We consider the multiperiod relationship between a client and a portfolio manager and the resulting problem of motivating a manager of unknown ability to acquire valuable information. We explore the contractual forms and the optimal retention policy of the client and find that the optimal initial set of contracts features a smaller performance-based fee component paid to the manager than in a first-best contract, and the contract choice elicits only partial information about the manager. As a result, ex post performance measurement is critical to future recontracting. In general, managers are retained only if the returns on their portfolio exceed the benchmark by an appropriate amount.

Previous tests of stock index arbitrage models have rejected the no-arbitrage constraint imposed by these models. This paper provides a detailed analysis of actual S&P 500 arbitrage trades and directly relates these trades to the predictions of index arbitrage models. An analysis of arbitrage trades suggests that i) short-sale rules are unlikely to affect the cashfutures mispricing, ii) the opportunity cost of arbitrage funds exceeds the Treasury bill rate, and iii) the average price discrepancy captured by arbitrage trades is small. Tests of the models provide some support for a version ofthe arbitrage model that incorporates an early liquidation option. The ability of these models to explain arbitrage trades, however, is surprisingly low.

It has long been market folklore that the best time to buy stocks is when individual investors are bearish, and the best time to sell is when individual investors are bullish. We examine the forecast power of three popular measures of individual investor sentiment: the level of discounts on closed-end funds, the ratio of odd-lot sales to purchases, and net mutual fund redemptions. Using data from 1933 to 1993, we find that fund discounts and net redemptions predict the size premium, the difference between small and large firm returns, but little evidence that the odd-lot ratio predicts returns.

Using a large sample of option granting firms, some of which were investigated for option grant backdating, we develop a predictive model for such investigations and examine how the capital market responded as the backdating scandal unfolded. Firms that were investigated experienced significant stock price declines from the beginning of the Wall Street Journal's Perfect Payday series through the end of 2006. Firms predicted to have backdating problems, but not the subject of publicly revealed investigations, experienced stock price performance during the same period that was remarkably similar to that of firms with publicly revealed investigations. In contrast, firms not predicted to have backdating problems experienced normal stock price performance. Our results suggest that capital markets disciplined companies with suspicious option grant histories, often prior to, and irrespective of, any public revelation of an investigation into the matter.

Some closed-end country funds trade at large premiums relative to their net asset values. This paper examines whether international investment restrictions raise country fund price-net asset value ratios by segmenting international capital markets. We test whether a relation exists between announcements of changes in investment restrictions and changes in these ratios using weekly data from May 1981 to January 1989. The results provide evidence that some foreign markets are at least partially segmented from the U.S. capital market.

ABSTRACT Some closed‐end country funds trade at large premiums relative to their net asset values. This paper examines whether international investment restrictions raise country fund price‐net asset value ratios by segmenting international capital markets. We test whether a relation exists between announcements of changes in investment restrictions and changes in these ratios using weekly data from May 1981 to January 1989. The results provide evidence that some foreign markets are at least partially segmented from the U.S. capital market.

We examine the components of displayed (quoted) liquidity and the amount of non-displayed liquidity on the NYSE for a sample of non-US stocks. Consistently with prior work, non-US stocks have less displayed liquidity than similar US stocks. Extending prior research, we find that this is true both in the limit order book and on the floor. As Domowitz et al. [Domowitz, I., Glen, J., Madhavan, A., 1998. International cross-listing and order flow migration: Evidence from and emerging market. Journal of Finance 53, 2001–2027] posit, non-US stocks from transparent/linked home markets have more displayed NYSE liquidity when the home market is open but non-US stocks from opaque/non-linked home markets have more NYSE displayed liquidity when the home market is closed. Non-US and US stocks have similar supplies of non-displayed liquidity, consistent with the idea that the conditional nature of non-displayed liquidity allows NYSE traders to mitigate adverse selection problems inherent in trading non-US stocks. Our results imply that non-US stocks have less total (displayed plus non-displayed) liquidity than US stocks.