In a general sense this analysis has been concerned with the extent of a market and the effect of limiting the extent on the prices of assets in that market. One example of the type of limited market extent with which we have been concerned is provided by nonmarketable assets and another is provided by market segmentation. Unambiguous statements of the effect of nonmarketable assets and market segmentation on the level of prices require that and be oppossite in sign (unless one or both are zero). Only two cases have been identified where unambiguous statements can be made. The first, the case of constant absolute risk aversion, implies there is no effect of nonmarketable assets or market segmentation on the level of asset prices. The second case, constant relative risk aversion, where the coefficient of relative risk aversion is equal to or less than one, implies that prices are lower in the presence of these imperfections. Arrow [1] argues that the coefficient of relative risk aversion must “hover around 1.” Thus, if constant relative risk aversion is a reasonable approximation to reality we should accept the implication of the latter case. Certainly, if a choice had to be made, the latter case would be the more palatable of the two. That is, constant relative risk aversion does imply decreasing absolute risk aversion, which appears more acceptable than the hypothesis of constant absolute risk aversion. The constant relative risk aversion case has implications for such things as the organization and operation of markets and corporate merger decisions. For example, higher margin requirements that inhibit diversification would be expected to lower asset values. Also, as a matter of corporate policy, it would appear that, ceteris paribus, mergers that increase the extent of a market would be preferable to within-market mergers.

This paper contends that corporations use callable, convertible bonds to lower the issuance costs of sequential financing. Sequential financing increases issue costs but helps control overinvestment incentives that can arise if financing is provided prior to an investment option's maturity. A convertible bond's conversion option reduces issue costs while helping to control the overinvestment incentive. Evidence of important investment and financing activity around the time convertible bonds are called and converted supports the hypothesis. The evidence shows significant increases in capital expenditures and new long-term debt financing starting in the year of the call.

This paper presents some of the implications of modern portfolio theory for the equilibrium structure of wages under conditions of uncertainty. The primary model presented is a model of wage uncertainty and hence the equilibrium structure is derived in terms of expected wages. The equilibrium structure with the assumption of a perfect labor market (e.g., labor units are infinitely divisible and costlessly mobile) and a perfect capital market is shown to have a very simple linear form. The model assumes homogeneous labor units as well as the usual single-period capital asset pricing model assumptions.

We examine employee stock ownership plan (ESOP) announcements to study the effects of an increase in managerial voting rights without a proportional increase in the ownership of cash flow claims. Our finding that when managers initially control few votes firm value increases with the fraction of shares contributed to the ESOP supports the view that managerial vote control serves shareholder interests. Conversely, the decrease in firm value with larger contributions to the ESOP when managers initially control many votes reflects a divergence of incentives that increases the agency problems between managers and outside shareholders.

We examine an unusual sample of firms within the life insurance industry: 30 firms which switched from a common-stock to a mutual-ownership structure. Our evidence indicates that the rate of growth of premium income from policyholders remains unchanged, stockholders receive a premium for their stock, and management turnover declines; thus, no group of claimholders systematically loses in the sample of firms which choose to go through the mutualization process. We therefore conclude that for this sample of firms, changing from a stock to a mutual-ownership structure is on average efficiency-enhancing.

The performance of Value Line Investment Survey recommendations made between 1965 and 1978 is evaluated by applying a future benchmark technique. The future benchmark technique avoids selection bias problems associated with using historic benchmarks as well as known difficulties of using Capital Asset Pricing Model benchmarks. Potential problems (implicit in the technique) are discussed and resolved within the conduct of the experiment. Results indicate statistically significant abnormal performance when future benchmarks are computed using a market model.

Recent work by Richard Roll has challenged the worth of portfolio performance measures based on the capital asset pricing model. This paper demonstrates that Roll's conclusions are due to his focusing on a ‘truly’ ex-ante efficient index. Using a choice and information theoretic framework, we show that an appropriate index is efficient relative to the probabilities assessed by the ‘market’. Residual analyses and portfolio performance tests, using such an index, yield meaningful results for a wide class of information structures. Roll's primary criticisms, however, relate to tests of the asset pricing model itself. We argue that these criticisms are vastly overstated.

Certain U.S. Government securities, known as flower bonds, can be redeemed at par plus accrued interest for the purpose of paying estate taxes, if held at the time of death. Thus, a flower bond, selling at a discount, is like a straight bond plus a life insurance policy. An equilibrium derived from a rational flower bond pricing model implies the existence of clienteles: individuals with the highest death probabilities hold the deepest discount flower bonds. The empirical implication, that bonds with the deepest discount should be redeemed at the fastest rate, is tested and the results support the proposition.

We analyze the individual's demand for insurance as a special case of general portfolio hedging activity. The demand for insurance contracts is determined simultaneously with the demands for other assets in the portfolio. We demonstrate that when the payoffs of the policy are correlated with the payoffs to the individual's other assets, the demand for insurance contracts is generally not a separable portfolio decision. We argue that this separability condition is not generally met because of significant interdependence of claims across different insurance policies. Furthermore, our generalizations can reverse the standard prediction that wealthier individuals will demand less insurance.