Knowledge that Transforms

Nous prsentons les rsultats d'une tude portant sur l'valuation de crances ventuelles de style europen pour une grande varit de caractristiques lies au rendement des actifs sousjacents. Les rsultats de notre valuation proposent en temps discret une formule tat-espace infinie, partir du principe de non-arbitrage et d'une mesure de martingale quivalente. Notre approche permet de tenir compte de formes gnrales d'htroscdasticit dans les rendements et d'obtenir, dans des cas spciaux, des rsultats d'valuation lis aux processus homoscdastiques. Elle permet aussi de considrer les innovations conditionnellement non normales en matire de rendement, ce qui reprsente un facteur critique, compte tenu du fait que l'htroscdasticit ne permet pas, elle seule, de saisir pleinement le caractre ironique de l'option. Nous analysons une catgorie de mesures de martingale quivalentes dont la dynamique du rendement risque-neutre obtenu est de la mme famille de distribution que la dynamique du rendement physique. Dans ce cas, notre cadre d'tude soutient les rsultats d'valuation obtenus par Nous tendons ces rsultats aux mesures de martingale quivalentes plus gnrales et aux modles de volatilit stochastique en temps discret et analysons aussi la relation entre nos rsultats et ceux obtenus dans le cas des modles en temps continu.

We use Monte Carlo simulations and real data to assess the performance of methods dealing with measurement error in investment equations. Our experiments show that fixed effects, error heteroscedasticity, and data skewness severely affect the performance and reliability of methods found in the literature. Estimators that use higher-order moments return biased coefficients for (both) mismeasured and perfectly measured regressors. These estimators are also very inefficient. Instrumental-variable-type estimators are more robust and efficient, although they require restrictive assumptions. We estimate empirical investment models using alternative methods. Real-world investment data contain firm-fixed effects and heteroscedasticity, causing high-order moments estimators to deliver coefficients that are unstable and not economically meaningful. Instrumental variables methods yield estimates that are robust and conform to theoretical priors. Our analysis provides guidance for dealing with measurement errors under circumstances researchers are likely to find in practice. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

This article uses a large panel dataset that tracks the housing wealth and credit card spending of 12,793 individuals in Hong Kong to study the relationship between housing wealth and household consumption. I identify a significant effect of housing wealth on consumption. A pure wealth effect can explain part of the sensitivity: households with multiple houses have much stronger consumption responses. Consistent with a relaxation of the credit constraints, mortgage refinancing significantly increases households' consumption sensitivities. However, for the majority of the households that do not refinance, consumption sensitivity appears to be due to a reduction in precautionary saving.

In a market with informationally connected traders, the dynamics of volume, price informativeness, price volatility, and liquidity are severely affected by the information linkages every trader experiences with his peers. We show that in the presence of information linkages among traders, volume and price informativeness increase. Moreover, we find that information linkages improve or damage market depth, and lower or boost the Traders' profits, according to whether these linkages convey positively or negatively correlated signals. Finally, our model predicts patterns of trade correlation consistent with those identified in the empirical literature: trades generated by “neighbor” traders are positively correlated and trades generated by “distant” traders are negatively correlated.

We use daily short-selling data to examine whether short selling around seasoned equity offerings (SEOs) reflects informed or manipulative trading. Around SEO announcements, we find no evidence of informed short selling. Around issue dates, higher levels of pre-issue short selling are significantly related to larger issue discounts for non-shelf-registered offerings. This evidence is consistent with manipulative trading. We show that SEC Rule 105 constrains some but not all manipulative trading. Our results reverse previous research that uses monthly short-interest data, because daily data allow more powerful tests. Our evidence helps explain the increased popularity of shelf registrations. Although short selling usually enhances price efficiency, we document a situation where short selling reduces price efficiency.

A large fraction of the companies that went private between 1990 and 2007 were fairly young public firms, often with the same management team making the crucial restructuring decisions at both the time of the initial public offering (IPO) and the buyout. This article investigates the determinants of the decision to go private over a firm's entire public life cycle. Our evidence reveals that firms with declining growth in analyst coverage, falling institutional ownership, and low stock turnover were more likely to go private and opted to do so sooner. We argue that a primary reason behind the decision of IPO firms to abandon their public listing was a failure to attract a critical mass of financial visibility and investor interest.

As domestic sources of outside finance are limited in many countries around the world, it is important to understand factors that influence whether foreign investors provide capital to a country's firms. We study 4, 409 firms from twenty-nine countries to assess whether and why concerns about corporate governance result in fewer foreign holdings. We find that foreigners invest less in firms that reside in countries with poor outsider protection and disclosure and have ownership structures that are conducive to governance problems. This effect is particularly pronounced when earnings are opaque, indicating that information asymmetry and monitoring costs faced by foreign investors likely drive the results. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

Three large banks control over half of the U.S. commercial loan market by volume through the syndication process. Using attributes of a borrower’s location to instrument for lender– borrower matching, I show that the borrower stock price response to a loan announcement is more favorable if one of these dominant banks is the lender, especially if the borrower is “opaque. ” I then show that these banks charge lower interest rates and are more likely to lend without the protection of a borrowing base. The results suggest that the domi-nant banks have a particularly high reputation for screening and monitoring borrowers. (JEL G21, L14) In financial economics, it has long been recognized that commercial banks play a special certification role through inside lending (Fama 1985) and delegated monitoring (Diamond 1984). It therefore follows that bank loan announce-ments should convey a positive signal or certification to the market that the borrower is “good.”1 In that regard, Mikkelson and Partch (1986) and James (1987) document that bank loan announcements elicit positive abnormal re-turns in borrower stocks, whereas announcements of public securities issues

This article studies optimal mortgage design in a continuous-time setting with volatile and privately observable income, costly foreclosure, and a stochastic market interest rate. We show that the features of the optimal mortgage are consistent with an option adjustable-rate mortgage (option ARM). Under the optimal contract, the borrower is given discretion of how much to repay until his balance reaches a certain limit. The default rates and interest rate payment on the mortgage correlate positively with the market interest rate. Gains from using the optimal contract relative to simpler mortgages are the biggest for those who face more income variability, buy pricey houses given their income level, or make little or no down payment. Our model thus may help to explain a high concentration of option ARMs among riskier borrowers.

We assemble a sample of 983 equity-based awards that include either an accelerated- or a contingent-vesting provision tied to firm performance and explore the frequency, contractual nature, usage, and implications of such awards. We find that performance-vesting (p-v) provisions specify meaningful performance hurdles and provide significant incentives for executives. The propensity to use p-v provisions is positively related to the arrival of a new CEO and the proportion of outsiders on the board of directors and negatively related to prior stock performance. Performance-vesting firms have significantly better subsequent operating performance than control firms. Abnormal accounting performance does not arise from earnings management or discernible differences in financial or investment policy.