[Rule 10b5-1 enables insiders to preplan future trades before becoming informed. Within a strategic rational expectations equilibrium framework, I characterize an insider’s unique optimal trading plan, which balances portfolio diversification against exploitation of the rule’s selective termination option. Because the rule reduces adverse selection and provides insurance against bad outcomes, the rule generally improves welfare for both the insider, who later becomes informed, and uninformed outsiders, provided there exists a sufficient degree of information asymmetry. Eliminating the rule’s selective termination option results in an even greater welfare improvement under a large subset of parametric conditions.]

[This article establishes a role for corporate governance regulation. An externality operating through executive compensation motivates regulation. Governance lowers agency costs, allowing firms to grant less incentive pay. When a firm increases governance and lowers incentive pay, other firms can also lower executive compensation. Because firms do not internalize the full benefit of governance, regulation can improve investor welfare. When regulation is enforced, large firms increase in value, small firms decrease in value, and all firms lower incentive pay. Distinct cross-sectional and cross-country predictions for the number of voluntary governance firms are provided.]

The effects of competitive interactions on investment decisions and on the dynamics of the price of a nonstorable commodity are studied in a model of incremental investment with time to build and operating flexibility. I find that an increase in uncertainty may encourage firms to increase their capacity. Furthermore, I show that it may be optimal to invest in additional capacity during periods in which part of the operational capacity is not being utilized. The impact of competition on the properties of the endogenous output price is dramatic. For example, I find that price volatility may be increasing in the number of competitors in the industry. Copyright 2003, Oxford University Press.

The effects of competitive interactions on investment decisions and on the dynamics of the price of a nonstorable commodity are studied in a model of incremental investment with time to build and operating flexibility. I find that an increase in uncertainty may encourage firms to increase their capacity. Furthermore, I show that it may be optimal to invest in additional capacity during periods in which part of the operational capacity is not being utilized. The impact of competition on the properties of the endogenous output price is dramatic. For example, I find that price volatility may be increasing in the number of competitors in the industry.

German dividends typically carry a tax credit which makes the dividend worth 42.86% more to a taxable German shareholder than to a tax-exempt or foreign shareholder. This results in a penalty for foreign investors who buy and hold German dividend-paying stocks. I document that, as a result of the credit, the ex-day drop exceeds the dividend by more than one-half of the tax credit, and show that futures and option prices embed more than one-half of the tax credit. The existence of the credit creates opportunities for cross-border tax arbitrage-in which foreign holders of German stock transfer the dividend to German shareholders-and implies that it is tax efficient for foreign investors to hold derivatives rather than investing directly in German stocks. The empirical findings are consistent with costly tax arbitrage activity by German investors, who face tax risk due to antiarbitrage rules. Since dividend tax credits exist in many other countries, the findings are potentially of broad interest.

German dividends typically carry a tax credit which makes the dividend worth 42.86% more to a taxable German shareholder than to a tax-exempt or foreign shareholder. This results in a penalty for foreign investors who buy and hold German dividend-paying stocks. I document that, as a result of the credit, the ex-day drop exceeds the dividend by more than one-half of the tax credit, and show that futures and option prices embed more than one-half of the tax credit. The existence of the credit creates opportunities for cross-border tax arbitrage—in which foreign holders of German stock transfer the dividend to German shareholders—and implies that it is tax efficient for foreign investors to hold derivatives rather than investing directly in German stocks. The empirical findings are consistent with costly tax arbitrage activity by German investors, who face tax risk due to antiarbitrage rules. Since dividend tax credits exist in many other countries, the findings are potentially of broad interest.

[I use a new technique to derive a closed-form solution for the price of a European call option on an asset with stochastic volatility. The model allows arbitrary correlation between volatility and spot-asset returns. I introduce stochastic interest rates and show how to apply the model to bond options and foreign currency options. Simulations show that correlation between volatility and the spot asset's price is important for explaining return skewness and strike-price biases in the Black-Scholes (1973) model. The solution technique is based on characteristic functions and can be applied to other problems.]

Implied volatility is widely believed to be informationally superior to historical volatility, because it is the “market’s” forecast of future volatility. But for S&P 100 index options, the most actively traded contract in the United States, we find implied volatility to be a poor forecast of subsequent realized volatility. In aggregate and across subsamples separated by maturity and strike price, implied volatility has virtually no correlation with future volatility, and it does not incorporate the information contained in recent observed volatility.

[This article investigates the out-of-sample predictability of bond excess returns. We assess the economic value of the forecasting ability of empirical models based on longterm forward interest rates in a dynamic asset allocation strategy. The results show that the information content of forward rates does not generate systematic economic value to investors. Indeed, these models do not outperform the no-predictability benchmark. Furthermore, their relative performance deteriorates over time.]

[We explore whether government ownership affects the cost of debt using a sample of fully and partially privatized companies. On average across firms, a one-percentage-point decrease in government ownership is associated with an increase in the credit spread, used as a proxy for the cost of debt, by three-quarters of a basis point. However, fully privatized companies exhibit lower credit spreads than partially privatized firms, indicating the cost of a lengthy privatization process. Empirical evidence suggests that these findings result from decreasing government guarantees, firm performance improvements, ownership uncertainty, and bondholder-shareholder conflicts.]