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Abstract:
There is substantial evidence that indicates that stocks that perform the best (worst) over a three- to 12-month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Momentum trading strategies that exploit this phenomenon have been consistently profitable in the United States and in most developed markets. Similarly, stocks with high earnings momentum outperform stocks with low earnings momentum. This article reviews the evidence of price and earnings momentum and the potential explanations for the momentum effect.

Price momentum, earnings momentum, earnings forecast revisions, market efficiency, behavioral models

Abstract:
This paper presents a continuous time model of a firm that can dynamically adjust both its capital structure and its investment choices. In the model we endogenize the investment choice as well as firm value, which are both determined by an exogenous price process that describes the firm's product market. Within the context of this model we explore cross-sectional as well as time-series variation in debt ratios. We pay particular attention to interactions between financial distress costs and debtholder/equityholder agency problems and examine how the ability to dynamically adjust the debt ratio affects the deviation of actual debt ratios from their targets. Regressions estimated on simulated data generated by our model are roughly consistent with actual regressions estimated in the empirical literature.

G32, G33, G35

Abstract:
This paper presents a continuous time model of a firm that can dynamically adjust both its capital structure and its investment choices. The model extends the dynamic capital structure literature by endogenizing the investment choice as well as firm value, which are both determined by an exogenous price process that describes the firm's product market. Within the context of this model we explore interactions between financial distress costs and debtholder/equityholder agency problems and examine how the ability to dynamically adjust the capital structure choice affects both target debt ratios and the extent to which actual debt ratios deviate from their targets. In particular, we examine how financial distress and the firm's objectives, i.e., whether it makes choices to maximize total firm value versus equity value, influence the extent to which firms make financing choices that move them towards their target debt ratios.

capital structure, investments, tradeoff, pecking order, market timing, mean-reversion, adjustment rate, depreciation rate, gold mining companies, transaction costs.

Abstract:
This study examines the influence of institutions on the capital structure and debt maturity choices in a cross-section of firms in 39 developed and developing countries. Our evidence indicate that firms operating within legal systems that provide better protection for financial claimants tend to have capital structures with less total debt, and more long-term debt as a proportion of total debt. In addition, we find that firms that choose to cross-list tend to use more equity and longer-term debt. We also find that taxes and the characteristics of the financial institutions that supply capital have an influence on how firms are financed. Finally, we find that the cross-sectional determinants of leverage differ across countries. In particular, the relationship between profitability and leverage tends to be stronger in countries with weaker shareholder protection.

Capital structure, Debt maturity

Abstract:
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990's suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of post-holding period returns sharply rejects a claim in the literature that the observed momentum profits can be explained completely by the cross-sectional dispersion in expected returns.

Abstract:
Firms that substantially increase capital investments subsequently achieve negative benchmark-adjusted returns. The negative abnormal capital investment/return relation is shown to be stronger for firms that have greater investment discretion, i.e., firms with higher cash flows and lower debt ratios, and is shown to be significant only in time periods when hostile takeovers were less prevalent. These observations are consistent with the hypothesis that investors tend to underreact to the empire building implications of increased investment expenditures. Although firms that increase capital investments tend to have high past returns and often issue equity, the negative abnormal capital investment/return relation is independent of the previously documented long-term return reversal and secondary equity issue anomalies.

Abstract:
Firms that spend the most on capital investments relative to their sales or total assets, subsequently achieve negative benchmark-adjusted returns. We consider two hypotheses to explain these returns. The first explanation, that firms artificially increase cash flows to fund investment expenditures, suggests that the negative relation between returns and investment expenditures should be strongest for the most financially constrained firms. The second explanation, that firms that invest a lot tend to be over-investing, suggests that the negative relation between returns and investment expenditures should be strongest for firms with the most financial slack. The evidence tends to support the second explanation. That is, the negative capital investment/return relation is stronger for firms with higher cash flows and lower debt ratios and reverses in the period when firms of this type were subject to hostile takeovers.

Investment, stock returns, financial constraints, free cash flow

Abstract:
This paper investigates the dynamic relation between net individual investor trading and short-horizon returns for a large cross-section of NYSE stocks. The evidence indicates that individuals tend to buy stocks following declines in the previous month and sell following price increases. We document positive excess returns in the month following intense buying by individuals and negative excess returns after individuals sell, which we show is distinct from the previously shown past return or volume effects. The patterns we document are consistent with the notion that risk-averse individuals provide liquidity to meet institutional demand for immediacy.

