Knowledge that Transforms

This paper presents a new methodology, quasilinear estimation, for efficiently estimating economic variables reflected in the prices of corporate securities. For example, ex ante bankruptcy costs are not directly observable, however, if these costs are sufficiently large, then current security prices are affected and bankruptcy costs can be indirectly measured. When bankruptcy costs and other relevant parameters are known, there are many numerical solution techniques that can be used to determine security prices. One technique, the method of lines, is compatible with quasilinear estimation, which has been employed extensively in the physical sciences for the estimation of coefficients in differential equation models. We demonstrate that quasilinear estimation is a potentially reliable and efficient technique for the estimation of corporate bankruptcy costs and the asset variance from security prices.

Stability tests are performed for the conventional U.S. money demand equation using switch regression techniques. This methodology provides for the identification of the shift point and the type of shift (abrupt or drift), and is conducive to hypothesis testing to determine the sources of the shift for the regression equation. Our findings do not support the contention that the 1974 change in money demand equation is a downward shift in the constant term, as suggested by many recent empirical money demand studies.

There is a natural separation between production decisions affecting the firm as a whole and individual decisions by each shareholder about his portfolio of securities. The end result of these two types of decisions is normally referred to as a productive exchange equilibrium. At such an equilibrium, no individual wants to adjust his portfolio and no firm can muster majority support for a change in its production plans. This paper presents a partial theory of takeover bids in that it examines the role of a takeover bid as a mechanism by which a simultaneous change in shareholdings and production plans can be achieved. This enables a new production exchange equilibrium to be reached which is preferred by a majority of the shareholders but which is inaccessible without a contingent contract in the form of a takeover bid.

Lawrence Fisher, Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation: Discussion, The Journal of Finance, Vol. 39, No. 3, Papers and Proceedings, Forty-Second Annual Meeting, American Finance Association, San Francisco, CA, December 28-30, 1983 (Jul., 1984), pp. 625-627

In this study a simple common algorithm which is applicable to seven models is proposed for optimal portfolio selection disallowing short sales of risky securities. The models considered in the analysis consist of a single index model, four multi-index models, and two constant correlation models. Unlike the previous approach, the proposed algorithm does not require explicit ranking of securities. Therefore, it is particularly useful for two multi-index models with orthogonal indices which do not provide any ranking criterion. Also, because of its algorithmic efficiency as demonstrated in a simulation study on models with multiple groups, the approach here can enhance their usefulness in portfolio analysis.