Using data from the 1998 proxy season, we find that higher levels of potential dilution from management-sponsored, executive-only stock option plans result in significantly negative cumulative abnormal returns in the 3-day period surrounding the proxy date. We also present evidence of a significantly negative relationship between the percentage vote against the option proposal and the percentage change in executive pay from the 1998 to 1999 compensation years. We interpret this finding to support the idea that boards of directors are responsive to shareholder concerns about CEO option awards following a high level of shareholder opposition.

We present and test an infinite-horizon, continuous-time model of a firm that can dynamically adjust the use of risk management instruments which seek to reduce product price uncertainty and thereby mitigate financial distress losses and reduce taxes. The dynamic setting relaxes several restrictive assumptions common to static models. In the model, the firm can adjust its use and the hedge ratio and maturity of risk management instruments over time, risk management instruments expire as time progresses, the available maturity of the risk management instruments is shorter than the lifetime of the firm, and transaction costs are associated with initiation and adjustment of risk management contracts. The model produces a number of new time-series and cross-sectional implications on how firms use short-term instruments to hedge long-term cash flow uncertainty. Numerical results describe the optimal timing, adjustment, and rollover of risk management instruments and the choice of contract maturity and hedge ratio in response to changes in the firm's product price. The results show that the structure of transaction costs can have an important effect on the firm's risk management strategy. The model predicts that firms that are either far from financial distress or deep in financial distress neither initiate nor adjust their risk management instruments, while firms between the two extremes initiate and actively adjust their risk management instruments. Using quarterly panel data on gold mining firms between 1993 and 1999, we find evidence of a non-monotonic relation between measures of financial distress and risk management activity consistent with the model. We also provide evidence supportive of the model's predictions with respect to the maturity choice of risk management contracts.

Britten-Jones and Neuberger (2000) derived a model-free implied volatility under the diffusion assumption. In this article, we extend their model-free implied volatility to asset price processes with jumps and develop a simple method for implementing it using observed option prices. In addition, we perform a direct test of the informational efficiency of the option market using the model-free implied volatility. Our results from the Standard & Poor's 500 index (SPX) options suggest that the model-free implied volatility subsumes all information contained in the Black-Scholes (B-S) implied volatility and past realized volatility and is a more efficient forecast for future realized volatility.

A firm seeks to raise capital in credit markets to fund risky operating activities. The firm has private information about the future cash flows from such activities. Firm owners delegate operating decisions to a manager who privately learns further information about the distribution of those cash flows subsequent to contracting, but before taking actions. Those actions include the selection of which operating activities to pursue and how much hidden effort to exert. At issue initially after introducing the problem is the efficient design of the manager's compensation as a device for signaling private information to lenders as well as for inducing operating decisions. Our results provide conditions under which a Bayesian Nash separating equilibrium satisfying the Cho–Kreps intuitive criterion exists. Broadly speaking, these results suggest that contracts that resolve internal adverse selection and moral hazard problems may serve as signaling devices in efficiently resolving information asymmetries with external parties. Next, we show how earnings-based debt covenants and the selection of conservative accounting methods may eliminate signaling costs altogether.

Many people assume that the most significant risk in the housing market is that homeowners are exposed to fluctuations in house values. However, homeownership also provides a hedge against fluctuations in future rent payments. This paper finds that, even though house price risk endogenously increases with rent risk, the latter empirically dominates for most households -so housing market risk actually increases homeownership rates and house prices.

We construct a novel data set matching occupational data from separate establishments to the establishments' corporate parents, in order to study labor market links across establishments within diverse firms. We find substantial wage components common to all establishments within firms, even after netting out industry and occupation effects. However, employment changes are localized to establishments. The data suggest that internal labor markets of multiestablishment firms are linked throughout their entire organizations, but that establishment-level demand shocks do not permeate the firm.

Abstract We examine the influence of corporate taxes on U.S. firms' financing methods for taxable acquisitions of 100 percent of a target corporation's stock. We conduct tests of acquirer firms' use of debt or internal funds as the funding source for these acquisitions over the period 1987‐97. Our results provide the first empirical evidence that U.S. firms' use of debt to fund acquisitions significantly declines as foreign tax credit limitations reduce the marginal tax benefits received from borrowing. This finding is consistent with earlier speculation that U.S. foreign tax credit provisions could materially affect the capital costs of U.S. companies in debt‐financed acquisitions. We also find that these firms are generally high‐tax‐rate corporations whose financing choices are not significantly influenced by whether they acquire target‐firm tax loss carryovers. Our findings contribute to the accounting literature on the influence of taxes on the structure and financing of corporate acquisitions.

Abstract In this paper, we consider the role of production externalities in the task assignment problem. Milgrom and Roberts (1992) suggest that complementarities available when agents are assigned to diverse tasks are necessary to overcome distortions in effort allocations caused by an inability to fine‐tune incentives when agents' compensation is based on aggregate imperfect signals. Our analysis formalizes this intuition in a setting that encompasses externalities under both diverse and similar task assignments.