Individual investor sentiment, return predictability, behavioral finance, liquidity provision, NYSE, contrarian, market efficiency

Abstract:
This paper examines the book building mechanism for marketing initial public offerings. We present a model where the underwriter selects a group of investors along with a pricing and allocation mechanism in a way that maximizes the information generated during the process of going public at a minimum cost. Unlike previous models, we take into account the moral hazard problem that is faced by investors when evaluation is costly. Our results suggest that for firms with the most to gain from accurate pricing, the number of investors participating in the offering is larger, and underpricing will be greater. When the demand for accuracy is relatively low, the expected amount of underpricing exactly offsets the investors' costs of acquiring information. However, when the demand for accuracy is high, the expected amount of underpricing can exceed the cost of information and investors can earn rents.

Abstract:
This paper examines the book building mechanism for marketing initial public offerings. We present a model where the underwriter selects a group of investors along with a pricing and allocation mechanism in a way that maximizes the information generated during the process of going public at a minimum cost. Unlike previous models, we take into account the moral hazard problem that is faced by investors when evaluation is costly. Our results suggest that for firms with the most to gain from accurate pricing, the number of investors participating in the offering is larger, and underpricing will be greater. When the demand for accuracy is relatively low, the expected amount of underpricing exactly offsets the investors' costs of acquiring information. However, when the demand for accuracy is high, the expected amount of underpricing can exceed the cost of information and investors can earn rents.

Initial Public Offering, Equity Issue, Going Public, Book Building, Private Information

Abstract:
We decompose stock returns into components attributable to tangible and intangible information. A firm's tangible return is the component of its return attributable to fundamental accounting-performance information, and its intangible return is the component which is orthogonal to this information. Our evidence indicates that intangible information reliably predicts future stock returns. However, in contrast to previous research, we find that tangible returns have no forecasting power. The premia associated with intangible information pose challenges for both traditional asset pricing models and models based on psychological factors.

Abstract:
Previous empirical studies suggest a negative relationship between prior 3-5 year fundamental performance and future returns: distressed firms outperform more profitable firms. In fact, we show here that after controlling for past stock returns firms with higher past fundamental returns actually outperform weaker firms. Our results are consistent with investors reacting appropriately to tangible information (defined as information which can be extracted from financial statements), but overreacting to intangible information. We explain these findings with a simple model based on the behavioral finding that investors are more overconfident about their ability to interpret intangible information. Finally, we reconcile our results with previous studies, and show that firms which grow through shareissuance activity experience low future returns, while firms that grow through increased profitability do not.

Abstract:
This paper examines how cash flows, investment expenditures and stock price histories affect debt ratios. Consistent with earlier work, we find that these variables have a substantial influence on changes in capital structure. Specifically, stock price changes and financial deficits (i.e., the amount of external capital raised) have strong influences on capital structure changes, but in contrast to previous conclusions, we find that over long horizons their effects are partially reversed. These results indicate that although firms' histories strongly influence their capital structures, over time their capital structures tend to move towards target debt ratios that are consistent with the tradeoff theories of capital structure.

Capital structure, tradeoff, market timing, pecking order, stock returns, target debt ratio

Abstract:
This paper examines how cash flows, investment expenditures and stock price histories affect corporate debt ratios. Consistent with earlier work, we find that these variables have a substantial influence on changes in capital structure. Specifically, stock price changes and financial deficits (i.e., the amount of external capital raised) have strong influences on capital structure changes, but in contrast to previous conclusions, we find that their effects are subsequently at least partially reversed. These results indicate that although a firm's history strongly influence their capital structures, that over time, financing choices tend to move firms towards target debt ratios that are consistent with the tradeoff theories of capital structure.

Abstract:
This paper examines how cash flows, investment expenditures and stock price histories affect corporate debt ratios. Consistent with earlier work, we find that these variables have a substantial influence on changes in capital structure. Specifically, stock price changes and financial deficits (i.e., the amount of external capital raised) have strong influences on capital structure changes, but in contrast to previous conclusions, we find that their effects are subsequently at least partially reversed. These results indicate that although a firm's history strongly influence their capital structures, that over time, financing choices tend to move firms towards target debt ratios that are consistent with the tradeoff theories of capital structure.

Capital structure, tradeoff, market timing, pecking order, stock returns, target debt ratio

Abstract:
Recent studies document a strong positive relation between quarterly and annual changes in institutional ownership and returns measured over the same period. The source of this positive correlation could arise from institutional investors' intra-period positive feedback trading, institutions forecasting intra-period price changes, or from price pressure caused by institutional trades. Price pressure can in turn arise for inventory/liquidity reasons, or because market participants infer information from institutional trades. Our results suggest that the price impact of institutional trading is primarily responsible for the documented positive covariance between quarterly changes in institutional ownership and quarterly returns. Moreover, our analyses suggest this price pressure results from information revealed through institutional trading.

