The paper investigates how quickly prices attain new equilibrium levels after large-block transactions, and measures the associated temporary and permanent price effects. We find that prices adjust within at most three trades, with most of the adjustment occurring in the first trade. The temporary price effect for seller-initiated transactions is related to block size, but the temporary price effect observed for buyer-initiated transactions is no larger than that observed in 100 share trades. Most of the price effect associated with block trades is permanent and is related to block size, regardless of the initiating party.

This research investigates the influence of market microstructure on liquidity premiums. Premiums of a competitive, multiple-dealership market (NASDAQ) are contrasted with those of a monopolistic, specialist system (NYSE). Differences in liquidity premiums are estimated from monthly stock returns. For small firms, the average returns of NYSE securities exceed the average returns of NASDAQ securities. This return differential persists after controlling for size, risk, and liquidity-related variables. Neither the NYSE nor NASDAQ dominates the other in providing liquidity. The NASDAQ appears to have a liquidity advantage over the NYSE for small firms but not for large companies.

I analyze financing policies in a firm owned by atomistic shareholders who observe neither cash flows nor management's investment decisions. Management derives perquisites from investment and invests as much as possible. Since it always claims that cash flow is too low fund all positive net present value projects, its claim is not credible when cash flow is truly low. Consequently, management is forced to invest too little when cash flow is low and chooses to invest too much when it is high. Financing policies, by influencing the resources under management's control, can reduce the costs of over- and underinvestment.

We investigate the market's reaction to original-issue deep discount (OID) bonds, which are issued at prices well below par and with coupons set below the market rate. Until July 1982 OID debt offered large tax advantages. Before that date stock-price responses to announcements of OID debt are significantly positive, in contrast to the negative, albeit insignificant, responses associated with par debt announcements. No stock-price gains are observed for OID debt issued after the tax advantages are removed. We conclude that in 1981–82 opportunities provided by financial innovation offset the negative information effects typically associated with debt-financing announcements.

We examine an exhaustive set of initial public offerings (IPOs) by venture-capital-backed companies between 1978 and 1987. We find that venture capitalists specialize their investments in firms to provide intensive monitoring services. Consistent with their monitoring role, the venture capitalists take concentrated equity positions, maintain their investment beyond the IPO, and serve on the boards of their portfolio firms. The quality of their monitoring services appears to be recognized by capital markets through lower underpricing for IPOs with better monitors.

We test the mean-variance efficiency of a given portfolio using a Bayesian framework. Our test is more direct than Shanken's (1987b), because we impose a prior on all the parameters of the multivariate regression model. The approach is also easily adapted to other problems. We use Monte Carlo numerical integration to accurately evaluate 90-dimensional integrals. Posterior-odds ratios are calculated for 12 industry portfolios from 1926–1987. The sensitivity of the inferences to the prior is investigated by using three different distributions. The probability that the given portfolio is mean-variance efficient is small for a range of plausible priors.

We investigate the effects of leveraged buyouts on total factor productivity (TFP) and related variables using a longitudinal database including over 12,000 manufacturing plants. LBOs (particularly MBOs) that occured during 1983–1986 had a strong positive effect on TFP in the first three post-buyout years: plant productivity increased from 2.0% above industry mean in the three pre-buyout years to 8.3% above industry mean in the three post-buyout years. However, 1981 and 1982 buyouts had no significant productivity effect. The employment and compensation of white-collar workers decline following buyouts, but those of blue-collar workers are unchanged.