Large U.S. banks dramatically increased their capitalization during the 1990s, to the highest levels in more than 50 years. We document this buildup of capital and evaluate several potential motivations. Our results support the hypothesis that regulatory innovations in the early 1990s weakened conjectural government guarantees and enhanced bank counterparties' incentives to monitor and price default risk. We find no evidence that a bank holding company's (BHC's) market capitalization increases with its asset volatility prior to 1994. Thereafter, the data display a strong cross-sectional relation between capitalization and asset risk.

Based on a textual analysis of initial public offering (IPO) prospectuses, we obtain a number of important findings regarding the relation between the conservatism in prospectuses, IPO pricing, and subsequent operating and stock return performance. First, prospectus conservatism is positively related to underpricing, with the relation more pronounced for technology than nontechnology firms. Second, for nontechnology IPOs, prospectus conservatism is able to predict the firm’s post-IPO operating performance. Specifically, we find that conservatism is inversely related to the firm’s operating performance for the 3 years following the IPO. However, this predictability is limited to nontechnology IPOs. Finally, we find some evidence that for nontechnology IPOs conservatism is inversely related to the firm’s post-IPO abnormal stock return. We conclude that the conservatism contained in an IPO’s prospectus contains useful information about pricing and subsequent operating and stock return performance. Moreover, prospectus conservatism for nontechnology IPOs deserves more attention from investors.

A three parameter stochastic process, termed the variance gamma process, that generalizes Brownian motion is developed as a model for the dynamics of log stock prices. Theprocess is obtained by evaluating Brownian motion with drift at a random time given by a gamma process. The two additional parameters are the drift of the Brownian motion and the volatility of the time change. These additional parameters provide control over the skewness and kurtosis of the return distribution. Closed forms are obtained for the return density and the prices of European options.The statistical and risk neutral densities are estimated for data on the S&P500 Index and the prices of options on this Index. It is observed that the statistical density is symmetric with some kurtosis, while the risk neutral density is negatively skewed with a larger kurtosis. The additional parameters also correct for pricing biases of the Black Scholes model that is a parametric special case of the option pricing model developed here.