Knowledge that Transforms

The unique characteristics of bank loans emerge endogenously to enhance efficiency in a model of renegotiation between a borrower and a lender in which there is the potential for moral hazard on each side of the relationship. Firm risk is endogenous and renegotiated interest rates on the debt need not be monotone in firm risk. The initial terms of the debt are not set to price default risk but rather are set to efficiently balance bargaining power in later renegotiation. Loan pricing may be nonlinear, involving initial transfers either from the borrower to the bank or from the bank to the borrower.

This study investigates the excess funds hypothesis using samples of special dividends, regular dividend increases, and self-tender offers. All three types of firms tend to have funds in excess of industry norms before the events. The excess funds are largely nonrecurring for special dividend and self-tender offer firms and recurring for regular dividend increase firms. The analysis of the stock price reaction suggests that large incremental disbursements mitigate the agency problem associated with excess funds. In particular, the stock price reaction is positively related to excess funds for self-tender offers and large special dividends, but not Ž. for regular dividend increases which tend to be smaller or small special dividends.

This article investigates which companies finance themselves through intermediaries and which borrow directly from arm's length investors. Our empirical results show that large companies with abundant cash and collateral tap credit markets directly; these markets cater to safe and profitable industries, and are most active when riskless rates or intermediary earnings are low. We show that determinants of lender selection sharpen during investment downturns and that there are substantial asymmetries in the way firms enter and exit capital markets. These results support a theoretical framework where intermediaries have better reorganizational skills but a higher opportunity cost of capital than bondholders.

The valuation of debt and equity, reorganization boundaries, and firm's optimal dividend policies are studied in a framework where we model strategic interactions between debt holders and equity holders in a game-theoretic setting which can accommodate varying bargaining powers to the two claimants. Two formulations of reorganization are presented: debt-equity swaps and strategic debt service resulting from negotiated debt service reductions. We study the effects of bond covenants on payout policies and distinguish liquidity-induced defaults from strategic defaults. We derive optimal equity issuance and payout policies. The debt capacity of the firm and the optimal capital structure are characterized.

We analyze a model of voluntary disclosure by firms and the desirability of disclosure regulation. In our model disclosure is costly, it has private and social value, and its precision is endogenous. We show that (i) a convexity in the value of disclosure can lead to a discontinuity in the disclosure policy; (ii) the Nash equilibrium of a voluntary disclosure game is often socially inefficient; (iii) regulation that requires a minimal precision level sometimes but not always improves welfare; (iii) the same is true for subsidies that change the perceived cost of disclosures; and (iv) neither regulation method dominates the other.

Journal Article Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs Get access Oya Altınkılıç, Oya Altınkılıç Virginia Tech Search for other works by this author on: Oxford Academic Google Scholar Robert S. Hansen Robert S. Hansen Virginia Tech Address correspondence to Robert S. Hansen, Department of Finance, Pamplin College of Business, Virginia Tech, Blacksburg, VA 24061, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 13, Issue 1, January 2000, Pages 191–218, https://doi.org/10.1093/rfs/13.1.191 Published: 15 June 2015

A relationship exists between aggregate risk-neutral and subjective probability distributions and risk aversion functions. We empirically derive risk aversion functions implied by options prices and realized returns on the S&P500 index simultaneously. These risk aversion functions dramatically change shapes around the 1987 crash: Precrash, they are positive and decreasing in wealth and largely consistent with standard assumptions made in economic theory. Postcrash, they are partially negative and partially increasing and irreconcilable with those assumptions. Mispricing in the option market is the most likely cause. Simulated trading strategies exploiting this mispricing show excess returns, even after accounting for the possibility of further crashes, transaction costs, and hedges against the downside risk.

Journal Article A Closed-Form GARCH Option Valuation Model Get access Steven L. Heston, Steven L. Heston Goldman Sachs & Company Search for other works by this author on: Oxford Academic Google Scholar Saikat Nandi Saikat Nandi Research Department, Federal Reserve Bank of Atlanta Address all correspondence to Saikat Nandi, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, N.W, Atlanta, GA 30303, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 13, Issue 3, July 2000, Pages 585–625, https://doi.org/10.1093/rfs/13.3.585 Published: 15 June 2015

Journal Article The Interaction between Product Market and Financing Strategy: The Role of Venture Capital Get access Thomas Hellmann, Thomas Hellmann Stanford University Search for other works by this author on: Oxford Academic Google Scholar Manju Puri Manju Puri Stanford University Address correspondence to Manju Puri, Graduate School of Business, Stanford University, Stanford, CA 94305-5015, or e-mail: [email protected]. Search for other works by this author on: Oxford Academic Google Scholar The Review of Financial Studies, Volume 13, Issue 4, October 2000, Pages 959–984, https://doi.org/10.1093/rfs/13.4.959 Published: 15 June 2015

Arguments for creating a market to allow trading the portfolio of all endowments in the entire world, the "market portfolio," are considered. This world share market would represent a radical innovation, since at the present time only a small fraction of world endowments are traded. Using a stochastic endowment economy where preferences are mean variance, it is shown that creating such a market may be justified in terms of its contribution to social welfare. It is also argued that creating a market for world shares is attractive for certain reasons of robustness and simplicity.