Knowledge that Transforms

This paper solves the stochastic inverse optimal problem. Dynamic programming is used to transform the origina l problem into a differential equation. A solution exists for any pro duction function with a finite slope at the origin provided the savin gs function, starting from the origin, is steep initially and flat ev entually. Three consumption functions-linear, Keynes-ian, and Cantabr igian-are also studied with a Cobb-Douglas production technology. A w ell-known result in discrete time models-that a logarithmic utility f unction and a Cobb-Douglas production function imply a Keynesian cons umption function-does not carry through to the continuous time case. Copyright 1988 by The Econometric Society.

Based on courses developed by the author over several years, this book provides access to a broad area of research that is not available in separate articles or books of readings. Topics covered include the meaning and measurement of risk, general single-period portfolio problems, mean-variance analysis and the Capital Asset Pricing Model, the Arbitrage Pricing Theory, complete markets, multiperiod portfolio problems and the Intertemporal Capital Asset Pricing Model, the Black-Scholes option pricing model and contingent claims analysis, 'risk-neutral' pricing with Martingales, Modigliani-Miller and the capital structure of the firm, interest rates and the term structure, and others.

ABSTRACT A combined treatment of corporate finance and corporate governance is herein proposed. Debt and equity are treated not mainly as alternative financial instruments, but rather as alternative governance structures. Debt governance works mainly out of rules, while equity governance allows much greater discretion. A project‐financing approach is adopted. I argue that whether a project should be financed by debt or by equity depends principally on the characteristics of the assets. Transaction‐cost reasoning supports the use of debt (rules) to finance redeployable assets, while non‐redeployable assets are financed by equity (discretion). Experiences with leasing and leveraged buyouts are used to illustrate the argument. The article also compares and contrasts the transaction‐cost approach with the agency approach to the study of economic organization.

ABSTRACT This paper analyzes the explanatory power of some of the recent theories of optimal capital structure. The study extends empirical work on capital structure theory in three ways. First, it examines a much broader set of capital structure theories, many of which have not previously been analyzed empirically. Second, since the theories have different empirical implications in regard to different types of debt instruments, the authors analyze measures of short‐term, long‐term, and convertible debt rather than an aggregate measure of total debt. Third, the study uses a factor‐analytic technique that mitigates the measurement problems encountered when working with proxy variables.

ABSTRACT This paper analyzes the circumstances under which tax considerations favor or disfavor the use of index‐linked corporate bonds. Using a model similar to Miller's, investors' choices of assets depend on their tax preferences for interest income versus capital gains and their preferences for the timing of returns. It is concluded that the absence of index‐linked bonds in the U.S. cannot be attributed solely to tax reasons. However, following the 1986 Tax Reform Act, the tax code is expected to disfavor the use of index‐linked bonds.