Knowledge that Transforms

This article presents evidence suggesting that the relationship that existed between the partnership of J. P. Morgan and its client firms partially resolved the latter's external financing problems by diminishing the principal-agent and asymmetric information problems. I estimate and compare investment regression equations for a sample of Morgan-affiliated companies and a control group of nonaffiliated companies. The econometric results seem to indicate that companies not affiliated to the House of Morgan were liquidity constrained.

We examine the impact of changes in equity-option margin requirements on the liquidity of options and underlying stock markets. We find that the decrease in margin was associated with an increase in spreads and trade informativeness, and a decrease in depth for the underlying stocks. In contrast, options spreads decreased indicating a change in the relative allocation of informed traders between the two markets. When the required margin was increased, no significant change was observed in the underlying stocks, but option spreads increased. Overall, our results indicate that uninformed traders are more sensitive to the margin dimension of trading costs.

The dynamics of innovation in industry dominant designs and the survival of firms product innovation as a creative force innovation and industrial evolution innovation in non-assembled products differences in innovations for assembled and non-assembled products invasion of a stable business by radical innovation the creative power of technology in process innovation innovation as a game of chutes and ladders innovation and corporate renewal.

Recent research has documented the failure of market beta to capture the cross-section of expected returns within the context of a two-pass estimation methodology. However, the two-pass methodology suffers from the errors-in-variables (EIV) problem that could attenuate the apparent significance of market beta. This article provides a new correction for the EIV problem that is robust to conditional heteroscedasticity. After the correction, I find more support for the role of market beta and less support for the role of firm size in explaining the cross-section of expected returns. While the EIV correction leads to a diminished role of firm size, the size variable remains a significant force in explaining the cross-section of expected returns.

1. Financial Innovation and The Financial System. 2. Securities Innovation: A Historical and Functional Approach. CASES. 1. Financial Engineering and Debt Securities. 1.1 Arbitrage Fundamentals. Cougars. RJRCHC 1991. Arb in Government Bonds. Coca Cola--Harmless Warrants.1.2 Taxes, Regulation and Accounting: Stimuli to Innovation. Citicorp 1985. Note: Eurodollar Bond. New England Property and Casualty. Schroeders Perpetual. Metromedia.1.3 Securitization. Travelers. Note: MBS. Amex TRS Case. Lehman Case.2. Financial Engineering and Equity Securities. 2.1 Addressing Information Asymmetries. Arley. Avon PERCs. GM PERCs. ALZA series (A-B1-B2-C). British Telecom. RJR 1990. Sally Jameson.2.2 Taxes, Regulation and Accounting: Stimuli to Innovation. ARPPS. MMP. Dart and Kraft. Waste Management.3. Managing Issuers' Exposures. 3.1 Managing Issuers' Exposures. B.F. Goodrich-Rabobank. GM--Liab Management. State of CT Muni Swap. Walt Disney. Gaz de France. American Barrick. Enron.3.2 Managing Investors' Exposures. SLH (A&B). Goldman Sachs Nikkel Put Warrants. Commodity Linked Debt. Note: Commodity Futures. Fidelity Case. Diamond Shamrock Natomas. BEA Associates. LOR: Portfolio Insurance. LOR: SuperTrust.FOUNDATION NOTES. Note: U.S. Government Debt Markets. Note: Foreign Exchange. Note: FX Swaps. Note: Introduction to Options. Note: Option Pricing. Note: Contingent Claims Analysis. Note: Financial Futures. Note: Interest Rate Derivatives.

How marketability affects security prices is one of the most important issues in finance. We derive a simple analytical upper bound on the value of marketability using option-pricing theory. We show that discounts for lack of marketability can potentially be large even when the illiquidity period is very short. This analysis also provides a benchmark for assessing the potential costs of exchange rules and regulatory requirements restricting the ability of investors to trade when desired. Furthermore, these results provide new insights into the relation between discounts for lack of marketability and the length of the marketability restriction.

Regulatory authorities set capital requirements to cover the position risk of securities firms and to protect against losses arising from fluctuations in the value of their holdings. The requirements may be set using the comprehensive approach required by the U.S. Securities and Exchange Commission, the building‐block approach required by the European Community, or the portfolio approach required by the United Kingdom. We compare these three alternatives using a large sample of U.K. equity trading books. The portfolio approach systematically specifies larger requirements for riskier books, and vice versa. It is more efficient than the building‐block approach, and far more efficient than the comprehensive approach.

After firms move trading in their stock to the American or New York Stock Exchanges, stock returns are generally poor. Many of these firms have been public only a short period of time. Moreover, once listed, several firms make seasoned equity offerings. However, the negative post-listing drift is not a manifestation of the new-equity issuance puzzle. Instead, the negative post-listing drift appears to be the result of managers opportunistically choosing when to apply for listing. The barriers posed by initial listing requirements appear to cause some managers to apply for listing prior to a decline in performance. These requirements are more binding in smaller, less widely held stocks, the same stocks for which the drift is most severe. For large, more widely held firms, the post-listing drift is absent. This finding of opportunistic behavior is strikingly similar to the market timing arguments that have been offered to explain the poor performance observed following equity offerings.

This article establishes efficient lattice algorithms for pricing American interest‐sensitive claims in the Heath, Jarrow, and Morton paradigm, under the assumption that the volatility structure of forward rates is restricted to a class that permits a Markovian representation of the term structure. The class of volatilities that permits this representation is quite large and imposes no severe restrictions on the structure for the spot rate volatility. The algorithm exploits the Markovian property of the term structure and permits the efficient computation of all types of interest rate claims. Specific examples are provided.