This paper derives a multibeta representation theorem for pricing assets using arbitrary reference variables that are not necessarily the true factors. Under this theorem, the upper bound on pricing deviations depends upon the correlations not only between the reference variables and the factors but also between the reference variables and the residual risks. A new concept of a well-diversified variable is introduced, which though free of residual risk, may be less than perfectly correlated with the true factors. Welldiversified variables correlated with the factors play a key role in the pricing of assets, since these variables can replace the factors without any loss in pricing accuracy under all linear asset pricing theories.

We examine the methods commonly employed to estimate Tobin's q ratios and find them to be flawed in design and arbitrary in implementation. We propose an alternative procedure which is both simpler and more accurate. The key to the procedure is an improved measure of fixed asset replacement costs, through the proper identification of the vintages of fixed assets that are in place for a firm. Application of this procedure to a large sample of nonfinancial corporations indicates that existing methods generally produce downward-biased measures of q and can result in errors in the ordering of firms by their q's.

Our simulation results show that tests for long-horizon (i.e.. multi-year) abnormal security returns around firm-specific events are severely misspecified. The rejection frequencies using parametric tests sometimes exceed 30% when the significance level of the test is 5%. Our results are robust to many different abnormal-return models. Conclusions from long-horizon studies require extreme caution. Nonparametric and bootstrap tests are likely to reduce misspecification.

We find reliable evidence that both book-to-market (B M) and dividend yield track time-series variation in expected real stock returns over the period 1926 91 (in which B M is stronger) and the subperiod 1941–1991 (in which dividend yield is stronger). A Bayesian bootstrap procedure implies that an investor with prior belief 0.5 that expected returns on the equal-weighted index are never negative comes away from the full-period B/M evidence with posterior probability 0.08 for the hypothesis (0.14 with the impact of the 1933 outlier tempered). Although this raises doubts about market efficiency, the post-1940 evidence is consistent with expected returns always being positive.

This paper investigates the role of vulture investors in the governance and reorganization of a sample of 288 firms that default on their public debt. The improvement in post-restructuring operating performance relative to the pre-default level is greater when the vulture investor becomes CEO or chairman or gains control of the target firm. We also find positive abnormal returns for the target's common stock and bonds in the two days surrounding the announcement of a vulture purchase of public debt or equity. Our evidence suggests that vulture investors add value by disciplining managers of distressed firms.

This paper studies contingent claim valuation in a Lucas-type exchange economy. The derived fundamental valuation equation differs from its Cox-Ingersoll-Ross production-economy counterpart in that it is expressed in terms of the direct utility function and an exogenous output process, thus offering superior tractability. We apply our approach to derive closed-form solutions for bond, bond option, individual stock, and stock option prices, under a more general setting than allowable in the Cox-Ingersoll-Ross framework. The resulting interest rate and stock price dynamics are empirically plausible. Moreover, our stock option pricing formula with stochastic volatility and interest rates can reconcile certain puzzling empirical regularities, including the volatility smile.