The well known Sharpe-Lintner-Mossin capital asset pricing model (CAPM) assumes the existence of stability in the price level so that the market price of risk (MPR) measured in nominal terms is the same for all risky assets in an equilibrium market. Friend, Landskroner and Losq [5, hereafter F-L-L] have recently shown that CAPM measured in nominal terms understates the MPR if an uncertain inflation is expected and if a covariance between the rate of return on the market and the rate of inflation is positive (p. 1287).

This study compares the dividend policies of independently owned and bank holding company-affiliated commercial banks. The hypothesis tested is that there exists a significant, positive relationship between the amount of cash dividends paid by a bank and its affiliation with a holding company. The issue is an important one because the distribution of earnings as dividends obviously reduces a bank's ability to generate capital internally, and retained earnings have been the chief source of growth in bank equity capital. For some time the bank supervisory authorities have been concerned over the relative decline in importance of capital in the balance sheet of the average bank, such funds permitting banks to absorb unexpected losses and weather periods of financial crises. Capital adequacy is thus a major consideration in the regulators' assessment of bank dividend policy. Prior research has shown that the banking subsidiaries of bank holding companies have maintained lower capital in relation to assets than have other banks despite achieving greater profitability. Since a bank's capital position is usually positively correlated with its earnings, this implies that affiliated banks have been more generous in paying dividends. Indeed, the statistical evidence of this study indicates that the banking subsidiaries of holding companies paid significantly higher dividends than other banks over the four–year period from 1973 through 1976. Whether or not this has resulted in these firms maintaining less than “adequate†capital is a question that goes far beyond the scope of this paper, but which ultimately must be considered.

In his 1976 Presidential Address to the American Finance Association, Merton Miller provided a compelling argument that there currently exists no viable theory of the optimal capital structure of an individual firm. This argument follows from the critique he presented of existing models of capital structure and from the theory he outlined of the optimal aggregate capital structure of the economy as a whole. That theory depends on the existence of different marginal tax rates for individuals and a tax-free security. Professor Miller pointed out that he was motivated to develop his hypothesis by the apparent inadequacy of a (if not the most) popular explanation for capital structure at both the micro and the aggregate level: the tradeoff between the tax advantages of debt and the cost to the firm's security holders of the bankruptcy process. He observed that neither the tax advantage of debt nor the costs of bankruptcy may be quite what they seem at first glance. When the corporate income tax and the differential taxation of regular income and capital gains are taken into account, then the tax advantage of debt is reduced. Moreover, the limited empirical evidence from actual bankruptcies suggests that the real costs to security holders of bankruptcy may be really rather low. And the recent discussion by Haugen and Senbet [6] suggests that most of the costs attributed to bankruptcy are really costs of liquidation of the firm's assets and not relevant to the capital structure decision.

In a recent article, Modigliani and Pogue [2] raised the issue of “leverage bias” in portfolio performance measures. Specifically, they contended that the value of the Jensen's alpha (α) could be affected by borrowing or lending at the risk-free rate, while the Treynor index (TI) does not suffer from this shortcoming. They illustrated this effect through the use of a graphical example similar to the one in Exhibit I where A and B are two unlevered portfolios with the same α's but different TI's. Modigliani and Pogue argued that by leveraging, i.e., borrowing at Rf, the portfolio with the greater slope (TI), A, could attain a levered portfolio AL which clearly dominates portfolio B. In other L words, the line with the higher TI will dominate the line with a lower TI regardless of α values. This seems to imply that, in general, TI is a better measure of ex post portfolio performance, and that ranking based on TI's is consistent and invariant to the leverage effect, while ranking based on a's is not.

Stochastic Dominance rules are playing an increasingly prominent role in the literature on choice under uncertainty. Their foundation is the mainstream VonNeumann-Morgenstern expected utility paradigm. Their essence is to provide an admissible set of choices under restrictions on the utility functions that follow from prevalent and appealing modes of economic behavior: The admissible sets generated are useful for a large group of individual decision makers and the optimal choice for an individual can then be obtained from among the smaller set of admissible choices.

In recent financial literature a large volume of the articles dealt with asset leasing. This author and his colleagues [6] and others [7] developed the conditions under which asset leasing cannot increase the overall firm's value over normal debt leverage. Many others [2, 3, 11] analyzed the “lease-buy” decision using a variety of models and assumptions. None, however, considered the effect of asset leasing on the firm's capitalization rate. While asset leasing per se would not affect the firm's unlevered cost of capital, it should affect its estimation. This paper developed the adjustment factor to obtain the firm's corresponding unlevered cost of capital with leasing leverage. Basically, Modigliani and Miller's methodology [9] was adjusted for the different tax situation with asset leasing. The effective benefit of leasing on the firm's average cost of funds was shown to be not nearly as effective as an equivalent amount of ordinary debt.

In equilibrium, each new capital asset must be priced properly relative to other assets. If an investor can also buy and sell assets in his portfolio costlessly and quickly, then the new asset will be accepted immediately and fully into the market and it will immediately behave as though it were a seasoned or previously available asset. However, it is often argued that recently issued bonds and seasoned or fully distributed bonds behave differently due to the frictions and risks associated with distributing a new security in the market. And it is also argued that recently issued bonds undergo a behavioral transformation as they become seasoned bonds. According to this argument there are significant empirical behavioral differences between recently issued bonds and seasoned bonds [4, 5, 7, 9, 13]. These differences disappear as the market gradually absorbs the new bond issue and the bond becomes “seasoned.”

The net monetary position of a firm, defined as the nominal value of its monetary assets minus the nominal value of its monetary liabilities, partly determines the wealth transferred to (or from) the firm's owners when unanticipated price level change occurs. Price level change (a random variable) is defined as unanticipated when assessments of (the moments of) its probability distribution are systematically incorrect or biased. During unanticipated inflation, which conventionally means an underestimate of the expected value of the distribution of price level change, the real dollar returns of net monetary debtor firms are enhanced—the unforeseen honoring of debt contracts in dollars of lower purchasing power is a wealth transfer to the firm's owners from the firm's creditors. Conversely, real returns of net monetary creditor firms suffer during unanticipated inflation and gain during unanticipated deflation.

Recent financial literature has discussed how a creditor should determine its investigation and extension policy. Mehta [8, 9] has developed a sequential process for credit extension, and others [1, 2, 4, 7, 10, 12, 14] have used credit-scoring functions to develop decisions rules. Instead of discussing the use of a particular system or the development of a new system, this paper shifts the focus to selection of the best of alternative systems. Different creditors face different profit-loss ratios on loans, business volume, and prior probabilities of good and bad customers. Furthermore, since the alternative systems have different initial costs, effectiveness, and investigation costs per application, no one system is optimal for all creditors. Finally, any credit-scoring alternative declines in effectiveness over time. Measurement of the overall effectiveness of a system requires that the optimal time between updating the system be known.

In this paper, a short-run partial-adjustment model of the demand for credit union shares was specified and estimated with time series data. The estimated results were used to derive long-run, equilibrium demand coefficients and elasticities. The main conclusions are that credit union shares are substitutes for deposits at savings and loan associations, time and savings deposits at commercial banks, and marketable bonds. Moreover, the implications of the statistical results are that credit union and savings and loan shares are more closely related to more liquid assets than to long-term assets. While real income was employed as a constraint variable, it was employed as a maintained hypothesis since the use of a wealth constraint led to perverse results. Also, some evidence was presented that the elasticities of the demand function for credit union shares are different from those of an aggregate savings deposits function. Thus, it is likely that an aggregate demand function will contain aggregation bias.