Abstract:
This paper examines momentum profits in eight Asian markets with a focus on ownership structure, legal systems and valuation uncertainty. The results indicate that momentum strategies, which buy past winners and sell past losers, are highly profitable when implemented on Asian stock markets outside Japan. Interestingly, the common law/civil law distinction provides a perfect indicator of whether or not a market exhibited a momentum effect prior to the financial crisis. Consistent with the previous findings in the U.S., we document that the momentum effect is relatively stronger for firms with smaller market capitalizations, lower book-to-market ratios, and higher turnover ratios. In addition, we document that the momentum effect is stronger for independent firms than for group-affiliated firms and present weak evidence that suggests that foreign ownership can influence the momentum effect in Japanese firms. We also find return reversals around nine or ten months after the portfolio formation date, which supports the prediction of some behavioral models.

Momentum, legal systems, ownership structure, Asian stock markets

Abstract:
U.S. corporations hold significant amounts of cash on their balance sheets, and these cash holdings have been justified in the existing empirical literature by transaction costs and precautionary motives. An additional explanation, considered in this study, is that U.S. multinational firms hold cash in their foreign subsidiaries because of the tax costs associated with repatriating foreign income. Consistent with this hypothesis, firms that face higher repatriation tax burdens hold higher levels of cash, hold this cash abroad, and hold this cash in affiliates that trigger high tax costs when repatriating earnings. Estimates indicate that a one standard deviation increase in the tax burden from repatriating foreign income is associated with a 7.9% increase in the ratio of cash to net assets. In addition, certain firms, specifically those that are less financially constrained domestically and those that are more technology intensive, exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.

Cash, Taxes, Repatriation

Abstract:
In this article we review and discuss empirical studies that examine how a firm's financing choice affects its strategic decisions and relationships with its non-financial stakeholders, such as its customers or workforce. Generally, high leverage appears to inhibit a firm's ability or willingness to compete aggressively, especially against well-financed competitors. Debt also disciplines the manager-worker relationship, preventing managers from hoarding labor during economic downturns. Many of the studies also indicate that a firm's relationships with its customers can be disrupted by concerns over the firm's long-term viability. A second purpose of this study is to highlight and discuss approaches researchers have taken to address endogeneity. Because leverage is chosen in advance by the firm, most of the studies we consider focus on exogenous shocks - either to the firm's competitive environment or to the firm's leverage ratio. For each study, we describe the particular endogeneity problem and then discuss each author's approach to it, emphasizing differences between approaches when they arise.

capital structure, stakeholder relationships, competition

Abstract:
This study presents evidence which indicates that stock prices, on average, react positively to stock dividend and stock split announcements that are uncontaminated by other contemporaneous firm-specific announcements. In addition, it documents significantly positive excess returns on and around the ex-dates of stock dividends and splits. Both announcement and ex-date returns were found to be larger for stock dividends than for stock splits. While the announcement returns cannot be explained by forecasts of imminent increases in cash dividends, the paper offers several signaling based explanations for them. These are consistent with a cross-sectional analysis of the announcement period returns.

Stock splits, stock dividends, signalling, announcement effects, ex-date effects

Abstract:
We provide a model in which irrational investors trade based upon considerations that are not inherently related to fundamentals. However, because trading activity affects market prices, and because of feedback from security prices to cash flows, the irrational trades influence underlying cash flows. As a result, irrational investors can, in some situations, earn positive expected profits. These expected profits are not market compensation for bearing risk, and can exceed the expected profits of rational informed investors. The trades of irrational investors can distort real investment choices and lower ex ante firm values, even though stocks prices follow a random walk.

Abstract:
We provide a simple argument that suggests that better informed hedge funds choose to have less exposure to factor risk. Consistent with this argument we find that hedge funds that exhibit lower R-squares with respect to systematic factors have higher Sharpe ratios, higher information ratios, charge higher fees and attract more future inflows.

Hedge funds, Systematic risk, Investment performance

Abstract:
In this study, we examine the cross-sectional determinants of expected REIT returns. We examine both the pre- and post-1990 periods, since the structure of the REIT market changed substantially around 1990. The determinants of expected returns differ between the two subperiods. In the pre-1990 subperiod, momentum, size, turnover and analyst coverage predict REIT returns. In the post-1990 period, momentum is the dominant predictor of REIT returns. Given the strength of the momentum effect in the post-1990 period, we examine it in great detail. For the whole period, and the post-1990 period where the momentum profit is strongest, our evidence is generally consistent with the studies on common stocks other than REITs. The only striking exception is that we find that momentum is stronger for the larger REITs rather than for the smaller REITs. In our multiple regressions that include the characteristics as well as interactions between past returns and firm characteristics, the turnover-momentum interaction effect provides the most significant results. More specifically, momentum effects are stronger for more liquid REITs.

