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

• Biais, B., & Hillion, P. (1994). Insider and Liquidity Trading in Stock and Options Markets. Review of Financial Studies, 7, 743–780.

  We analyze the introduction of a nonredundant option, which completes the markets, and the effects of this on information revelation and risk sharing. The option alters the interaction between liquidity and insider trading. We find that the option mitigates the market breakdown problem created by the combination of market incompleteness and asymmetric information. The introduction of the option has ambiguous consequences on the informational efficiency of the market. One the one hand, by avoiding market breakdown, it enables trades to occur and convey information. On the other hand, the introduction of the option enlarges the set of trading strategies the insider can follow. This can make it more difficult for the market makers to interpret the information content of trades and consequently can reduce the informational efficiency of the market. The introduction of the option also has an ambiguous effect on the profitability of insider trades, which can either increase or decrease depending on parameter values.

• Boudoukh, J., Richardson, M. P., & Whitelaw, R. F. (1994). A Tale of Three Schools: Insights on Autocorrelations of Short-Horizon Stock Returns. Review of Financial Studies, 7, 539–573.

  This article reexamines the autocorrelation patterns of short-horizon stock returns. We document empirical results which imply that these autocorrelations have been overstated in the existing literature. Based on several new insights, we provide support for a market efficiency-based explanation of the evidence. Our analysis suggests that institutional factors are the most likely source of the autocorrelation patterns.

• Boyd, J. H., & Jagannathan, R. (1994). Ex-dividend Price Behavior of Common Stocks. Review of Financial Studies, 7, 711–741.

  This study examines common stock prices around ex-dividend dates. Such price data usually contain a mixture of observations–some with and some without arbitrageurs and/or dividend capturers active. Our theory predicts that such mixing will result in a nonlinear relation between percentage price drop and dividend yield–not the commonly assumed linear relation. This prediction and another important prediction of theory are supported empirically. In a variety of tests, marginal price drop is not significantly different from the dividend amount. Thus, over the last several decades, one-for-one marginal price drop has been an excellent (average) rule of thumb.

• Bradley, M., Khanna, N., & Slezak, S. L. (1994). Insider Trading, Outside Search, and Resource Allocation: Why Firms and Society May Disagree on Insider Trading Restrictions. Review of Financial Studies, 7, 575–608.

  We show that entrepreneurs may prefer to allow insider trading even when it is not socially optimal. We examine a model in which an insider/manager allocates resources on the basis of his private information and outside information conveyed through the secondary-market price of the firm's shares. If the manager is allowed to trade, he will compete with informed outsiders, reducing the equilibrium quality of outside information. While the benefits to production of outside information are the same for society and entrepreneurs, we show that the social and private costs are different. Thus, entrepreneurs and society may disagree on the conditions under which insider trading restrictions should be imposed.

• Chemmanur, T. J., & Fulghieri, P. (1994). Reputation, Renegotiation, and the Choice between Bank Loans and Publicly Traded Debt. Review of Financial Studies, 7, 475–506.

  We model firms' choice between bank loans and publicly traded debt, allowing for debt renegotiation in the event of financial distress. Entrepreneurs, with private information about their probability of financial distress, borrow from banks (multiperiod players) or issue bonds to implement projects. If a firm is in financial distress, lenders devote a certain amount of resources (unobservable to entrepreneurs) to evaluate whether to liquidate the firm or to renegotiate its debt. We demonstrate that banks' desire to acquire a reputation for making the "right" renegotiation versus liquidation decision provides them an endogenous incentive to devote a larger amount of resources than bondholders toward such evaluations. In equilibrium, bank loans dominate bonds from the point of view of minimizing inefficient liquidation; however, firms with a lower probability of financial distress choose bonds over bank loans.

• Chowdhry, B., & Nanda, V. (1994). Repurchase Premia as a Reason for Dividends: A Dynamic Model of Corporate Payout Policies. Review of Financial Studies, 7, 321–350.

  We propose that it is precisely because firms' repurchases of their own stock through tender offers are associated with large stock-price increases that repurchases are unattractive as a means of distributing cash. As a result, firms distribute some cash in the form of dividends–despite the tax disadvantage–and carry the rest to future periods. However, when their stock is sufficiently undervalued, firms distribute all accumulated cash through stock repurchases. We show that dividends are smoothed and are positively related both to earnings innovations and to previous period's dividends. Also, the stock-price reaction to a repurchase announcement, of a given size, is increasing in the previous period's dividends.

• Cooper, I., & Kaplanis, E. (1994). Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium. Review of Financial Studies, 7, 45–60.

  We test whether the home bias in equity portfolios is caused by investors trying to hedge inflation risk. The empirical evidence is consistent with this motive only if investors have very high levels of risk tolerance and equity returns are negatively correlated with domestic inflation. We then develop a model of international portfolio choice and equity market equilibrium that integrates inflation risk and deadweight costs. Using this model we estimate the levels of costs required to generate the observed home bias in portfolios consistent with different levels of risk aversion. For a level of risk aversion consistent with standard estimates of the domestic equity market risk premium, these costs are about a few percent per annum, greater than observable costs such as withholding taxes. Thus, the home bias cannot be explained by either inflation hedging or direct observable costs of international investment unless investors have very low levels of risk aversion.

• Engle, R. F., Ito, T., & Lin, W.-L. (1994). Do Bulls and Bears Move across Borders? International Transmission of Stock Returns and Volatility. Review of Financial Studies, 7, 507–538.

  This article investigates empirically how returns and volatilities of stock indices are correlated between the Tokyo and New York markets. Using intradaily data that define daytime and overnight returns for both markets, we find that Tokyo (New York) daytime returns are correlated with New York (Tokyo) overnight returns. We interpret this result as evidence that information revealed during the trading hours of one market has a global impact on the returns of the other market. In order to extract the global factor from the daytime returns of one market, we propose and estimate a signal-extraction model with GARCH processes.

• Fedenia, M., Hodder, J. E., & Triantis, A. J. (1994). Cross-Holdings: Estimation Issues, Biases, and Distortions. Review of Financial Studies, 7, 61–96.

  Cross-holding occurs when listed corporations own securities issued by other corporations. We analyze the effect of cross-holdings on market capitalization and return measures as well as implications for econometric testing of asset pricing theories. We show that cross-holdings generally distort standard market return and risk measures The magnitudes of such distortions are calculated for simulated economies by using a variety of crossholding patterns. In addition, cross-holdings are shown to induce nonstationarity in the covariance matrix of security returns. We examine the effect of this nonstationarity for estimating efficient frontiers and factor structures. We also discuss the implications for risk-return estimates in equilibrium asset pricing models.

• Gerety, M. S., & Mulherin, J. H. (1994). Price Formation on Stock Exchanges: The Evolution of Trading within the Day. Review of Financial Studies, 7, 609–629.

  Prior analyses of prices of the NYSE and other exchanges find that transitory price volatility is greater at the open of trading than at the close. We extend this line of research by using 40 years of hourly Dow Jones 65 Composite price index data to estimate transitory volatility throughout the trading day. Our results indicate that transitory volatility steadily declines during the trading day. We find a similar intraday decline in transitory volatility for a 2 1/2-year sample of the individual firms in the Dow Jones 30 Industrials Index. The results are consistent with the hypothesis that trading aids price formation and do not support the argument that particular trading mechanisms are the source of greater volatility at the open of trading.