A Fast Literature Search Engine based on top-quality journals, by Dr. Mingze Gao.

• Aguerrevere, F. L. (2003). Equilibrium Investment Strategies and Output Price Behavior: A Real-Options Approach. Review of Financial Studies, 16, 1239–1272.

  The effects of competitive interactions on investment decisions and on the dynamics of the price of a nonstorable commodity are studied in a model of incremental investment with time to build and operating flexibility. I find that an increase in uncertainty may encourage firms to increase their capacity. Furthermore, I show that it may be optimal to invest in additional capacity during periods in which part of the operational capacity is not being utilized. The impact of competition on the properties of the endogenous output price is dramatic. For example, I find that price volatility may be increasing in the number of competitors in the industry. Copyright 2003, Oxford University Press.

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• Ahn, D.-H., Conrad, J., & Dittmar, R. F. (2003). Risk Adjustment and Trading Strategies. Review of Financial Studies, 16, 459–485.

  We assess the profitability of momentum strategies using a stochastic discount factor approach. In unconditional tests, approximately half of the strategies' profitability is explained. In conditional tests we see a further slight decline in profits. We argue that the risk of these strategies should be increasing in the market risk premium. Empirically, while their risk measures estimated relative to the stochastic discount factor behave as predicted, market betas do not; thus capital asset pricing model (CAPM)-like benchmarks may lead to incorrect inferences. Given that our nonparametric risk adjustment explains roughly half of momentum strategy profits, we cannot rule out the possibility of residual mispricing. Copyright 2003, Oxford University Press.

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• Almazan, A., & Suarez, J. (2003). Managerial Compensation and the Market Reaction to Bank Loans. Review of Financial Studies, 16, 237–261.

  This article considers why a manager would choose to submit himself to the discipline of bank monitoring. This issue is analyzed within the context of a model where the manager enjoys private benefits, which can be restricted by the monitor, and is optimally compensated by shareholders. Within this setting we find that managers will submit to monitoring when they receive favorable private information. This result is consistent with event study evidence that suggests that the market has a favorable view of financing choices that increase monitoring. Copyright 2003, Oxford University Press.

• Bakshi, G., & Kapadia, N. (2003). Delta-Hedged Gains and the Negative Market Volatility Risk Premium. Review of Financial Studies, 16, 527–566.

  We investigate whether the volatility risk premium is negative by examining the statistical properties of delta-hedged option portfolios (buy the option and hedge with stock). Within a stochastic volatility framework, we demonstrate a correspondence between the sign and magnitude of the volatility risk premium and the mean delta-hedged portfolio returns. Using a sample of S&P 500 index options, we provide empirical tests that have the following general results. First, the delta-hedged strategy underperforms zero. Second, the documented underperformance is less for options away from the money. Third, the underperformance is greater at times of higher volatility. Fourth, the volatility risk premium significantly affects delta-hedged gains, even after accounting for jump fears. Our evidence is supportive of a negative market volatility risk premium. Copyright 2003, Oxford University Press.

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• Bakshi, G., Kapadia, N., & Madan, D. (2003). Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options. Review of Financial Studies, 16, 101–143.

  This article provides several new insights into the economic sources of skewness. First, we document the differential pricing of individual equity options versus the market index and relate it to variations in return skewness. Second, we show how risk aversion introduces skewness in the risk-neutral density. Third, we derive laws that decompose individual return skewness into a systematic component and an idiosyncratic component. Empirical analysis of OEX options and 30 stocks demonstrates that individual risk-neutral distributions differ from that of the market index by being far less negatively skewed. This article explains the presence and evolution of risk-neutral skewness over time and in the cross section of individual stocks. Copyright 2003, Oxford University Press.

• Barclay, M. J. (2003). Price Discovery and Trading After Hours. Review of Financial Studies, 16, 1041–1073.

  We examine the effects of trading after hours on the amount and timing of price discovery over the 24-hour day. A high volume of liquidity trade facilitates price discovery. Thus prices are more efficient and more information is revealed per hour during the trading day than after hours. However, the low trading volume after hours generates significant, albeit inefficient, price discovery. Individual trades contain more information after hours than during the day. Because information asymmetry declines over the day, price changes are larger, reflect more private information, and are less noisy before the open than after the close. Copyright 2003, Oxford University Press.

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• Bennett, J. A. (2003). Greener Pastures and the Impact of Dynamic Institutional Preferences. Review of Financial Studies, 16, 1203–1238.

  Although institutional investors have a preference for large capitalization stocks, over time they have shifted their preferences toward smaller, riskier securities. These changes in aggregate preferences have arisen primarily from changes in the preferences of each class of institution, rather than changes in the importance of different classes. Evidence also suggests that recent growth in institutional investment combined with this shift in preferences helps explain why markets in general, and smaller stocks in particular, have exhibited greater firm-specific risk and liquidity in recent years. Additional analyses suggest that institutional investors moved toward smaller securities because such securities offer "greener pastures." Copyright 2003, Oxford University Press.

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• Billett, M. T. (2003). Cross-Subsidies, External Financing Constraints, and the Contribution of the Internal Capital Market to Firm Value. Review of Financial Studies, 16, 1167–1201.

  We examine the link between the excess value of a diversified firm and the value of its internal capital market. Subsidies to small financially constrained segments with good relative investment opportunities significantly increase excess value, while transfers of resources from segments with good relative investment opportunities significantly decrease excess value. Of interest is that subsidies to small financially constrained segments with poor relative investment opportunities also significantly increase excess value. However, there is little evidence that this result depends on the diversity of a firm's investment opportunities. We conclude that financing constraints drive the relationship between the internal capital market and firm value. Copyright 2003, Oxford University Press.

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• Brav, A., & Gompers, P. A. (2003). The Role of Lockups in Initial Public Offerings. Review of Financial Studies, 16, 1–29.

  In a sample of 2,794 initial public offerings (IPOs), we test three potential explanations for the existence of IPO lockups: lockups serve as (i) a signal of firm quality, (ii) a commitment device to alleviate moral hazard problems, or (iii) a mechanism for underwriters to extract additional compensation from the issuing firm. Our results support the commitment hypothesis. Insiders of firms that are associated with greater potential for moral hazard lockup their shares for a longer period of time. Insiders of firms that have experienced larger excess returns, are backed by venture capitalists, or go public with high-quality underwriters are more likely to be released from the lockup restrictions. Copyright 2003, Oxford University Press.

• Derrien, F., & Womack, K. L. (2003). Auctions vs. Bookbuilding and the Control of Underpricing in Hot IPO Markets. Review of Financial Studies, 16, 31–61.

  Market returns before the offer price is set affect the amount and variability of initial public offering (IPO) underpricing. Thus an important question is "What IPO procedure is best adapted for controlling underpricing in "hot" versus "cold" market conditions?" The French stock market offers a unique arena for empirical research on this topic, since three substantially different issuing mechanisms (auctions, bookbuilding, and fixed price) are used there. Using 1992–1998 data, we find that the auction mechanism is associated with less underpricing and lower variance of underpricing. We show that the auction procedure's ability to incorporate more information from recent market conditions into the IPO price is an important reason. Copyright 2003, Oxford University Press.