We examine the determinants and implications of holdings of cash and marketable securities by publicly traded U.S. firms in the 1971–1994 period. In time-series and cross-section tests, we find evidence supportive of a static tradeoff model of cash holdings. In particular, firms with strong growth opportunities and riskier cash flows hold relatively high ratios of cash to total non-cash assets. Firms that have the greatest access to the capital markets, such as large firms and those with high credit ratings, tend to hold lower ratios of cash to total non-cash assets. At the same time, however, we find evidence that firms that do well tend to accumulate more cash than predicted by the static tradeoff model where managers maximize shareholder wealth. There is little evidence that excess cash has a large short-run impact on capital expenditures, acquisition spending, and payouts to shareholders. The main reason that firms experience large changes in excess cash is the occurrence of operating losses.

This paper uses commercial aircraft transactions to determine whether prices obtained from asset sales are greater under Chapter 11 reorganization than under Chapter 7 liquidation. Results indicate that prices obtained under both bankruptcy regimes are substantially lower than prices obtained by non-distressed airlines. Furthermore, there is no evidence that prices obtained by firms reorganizing under Chapter 11 are greater than those obtained by firms liquidating under Chapter 7. An analysis of aircraft sales indicates that Chapter 11 is also ineffective in limiting the number of aircraft sold at discounted prices.

Nonfinancial firms that use interest rate swaps are compared with nonusers for the years 1991, 1993, and 1995. Swap use grew from 6% of all firms in 1991 to 8% in 1995. Nonfinancial firms use fixed rate payer swaps more often than floating rate payer swaps. Firms that use swaps are significantly larger and have a higher debt to equity ratio relative to nonusers. Fixed rate payers receive a ratings' upgrade significantly more often than floating rate payers and experience a significantly higher percentage increase in net sales in the year of swap initiation relative to floating rate payers and the industry average. Floating rate payers have a significantly higher S&P bond rating relative to the industry average. The test results lend support to the information asymmetry theory of swap usage [Titman, S., 1992. Interest rate swaps and corporate financing choices, Journal of Finance 47, pp. 1503–1516] and lend some support to the asset substitution portion of the agency cost theory of swap usage [Wall, L.D., 1989. Interest rate swaps in an agency theoretic model with uncertain interest rates. Journal of Banking and Finance 13, pp. 261–270].

Under what conditions will a multinational corporation alter its operations to manage its risk exposure? We show that multinational firms will engage in operational hedging only when both exchange rate uncertainty and demand uncertainty are present. Operational hedging is less important for managing short-term exposures, since demand uncertainty is lower in the short term. Operational hedging is also less important for commodity-based firms, which face price but not quantity uncertainty. When the fixed costs of establishing a plant are low or the variability of the exchange rate is high, a firm may benefit from establishing plants in both the domestic and foreign location. Capacity allocated to the foreign location relative to the domestic location will increase when the variability of foreign demand increases relative to the variability of domestic demand or when the expected profit margin is larger. For firms with plants in both a domestic and foreign location, the foreign currency cash flow generally will not be independent of the exchange rate and consequently the optimal financial hedging policy cannot be implemented with forward contracts alone. We show that the optimal financial hedging policy can be implemented using foreign currency call and put options and forward contracts.

We examine how principals should design incentives to induce time-inconsistent procrastinating agents to complete tasks efficiently. Delay is costly to the principal, but the agent faces stochastic costs of completing the task, and efficiency requires waiting when costs are high. If the principal knows the task-cost distribution, she can always achieve first-best efficiency. If the agent has private information, the principal can induce first-best efficiency for time-consistent agents, but often cannot for procrastinators. We show that second-best optimal incentives for procrastinators typically involve an increasing punishment for delay as time passes.

In this paper we study the quantitative impact of marginal tax rates on the distribution of income. Our methodology builds on computable general-equilibrium framework. We find that distortions from marginal tax rate changes of the sort implied by the Tax Reform Act of 1986 have sizable effects on income inequality in a reasonably quantified life-cycle setting: In our model rate changes alone capture half the increase in the pretax Gini that actually occurred between 1984 and 1989.

We find that firms protected by “second generation” state antitakeover laws substantially reduce their use of debt, and that unprotected firms do the reverse. This result supports recent models in which the threat of hostile takeover motivates managers to take on debt they would otherwise avoid. An implication is that legal barriers to takeovers may increase corporate slack.

Derivatives valuation and risk management involve heavy use of quantitative models. To develop a quantitative assessment of model risk as it affects the basic option writing strategy that might be followed by a financial institution, we conduct an empirical simulation, with and without hedging, using data from 1976 to 1996. Results indicate that imperfect models and inaccurate volatility forecasts create sizable risk exposure for option writers. We consider to what extent the damage due to model risk can be limited by pricing options using a higher volatility than the best estimate from historical data.

There Appears to be significant diversity in the incidence of bureaucratic corruption across countries at different stages of economic development and under different political and economic regimes. Little theoretical or empirical analysis has been offered, however, on the link between corruption, government, and growth. The paper attempts to fill the void through equilibrium models of endogenous growth. “balanced growth” is derived as a balancing act between accumulating human capital, which engenders growth, and accumulating political capital, which mainly assures bureaucratic power. The analysis focuses on the interplay between investment in these two types of capital and its implications for long‐term growth under alternative political regimes. Some propositions are tested and confirmed empirically.

Ray J. Pfeiffer, Jr., Pieter T. Elgers, Controlling for Lagged Stock Price Responses in Pricing Regressions: An Application to the Pricing of Cash Flows and Accruals, Journal of Accounting Research, Vol. 37, No. 1 (Spring, 1999), pp. 239-247