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

• Agarwal, V. (2004). Risks and Portfolio Decisions Involving Hedge Funds. Review of Financial Studies, 17, 63–98.

  This article characterizes the systematic risk exposures of hedge funds using buy-and-hold and option-based strategies. Our results show that a large number of equity-oriented hedge fund strategies exhibit payoffs resembling a short position in a put option on the market index and therefore bear significant left-tail risk, risk that is ignored by the commonly used mean-variance framework. Using a mean-conditional value-at-risk framework, we demonstrate the extent to which the mean-variance framework underestimates the tail risk. Finally, working with the systematic risk exposures of hedge funds, we show that their recent performance appears significantly better than their long-run performance. Copyright 2004, Oxford University Press.

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• Avramov, D. (2004). Stock Return Predictability and Asset Pricing Models. Review of Financial Studies, 17, 699–738.

  This article develops an asset allocation framework that incorporates prior beliefs about the extent of stock return predictability explained by asset pricing models. We find that when prior beliefs allow even minor deviations from pricing model implications, the resulting asset allocations depart considerably from and substantially outperform allocations dictated by either the underlying models or the sample evidence on return predictability. Under a wide range of beliefs about model pricing abilities, asset allocations based on conditional models outperform their unconditional counterparts that exclude return predictability. Copyright 2004, Oxford University Press.

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• Baliga, S. (2004). The Emergence and Persistence of the Anglo-Saxon and German Financial Systems. Review of Financial Studies, 17, 129–163.

  We use a moral hazard model to compare monitored (nontraded) bank loans and traded (nonmonitored) bonds as sources of external funds for industry. We contrast the theoretical conditions that favor each system with the historical conditions prevailing when these financial systems evolved during the British and German industrial revolutions. To study persistence, we consider an entry model where financiers take the industrial structure as given when they lend and firms take the financial system as given when they borrow. We show multiple equilibria can exist, compare equilibria in welfare terms, and discuss their robustness to coordination between lenders and borrowers. Copyright 2004, Oxford University Press.

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• Bange, M. M. (2004). Board Composition, Board Effectiveness, and the Observed Form of Takeover Bids. Review of Financial Studies, 17, 1185–1215.

  We show that bidding firms consider target board characteristics when deciding takeover offer types and initial offer premiums. We study a sample of 436 proposed negotiated mergers and bypass offers. Firms with individuals holding the titles of both chief executive officer (CEO) and board chair are more likely to receive bypass offers. These offers are more likely to be successful and generate higher target shareholder gains over the takeover offer period. When the target's board is independent, the target is less likely to receive a high premium and the offer is less likely to succeed. Copyright 2004, Oxford University Press.

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• Bekaert, G. (2004). Conditioning Information and Variance Bounds on Pricing Kernels. Review of Financial Studies, 17, 339–378.

  Gallant, Hansen, and Tauchen (1990) show how to use conditioning information optimally to construct a sharper unconditional variance bound (the GHT bound) on pricing kernels. The literature predominantly resorts to a simple but suboptimal procedure that scales returns with predictive instruments and computes standard bounds using the original and scaled returns. This article provides a formal bridge between the two approaches. We propose an optimally scaled bound that coincides with the GHT bound when the first and second conditional moments are known. When these moments are misspecified, our optimally scaled bound yields a valid lower bound for the standard deviation of pricing kernels, whereas the GHT bound does not. We illustrate the behavior of the bounds using a number of linear and nonlinear models for consumption growth and bond and stock returns. We also illustrate how the optimally scaled bound can be used as a diagnostic for the specification of the first two conditional moments of asset returns. Copyright 2004, Oxford University Press.

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• Berk, J. B. (2004). Valuation and Return Dynamics of New Ventures. Review of Financial Studies, 17, 1–35.

  A dynamic model of a multistage investment project that captures many features of research and development (R&D) ventures and start-up companies is developed. An important feature these problems share is that firms learn about the potential profitability of the project throughout its life, but that technical uncertainty about the R&D effort is only resolved through additional investment. Consequently the risks associated with the ultimate cash flows have a systematic component even while the purely technical risks are idiosyncratic. Our model captures these different sources of risk and allows us to study their interaction in determining the value and risk premium of the venture. Copyright 2004, Oxford University Press.

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• Berkovitch, E. (2004). Why the NPV Criterion does not Maximize NPV. Review of Financial Studies, 17, 239–255.

  This article presents a theory of capital allocation that shows how the use of net present value (NPV) as an investment criterion leads to inefficient capital budgeting outcomes and how this criterion may be dominated by other capital budgeting criteria, like the internal rate of return and the profitability index. The essence of our theory is rooted in the mainstream paradigm of corporate finance: while firms use NPV to measure the addition to firm value from prospective projects, "classical" informational and agency considerations prevent it from implementing the optimal capital budgeting outcome. Our theory also identifies conditions when alternative criteria should be used. Finally, we characterize when direct monitoring through capital budgeting dominates compensation contracts in alleviating the agency problem. Copyright 2004, Oxford University Press.

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• Bernardo, A. E. (2004). Capital Budgeting in Multidivision Firms: Information, Agency, and Incentives. Review of Financial Studies, 17, 739–767.

  We examine optimal capital allocation and managerial compensation in a firm with two investment projects (divisions) each run by a risk-neutral manager who can provide (i) (unverifiable) information about project quality and (ii) (unverifiable) access to value-enhancing, but privately costly resources. The optimal managerial compensation contract offers greater performance pay and a lower salary when managers report that their project is higher quality. The firm generally underinvests in capital and managers underutilize resources (relative to first-best). We also derive cross-sectional predictions about the sensitivity of investment in one division to the quality of investment opportunities in the other division, and the relative importance of division-level and firm-level performance-based pay in managerial compensation contracts. Copyright 2004, Oxford University Press.

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• Cantillo, M. (2004). A Theory of Corporate Capital Structure and Investment. Review of Financial Studies, 17, 1103–1128.

  This article uses a general equilibrium framework to explore the origins and limitations of financial intermediaries. In the model, investors have a generic lending technology that they can improve at a cost. Those who upgrade become intermediaries to exploit their advantage. However, conflicts with depositors will limit the banks' market presence, and they will only lend to moderately endowed firms while bondholders will finance cash-rich corporations. The article also analyzes the extent to which investors adopt the superior lending technique, the nature of bank competition, and how corporate and bank conditions affect interest rates and investment.

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• Cook, D. O. (2004). On the Timing and Execution of Open Market Repurchases. Review of Financial Studies, 17, 463–498.

  Little is known about the timing and execution of open market repurchases. U.S. firms are under no obligation to disclose when they are trading, and generally report only quarterly changes in shares outstanding. We use 64 firms' supplementally disclosed repurchase trading data to provide the first examination of repurchase timing and execution. Across the days reported in our sample, firms adopted a variety of execution styles ranging from immediate intense repurchasing to delayed and smoothed repurchasing. We find no clear evidence that repurchases are timed to coincide with, precede, or follow, days on which information is released. We benchmark the costs and value of a given repurchase program against naive accumulation strategies achieving the same terminal portfolio. While there is considerable variation across the firms, NYSE firms on average beat their benchmarks, whereas NASDAQ firms do not. Finally, we document the liquidity impact of open market repurchases. We find that repurchasing contributes to market liquidity by narrowing bid-ask spreads and attenuating the price impact of order imbalances on days when repurchase trades are completed. Copyright 2004, Oxford University Press.

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