Knowledge that Transforms

http://deepblue.lib.umich.edu/bitstream/2027.42/39533/3/wp143.pdf

We study the precursors and outcomes of refocusing episodes by 107 diversified firms that were not taken over between 1984 and 1993. These firms had more value-reducing diversification policies than diversified firms that did not refocus. However, major disciplinary or incentive-altering events (including management turnover, outside shareholder pressure, changes in management compensation, and financial distress) usually occurred before refocusing took place. The cumulative abnormal returns over a firm's refocusing-related announcements averaged 7.3% and were significantly related to the amount of value reduction associated with the refocuser's diversification policy.

This paper investigates the distribution of equity ownership between entrenched corporate insiders and dispersed outsiders when management has the ability to divert or manipulate the cash flows and when it is costly for equity holders to verify or prove any managerial wrongdoing for a third party such as a court. Management chooses the distribution of equity ownership so as to maximize private benefits against the risk of potential control challenges. When shareholders are long term oriented, then outside shares trade at a premium over their value to management, and management is inclined to sell of its equity stake to dispersed outsiders. When shareholders are short-term oriented, then outside share trade at a discount below their value to management, and disciplinary pressure can be substantially reduced via strategic share purchases.

This article shows that introducing derivative assets increases incentives to collect information about asset payoffs. The increase in information collection makes the price of the underlying asset more informative and causes the expected price to increase. Extending the model to a dynamic setting with multiple risky assets, we find the introducing derivative assets for one asset increases the expected prices of positively correlated assets and reduces price reaction to future earnings announcements. These findings are consistent with the bulk of the empirical evidence on the relationship between the introduction of derivative assets and the behavior of asset prices.

We empirically examine whether access to deposits with inelastic rates (core deposits) permits a bank to make contractual agreements with borrowers that are infeasible if the bank must pay market rates for funds. Such access insulates a bank's costs of funds from exogenous shocks, allowing it to insulate its borrowers against exogenous credit shocks. We find that, controlling for loan market competition, banks funded more heavily with core deposits provide more loan rate smoothing in response to exogenous changes in aggregate credit risk. Thus we provide evidence for a novel channel linking bank liabilities to relationship lending.

Statistical model selection criteria provide an informed choice of the model with best external (i.e., out-of-sample) validity. Therefore they guard against overfitting (“data snooping”). We implement several model selection criteria in order to verify recent evidence of predictability in excess stock returns and to determine which variables are valuable predictors. We confirm the presence of in-sample predictability in an international stock market dataset, but discover that even the best prediction models have no out-of-sample forecasting power. The failure to detect out-of-sample predictability is not due to lack of power.

We empirically examine the hypothesis that access to deposits with inelastic rates (core deposits) permits a bank to make contractual agreements with borrowers that are infeasible if the bank must pay market rates for its funds. Access to core deposits insulates a bank's costs of funds from exogenous shocks, allowing the bank to insulate its borrowers against exogenous credit shocks. We find that, controlling for competitive conditions in loan markets, banks funded more heavily with core deposits provide more smoothing of loan rates in response to exogenous changes in aggregate credit risk. This suggests that a distinctive feature of bank lending is that firms and banks form multiperiod lending relationships in which loans need not break even period by period. It also partially explains the declining share of bank loans (or near substitutes for bank loans) in credit markets. As banks have increasingly been forced to pay market rates for an increasing share of their funds, multiperiod relationship lending has become increasingly less feasible and bank loans have lost some of their comparative advantage over securities. Our results suggest that access to core deposits is one of the foundations of relationship lending.

I consider the costs and benefits of introducing a new security in a standard framework where uninformed traders with hedging needs interact with risk-averse informed traders, Opening a new market may make everyboby worse off, even when the new security is traded in equilibrium, This article emphasizes cross-market links between hedging and speculative demands: risk-averse arbitrageurs can use the new market to hedge their positions in the preexisting security, which cart affect liquidity in the old market. More generally, the availability of such hedging opportunities will influence the strategies to which traders will direct resources.

Constraints on the gamma of the replicating portfolio, constraints on portfolio amounts, and constraints on the number of shares are also considered.

A number of recent papers have used nonparametric density estimation or nonparametric regression to study the instantaneous spot interest rate, and to test term structure models. However, little is known about the performance of these methods when applied to persistent time-series, such as U.S. interest rates. This paper uses the Vasicek [1977] model to study the performance of kernel density estimates of the ergodic distribution of the instantaneous spot rate. The model's tractability allows me to analyze the MISE of the kernel estimate as a function of persistence, variance of the ergodic distribution, span of the data, sampling frequency, and kernel bandwidth. Our principle result is that persistence has an important impact on optimal bandwidth selection and on finite sample performance. We also find that sampling the data more frequently has little effect on estimator quality. We also examine one of Ait-Sahalia's [1996a] new nonparametric tests of parametric continuous-time Markov ...