Knowledge that Transforms

This paper describes three new sources of data on small business finances: Bank Call Report data on small business lending, the 1995 Survey of Consumer Finances (SCF), and the 1993 National Survey of Small Business Finances (NSSBF). Each of these data sources offers publicly available micro-level data useful for examining a wide variety of issues and questions about small business finances. A number of studies which have utilized these data are cited and information on how to access these data is provided.

This paper examines the importance of allowing for correlation between returns and volatility in a continuous time stochastic volatility option pricing model. Specifically it tests the closed-form stochastic volatility model of Heston (Review of Financial Studies 6, 1993, 327–343) that allows for non-zero correlation, in terms of pricing and hedging options on the S&P 500 index. It is found that non-zero correlation in the stochastic volatility model leads to significant improvements in mispricing of out-of-the-money options and overall pricing performance compared to if correlation is constrained to be zero. In terms of hedging, non-zero correlation results in significantly lower hedging errors for out-of-the-money options.

We examine the profit efficiency of US banks chartered between 1980 and 1994. Our results suggest that profit efficiency improves rapidly at the typical de novo bank during its first three years of operation, but on average takes about nine years to reach established bank levels. Excess branch capacity, reliance on large deposits, and affiliation with a multibank holding company are associated with low profit efficiency at de novo banks. De novo national banks are initially less profit efficient than are state-chartered de novos, perhaps reflecting differences in the chartering philosophy of federal and state bank regulators.

This paper develops a model of the banking market in which individual banks make decisions concerning both the size and risk characteristics of their portfolios, and in which actions of one bank spill over to affect actions of other banks. Various observed banking market behaviors, such as herding, credit crunches, bank reaction to policy changes, etc., are explained as optimal bank responses to idiosyncratic or systemic shocks.

This paper examines the three cases of hostile takeovers in Germany in the post Second World War period. It describes the important role played by banks in affecting the outcome of the bids: bank representatives were chairmen of the supervisory board in all three cases and banks voted a large number of proxies in important decisions affecting the bids. The paper reports that low returns were earned by shareholders of two of the target firms and offers an explanation in terms of bank control and the regulatory regime operating in Germany.

Bond ratings are usually first assigned by rating agencies to public debt at the time of issuance and are periodically reviewed by the rating companies. If deemed warranted, changes in ratings are assigned after the review. A change in a rating reflects the agency’s assessment that the company’s credit quality has improved (upgrade) or deteriorated (downgrade). A coincident effect, in some proximity to the date of the rating change, is a change in the price of the issue. This article reports on an in-depth investigation of the expected ratings changes (drift) over time. Our analysis compares rating changes from the two major agencies, Moody’s and S&P, over the period 1970–1996. For the first time, results from several studies which have documented and analyzed these data patterns are contrasted. Depending upon which study one uses, the results and implications can be very different. We expect that the findings will have implications for such diverse practitioners as bond investors who concentrate on any or all segments of the corporate bond market, eg., high yield bond and “crossover” investors, mark-to-market analysts, and traders in the new and growing market for credit-risk-derivatives and for the many analysts who properly view that credit quality assessment involves the entire spectrum of possible outcomes, not just default. A follow-up study will analyze, in greater depth, two critical characteristics of the rating drift phenomenon. These are unexpected, as well as expected, rating migration patterns and also the implied impact on the price of the fixed income instrument.

A model is developed wherein entrepreneurs and venture capitalists contract under symmetric information. Asymmetric information may arise following first contracting. It is shown this can lead to debt infeasibility and preferred equity usage. Control is linked to choice between common and preferred. Results are robust to multiperiod extensions. Roles of convertible preferred, retained equity, and debt in IPOs are considered. An empirical survey of venture capital firms is presented demonstrating preferred dominates in early financing. Debt and common are used far less – generally at later stages under lower probability of asymmetric information. These results agree with the theory's implications.