This paper describes the firm's decision to borrow short- term versus long-term and shows how the introduction of interest rate swaps affects this choice. The model shows that in the absence of a swap market, interest rate uncertainty can lead firms to substitute long-term for short-term financing. However, when swaps exist, there is a tendency for firms that expect their credit quality to improve to borrow short-term and use swaps to hedge interest rate risk. The model suggests that, while the demand for fixed for floating swaps is enhanced, the demand for floating for fixed swaps is reduced by the presence of asymmetric information.

[Feedback from stock prices to cash flows occurs because information revealed by firms' stock prices influences the actions of competitors. We explore the implications of feedback within a noisy rational expectations setting with incumbent publicly traded firms and privately held new entrants. In this setting the equilibrium relation among stock prices and both future dividends and aggregate output depends on the strategic environment in which these firms operate. In general, under reasonable conditions, the relations between prices, dividends, and economic output in our framework are consistent with empirical evidence in the macroliterature. We also generate new, potentially testable, implications.]

[We provide a simple argument that suggests that better-informed hedge funds choose to have less exposure to factor risk. Consistent with this argument, we find that hedge funds that exhibit lower tf-squareds with respect to systematic factors have higher Sharpe ratios, higher information ratios, and higher alphas. They also exhibit higher manipulation-proof performance measures and charge higher fees.]

[This article examines information and incentive problems that can exist in the market for commercial mortgages that are pooled and repackaged as commercial mortgage-backed securities (CMBSs). We find that mortgages that are originated by institutions with large negative stock returns in the quarters prior to the origination date tend to have higher credit spreads and default more than other mortgages with similar observable characteristics. Properties financed with these mortgages also exhibit weaker post-securitization operating performance. In addition, stock price loser institutions are anxious to securitize mortgages they originate more quickly. Finally we find that credit rating agencies require higher levels of subordination for CMBS pools (i.e., view these pools as riskier) that include more mortgages originated by underperforming originators. This evidence is consistent with reputation models in which poorly performing originators have less incentive to carefully evaluate the credit quality of prospective borrowers, thereby letting relatively riskier mortgages pass through their weaker screening standards.]

Portfolio strategies that buy stocks with high returns over the previous 3-12 months and sell stocks with low returns over this same time period perform well over the following 12 months. A recent article by Conrad and Kaul (1998) presents striking evidence suggesting that the momentum profits are attributable to cross-sectional differences in expected returns rather than to any time-series dependence in returns. This article shows that Conrad and Kaul reach this conclusion because they do not take into account the small sample biases in their tests and bootstrap experiments. Our unbiased empirical tests indicate that cross-sectional differences in expected returns explain very little, if any, of the momentum profits.

[Recent empirical evidence indicates that capital structure changes affect pricing strategies. In most cases, prices increase following the implementation of a leveraged buyout of a major firm in an industry, with the more leveraged firm in the industry charging higher prices on average. Notable exceptions exist, however, when the leverage increasing firm's rival is relatively unlevered. The first observation is consistent with a model where firms compete for market share on the basis of price. The second observation can be explained within the context of a Stackelberg model where the relatively unlevered rival acts as the Stackelberg price leader.]

[This article examines the contribution of stock price overreaction and delayed reaction to the profitability of contrarian strategies. The evidence indicates that stock prices overreact to firm-specific information, but react with a delay to common factors. Delayed reactions to common factors give rise to a size-related lead-lag effect in stock returns. In sharp contrast with the conclusions in the extant literature, however, this article finds that most of the contrarian profit is due to stock price overreaction and a very small fraction of the profit can be attributed to the lead-lag effect.]

[The effect of financial policy on a firm's incentives to maintain its reputation for producing a high-quality product is analyzed. It is demonstrated that in certain situations debt will reduce a firm's ability to credibly offer high-quality products and, as a consequence, will reduce its value. However, for firms with assets that have high salvage values in liquidation, debt may increase their ability to credibly offer high-quality products and, therefore, increase their values.]