We develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions. Our model incorporates two key features: (i) value-maximizing banks have a well-founded concern with risk management; and (ii) not all the risks they face can be frictionlessly hedged in the capital market. This approach allows us to show how bank-level risk management considerations should factor into the pricing of those risks that cannot be easily hedged. We examine several applications, including: the evaluation of proprietary trading operations, and the pricing of unhedgeable derivatives positions. We also compare our approach to the RAROC methodology that has been adopted by a number of banks.

This paper explores daily international portfolio flows into and out of 44 countries from 1994 through 1998. We find several facts concerning the behavior of flows and their relationship with equity returns. First, we detect regional flow factors that have increased in importance through time. Second, the flows appear to be stationary, but far more persistent than returns. Third, flows are strongly influenced by past returns, a finding consistent with positive feedback trading by international investors. Fourth, inflows have positive forecasting power for future equity returns, and this power is statistically significant in emerging markets. Fifth, the sensitivity of local stock prices to foreign inflows is positive and large. Sixth, prices seem consistent with flow persistence, in that transitory inflows impact future returns negatively.

We develop real-time proxies of retail corporate sales from multiple sources, including ∼50 million mobile devices. These measures contain information from both the earnings quarter (“within quarter”) and the period between the quarter-end and the earnings announcement date (“post quarter”). Our within-quarter measure is powerful in explaining quarterly sales growth, revenue surprises, and earnings surprises, generating average excess announcement returns of 3.4%. However, our post-quarter measure is related negatively to announcement returns and positively to post-announcement returns. When post-quarter private information is positive, managers, at announcement, provide pessimistic guidance and use negative language. This effect is more pronounced when, post-announcement, management insiders trade. We conclude that managers do not fully disclose their private information and instead bias their disclosures down when in possession of positive private information. The data suggest that they could be motivated in part by subsequent personal stock-trading opportunities.