I examine whether monitoring-related contract costs are reflected in bank loan spreads and find evidence that cross-monitoring by senior and subordinate claimholders is associated with smaller spreads. I also find that loan spreads reflect financial contract costs of controlling borrower behavior toward the assets being financed. These results support the importance of contract costs in firms' financing decisions and provide evidence of the importance of monitoring in bank lending arrangements.

We develop an explanation for IPO underpricing in which the issuer's demand for ownership dispersion creates an incentive to underprice. Promoting oversubscription allows broad initial ownership, which in turn increases secondary-market liquidity. Increased liquidity reduces the required return to investors. Broad initial ownership, however, requires an increase in investor-borne information costs. These information costs are offset through initial underpricing. Empirical results are consistent with initial underpricing reflecting the level of ownership dispersion.

We find that the presence of commercial bankers on the board is positively related to aggregate firm debt. Separating by type of debt, the presence of commercial bankers on the board is positively related to short-term, long-term, and total bank debt. We also find that while the presence of unaffiliated commercial bankers on the board is positively related to bank borrowing, the presence of affiliated commercial bankers on the board is not. The results are consistent with the theory that commercial bankers supply bank debt market expertise, but not with the theory that they sit on boards to monitor lending relationships.

We investigate factors affecting the number of outside directorships held by CEOs. CEOs of firms with growth opportunities hold fewer outside directorships than CEOs of firms consisting primarily of assets-in-place. We find evidence consistent with CEOs holding more outside directorships as they transfer decision rights to their eventual successors. We also find that when employees (not necessarily CEOs) of two different firms sit on each other's boards, CEOs hold more outside directorships, suggesting CEO participation bonds the relationship between the two firms. We find little evidence that outside directorships represent unchecked perquisite consumption on the part of CEOs.

The unique characteristics of options enable investors to create nonnormal portfolio return distributions that cannot be replicated with other assets. This analysis explores the power of various investment selection criteria to identify efficient portfolios from investment strategies involving call options and treasury bills, stocks, and covered option writing. The preference structure for strategies incorporating options is compared to traditional stock-fixed income investments, and the importance of options to investor utility maximization is illustrated. This study reveals that rules of stochastic dominance that place few restrictions on investor preference functions and asset return distribution are appropriate criteria by which to rank portfolios containing options and other assets.

James R. Booth, Richard L. Smith, II, The Application of Errors-In-Variables Methodology to Capital Market Research: Evidence on the Small-Firm Effect, The Journal of Financial and Quantitative Analysis, Vol. 20, No. 4 (Dec., 1985), pp. 501-515

In this paper we examine whether regulation can be used to substitute for internal monitoring mechanisms (percentage of outside directors, officer and director common stock ownership, and CEO/Chair duality) to control for agency conflicts in a firm. We find that, in general, the percentage of outside directors is negatively related to insider stock ownership, but is not affected by CEO/Chair duality. CEO/Chair duality is, however, less likely when insider stock ownership increases. We find these internal monitoring mechanisms to be significantly less related with regulated firms (banks and utilities). We conclude that to the extent that regulations reduce the impact of managerial decisions on shareholder wealth, effective internal monitoring of managers becomes less important in controlling agency conflicts.

This paper develops a theory of the role of the underwriter in certifying that risky issue prices reflect potentially adverse inside information. The theory derives from the literature on the use of reputational capital to guarantee product quality. An underwriting cost/benefit paradigm is employed to generate testable implications related to announcement effects, issue underpricing, the choice of competitive versus negotiated underwriting, and the level of underwriter compensation as a function of firm-specific information. Existing empirical literature is reviewed in the context of the certification hypothesis and several new tests are conducted. All of the findings are supportive of the hypothesis.