Boquist, Racette, and Schlarbaum [3] and Livingston [6] show that a security systematic risk may be expressed as a function of its duration. These results have led to research examining the role of duration in explaining systematic risk, but Lanstein and Sharpe [5] indicate that Livingston's expression relies on the implicit assumption that extra-market covariances between securities are insignificant. Lanstein and Sharpe argue that such an assumption is unwarranted. They find a significant negative relationship between extra-market covariances and differences in duration between paired samples of common stock. Their paper suggests that duration may be associated with unsystematic risk and that any relation between duration and systematic risk is more complex than implied in [3] and [6].

The solution to the problem of portfolio choice is relevant in a positive financial economics context because it provides models of individual maximizing behavior which when aggregated to the level of the market provide models of equilibrium asset pricing. These models generally assume that the parameters of the probability distribution of security returns are known to individual investors. In practice, however, the individual has to estimate these parameters. To the extent that there is parameter uncertainty or “estimation risk”, what are the observable implications of a market equilibrium derived on the assumption that the information set of all investors is equivalent to a given set of sample data?

This article investigates the impact of political uncertainty on contractual lending terms using a large sample of syndicated loans and a within-firm estimation approach to achieve identification. Firms pay 7 basis points (bps) more on loans originated when their lenders are undergoing an election relative to when their lenders are not undergoing an election. Lenders from less financially developed countries are more likely to pass political uncertainty costs to borrowers. Consistent with electoral uncertainty driving this premium, the most contested elections have the largest impact (17 bps). Overall, political uncertainty leads to a tangible increase in firms’ financing costs.

Recently, agency theory has become popular as a means of explaining the structure of contracts between various classes of economic agents. Oftentimes the contracts of interest represent sharing rules for the payoffs that result from some production activity. In the usual two-party model of the contracting problem, one party designated the principal delegates authority for decisions affecting production to another party designated the agent. Typically, the assumptions made about the consequences of the agent's actions are that they are associated with effort on the part of the agent for which the agent (but not the principal) has disutility, and that greater effort will result in higher payoffs from production in every state of nature. Moral hazard is then introduced by assuming that the principal is unable to observe the agent's effort, or to infer what effort the agent applied through an ex post observation of the payoff that results.

Samuel S. Stewart, Jr., Discussion: The Impossibility of Efficient Decision Rules for Firms in Competitive Stock Market Economies, The Journal of Financial and Quantitative Analysis, Vol. 17, No. 4, Proceedings of the 17th Annual Conference of the Western Finance Association, June 16-19, 1982, Portland, Oregon (Nov., 1982), pp. 575-577

The recent experience of increased volatility of exchange rates among major currencies coupled with highly unstable price levels necessitates a more fundamental understanding of exchange risk. This necessity is further enhanced by the increased internationalization of consumption, investment, and other aspects of economic activity.

This study compares the dividend policies of independently owned and bank holding company-affiliated commercial banks. The hypothesis tested is that there exists a significant, positive relationship between the amount of cash dividends paid by a bank and its affiliation with a holding company. The issue is an important one because the distribution of earnings as dividends obviously reduces a bank's ability to generate capital internally, and retained earnings have been the chief source of growth in bank equity capital. For some time the bank supervisory authorities have been concerned over the relative decline in importance of capital in the balance sheet of the average bank, such funds permitting banks to absorb unexpected losses and weather periods of financial crises. Capital adequacy is thus a major consideration in the regulators' assessment of bank dividend policy. Prior research has shown that the banking subsidiaries of bank holding companies have maintained lower capital in relation to assets than have other banks despite achieving greater profitability. Since a bank's capital position is usually positively correlated with its earnings, this implies that affiliated banks have been more generous in paying dividends. Indeed, the statistical evidence of this study indicates that the banking subsidiaries of holding companies paid significantly higher dividends than other banks over the four–year period from 1973 through 1976. Whether or not this has resulted in these firms maintaining less than “adequate†capital is a question that goes far beyond the scope of this paper, but which ultimately must be considered.

The well known Sharpe-Lintner-Mossin capital asset pricing model (CAPM) assumes the existence of stability in the price level so that the market price of risk (MPR) measured in nominal terms is the same for all risky assets in an equilibrium market. Friend, Landskroner and Losq [5, hereafter F-L-L] have recently shown that CAPM measured in nominal terms understates the MPR if an uncertain inflation is expected and if a covariance between the rate of return on the market and the rate of inflation is positive (p. 1287).

In his 1976 Presidential Address to the American Finance Association, Merton Miller provided a compelling argument that there currently exists no viable theory of the optimal capital structure of an individual firm. This argument follows from the critique he presented of existing models of capital structure and from the theory he outlined of the optimal aggregate capital structure of the economy as a whole. That theory depends on the existence of different marginal tax rates for individuals and a tax-free security. Professor Miller pointed out that he was motivated to develop his hypothesis by the apparent inadequacy of a (if not the most) popular explanation for capital structure at both the micro and the aggregate level: the tradeoff between the tax advantages of debt and the cost to the firm's security holders of the bankruptcy process. He observed that neither the tax advantage of debt nor the costs of bankruptcy may be quite what they seem at first glance. When the corporate income tax and the differential taxation of regular income and capital gains are taken into account, then the tax advantage of debt is reduced. Moreover, the limited empirical evidence from actual bankruptcies suggests that the real costs to security holders of bankruptcy may be really rather low. And the recent discussion by Haugen and Senbet [6] suggests that most of the costs attributed to bankruptcy are really costs of liquidation of the firm's assets and not relevant to the capital structure decision.

Stochastic Dominance rules are playing an increasingly prominent role in the literature on choice under uncertainty. Their foundation is the mainstream VonNeumann-Morgenstern expected utility paradigm. Their essence is to provide an admissible set of choices under restrictions on the utility functions that follow from prevalent and appealing modes of economic behavior: The admissible sets generated are useful for a large group of individual decision makers and the optimal choice for an individual can then be obtained from among the smaller set of admissible choices.