Knowledge that Transforms

This article addresses the problem of valuing American call options with caps on dividend-paying assets. Since early exercise is allowed, the valuation problem requires the determination of optimal exercise policies. Options with two types of caps are analyzed: constant caps and caps with a constant growth rate. For constant caps, it is optimal to exercise at the first time at which the underlying asset’s price equals or exceeds the minimum of the cap and the optimal exercise boundary for the corresponding uncapped option. For caps that grow at a constant rate, the optimal exercise strategy can be specified by three endogenous parameters.

To investigate the effect of taxation on stock price and trading volume around the ex-dividend day, we use the Italian stock market, where dividends on two classes of stock are taxed differently. We find that the weighted average of investors' tax rates is reflected in the ex-day prices and the variance of the relative tax rate across investors is reflected in the volume of trades. We also show that higher transaction costs result in higher ex-dividend day excess returns and lower abnormal volume. This finding is consistent with ''profit elimination'' activity by institutions and corporations.

Corporate finance researchers have long been puzzled by low corporate debt ratios given debt's corporate tax advantage. This article recognizes that firm value typically reflects a growing stream of earnings, while current debt reflects a nongrowing stream of interest payments. Debt to value is therefore a distorted measure of corporate tax shielding. Even with very small debt-related costs, this may explain the observed magnitude and cross-sectional variation of debt ratios. Since this variation may be independent of tax shielding, debt ratios provide an inappropriate framework for empirically examining the trade-off theory of capital structure.

Nonprofit, mutually owned insurance and banking organizations have significant market shares in the insurance and banking industries. A first step in a systematic study of these financial mutuals is to examine the reasons for their formation. Doing so provides empirical support for the view that these mutuals arose as an efficient means of addressing contracting challenges caused by aggregate uncertainties and moral hazard. A formal model with this property is presented. We argue that information asymmetries do more to explain the kinds of contracts offered by financial mutuals than do agency problems between owners, managers, and customers.

We provide a comprehensive empirical analysis of stock price behavior around the ex-dividend day in Japan. We find that prices rise on the ex-day and that dividend-related tax effects appear to be secondary. Returns around ex-dividend days are dominated by the proximity of many ex-days to the fiscal year end. Excess returns of 1 percent, which are independent of any dividend-related considerations, are higher than round-trip transaction costs on medium-sized transactions. Prices seem to imply selling pressure before and buying pressure at the start of the new fiscal year. These trading patterns appear to be motivated by intercorporate manipulative trading around the end of the firms’ fiscal year, which are unrelated to dividends.

Markets for many real assets are characterized by sequential search followed by bilateral bargaining between matched buyers and sellers. For a category of real assets, the joint, intertemporal valuation problems of buyers, owners, and sellers, and the associated Nash pricing function are solved explicitly. In equilibrium, the average transaction price is a noisy, proportional random walk, and the liquidity premium is positive for matched owners. Depending on the values of the parameters, the liquidity premium can be substantial. In a related problem of optimal development with costly search, the optimal exercise point, cost of development, and value of the undeveloped asset are calculated analytically. With search, development can occur sooner and undeveloped assets have lower market values than the standard solution without search.

Financial market regulations require various “insiders” to disclose their trades after the trades are made. We show that such mandatory disclosure rules can increase insiders’ expected trading profits. This is because disclosure leads to profitable trading opportunities for insiders even if they possess no private information on the asset’s value. We also show that insiders will generally not voluntarily disclose their trades, so for disclosure to be forthcoming, it must be mandatory. Key to the analysis is that the market cannot observe whether an insider is trading on private information regarding asset value or is trading for personal portfolio reasons.

Journal Article Costly State Verification and Multiple Investors: The Role of Seniority Get access Andrew Winton Andrew Winton Northwestern University Address correspondence to Andrew Winton, KGSM/Finance, 2001 Sheridan Road, Evanston, IL 60208. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 8, Issue 1, January 1995, Pages 91–123, https://doi.org/10.1093/rfs/8.1.91 Published: 28 May 2015

Yasushi HamaoColumbia UniversityJoel HasbrouckNew York UniversityThis article investigates the behavior of intra-day trades and quotes for individual stocks onthe Tokyo Stock Exchange (TSE). We examine thetransaction and quote record for three firms forthe first 3 months of 1990. Our findings suggestthat the immediacy available (at least for smalltrades) in the market is high, despite the re-liance on public limit orders to supply liquidity.When orders that would otherwise walk throughthe limit order book are converted into limit or-ders, execution is delayed; but some orders exe-cute (at least in part) at more favorable prices.

This article examines the conditions under which bank lenders make concessions by taking equity in financially distressed firms. I show that the role banks play in debt restructurings depends on the financial condition of the firm, the existence of public debt in the firm's capital structure and the ability of public debt to be restructured. Empirically, I find that for firms with public debt outstanding, banks never make concessions unless public debtholders also restructure their claims. When banks do take equity, on average they obtain a substantial proportion of the firm's stock, and they maintain their position for over two years.