REITs, Momentum, Expected returns

Abstract:
This study investigates the relation between firms' investment choices and various governance mechanisms, using a sample of Real Estate Investment Trusts (REITs). Since REITs provide a relatively accurate measure of Tobin's q, a transparent structure, and generally less asymmetric information about their investment opportunities, they provide an especially good sample to evaluate these issues. We find evidence that the responsiveness of REITs' investment expenditures to their opportunities depends on their corporate governance structures. Within the set of governance mechanisms that we examine, we find particularly strong links between investment behavior and ownership. Specifically, we find that the investment choices of REITs are more closely tied to Tobin's q if they have greater institutional ownership, or lower director and officer stock ownership. These results are consistent with institutional owners monitoring the firm's investment policies, and with high insider ownership allowing managers to follow their own investment agendas.

Governance, investment, REITs, institutional investors

Abstract:
Real estate investment trusts (REITs) provide a good setting to examine intra-industry momentum. The industry is relatively homogenous and well defined, and the industry experienced structural changes that allow us to test alternative explanations for the observed momentum effect. Specifically, we test predictions that relate to investor overconfidence (based on Daniel, Hirshleifer and Subrahmanyam (1998)) and the speed of information diffusion (based on Hong and Stein (1999)). The first predicts a stronger momentum effect in REITs during the post-1990 period than during the pre-1990 period due to more valuation uncertainty in the post-1990 period. The second predicts a more pronounced momentum effect in REITs during the pre-1990 period than during the post-1990 period due to the higher speed of information diffusion in the post-1990 period. Our findings tend to support the first prediction. Specifically, while we do not find a momentum effect in REITs during the pre-1990 period, we find a strong and prevalent momentum effect in REITs in the post-1990 period.

REITs, momentum, behavioral finance

Abstract:
This paper examines the importance of financial constraints for firm investment expenditures by looking at the relationship between investment expenditures and proceeds from voluntary asset sales in financially healthy US manufacturing companies. Specifically, we examine whether asset sales have a greater influence on investment expenditures for firms that are likely to be financially constrained. Asset sales may provide a cleaner indicator of liquidity than cash flow since it appears not to be positively correlated with future investment opportunities. The cross-sectional differences in firm investment expenditures are examined using an endogenous switching regression model with unknown sample separation, which does not require an a priori classification of firms or knowledge of their financial constraints. We find that after controlling for investment opportunities and cash generated from operations, cash obtained from asset sales is a significant determinant of corporate investment. Moreover, the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be associated with characteristics associated with financial constraints.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This paper examines the importance of financial constraints for firm investment expenditures by looking at the relationship between investment expenditures and proceeds from voluntary asset sales in financially healthy US manufacturing companies. Specifically, we examine whether asset sales have a greater influence on investment expenditures for firms that are likely to be financially constrained. Asset sales may provide a cleaner indicator of liquidity than cash flow since it appears not to be positively correlated with future investment opportunities. The cross-sectional differences in firm investment expenditures are examined using an endogenous switching regression model with unknown sample separation, which does not require an a priori classification of firms or knowledge of their financial constraints. We find that after controlling for investment opportunities and cash generated from operations, cash obtained from asset sales is a significant determinant of corporate investment. Moreover, the sensitivity of investment to proceeds from asset sales is significantly stronger for firms that are likely to be associated with characteristics associated with financial constraints.

investment, asset sales

Abstract:
We analyze the hedging decisions of firms, which take into account both the costs and the benefits of risk, in an equilibrium context. The equilibrium setting allows us to examine how a firm's hedging choice depends on the hedging choices of its competitors. We show that in equilibrium some firms hedge, while others do not, even though all firms are ex ante identical. The model further shows how the fraction of firms that hedge depends on industry characteristics, such as on the number of firms in the industry, the elasticity of demand, the convexity of production costs, and the relative market shares of each firm. Consistent with prior empirical findings the model predicts that we should observe more heterogeneity in the decision to hedge in the most competitive industries.

Financial constraints, hedging, speculating, equilibrium, competition

Abstract:
Price changes can be associated with either increases or decreases in systematic risk. Most of the existing literature focuses on the leverage effect, which suggests that betas decrease (increase) as stock prices increase (decrease). Alternatively, betas may move in the same direction as stock prices if growth opportunities have higher betas and are more volatile than assets in place. Our empirical work indicates that the latter effect dominates, even for a sub-sample of highly levered firms that presumably have relatively fewer growth opportunities. We also link variations in betas to firm characteristics that proxy for the proportion of the firm invested by growth opportunities. These growth opportunity proxies explain a large portion of cross-sectional differences in betas. Finally, we find preliminary evidence that investors may under-react to the decrease in the beta of stocks that have performed particularly poorly.

