Knowledge that Transforms

This paper uses stamp catalogue prices to investigate the returns on British collectible postage stamps over the period 1900–2008. We find an annualized return on stamps of 7.0% in nominal terms, or 2.9% in real terms. These returns are higher than those on bonds but below those on equities. The volatility of stamp prices approaches that of equities. Stamp returns are impacted by movements in the equity market, but the systematic risk of stamps remains low. Stamps partially hedge against unanticipated inflation. Estimates of average after-cost returns for individual investors show that stamps may rival equities in terms of realized performance.

We examine how firms redraw their boundaries after acquisitions using plant-level data. We find that there is extensive restructuring in a short period following mergers and full-firm acquisitions. Acquirers of full firms sell 27% and close 19% of the plants of target firms within three years of the acquisition. Acquirers with skill in running their peripheral divisions tend to retain more acquired plants. Retained plants increase in productivity whereas sold plants do not. These results suggest that acquirers restructure targets in ways that exploit their comparative advantage.

Motivated by existing evidence of a preference among investors for assets with lottery-like payoffs and that many investors are poorly diversified, we investigate the significance of extreme positive returns in the cross-sectional pricing of stocks. Portfolio-level analyses and firm-level cross-sectional regressions indicate a negative and significant relation between the maximum daily return over the past one month (MAX) and expected stock returns. Average raw and risk-adjusted return differences between stocks in the lowest and highest MAX deciles exceed 1% per month. These results are robust to controls for size, book-to-market, momentum, short-term reversals, liquidity, and skewness. Of particular interest, including MAX reverses the puzzling negative relation between returns and idiosyncratic volatility recently shown in Ang et al., 2006, Ang et al., 2009.

I argue that the reason the book-to-market effect is stronger in small stocks is because smaller stocks generally have shorter life expectancy and therefore shorter equity duration. I build a model in which the book-to-market effect is stronger in stocks with shorter life expectancy. Empirically, I use delisting probability as my proxy for life expectancy. The data support my model's central prediction and its additional implications for stock return and variance. My results provide a rational explanation for the heterogeneity of the book-to-market effect, evidence previously taken as support for behavioral explanations.

The option to terminate a manager early minimizes investor losses if he is unskilled. However, it also deters a skilled manager from undertaking efficient long-term projects that risk low short-term earnings. This paper demonstrates how risky debt can overcome this tension. Leverage concentrates equityholders' stakes, inducing them to learn the cause of low earnings. If they result from investment (poor management), the firm is continued (liquidated). Therefore, unskilled managers are terminated and skilled managers invest without fear of termination. Unlike models of managerial discipline based on total payout, dividends are not a substitute for debt—they allow for termination upon non-payment, but at the expense of investment since they do not concentrate ownership and induce monitoring. Debt is dynamically consistent as the manager benefits from monitoring. In traditional theories, monitoring constrains the manager; here, it frees him to invest.