We use futures transaction data to investigate cross-sectional relationships between market-maker inventory positions and trade activity. The investigation documents strongly that traders control inventory throughout the trading day. Despite this evidence of inventory management, typical inventory control models are contradicted by our data. These inventory models predict that market-maker reservation prices are negatively influenced by inventory. Surprisingly, our evidence shows, as a strong and consistent empirical regularity, that correlations between inventory and reservation prices are positive. We interpret the evidence as consistent with active position taking by futures market floor traders.

[We use futures transaction data to investigate cross-sectional relationships between market-maker inventory positions and trade activity. The investigation documents strongly that traders control inventory throughout the trading day. Despite this evidence of inventory management, typical inventory control models are contradicted by our data. These inventory models predict that market-maker reservation prices are negatively influenced by inventory. Surprisingly, our evidence shows, as a strong and consistent empirical regularity, that correlations between inventory and reservation prices are positive. We interpret the evidence as consistent with active position taking by futures market floor traders.]

Recent evidence indicates irrational behavior among retail investors. They hold onto losses and sell winners in a manner consistent with the disposition effect. Market professionals often use the term “discipline” to indicate trading strategies that minimize potential behavioral influences. We investigate the nature of trading discipline and whether professional traders are able to avoid the costly irrational behaviors found in retail populations. The full-time traders in our sample hold onto losses significantly longer than gains, but we find no evidence of costs associated with this behavior. The successful floor futures traders in our sample exhibit trading behavior characterized as rational and disciplined. Moreover, measures of relative trading discipline have predictive power for subsequent trading success.

We document that borrowing costs and credit ratings are less sensitive to off-balance sheet lease financing than to on-balance sheet debt financing, particularly for firms that are financially constrained and firms that have limited ability to use tax shields. This evidence is consistent with theoretical predictions based on tax benefits as well as bankruptcy costs. Our evidence on borrowing costs and credit ratings suggests that credit markets treat operating leases differently from balance sheet debt. Consistent with this interpretation, we document that firms closer to ratings borderlines lease more, particularly around the investment grade borderline.

There is much recent interest in the role of market timing in firm financial decisions. Using a large detailed sample of corporate public debt issues, private placements, Rule 144A issues and bank loans over the period 1970–2006, we investigate the relationship between interest rate changes and issues of floating and fixed-rate debt. Our results indicate that both past and future rates are associated with issuance decisions. We examine whether firms are able to lower their cost of capital by anticipating future rate changes, controlling for firm characteristics and market conditions. Our findings suggest that evidence of timing success is dependent on the time interval and type of debt examined. Over the longest time intervals available in our data, we do not find evidence of timing ability for fixed-rate or floating-rate debt issues.