Assets in place, beta, CAPM, growth opportunities, risk premium, size, value

Abstract:
This paper investigates the relation between a firm's location and its corporate finance decisions. We develop a simple model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms that are located within industry clusters tend to make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. In addition, we document that firms in growing cities and technology centers also maintain more financial slack. Overall, these findings, which reveal systematic patterns between geography and corporate finance choices, suggest the importance of growth opportunities in firms' financial decisions.

Capital Structure, Cash Balances, Liquidity, M&A

Abstract:
This paper investigates the relation between a firm's location and its corporate finance decisions. We develop a simple model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms that are located within industry clusters tend to make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. In addition, we document that firms in growing cities and technology centers also maintain more financial slack. Overall, these findings, which reveal systematic patterns between geography and corporate finance choices, suggest the importance of growth opportunities in firms' financial decisions.

Abstract:
This paper investigates the relation between firms’ locations and their corporate finance decisions. We develop a model where being located within an industry cluster increases opportunities to make acquisitions, and to facilitate those acquisitions, firms within clusters maintain more financial slack. Consistent with our model we find that firms located within industry clusters make more acquisitions, and have lower debt ratios and larger cash balances than their industry peers located outside clusters. We also document that firms in high tech cities and growing cities also maintain more financial slack. Overall the evidence suggests that growth opportunities influence firms’ financial decisions.

Capital structure, firm location, cash balances, asset liquidity, mergers and acquisitions

Abstract:
Credit ratings can be viewed as a summary statistic that captures various elements of a firm’s capital structure. They incorporate a firm’s debt ratio, the maturity and priority structure of its debt, as well as the volatility of its cash flows. However, regressions of credit ratings on firm characteristics provide inferences that are not always consistent with the interpretations of extant regressions that include various debt ratios as independent variables. In particular, we find that coefficients of variables that have been viewed as proxies for the uniqueness and the extent that assets can be redeployed, e.g., R&D expenses and asset tangibility, have different effects in the credit rating regressions than in the debt ratio regressions. In addition, we find that after controlling for whether or not firms have debt ratings, the extant evidence of a positive relation between debt ratios and size is reversed. Finally, using regression-based proxies for target ratings and debt ratios, we find that deviations from rating targets as well as debt ratio targets influence subsequent corporate finance choices. When observed ratings are below (above) the target, firms tend to make security issuance and repurchase decisions that reduce (increase) leverage. In addition, firms are more likely to decrease (increase) dividend payouts when they have below (above) target ratings and make more (fewer) acquisitions when they have above (below) target ratings.

credit rating, leverage, capital structure, target capital structure, tradeoff theory

Abstract:
While Real Estate Investment Trusts (REITs) have experienced very high growth rates over the past 15 years, the growth in mutual funds that invest in REITs has been even more dramatic. REIT mutual fund returns are typically presented relative to the return on a simple value-weighted REIT index. We ask whether including additional factors when benchmarking funds' returns can improve the explanatory power of the models and offer more precise estimates of alpha. We investigate three sets of REIT-based benchmarks, plus an index of returns derived from non-REIT real estate firms, namely homebuilders, and real estate operating companies. The REIT-based factors are a set of characteristic factors, a set of property-type factors, and a set of statistical factors. Using traditional single index benchmarks, we find that about six percent of the REIT funds exhibit significant positive performance using traditional significance levels, which is more than twice what random chance would predict. However, with the multiple index benchmarks that we prefer, this falls considerably, to only 0.7 percent. In addition, we find that these sets of factors and the non-REIT indices better explain the month-to-month returns of the REIT mutual funds. This suggests that investors or researchers evaluating REIT mutual fund performance may benefit from a multiple benchmark approach.

REITs, Mutual Funds, Performance Evaluation

Abstract:
This survey provides a synthesis of the empirical capital structure literature. Our synthesis is divided into three parts. The first part examines the evidence that relates to the cross-sectional determinants of capital structure. This literature identifies and discusses the characteristics of firms that tend to be associated with different debt ratios. In the second part, we review the literature that examines changes in capital structure. The papers in this literature explore factors that move firms away from their target capital structures as well as the extent to which future financing choices move firms back toward their targets. Finally, we complete our review with a set of studies that explore the consequences of leverage, rather than its determinants. These studies are concerned with feedback from financing to real decisions. For example, we explore how a firm's financing choices influences its incentive to invest in its workers, price its products, form relationships with suppliers, or compete aggressively with competitors.

