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

• Grenadier, S. R., & Malenko, A. (2010). A Bayesian Approach to Real Options: The Case of Distinguishing Between Temporary and Permanent Shocks. The Journal of Finance, 65, 1949–1986.

  Traditional real options models demonstrate the importance of the “option to wait” due to uncertainty over future shocks to project cash flows. However, there is often another important source of uncertainty: uncertainty over the permanence of past shocks. Adding Bayesian uncertainty over the permanence of past shocks augments the traditional option to wait with an additional “option to learn.” The implied investment behavior differs significantly from that in standard models. For example, investment may occur at a time of stable or decreasing cash flows, respond sluggishly to cash flow shocks, and depend on the timing of project cash flows.

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• Hirshleifer, D., & Jiang, D. (2010). A Financing-Based Misvaluation Factor and the Cross-Section of Expected Returns. Review of Financial Studies, 23, 3401–3436.

  Behavioral theories suggest that investor misperceptions and market mispricing will be correlated across firms. We use equity and debt financing to identify common misvaluation across firms. A zero-investment portfolio (UMO, undervalued minus overvalued) built from repurchase and issue firms captures comovement in returns beyond that in some standard multifactor models, and substantially improves the Sharpe ratio of the tangency portfolio. Loadings on UMO incrementally predict the cross-section of returns on both portfolios and individual stocks, even among firms not recently involved in external financing activities. Further evidence suggests that UMO loadings proxy for the common component of a stock's misvaluation.

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• Greenwood, R., Hanson, S., & Stein, J. C. (2010). A Gap‐filling Theory of Corporate Debt Maturity Choice. The Journal of Finance, 65, 993–1028.

  We argue that time variation in the maturity of corporate debt arises because firms behave as macro liquidity providers, absorbing the supply shocks associated with changes in the maturity structure of government debt. We document that when the government funds itself with more short‐term debt, firms fill the resulting gap by issuing more long‐term debt, and vice versa. This type of liquidity provision is undertaken more aggressively: (1) when the ratio of government debt to total debt is higher and (2) by firms with stronger balance sheets. Our theory sheds new light on market timing phenomena in corporate finance more generally.

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• Verdelhan, A. (2010). A Habit‐based Explanation of the Exchange Rate Risk Premium. The Journal of Finance, 65, 123–146.

  This paper presents a model that reproduces the uncovered interest rate parity puzzle. Investors have preferences with external habits. Countercyclical risk premia and procyclical real interest rates arise endogenously. During bad times at home, when domestic consumption is close to the habit level, the representative investor is very risk averse. When the domestic investor is more risk averse than her foreign counterpart, the exchange rate is closely tied to domestic consumption growth shocks. The domestic investor therefore expects a positive currency excess return. Because interest rates are low in bad times, expected currency excess returns increase with interest rate differentials.

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• Epple, D., Gordon, B., & Sieg, H. (2010). A New Approach to Estimating the Production Function for Housing. American Economic Review, 100, 905–924.

  Dating to the classic works of Alonso, Mills, and Muth, the production functionfor housing has played a central role in urban economics and local public finance. This paper provides a new flexible approach for estimating the housing production function which treats housing quantities and prices as latent variables. The empirical analysis is based on a comprehensive database of recently built properties in Allegheny County, Pennsylvania. We find that the new method proposed in this paper works well in the application and provides reasonable estimates for the underlying production function. (JEL C51, D24, R11, R31)

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• Weyl, E. G. (2010). A Price Theory of Multi-sided Platforms. American Economic Review, 100, 1642–1672.

  I develop a general theory of monopoly pricing of networks. Platforms use insulating tariffs to avoid coordination failure, implementing any desired allocation. Profit maximization distorts in the spirit of A. Michael Spence (1975) by internalizing only network externalities to marginal users. Thus the empirical and prescriptive content of the popular Jean-Charles Rochet and Jean Tirole(2006) model of two-sided markets turns on the nature of user heterogeneity. I propose a more plausible, yet equally tractable, model of heterogeneity in which users differ in their income or scale. My approach provides a general measure of market power and helps predict the effect of price regulation and mergers. (JEL D42, D85, L14)

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• George, T. J., & Hwang, C.-Y. (2010). A Resolution of the Distress Risk and Leverage Puzzles in the Cross Section of Stock Returns. Journal of Financial Economics, 96, 56–79.

  We revisit findings that returns are negatively related to financial distress intensity and leverage. These are puzzles under frictionless capital markets assumptions but are consistent with optimizing firms that differ in their exposure to financial distress costs. Firms with high costs choose low leverage to avoid distress, but they retain exposure to the systematic risk of bearing such costs in low states. Empirical results are consistent with this explanation. The return premiums to low leverage and low distress are significant in raw returns, and even stronger in risk-adjusted returns. When in distress, low-leverage firms suffer more than high-leverage firms as measured by a deterioration in accounting operating performance and heightened exposure to systematic risk. The connection between return premiums and distress costs is apparent in subperiod evidence. Both are small or insignificant prior to 1980 and larger and significant thereafter.

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• Lewellen, J., Nagel, S., & Shanken, J. (2010). A Skeptical Appraisal of Asset Pricing Tests. Journal of Financial Economics, 96, 175–194.

  It has become standard practice in the cross-sectional asset pricing literature to evaluate models based on how well they explain average returns on size-B/M portfolios, something many models seem to do remarkably well. In this paper, we review and critique the empirical methods used in the literature. We argue that asset pricing tests are often highly misleading, in the sense that apparently strong explanatory power (high cross-sectional R2s and small pricing errors) can provide quite weak support for a model. We offer a number of suggestions for improving empirical tests and evidence that several proposed models do not work as well as originally advertised.

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• Asker, J. (2010). A Study of the Internal Organization of a Bidding Cartel. American Economic Review, 100, 724–762.

  This paper examines bidding in over 1,700 knockout auctions used by a bidding cartel (or ring) of stamp dealers in the 1990s. The knockout was conducted using a variant of the model studied by Daniel Graham, Robert Marshall, and Jean-Francois Richard (1990). Following a reduced form examination of these data, damages, induced inefficiency, and the ring's benefit from colluding are estimated using a structural model in the spirit of Emmanuel Guerre, Isabelle Perrigne, and Quang Vuong (2000). A notable finding is that nonring bidderssuffered damages that were of the same order of magnitude as those of the sellers. (JEL D43, D44, L12)

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• Eeckhout, J., Persico, N., & Todd, P. E. (2010). A Theory of Optimal Random Crackdowns. American Economic Review, 100, 1104–1135.

  An incentives based theory of policing is developed which can explain the phenomenon of random "crackdowns," i.e., intermittent periods of high interdiction/surveillance. For a variety of police objective functions, random crackdownscan be part of the optimal monitoring strategy. We demonstrate support for implications of the crackdown theory using traffic data gathered by theBelgian Police Department and use the model to estimate the deterrence effectof additional resources spent on speeding interdiction. (JEL K42, R41)

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