Michigan. I want to thank the audience members for their comments and for encouraging me to produce an editorial based on the speech. I also want to thank Professor Hirshleifer for both his comments on an earlier draft and for giving me the opportunity to publish the Review of Financial Studies ’ (RFS) first editorial. I also want to thank Martijn Cremers, Andrew Karolyi, Nancy Nash-Mendez, Paul Tetlock, and Michael Weisbach for their comments. Nothing in here should be construed as representing the views of the Society for Financial Studies or the current editorial board of the RFS. Editorial: Presumably, academic journals exist and publish articles to disseminate new ideas. Somehow that simple goal has been lost. Today, articles appear in print only after a referee is convinced that all other alternative explanations for its results have been ruled out. In reality, no article can exclude every possible alternative, so this is basically an exercise in futility. The criterion for publication should be that once an article crosses some threshold it is good enough to publish. The problem seemingly lies in our inability to say “good enough. ” But this is a problem we can fix. 2 Foreword Because this is an editorial, I want to warn the reader not to expect either the prose or evidence

Academics responded to the challenges posed by the 2008 financial crisis with a flurry of studies. This collection of articles is just the academic community's first look into it. The articles begin with an examination at the last national housing price crash: the great depression of the 1930s. This is followed by articles looking at the current mortgage market and how it behaved. Did modern innovations reflect or add to the downturn? The next set of papers examines how non-financial firms were impacted by the crash. To what degree did credit worthy firms nevertheless find themselves without access to capital? The papers then end with a look into how the banking sector itself fared throughout this period.

The Review of Financial Studies has among its missions the facilitation and promotion of a vigorous academic debate across unsettled questions in finance. This issue represents a cross section of views regarding one such debate: Can ourempirical models accurately forecast the equity premium any better than the historical mean? Or, is the forecast our empirical models give us any more accurate than what we would get by simply using the historical mean? The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: [email protected]., Oxford University Press.

A number of empirical studies have reached the conclusion that stock price volatility cannot be fully explained within the standard dividend discount model. This article proposes a resolution based upon a model that contains both a random supply of risky assets and finitely lived agents who trade in a multiple security environment. As the analysis shows there exist 2^K equilibria when K securities trade. The low volatility equilibria have properties analogous to those found in the infinitely lived agent models of Campbell and Kyle (1991) and Wang (1993, 1994). In contrast, the high-volatility equilibria have very different characteristics. Within the high-volatility equilibria very large price variances can be generated with very small supply shocks. Adding securities to the economy further reduces the required supply shocks. Using previously established empirical results the model can reconcile the data with supply shocks that are less than 10% as large as observed return shocks. These results are shown to hold even when the dividend process is mean reverting.

Several papers use a fractional specification (net inflow/ assets under management) to infer a convex relation between flow and past performance. However, heterogeneous linear response functions combined with the pooled analysis commonly used in these studies can yield false convexity estimates. We show that such heterogeneity obtains in practice. Along these same lines, the paper also finds that several previously unexamined implications of a convex flow-performance relation fail to hold. Moreover, convexity with fractional flows (which we confirm) largely disappears in a conditional analysis that controls for heterogeneity. Market shares offer an alternative specification for flow that is more resilient to heterogeneity. Using this alternative specification, we again find no evidence of convexity in the flow-performance relation. We conclude that the widely held belief that the flow response function is convex is due solely to misspecification of the empirical model. The flow-return relation is linear.

Using a comprehensive database of coastal home sales merged with data on elevation relative to local tides, we compare prices for houses based on their inundation threshold under projections of sea level rise. The analysis separates the sensitivity of housing to rising seas from other confounding characteristics by exploiting cross-sectional differences in relative sea level rise due to vertical land motion. This provides variation in the expected time to inundation for properties of similar elevation and distance from the coast. In a variety of specifications and test settings, we find precisely estimated null results suggesting limited price effects.

IPO firms’ rivals tend to experience performance declines following an IPO in the industry. Why? We estimate a dynamic structural oligopoly model to distinguish between alternative theories that can explain an industry’s evolution post-IPO. We find that most changes in rivals’ performance are due to industry trends that also drive IPOs. However, we also find some “competitive” IPOs where the IPO enhances the IPO firm’s performance at the expense of competitors. These findings help reconcile prior evidence of average performance reductions of both IPO firms and their rivals with well-known cases in which firms have benefited from going public.

When the imminence of news announcements is not public knowledge, many traders will lack information on both the mean and variance of private information. Our analysis of such a setting in both single and multisecurity contexts implies that disclosure of impending information events by firms can bound variance uncertainty and thereby improve investor welfare by mitigating the market breakdown problem. We also find that the equilibrium pricing functions are nonlinear; specifically, convex for small trades and concave for larger ones. In addition, we predict that large transactions will be followed by large levels of volatility. Journal of Economic Literature Classification Numbers: 022, 026, 522.

This paper separates the components of capital appreciation returns in an asset market into fixed and stochastic portions. It proposes a control for the problem of fixed components in the capital appreciation return used in transactions-based return estimates. We find a consistent bias in the index resulting from repeat sales regressions which may be eliminated through simple methods. The sign and magnitude of the bias, as well as its systematic variation across property, suggest that it is caused by incremental home improvements, as well as by price risk. We propose a maximum likelihood method for estimating the first and second moments of the fixed and temporal components of real estate returns that relies upon relatively small samples.

A great deal of attention has recently been devoted to providing noncooperative game theory foundations to bargaining problems, (compare Ingolf Stahl, 1972, and Ariel Rubinstein, 1982). This approach has produced sharp predictions about the way surplus will be divided, and has given hope that a problem long thought to be insoluble might be resolved. This paper reports the results of two experiments designed to test the theory of bargaining developed by Stahl/Rubinstein.' Each experiment was designed to conform precisely to their rules of the game. We were particularly interested in how their solution, which is based on backward induction, would fare when bargaining was extended over more than two periods. We were also interested in how the outcomes would compare with the alternative hypothesis that bargainers tend to split a pie 50-50. Our work can also be seen as a response to the experiment reported by K. Binmore, A. Shaked, and J. Sutton (1985). They show that in a two-round game with alternating offers and a shrinking pie, experienced subjects chose offers consistent with the Stahl/Rubinstein theory. We duplicate their Game B result,2 but demonstrate that in games with more than two rounds the Stahl/Rubinstein theory is rejected. Thus to conclude on the basis of their results that subjects behave as gamesmen (i.e., in a manner consistent with the predictions of backward induction), would be premature. In experiments with varying numbers of rounds, our first players consistently demanded divisions which left their opponents with shares equal to the value of the second round pie.3 In a two-round game this behavior by definition yields demands consistent with the Stahl/Rubinstein theory. In games with more rounds it does not. The regularity of our subjects' behavior is most striking. In our experiments that went more than three rounds, the Stahl/Rubinstein division was strongly controverted. Furthermore, the divisions that were observed were remarkably similar across bargaining pairs and these divisions did not vary with experience or with the amount of money at stake.