Abstract:
This paper examines the extent to which cultural differences influence the returns of momentum strategies. We measure cultural differences using an index of individualism developed by Hofstede (2001), which we argue is related to overconfidence and self-attribution bias. Our cross-country evidence indicates that individualism is positively associated with trading volume and volatility, and is strongly related to the magnitude of momentum profits. The evidence also indicates that momentum profits are positively related to the dispersion of analyst forecasts, transaction costs, and the familiarity of a market to foreign investors, and negatively related to firm size and stock volatility. However, the addition of these and other variables does not dampen the relation between individualism and momentum profits. These results are robust to whether or not East Asian countries, which exhibit less momentum, are included in our sample. Finally, consistent with the prediction of behavioral models, momentum profits reverse one year after portfolio formation in most countries, and the magnitude of the reversals tends to be higher in countries with higher individualism.

International momentum, Individualism, Overconfidence, Volatility, Trading volume

Abstract:
This paper presents evidence that suggests that in Japan, corporate ownership structure affects the relation between capital investment expenditures and firm performance. Specifically, there is a negative relation between capital expenditures and subsequent risk-adjusted returns amongst keiretsu firms, which have a strong banking relationship, but a positive relation amongst independent firms. There is no relation between these returns and financial constraints for keiretsu firms. However, the positive relation between capital investments and stock returns for independent firms is strongest for those firms that have the lowest cash flows, and are thus likely to be the most financially constrained.

Capital expenditures, Stock returns, Corporate groups, Financial constraints

Abstract:
This paper investigates a unique dataset that enables us to determine the aggregate buy and sell volume of individual investors for a large cross-section of NYSE stocks. We find that individuals trade as if they are contrarians, and that the stocks that individuals buy exhibit positive excess returns in the following month. These patterns are consistent with the idea that risk-averse individuals provide liquidity to meet institutional demand for immediacy. We further examine the relation between individual investor sentiment and short-horizon (weekly) return reversals that have been documented in the literature. Our results reveal that individual investor sentiment predicts future returns, and that the information content of investor sentiment is distinct from that of past returns or past volume. Furthermore, the trading of individuals predicts weekly returns in the post-2000 era for stocks of all sizes, while past return seems to have lost its predictive power for all but small stocks over the same time period. Lastly, we note that there is very little cross-sectional correlation of our individual sentiment measure across the stocks in our sample.

Abstract:
This paper investigates a unique dataset that enables us to determine the aggregate buy and sell volume of individual investors for a large cross-section of NYSE stocks. We find that individuals trade as if they are contrarians, and that the stocks that individuals buy exhibit positive excess returns in the following month. These patterns are consistent with the idea that risk-averse individuals provide liquidity to meet institutional demand for immediacy. We further examine the relation between individual investor sentiment and short-horizon (weekly) return reversals that have been documented in the literature. Our results reveal that individual investor sentiment predicts future returns, and that the information content of investor sentiment is distinct from that of past returns or past volume. Furthermore, the trading of individuals predicts weekly returns in the post-2000 era for stocks of all sizes, while past return seems to have lost its predictive power for all but small stocks over the same time period. Lastly, we note that there is very little cross-sectional correlation of our individual sentiment measure across the stocks in our sample.

Abstract:
This paper investigates a unique dataset that enables us to determine the aggregate buy and sell volume of individual investors for a large cross-section of NYSE stocks. We find that individuals trade as if they are contrarians, and that the stocks that individuals buy exhibit positive excess returns in the following month. These patterns are consistent with the idea that risk-averse individuals provide liquidity to meet institutional demand for immediacy. We further examine the relation between individual investor sentiment and short-horizon (weekly) return reversals that have been documented in the literature. Our results reveal that individual investor sentiment predicts future returns, and that the information content of investor sentiment is distinct from that of past returns or past volume. Furthermore, the trading of individuals predicts weekly returns in the post-2000 era for stocks of all sizes, while past return seems to have lost its predictive power for all but small stocks over the same time period. Lastly, we note that there is very little cross-sectional correlation of our individual sentiment measure across the stocks in our sample.

Abstract:
The 1986 Tax Reform Act (TRA) replaced non-synchronous tax year-ends with a common October 31 year-end for all mutual funds. After the TRA, we find that funds systematically accelerated the sale of losers prior to October 31. A similar pattern is not present for funds before the TRA, or for other types of institutions either before or after the Act. Examining stock returns in the first year the new TRA regulations became fully effective, we find evidence of a strong "November effect" for prior losers in which funds collectively had large holdings. Interestingly, fund managers appear to have learned from this experience. In subsequent years, our results suggest that funds were able to mitigate potential price pressures by having the foresight to spread tax-motivated sales over relatively long time horizons.

