This paper examines the relation between nominal and real interest rates, and the nominal and real term structure under uncertainty. We show that two separate risk terms cause the Fisher theorem to fail. One risk term is related only to the variability of money prices, while the other is related to the purchasing power riskiness of the nominal bond. Monetary policy can affect the value of both these risk terms. We also show that the pure expectations hypothesis of the term structure fails for both real and nominal bonds because of risk premia. Even if the economy is neutral with respect to monetary policy, monetary policy can alter the nominal term structure.

This paper examines the relation between nominal and real interest rates, and the nominal and real term structure under uncertainty. We show that two separate risk terms cause the Fisher theorem to fail. One risk term is related only to the variability of money prices, while the other is related to the purchasing power riskiness of the nominal bond. Monetary policy can affect the value of both these risk terms. We also show that the pure expectations hypothesis of the term structure fails for both real and nominal bonds because of risk premia. Even if the economy is neutral with respect to monetary policy, monetary policy can alter the nominal term structure.

We study the dynamics of IPOs by examining the tradeoff between an entrepreneur's private benefits, which are lost whenever the firm is publicly traded, and the gains from diversification. We characterize the timing dimension of the decision to go public and its impact on firm value and the evolution of firm risk over time. By endogenizing the timing of the decision to go public, we explain the clustering of IPOs and buyouts in time, the industry concentration of IPO waves, the high incidence of reprivatization of recent IPOs, and the long-run underperformance of recently issued stock relative to the shares of longer-listed companies.

We derive general conditions for forward and/or put unbiasedness and show that restrictions on the probability distribution suffice for simultaneous unbiasedness of forwards and puts, even if consumers are assumed to be risk averse. We examine the optimal production and hedging decisions by a risk-averse producer. If the producer’s state prices are derived from his marginal rates of substitution, an unbiased market forward price is perceived as overpriced and an unbiased market put price as underpriced. Even in this case the full hedging and separation theorems still hold and, contrary to previous literature, there is a hedging role for puts.

This paper connects executive compensation with hedging and analyzes a crucial shareholders and managers agency source that evolves from the pricing of the hedging device. The shareholders are risk-neutral, while the risk-averse manager hedges the price risk of the manufactured quantity, and his compensation package includes equity-linked compensation-stock grants. Only when the hedging instrument's pricing includes a risk premium, hedging is costly to the shareholders, while it is costless to the manager. Then from the owners' point of view, we observe managerial over-hedging, increasing in the equity-linked compensation level. This result leads to a violation of the classical production and hedging separation theorem. We conclude that, in the case where the hedging device's pricing bears a risk premium, shareholders can regulate the corporate value diversion to managers through diminishing the managerial equity-linked compensation scheme or by putting restrictions on the extent of hedging activities of executives.

We adapt the Benninga et al. (2005) framework to value employee stock options (ESOs). The model quantifies non-diversification effects, is computationally simple, and provides an endogenous explanation of ESO early-exercise. Using a proprietary dataset of ESO exercise events we measure the non-marketability ESO discount. We find that the ESO value on the grant date is approximately 45% of a similar plain vanilla Black–Scholes value. The model is aligned with empirical findings of ESOs, gives an exercise boundary of ESOs and can serve as an approximation to the fair value estimation of share-based employee and executive compensation. Using the model we give a numerical measure of non-diversification in an imperfect market.

The paper presents a method for calculating the cost of equity capital for the non-marketable securities of private firms and its difference from the cost of equity capital of an all else equal public firm (the private firm premium). The method is based on a theoretical framework that assumes the investor is undiversified due to her holdings in non-marketable securities. We implement the method for both unlevered and levered firms, and also consider the effect of taxes. The findings indicate that the private firm premium increases with the firm's asset risk, its leverage ratio, and the non-diversification of the private firm's owner, while taxes are negatively related to the private firm premium.