a more likely acquisition target. Trading in the security also reveals important, yet previously unavailable, information about CalFed's lawsuit: its price reveals a market-based estimate of damages while its beta reveals information regarding expected returns and trial duration. In a broader context, this paper identifies acquisition facilitation as a benefit of issuing targeted stock and highlights a series of lawsuits that will set important precedents regarding the determination of liability and the estimation of damages in breach of contract cases.

Much of capital market research in accounting over the past 20 years has assumed that the price adjustment process to information is instantaneous and/or trivial. This assumption has had an enormous influence on the way we select research topics, design empirical tests, and interpret research findings. In this discussion, I argue that price discovery is a complex process, deserving of more attention. I highlight significant problems associated with a naı̈ve view of market efficiency, and advocate a more general model involving noise traders. Finally, I discuss the implications of recent evidence against market efficiency for future research.

This paper evaluates the effectiveness of four econometric approaches intended to identify the learning rules being used by subjects in experiments with normal form games. This is done by simulating experimental data and then estimating the econometric models on the simulated data to determine if they can correctly identify the rule that was used to generate the data. The results show that all of the models examined possess difficulties in accurately distinguishing between the data generating processes.

Workers in cities earn 33% more than their nonurban counterparts. A large amount of evidence suggests that this premium is not just the result of higher ability workers living in cities, which means that cities make workers more productive. Evidence on migrants and the cross effect between urban status and experience implies that a significant fraction of the urban wage premium accrues to workers over time and stays with them when they leave cities. Therefore, a portion of the urban wage premium is a wage growth, not a wage level, effect. This evidence suggests that cities speed the accumulation of human capital. Copyright 2001 by University of Chicago Press.

I investigate the relationship between the amount of information provided by a firm's comparables (i.e., firms in the same line of business as the firm being valued) and the precision of the firm's equity valuation. When investors have more information, previous studies argue that investors can make a more precise estimate of a firm's true equity value and this implies a lower (excess) stock return volatility around corporate events such as earnings announcements. I develop a simple model that shows a negative relationship between the amount of information provided by a firm's comparables and the firm's stock return volatility. Using alternative measures of information provided by comparables and different definitions of comparables, I consistently find a negative and significant relationship between these information measures and stock return volatility, ceteris paribus.

In an Arrow-Debreu exchange economy with identical agents except for their initial endowment, we examine how wealth inequality affects the equilibrium level of the equity premium and the risk-free rate. We first show that wealth inequality raises the equity premium if and only if the inverse of absolute risk aversion is concave in wealth. We then show that the equilibrium risk-free rate is reduced by wealth inequality if the inverse of the coefficient of absolute prudence is concave. We also prove that the combination of a small uninsurable background risk with wealth inequality biases asset pricing towards a larger equity premium and a smaller risk-free rate.