As argued by Jensen (1993), the primary tasks of a firm’s board of directors are to advise, hire, fire and determine the level and form of managerial compensation. Managerial pay can be structured as part cash and in part be tied to a performance index, such as corporate earnings or the firm’s stock price. The latter effectively aligns the interest of managers with those of stockholders, which in turn reduces agency problems related to free cash flow, managerial time horizons and effort levels. At the same time, stock-based compensation increases managerial exposure to non-diversifiable risk, which may cause risk-averse managers to underinvest in risky projects. The trade-off between the benefits of managerial incentive alignment and the cost of underinvestment is largely an empirical issue, and the widespread observation that managerial compensation is primarily paid in cash 1 suggests that managerial risk aversion weighs heavily or that boards generally resort to substitute monitoring mechanisms. The paper by Angbazo and Narayanan (1997) is part of a rapidly growing empirical literature attempting to identify important cross-sectional determinants

Our simulation results show that tests for long-horizon (i.e.. multi-year) abnormal security returns around firm-specific events are severely misspecified. The rejection frequencies using parametric tests sometimes exceed 30% when the significance level of the test is 5%. Our results are robust to many different abnormal-return models. Conclusions from long-horizon studies require extreme caution. Nonparametric and bootstrap tests are likely to reduce misspecification.

Fundamental Analysis, Stock price, Fundamental signals, Future earnings

We find reliable evidence that both book-to-market (B M) and dividend yield track time-series variation in expected real stock returns over the period 1926 91 (in which B M is stronger) and the subperiod 1941–1991 (in which dividend yield is stronger). A Bayesian bootstrap procedure implies that an investor with prior belief 0.5 that expected returns on the equal-weighted index are never negative comes away from the full-period B/M evidence with posterior probability 0.08 for the hypothesis (0.14 with the impact of the 1933 outlier tempered). Although this raises doubts about market efficiency, the post-1940 evidence is consistent with expected returns always being positive.

This study tests assertions that Economic Value Added (EVA®) is more highly associated with stock returns and firm values than accrual earnings, and evaluates which components of EVA, if any, contribute to these associations. Relative information content tests reveal earnings to be more highly associated with returns and firm values than EVA, residual income, or cash flow from operations. Incremental tests suggest that EVA components add only marginally to information content beyond earnings. Considered together, these results do not support claims that EVA dominates earnings in relative information content, and suggest rather that earnings generally outperforms EVA.

We use store-level data to document the exact process of changing prices and to directly measure menu costs at five multistore supermarket chains. We show that changing prices in these establishments is a complex process, requiring dozens of steps and a nontrivial amount of resources. The menu costs average $105,887/year per store, comprising 0.70 percent of revenues, 35.2 percent of net margins, and $0.52/price change. These menu costs may be forming a barrier to price changes. Specifically, (1) a supermarket chain facing higher menu costs (due to item pricing laws that require a separate price tag on each item) changes prices two and one-half times less frequently than the other four chains; (2) within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law. “In principle, fixed costs of changing prices can be observed and measured. In practice, such costs take disparate forms in different firms, and we have no data on their magnitude. So the theory can be tested at best indirectly, at worst not at all” [Alan Blinder 1991, p. 90].

We value American options on bonds using a generalization of the Geske–Johnson (Geske, R., Johnson, H., 1984. Journal of Finance 39, 1151–1542) (GJ) technique. The method requires the valuation of European options, and options with multiple exercise dates. It is shown that a risk-neutral valuation relationship (RNVR) along the lines of Black–Scholes (Black, F., Scholes, M., 1973. Journal of Political Economy 81, 637–659) model holds for options exercisable on multiple dates, even under stochastic interest rates, when the price of the underlying asset is lognormally distributed. The proposed computational procedure uses the maximized value of these options, where the maximization is over all possible exercise dates. The value of the American option is then computed by Richardson extrapolation. The volatility of the underlying default-free bond is modeled using a two-factor model, with a short-term and a long-term interest rate factor. We report the results of simulations of American option values using our method and show how they vary with the key parameter inputs, such as the maturity of the bond, its volatility, and the option strike price.

The Geske–Johnson approach provides an efficient and intuitively appealing technique for the valuation and hedging of American-style contingent claims. Here, we generalize their approach to a stochastic interest rate economy. The method is implemented using options exercisable on one of a finite number of dates. We illustrate how the value of an American-style option increases with interest rate volatility. The magnitude of this effect depends on the extent to which the option is in the money, the volatilities of the underlying asset and the interest rates, as well as the correlation between them.