Many studies use the book value of debt as a proxy for its market value because most corporate debt does not trade. I call this practice the book value of debt (BVD) approximation, and it appears to be justified by the observation that the average market value of debt is close to its book value. Many corporate bonds, however, trade at values significantly different from their book values, and consequently the BVD approximation can create important biases. I compare the accuracy of the BVD approximation to Merton's option pricing (OPT) model of corporate debt valuation, and find consistent evidence that the Merton model provides more accurate estimates. I also show that this model is an easily estimated alternative to the BVD approximation. In short, the BVD approximation not only creates significant biases, but it is also an unnecessary simplification.

We examine the underinvestment rationale for corporate hedging and test the hypothesis that if firms hedge to reduce both their reliance on external funds and the volatility of internal cash flow, then their investment spending should be less sensitive to prehedged cash flow. Our results are consistent with this hypothesis and indicate that investment spending is less sensitive to cash flow for hedgers than for nonhedgers. We also find that among hedgers, investment spending is less sensitive to cash flow when the extent of hedging is higher. Our results are generally robust to five different measures of cash flow.

This study examines online multi-unit, discriminatory, ascending auctions of certificates of deposit. We find evidence suggesting that the most aggressive bids are likely to occur at the beginning and the end of the auctions. The opening of the auction serves an important role in price discovery. In addition, in multi-unit auctions last-minute bidding is a conditional strategy, and is used only when bidding is intense. Furthermore, we provide evidence suggesting that revenues are increasing in the depth of the market, in the concentration of early bids, and in bank participation relative to the size of the principal.

Abstract This paper uses stock market data to investigate the popular claim that investors are misled by the “pro forma” earnings numbers conspicuously featured in the press releases of some U.S. firms. We first document the frequency and magnitude of pro forma earnings in press releases issued during June through August 2000, and describe the 433 firms that engaged in this financial disclosure strategy. Our test period predates public expressions of concern by trade associations and regulators that pro forma earnings may mislead investors and the subsequent issuance of guidelines and rules on the disclosure of pro forma earnings numbers. We use two complementary approaches to determine whether the share prices that investors assign to pro forma firms are systematically higher than the prices assigned to other firms. Our market‐multiples tests for differences in price levels find some evidence suggesting that pro forma firms may be priced higher than firms that do not use the disclosure strategy. This apparent overpricing is not, however, related to the pro forma earnings numbers themselves. Our narrow‐window stock returns tests reveal no evidence of a stock return premium for pro forma firms at the quarterly earnings announcement date. Collectively, the results cast doubt on the notion that investors are, on average, misled by pro forma earnings disclosures despite the widespread concern expressed in the financial press and by regulators.

This paper views the standard production function in macroeconomics as a reduced form and derives its properties from microfoundations. The shape of this production function is governed by the distribution of ideas. If that distribution is Pareto, then two results obtain: the global production function is Cobb-Douglas, and technical change in the long run is labor-augmenting. Kortum showed that Pareto distributions are necessary if search-based idea models are to exhibit steady-state growth. Here we show that this same assumption delivers the additional results about the shape of the production function and the direction of technical change

The majority of asset-management intermediaries (e.g., mutual funds, hedge funds) are structured on an open-end basis, even though it appears that the open-end form can be a serious impediment to arbitrage. I argue that the equilibrium degree of open-ending in an economy can be excessive from the point of view of investors. When funds compete for investors' dollars, they may engage in a counterproductive race towards the open-end form, even though this form leaves them ill-suited to undertaking certain types of arbitrage trades. One implication of the analysis is that, even absent short-sales constraints or other frictions, economically large mispricings can coexist with rational, competitive arbitrageurs who earn small excess returns.

Previous studies ignore the fact that employee stock options are warrants because these options have been an insignificant component of firms’ capital structures. I show that this assumption is no longer correct. For example, for more than 36% of my sample firms, employee stock options represent a more significant claim on firm value than the firm’s debt and preferred stock combined. Moreover, in contrast to the suggestions of previous research, I show that employee stock options are a significant claim on firms throughout the economy, including larger firms, older firms, and firms in “Old Economy” industries. Finally, I show that the presumption in prior studies that employee stock options are not warrants causes a potential misunderstanding of the risk-shifting interests of securityholders and biases the analysis of capital structure issues.

We derive the quantitative implications of growth theory for U.S. corporate equity plus net debt over the period 1960–2001. There were large secular movements in corporate equity values relative to GDP, with dramatic declines in the 1970's and dramatic increases starting in the 1980's and continuing throughout the 1990's. During the same period, there was little change in the capital—output ratio or earnings share of output. We ask specifically whether the theory accounts for these observations. We find that it does, with the critical factor being changes in the U.S. tax and regulatory system. We find that the theory also accounts for the even larger movements in U.K. equity values relative to GDP in this period.

Abstract In this study, we incorporate taxpayers' threat /opportunity perceptions into our analysis of taxpayer behavior in order to refine and extend our understanding of the internal cognitive forces that shape taxpayer behavior. Decision‐making frames (that is, the gain and loss domains from the prospect theory value function) and individual perceptions (that is, perceptions of decision alternatives as being threats or opportunities) are both likely to influence behavior, yet prior research has generally ignored the behavioral effects of individual perceptions. The results of our experiment reveal that taxpayers who are due a tax refund (owe additional taxes) prior to considering a judgemental tax deduction tend to perceive the conservative (aggressive) tax deduction to be more of an opportunity/less of a threat. In turn, we find that taxpayer frames have a direct effect on taxpayer behavior and an indirect effect on behavior through their effect on taxpayers' threat/opportunity perceptions. Perhaps the most important message of this study is that researchers can advance our understanding of the internal cognitive processes that shape taxpayer behavior by incorporating taxpayer perceptions into their research designs.