As an operational objective for firm management, the market value maximization criterion derives its theoretical validity from the Fisherian separation principle which states that production decisions for an economy can be made without regard to consumer-investors' preferences for consumption, given perfectly competitive markets. In other words, if the firm's activities do not affect the prices of consumptive goods, then maximizing the wealth of its shareholders will lead to a maximization of each shareholder's utility. Not only does this optimality criterion avoid the ambiguities and vagaries of constructing an aggregate shareholder preference function, but when implemented as a firm decision rule, should result in the same production plan that each investor would select himself, and thereby should represent a Pareto optimal allocation of resources: (Hirshleifer [5, Chapters 1, 9]; Fama and Miller [3, Chapters 2, 7]; and more recently, Ekern and Wilson [2], Merton-Subrahmanyam [7], LeRoy [6]).

Considerable literature in the investment, growth, and financing of the corporation has developed in recent years. While theoretical studies in this area have contributed importantly to the understanding of the firm's time-optimal decision program, they have generally been limited in scope to the all-internally-funded firm and steady-state dynamics. The well-known analyses of Gordon ]7[ and Lintner ]13[ are typical of this restricted focus. Herein we relax these specializing conditions, both by permitting external equity as a financing alternative and by not a priori requiring the firm to make identical (earnings proportional) investment and financing decisions at every time instant such that it progresses only along a constant, exponentially growing earnings path.

There are two well-known distinct aspects to the behavior of a risk-averse individual towards a risky proposition: the position he takes, long or short, with regard to the gamble, and the scale of the position taken–the amount by which he goes long or short. On one hand, the first aspect depends only on the individual's assessment of the expected return from the gamble relative to a safe return. The second aspect, on the other hand, will be influenced by the individual's degree of risk aversion and the level of risk of the gamble.

Wayne Y. Lee, Kanwal S. Sachdeva, The Role of the Multinational Firm in the Integration of Segmented Capital Markets, The Journal of Finance, Vol. 32, No. 2, Papers and Proceedings of the Thirty-Fifth Annual Meeting of the American Finance Association, Atlantic City, New Jersey, September 16-18, 1976 (May, 1977), pp. 479-492

Using the Investors' Intelligence sentiment index, we employ a generalized autoregressive conditional heteroscedasticity-in-mean specification to test the impact of noise trader risk on both the formation of conditional volatility and expected return as suggested by De Long et al. [Journal of Political Economy 98 (1990) 703]. Our empirical results show that sentiment is a systematic risk that is priced. Excess returns are contemporaneously positively correlated with shifts in sentiment. Moreover, the magnitude of bullish (bearish) changes in sentiment leads to downward (upward) revisions in volatility and higher (lower) future excess returns.

Using a logistic regression model, we identify the characteristics of firms whose shareholders are likely to benefit from bankruptcy resolution. That is, winners (losers) are firms whose shareholders experience positive (negative) excess returns after bankruptcy filing. We find that winners are relatively smaller firms with higher proportions of convertible debt, tend to file for bankruptcy for strategic reasons, have low share-ownership concentration, and suffer comparatively larger pre-filing stock price declines. Among winners, shareholder returns are greater for firms that have higher levels of private debt and research and development (R&D) expenditures, and operate in more concentrated industries. In addition, our analysis indicates that an ex ante trading strategy of purchasing bankrupt stocks with a greater than 50% probability of being a winner on the day after bankruptcy filing and holding the stocks for a year, on an average, can generate average compounded and excess compounded holding-period returns of +71% and +42%, respectively.