ABSTRACT Commonly used trade credit terms implicitly define a high interest rate that operates as an efficient screening device where information about buyer default risk is asymmetrically held. By offering trade credit, a seller can identify prospective defaults more quickly than if financial institutions were the sole providers of short‐term financing. The information is valuable in cases where the seller has made nonsalvageable investments in buyers since it enables the seller to take actions to protect such investments.
ABSTRACT This paper provides simple, analytic approximations for pricing exchange‐traded American call and put options written on commodities and commodity futures contracts. These approximations are accurate and considerably more computationally efficient than finite‐difference, binomial, or compound‐option pricing methods.
The sphere of modern financial economics encompases finance, micro investment theory and much of the economics of uncertainty.As is evident from its influence on other branches of economics including public finance, industrial organization and monetary theory, the boundaries of this sphere are both permeable and flexible.The complex interactions of time and uncertainty guarantee intellectual challenge and intrinsic excitement to the study of financial economics.Indeed, the mathematics of the subject contain some of the most interesting applications of probability and optimization theory.But for all its mathematical refinement, the research has nevertheless had a direct and significant influence on practice.It was not always thus.Thirty years ago, finance theory was little more than a collection of anecdotes, rules of thumb, and manipulations of accounting data with an almost exclusive focus on corporate financial management.There is no need in this meeting of the guild to recount the subsequent evolution from this conceptual potpourri to a rigorous economic theory subjected to systematic empirical examination.1 Nor is there a need III -2on this occasion to document the wide-ranging impact of the research on 2 finance practice.I simply note that the conjoining of intrinsic intellectual interest with extrinsic application is a prevailing theme of research in financial economics.The later stages of this successful evolution has however been marked by a substantial accumulation of empirical anomalies; discoveries of theoretical inconsistencies; and a well-founded concern about the statistical power of many of the test methodologies.3Finance, thus finds itself today in the seemingly-paradoxical position of having more questions and empirical puzzles than at the start of its modern development.To be sure, some of the empirical anomalies will eventually be shown to be mere statistical artifacts.However, just as surely, others will not be so easily dismissed.I see this new-found ignorance in finance as mostly of the useful type that reflects our "...express recognition of what is not yet known, but needs to be known in order to lay the foundation for still more knowledge." 5Anomalous empirical evidence has indeed stimulated wide-ranging research efforts to make explicit the theoretical and empirical limitations of the basic finance model with its frictionless markets, complete information, and rational, optimizing economic behavior.Although much has been done, this research line is far from closure.Some hold that the paradigm of rational and optimal behavior must be largely discarded if knowledge in finance is to significantly advance.Others believe that most of the important empirical anomalies surrounding the current theory can be resolved within that traditional paradigm.Whichever view emerges as the dominant theme in finance, our understanding of the subject promises to be greatly enriched by these research programs.
ABSTRACT This study explores the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids. The results reveal significant differences in the abnormal returns between common stock exchanges and cash offers. The results are independent of the type of takeover bid, i.e., merger or tender offer, and of bid outcomes. These findings, supported by analysis of nonconvertible bonds, are attributed mainly to signalling effects and imply that the inconclusive evidence of earlier studies on takeovers may be due to their failure to control for the method of payment.
ABSTRACT In a previous paper, we found systematic price reversals for stocks that experience extreme long‐term gains or losses: Past losers significantly outperform past winners. We interpreted this finding as consistent with the behavioral hypothesis of investor overreaction. In this follow‐up paper, additional evidence is reported that supports the overreaction hypothesis and that is inconsistent with two alternative hypotheses based on firm size and differences in risk, as measured by CAPM‐betas. The seasonal pattern of returns is also examined. Excess returns in January are related to both short‐term and long‐term past performance, as well as to the previous year market return.
ABSTRACT One option‐pricing problem that has hitherto been unsolved is the pricing of a European call on an asset that has a stochastic volatility. This paper examines this problem. The option price is determined in series form for the case in which the stochastic volatility is independent of the stock price. Numerical solutions are also produced for the case in which the volatility is correlated with the stock price. It is found that the Black‐Scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity.
The sphere of modern financial economics encompases finance, micro investment theory and much of the economics of uncertainty. As is evident from its influence on other branches of economics including public finance, industrial organization and monetary theory, the boundaries of this sphere are both permeable and flexible. The complex interactions of time and uncertainty guarantee intellectual challenge and intrinsic excitement to the study of financial economics. Indeed, the mathematics of the subject contain some of the most interesting applications of probability and optimization theory. But for all its mathematical refinement, the research has nevertheless had a direct and significant influence on practice. It was not always thus. Thirty years ago, finance theory was little more than a collection of anecdotes, rules of thumb, and manipulations of accounting data with an almost exclusive focus on corporate financial management. There is no need in this meeting of the guild to recount the subsequent evolution from this conceptual potpourri to a rigorous economic