Abstract:
This paper develops a structural model that determines default spreads on risky debt. In contrast to previous research, the value of the debt's collateral is endogenously determined by the borrower's investment choice, as well as by a market demand variable that has permanent as well as temporary components. The model also considers market imperfections that limit the borrower's ability to contract to undertake the value-maximizing investment choice, and which may in addition limit the borrower's ability to raise external capital. The model is calibrated with data on commercial mortgages, and based on our calibration, we present numerical simulations that quantify the extent to which investment flexibility, incentive problems and credit constraints affect default spreads.

debt pricing, default spreads, agency cost, market imperfections, contracting environment

Abstract:
This paper investigates the behavior of individual investors around earnings announcements using a unique dataset of NYSE stocks. We find that intense individual buying (selling) prior to the announcement is associated with significant positive (negative) abnormal returns in the three months following the event. Compensation for risk-averse liquidity provision seems to account for approximately half of the abnormal return, but a significant component remains that could be due to private information or skill. We also examine the behavior of individuals after the earnings announcement and find that they trade in the opposite direction to both pre-event returns (i.e., exhibit "contrarian" behavior) and the earnings surprise (i.e., exhibit "news-contrarian" behavior). The latter behavior could potentially slow down the adjustment of prices to earnings news and contribute to the post-earnings announcement drift.

individual investors, earnings, liquidity, private information

Abstract:
This paper investigates the behavior of individual investors around earnings announcements using a unique dataset of NYSE stocks. We find that intense individual buying (selling) prior to the announcement is associated with significant positive (negative) abnormal returns in the three months following the event. Compensation for risk-averse liquidity provision seems to account for approximately half of the abnormal return, but a significant component remains that could be due to private information or skill. We also examine the behavior of individuals after the earnings announcement and find that they trade in the opposite direction to both pre-event returns (i.e., exhibit contrarian behavior) and the earnings surprise (i.e., exhibit news-contrarian behavior). The latter behavior could potentially slow down the adjustment of prices to earnings news and contribute to the post-earnings announcement drift.

Abstract:
We develop a general equilibrium model of an exhaustible resource market where both the prices and extraction choices are determined endogenously. The model generates price dynamics that are roughly consistent with observed oil and gas forward and option prices as well as with the two-factor price processes that were calibrated in Schwartz and Smith (2000). However, the subtle differences between the endogenous price process determined within our general equilibrium model and the exogenous processes considered in earlier papers can generate significant differences in both financial and real option values.

Exhaustible Resources, Energy

Abstract:
This paper examines information and incentive problems that can exist in the market for conduit mortgages, which are commercial mortgages placed in pools that are repackaged and sold as CMBS. We find that conduit mortgages that are originated by institutions with negative stock price performance in the quarters just prior to the origination date tend to have higher credit spreads and default more than other mortgages with similar characteristics. This evidence is consistent with reputation models that suggest that poorly performing originators have less incentive to expend resources evaluating the credit quality of prospective borrowers. We also find that the originator/performance effect is stronger when the originator of the mortgage is also the lead underwriter of the CMBS and that the time between the origination date and the CMBS offering is shorter for originators that are stock price losers.

securitization, CMBS, credit spreads, mortgages, reputation

Abstract:
This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990's suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions which are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. Although we find no evidence of significant return reversals in the 2 to 3 years following the following formation date, there are significant return reversals 4 to 5 years after the formation date. Our analysis of post-hiding period returns sharply rejects a claim in the literature that the observed momentum profits can be explained completely by the cross-sectional dispersion in expected returns.

Abstract:
This paper explains why investors are likely to be overconfident and how this behavioral bias affects investment decisions. Our analysis suggests that investor overconfidence can potentially generate stock return momentum and that this momentum effect is likely to be the strongest in those stocks whose valuation requires the interpretation of ambiguous information. Consistent with this, we find that momentum effects are stronger for growth stocks than value stocks. A portfolio strategy based on this hypothesis generates strong abnormal returns that do not appear to be attributable to risk. Although these results violate the traditional efficient markets hypothesis, they do not necessarily imply that rational but uniformed investors, without the benefit of hindsight, could have actually achieved the returns. We argue that to examine whether unexploited profit opportunities exist, one must test for what we call adaptive-efficiency, which is a somewhat weaker form of market efficiency that allows for the appearance of profit opportunities in historical data, but requires these profit opportunities to dissipate when they become apparent. Our tests reject this notion of adaptive-efficiency.

Abstract:
James Kingsley, a financial analyst for Progressive Exploration and Development Company, has been asked to join a team that will analyze the possible acquisition of a sizable oil field in southeastern Oklahoma. To prepare for the task Mr. Kingsley constructs a spreadsheet model of the economic implications of investing in an early stage E&P project.

