Knowledge that Transforms

ABSTRACT Under heterogeneous expectations, the mean–variance model of capital market equilibrium is employed to determine the effect restricting short sales has on equilibrium asset prices. Two equivalent markets differing only with respect to short sale restrictions are compared. It is shown that, in general, risky asset prices can either rise or fall due to short sale constraints. However, under a homogeneity of beliefs for the covariance matrix of future prices, short sale constraints will only increase risky asset prices.

CAPITAL BUDGETING. The Goal of the Firm. Capital Budgeting: An Overview. The Economic Evaluation of Investment Proposals. Net Present Value Versus Internal Rate of Return. Using Cash Flows to Evaluate Investments. Traditional Measures of Investment Worth. Managing Working Capital. RISK AND UNCERTAINTY. Foundations of Risk Analysis. Measuring Risk. Applications of Risk Analysis. Decreasing Risk by Diversification: The Portfolio Approach. The Capital Asset Pricing Model and Arbitrage Pricing Theory. LONG-TERM FINANCIAL DECISIONS. Financial Leverage. Capital Structure and Valuation. Bankruptcy Risk and the Choice of Financial Structure. Defining the Cost of Capital. Measuring the Cost of Capital. Dividend Policy. Options and Futures. The Lease or Buy Decision. Mergers. International Financial Management. Appendices. Index.

ABSTRACT The agency costs of debt are introduced in this paper to explain the existence of complex financial instruments. Two areas of complexities are discussed in detail: the call provision and the maturity structure of debt. Their existence is rationalized as a means of resolving agency problems associated with informational asymmetry, managerial (stockholder) risk incentives, and foregone growth opportunities. It is also demonstrated that both features of corporate debt serve identical purposes in solving agency problems. Complex financial instruments are required because markets fail to provide complete and costless solutions to the agency problems discussed in the paper.

ABSTRACT Empirical tests are reported for Ross' [48] arbitrage theory of asset pricing. Using data for individual equities during the 1962–72 period, at least three and probably four priced factors are found in the generating process of returns. The theory is supported in that estimated expected returns depend on estimated factor loadings, and variables such as the own standard deviation, though highly correlated (simply) with estimated expected returns, do not add any further explanatory power to that of the factor loadings.