We find that the determinants of the cross-section of expected stock returns are stable in their identity and influence from period to period and from country to country. Out-of-sample predictions of expected return are strongly and consistently accurate. Two findings distinguish this paper from others in the contemporary literature: First, stocks with higher expected and realized rates of return are unambiguously lower in risk than stocks with lower returns. Second, the important determinants of expected stock returns are strikingly common to the major equity markets of the world. Overall, the results seem to reveal a major failure in the Efficient Markets Hypothesis.

The general model, 660. — The regression model, 663. — Correlation and regression results, 666. — Evaluation, 667. — Some conclusions, 670. — Appendix, 671.

This paper investigates the role of stock options in resolving the agency problems of external capital as originally identified by Jensen and Meckling (1976). These problems are precipitated by managerial incentives a) to consume excessive non‐pecuniary benefits or perquisites beyond the optimal level for sole ownership and b) to engage in risk shifting in productive decisions so as to transfer wealth from external capital contributors. These incentive problems can be resolved through a strategy that judiciously combines call and put options retained by the owner‐manager and external financiers, respectively. The resolution of the agency problems through this mechanism provides an economic rationale for the existence of managerial stock options and convertible debt.