This paper documents that insiders are both contrarians and possessors of superior information. We find that insider trades are positively related to the firm's future earnings performance (proxy for superior cash flow information), positively related to the firm's book-to-market ratio and inversely related to recent returns (proxies for trading against misvaluation). Each relation has incremental explanatory power, yet information about future cash flow changes explains a smaller portion of insider purchases than do proxies for security misvaluation. The relation between insider trades and future earnings performance is amplified (attenuated) as the benefits (costs) to trading on financial performance information increase.

This paper compares the empirical performances of statistical projection models with those of the Black–Scholes (adapted to account for skew) and the GARCH option pricing models. Empirical analysis on S&P500 index options shows that the out-of-sample pricing and projected trading performances of the semi-parametric and nonparametric projection models are substantially better than more traditional models. Results further indicate that econometric models based on nonlinear projections of observable inputs perform better than models based on OLS projections, consistent with the notion that the true unobservable option pricing model is inherently a nonlinear function of its inputs. The econometric option models presented in this paper should prove useful and complement mainstream mathematical modeling methods in both research and practice.

When a homeowner uses an agent to sell his property, he may have less information than his agent and be disadvantaged in price setting and negotiating. This study examines whether the percentage commission structure in real estate brokerage creates agency problems. We investigate whether agents are able to use their information advantage to either sell their own property faster or for a higher price than their clients’ properties. The empirical results confirm our theoretical predictions of agency problems, as we find that agent-owned houses sell no faster than client-owned houses, but they do sell at a price premium of approximately 4.5%.

Modigliani and Cohn hypothesize that the stock market suffers from money illusion, discounting real cash flows at nominal discount rates. While previous research has focused on the pricing of the aggregate stock market relative to Treasury bills, the money-illusion hypothesis also has implications for the pricing of risky stocks relative to safe stocks. Simultaneously examining the pricing of Treasury bills, safe stocks, and risky stocks allows us to distinguish money illusion from any change in the attitudes of investors toward risk. Our empirical results support the hypothesis that the stock market suffers from money illusion.

We examine the impact of asset liquidation value on debt contracting using a unique set of commercial property loan contracts. We employ commercial zoning regulation to capture the flexibility of a property's permitted uses as a measure of an asset's redeploy ability or value in its next best use. Within a census tract, more redeployable assets receive larger loans with longer maturities and durations, lower interest rates, and fewer creditors, controlling for the property's type, sale price, and earnings-to-price ratio. These results are consistent with incomplete contracting and transaction cost theories of liquidation value and financial structure.

We measure media bias by estimating ideological scores for several major media outlets. To compute this, we count the times that a particular media outlet cites various think tanks and policy groups, then compare this with the times that members of Congress cite the same groups. Our results show a strong liberal bias: all of the news outlets we examine, except Fox News ’ Special Report and the Washington Times, received scores to the left of the average member of Congress. Consistent with claims made by conservative critics, CBS Evening News and the New York Times received scores far to the left of center. The most centrist media outlets were PBS NewsHour, CNN’s Newsnight, and ABC’s Good Morning America; among print outlets, USAToday was closest to the center. All of our findings refer strictly to news content; that is, we exclude editorials, letters, and the like.

We empirically examine whether firms engage in a dynamic rebalancing of their capital structures while allowing for costly adjustment. We begin by showing that the presence of adjustment costs has significant implications for corporate financial policy and the interpretation of previous empirical results. After confirming that financing behavior is consistent with the presence of adjustment costs, we find that firms actively rebalance their leverage to stay within an optimal range. Our evidence suggests that the persistent effect of shocks on leverage observed in previous studies is more likely due to adjustment costs than indifference toward capital structure.

The existence of “spillover effects” in financial markets is well documented and multivariate time series techniques have been used to study the transmission of conditional variances among large and small market value firms. Earlier research has suggested that volatility surprises to large capitalization firms are a reliable predictor of the volatility of small capitalization firms. A related line of research has examined how regime shifts in volatility may account for a considerable amount of the persistence in volatility. However, these studies have focused on univariate modeling and many have imposed regime changes on a priori grounds. This paper re-examines the asymmetry in the predictability of the volatilities of large versus small market value firms allowing for sudden changes in variance. Our method of analysis extends the existing literature in two important ways. First, recent advances in time series econometrics allow us to detect the time periods of sudden changes in volatility of large cap and small cap stocks endogenously using the iterated cumulated sums of squares (ICSS) algorithm. Second, we directly incorporate the information obtained on sudden changes in volatility in a Bivariate GARCH model of small and large cap stock returns. Our findings indicate that accounting for volatility shifts considerably reduces the transmission in volatility and, in essence, removes the spillover effects. We conclude that ignoring regime changes may lead one to significantly overestimate the degree of volatility transmission that actually exists between the conditional variances of small and large firms.

We analyze race discrimination in labor markets in which wage offers are posted. If employers with job vacancies receive multiple applicants, they choose the most qualified but may choose arbitrarily among equally qualified applicants. In the model, firms post wages, workers choose where to apply, and firms decide which workers to hire. Labor-market frictions greatly amplify racial disparities, so mild discriminatory tastes or small productivity differences can produce large wage differentials between the races. Compared with the nondiscriminatory equilibrium, the discriminatory equilibrium features lower net output, lower wages for both white and black workers and greater profits for firms.(This abstract was borrowed from another version of this item.)