Abstract Fama and French (1992) show that size and book-to-price dominate CAPM beta and other variables such as the price-earnings ratio and dividend yield in explaining the cross-section of US stock returns. Comparable evidence for the UK points to a book-to-price effect, but not a size effect (Chan and Chui, 1996; Strong and Xu, 1997). In this paper, our first contribution is to show that a measure of research and development (RD) helps explain cross-sectional variation in UK stock returns. Our cross-sectional results on the association between stock returns and RD are consistent with recent US evidence reported by Lev and Sougiannis (1996, 1999) and Chan, Lakonishok and Sougiannis (2001).Fama and French (1993, 1995, 1996) also show that a three-factor model captures a high proportion of the time series variation in portfolio returns, again for the US. Our second contribution is to show, for the UK, that a modification to the three-factor model to take account of RD activity can significantly enhance the explanatory power of the three-factor model. We show that, as a practical matter, estimated risk premia based on the modified three-factor model can differ considerably from risk premia estimated using the CAPM or the three-factor model. In particular, risk premia for industries in which few firms undertake RD activities tend to be over-estimated.

We use a unique set of equities in the when-issued market to provide new tests of the law of one price in financial markets. We compare the prices of when-issued and regular-way shares of publicly-traded subsidiaries and their parents around the time the subsidiaries are fully divested. In contrast to prior analyses of when-issued trading in equity markets, we find that the when-issued shares of the subsidiary trade at a discount. Some of the pricing differences stem from measurement factors such as exchange location and bid-ask clustering that bias the observed when-issued pricing differential away from zero. The remaining difference between the when-issued and regular-way prices is due to asymmetric movements in bid and ask quotes in the two markets. We also find evidence of temporary price pressures on the date of execution of the spinoff of the subsidiary firms that bear resemblance to the pricing in the when-issued market. We interpret the evidence as consistent with the law of one price in the presence of transaction costs.

The trading volume channeled through off-market crossing networks is growing. Passive matching of orders outside the primary market lowers several components of execution costs compared to regular trading. On the other hand, the risk of non-execution imposes opportunity costs, and the inherent “free riding” on the price discovery process raises concerns that this eventually will lead to lower liquidity in the primary market. Using a detailed data set from a large investor in the US equity markets, we find evidence that competition from crossing networks is concentrated in the most liquid stocks in a sample of the largest companies in the US. Simulations of alternative trading strategies indicate that the investor’s strategy of initially trying to cross all stocks was cost effective: in spite of their high liquidity, the crossed stocks would have been unlikely to achieve at lower execution costs in the open market.

Abstract This paper examines the linkages between discretionary accruals (DAs), managerial share ownership, management compensation, and audit fees. It draws on the theory that managers of firms with high management ownership are likely to use DAs to communicate value‐relevant information, while managers of firms with high accounting‐based compensation are likely to use DAs opportunistically to manage earnings to improve their compensation. OLS regression results of 648 Australian firms show that (1) there is a positive association between DAs and audit fees; (2) managerial ownership negatively affects the positive relationship between DAs and audit fees; and (3) this negative impact is further found to be weaker for firms with high accounting‐based management compensation.

This paper investigates depository institutions' decisions whether or not to impose surcharges (direct usage fees) on nondepositors who use their ATMs. In addition to documenting patterns of surcharging, we examine motives for surcharging, including both direct generation of fee revenue and the potential to attract deposit customers who wish to avoid incurring surcharges at an institution's ATMs. Consistent with expectations, we find that the probability of surcharging increases with both the institution's share of market ATMs and the time since surcharging was first allowed in the state, and decreases with increasing local ATM density. Further, we find evidence consistent with the use of surcharges to attract deposit customers who are new to the local banking market, but we find no evidence that larger banks use surcharges as a means to attract existing customers away from smaller local competitors.

Measuring Unilateral Market Power in Wholesale Electricity Markets: The California Market, 1998-2000 by Frank A. Wolak. Published in volume 93, issue 2, pages 425-430 of American Economic Review, May 2003

This study investigates whether higher input use per stay in the hospital (treatment intensity) and longer length of stay improve outcomes of care. We allow for endogeneity of intensity and length of stay by estimating a quasi-maximum-likelihood discrete factor model, where the distribution of the unmeasured variable is modeled using a discrete distribution. Data on elderly persons come from several waves of the National Long-Term Care Survey merged with Medicare claims data for 1984–1995 and the National Death Index. We find that higher intensity improves patient survival and some dimensions of functional status among those who survive.

We provide an analytical discussion of the optimal hedge ratio under discrepancies between the futures market price and its theoretical valuation according to the cost-of-carry model. Assuming a geometric Brownian motion for spot prices, we model mispricing as a specific noise component in the dynamics of futures market prices. Empirical evidence on the model is provided for the Spanish stock index futures. Ex-ante simulations with actual data reveal that hedge ratios that take into account the estimated, time varying, correlation between the common and specific disturbances, lead to using a lower number of futures contracts than under a systematic unit ratio, without generally losing hedging effectiveness, while reducing transaction costs and capital requirements. Besides, the reduction in the number of contracts can be substantial over some periods. Finally, a mean–variance expected utility function suggests that the economic benefits from an optimal hedge can be substantial.

Mortgage overage pricing is little understood by consumers and has received little academic scrutiny. We consider the impact of the market power of individual loan officers on overages paid by borrowers, particularly minorities. We include numerous borrower and lender characteristics unavailable previously. We find that minorities who purchase homes pay larger overages than whites, but our evidence suggests that this traces to differences in the pools of borrowers rather than to racial discrimination. We conclude that a more effective way to eliminate racial differences in overages is to increase minorities’ ability to bargain rather than to enact additional anti-discrimination laws.