Knowledge that Transforms

Sherman J. Maisel, Robert Jacobson, Interest Rate Changes and Commercial Bank Revenues and Costs, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 4, Proceedings of Thirteenth Annual Conference of the Western Finance Association, June 20-26, 1978 (Nov., 1978), pp. 687-700

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The Proceedings Issue contains selected papers, abstracts of papers, discussants' comments, and the proceedings of the Western Finance Association meetings. From time to time a special issue, devoted to one topic of interest to the membership, is published.

issue of this Journal, Bierman 2 and Hass (BH) construct a steam roller for the purpose of cracking a nut.BH's paper is essentially an attempt to use subjective probabilities to set yields on new bond issues.I am concerned primarily with the first two-thirds of their paper (pp.757-67), which, in my view, contains a number of statements that are seriously misleading.The first section of this comment will briefly summarize those portions of pp.757-67 of their paper.The second section contains the comment itself, plus a few observations on the final portion of their paper. I.(1) Assuming a risk-neutral buyer of debt issues and given what they call the "probability of survival" (P), BH show how to obtain the "required" yield on a new risky perpetuity (their equation 4, p. 759).They use a perpetuity in order to avoid, at the outset, the complications created by the fact that (risky) borrowers must also, in every case, make not only interest payments but also payments on principal.They then state as their conclusions to this initial section of their paper that: Deceased, formerly University of North Carolina, Chapel Hill.The

Evaluating investments by discounting anticipated future benefits at an exogenously determined risk-adjusted discount rate (hereafter referred to as the RADR approach) is well accepted in the canon of finance. If benefits (D) are to be received for T periods and if k, the discount rate, is constant over each of the t periods, then the discrete time net present value (NPV) is de-fined as: T t (1) NPV = E D /(l + k). t=0 A positive NPV characterizes a desirable investment. A frequently offered criticism of the RADR approach centers on the fact that both risk and timing considerations are treated in the denominator of equation (1). The certainty equivalent (CE) method has been suggested as a way of distinguishing between the two effects. In computation of the CE-NPV, riskless benefits that are equal in utility to the risky projected benefits

After Markowitz [14, p. 100] and Sharpe [19, 20] suggested estimating the beta systematic risk coefficient for market assets, finance professors, stock brokers, investment managers, and others began expending large quantities of resources each year on estimating betas. Unfortunately however, it appears that the ordinary least-squares (OLS) regressions used in nearly every instance may be inappropriate. This paper suggests that many stocks' beta coefficients move randomly through time rather than remain stable as the OLS model presumes.

William F. Sharpe, Bank Capital Adequacy, Deposit Insurance and Security Values, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 4, Proceedings of Thirteenth Annual Conference of the Western Finance Association, June 20-26, 1978 (Nov., 1978), pp. 701-718

Of the behavioral recommendations garnered from modern capital market theory, few, if any, generalizations have been documented as convincingly as the simple advice to hold several assets in one's portfolio. Sharpe made such a conclusion perfectly clear when he stated [27, p. 184]:If the market is efficient and if an investor is privy to no special information or predictive power, what should he do? First, and most important: diversify.

Interim reporting, Informational content, Predictive power, Analyst forecasts

Recent formulations of social decisions problems focus on rules by which a group of individuals (the society) arrives at a choice among available alternatives. Such a rule, which we shall call the outcome function (Gibbard's "game form, " see [ 3 J), specifies the