Using audit trail data for a sample of NYSE firms we show that medium-size trades are associated with a disproportionately large cumulative stock price change relative to their proportion of all trades and volume. This result is consistent with the predictions of Barclay and Warner's (1993) stealth-trading hypothesis. We find that the source of this disproportionately large cumulative price impact of medium-size trades is trades initiated by institutions. This result is robust to various sensitivity checks. Our findings appear to confirm street lore that institutions are informed traders.

This paper proposes an alternative to the asymptotic principal components procedure of Connor and Korajczyk (J. Financial Econom. 15 (1986) 373) that is robust to time series heteroskedasticity in the factor model residuals. The new method is simple to use and requires no assumptions stronger than those made by Connor and Korajczyk. It is demonstrated through simulations and analysis of actual stock market data that allowing heteroskedasticity sometimes improves the quality of the extracted factors quite dramatically. Over the period from 1989 to 1993, for example, a single factor extracted using the Connor and Korajczyk method explains only 8.2% of the variation of the CRSP value-weighted index, while the factor extracted allowing heteroskedasticity explains 57.3%. Accounting for heteroskedasticity is also important for tests of the APT, with p-values sometimes depending strongly on the factor extraction method used.

In 1993 and 1994, FreeportMcMoRan Copper and Gold issued two series of gold-denominated depositary shares to finance the expansion of its mining capacity in Indonesia. The pricing of these securities reflected their enhanced credit quality, which arose from the positive correlation between the value of the firm and the value of the securities. This feature of the securities effectively bundles a gold hedge with financing. A bundled hedge avoids wealth transfers to senior bondholders, since junior bondholders can effectively net their bond-related claims on the firm against their hedge-related liability to the firm. Such securities cannot be replicated by conventional hedging strategies, and they also mitigate the asset substitution problem.

We investigate the trade-off between the benefits from bank monitoring when a banker is represented on a firm's board and the costs from two sources: conflicts of interests between lenders and shareholders, and U.S. legal doctrines that generate lender liability for bankers on boards of firms in financial distress. Consistent with high costs of active involvement, bankers are on boards of large, stable firms with high proportions of collateralizable assets and low reliance on short-term financing. While permitting banks to own equity could mitigate conflicts, the protection of shareholder versus creditor rights could continue to reduce the role of U.S. banks in corporate governance.

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.

This paper studies the costs of applying single-factor exercise strategies to American swap options when the term structure is actually driven by multiple factors. Using a multifactor string market model of the term structure, we find that even when single-factor models are recalibrated to match the market at every exercise date, the exercise strategies they imply can be suboptimal. Based on estimates of notional amounts outstanding, the total present value costs of following single-factor strategies could be several billion dollars. These results illustrate the importance of using well-specified term structure models.

This paper is an exploration of the ability of game theory to explain real-world corporate maneuvering. We explore this issue by investigating bond tender offers accompanied by a threat to call nontendered bonds, so called “Simultaneous Tender and Call” (STAC) offers. We argue that STACs engender a transparent game played by bondholders and shareholders. We model this game and use this model to predict the outcome of STACs. Finally, we investigate the issue of whether this theoretical model explains the outcomes of four actual STAC issues made by James River, May Department Stores, and Houston Lighting & Power Company. Our clinical analysis provides support for the explanatory power of our model. Calibrating the predictions of the model with data from these STACs, we demonstrate a correspondence between theory and actual corporate behavior. As predicted by our model, subgame perfection, or threat credibility, and preplay coordination are central to explaining the outcomes of the STACs.