The case provides the opportunity for the following types of student analysis:

1. Forecast project cash flows for an E&P project including the incorporation of an allowance for depletion expenses and the payment of both ad valorem and severance taxes which you may assume are tax deductible for income tax purposes.

2. Calculate alternative measures of project value creation including net present value and internal rate of return. Use these measures to arrive at a conclusion regarding whether to undertake the investment.

3. Use sensitivity analysis to determine the key value drivers that contribute most to the success or failure of the investment proposal.

4. Use simulation analysis to better understand the potential risks inherent in the investment. Specifically, the fundamental risks associated with the quantity of oil and the price at which it can be sold.

Valuation, Real Options, Uncertainty, Simulation

Abstract:
Firm size and book-to-market ratios are both highly correlated with the returns of common stocks. Fama and French (1993) have argued that the association between these firm characteristics and their stock returns arises because size and book-to-market ratios are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the firm characteristics and not the covariance structure of returns that explain the cross-sectional variation in stock returns.

Abstract:
Firm sizes and book-to-market ratios are both highly correlated with the average returns of common stocks. Fama and French (1993) argue that the association between these characteristics and returns arises because the characteristics are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the characteristics rather than the covariance structure of returns that appear to explain the cross-sectional variation in stock returns.

Abstract:
Firm size and book-to-market ratios are both highly correlated with the returns of common stocks. Fama and French (1993) and others have argued that the association between these firm characteristics and their stock returns arises because size and book-to-market ratios are proxies for non-diversifiable factor risk. In contrast, the evidence in this paper indicates that the return premia on small capitalization and high book-to-market stocks does not arise because of the co-movements of these stocks with pervasive factors. It is the firm characteristics and not the covariance structure of returns that explain the cross-sectional variation in stock returns.

Abstract:
Most of the recent literature on risk management and capital structure assumes that markets are perfect, i.e., efficient and complete. This paper presents anecdotal evidence that suggests that different capital markets (e.g., debt, equity and warrants markets) may not be perfectly integrated, and discusses the implications of this lack of integration on financing strategies. I argue that although models that assume perfect markets are sufficient to explain cross-sectional differences in financing and risk management choices within an economy, that issues relating to market conditions may be necessary to explain differences in these choices across countries and across time.

Abstract:
Firms that are more highly levered are forced to raise capital more often, a process that leads to the generation of information. Of course, transparency can improve the allocation of capital. When the information about the firm affects the terms under which the firm transacts with its customers and employees, however, transparency can have an offsetting negative effect. Under relatively general conditions, good news improves these terms of trade less than bad news worsens them, implying that increased transparency can lower firm value. In addition, we show that transparency can reduce the incentives of firms and stakeholders to undertake relationship-specific investments, can lead firms to pass up positive NPV investments that require external funding, and can lead firms to choose more conservative capital structures than they would otherwise choose. These effects are likely to be especially important for technology firms that require a reputation for being on the 'leading edge'.

Equity issuance, under-investment, market scrutiny, dynamic capital structure

Abstract:
Firms that are more highly levered are forced to raise capital more often, a process that generates information about them. Of course transparency can improve the allocation of capital. However, when the information about the firm affects the terms under which the firm transacts with its customers and employees, transparency can have an offsetting negative effect. Under relatively general conditions, good news improves these terms of trade less than bad news worsens them, implying that increased transparency can lower firm value. In addition, we show that transparency can reduce the incentives of firms and stakeholders to undertake relationship specific investments. The negative effects of transparency can lead firms to pass up positive NPV investments that require external funding and to choose more conservative capital structures that they would otherwise choose. These effects should be especially important for technology firms that require a reputation for being on the 'leading edge.'

Abstract:
Japanese stock returns are even more closely related to their book-to-market ratios than are their U.S. counterparts, and thus provide a good setting for testing whether the return premia associated with these characteristics arise because the characteristics are proxies for covariance with priced factors. Our tests, which replicate the Daniel and Titman (1997) tests on a Japanese sample, reject the Fama and French (1993) three-factor model but fails to reject the characteristic model.

Abstract:
This paper examines how debt affects firms following failed takeovers. Using a sample of 573 unsuccessful takeovers, we find that, on average, targets significantly increase their debt levels. Targets that increase their debt levels more than the median amount reduce their levels of capital expenditures, sell off assets, reduce employment, increase focus and increase their operating cash flows. These leverage-increasing targets also realize superior stock price performance over the five years following the failed takeover. In contrast, those firms that increase their leverage the least show insignificant changes in their level of investment and their operating cash flows and realize stock price performance that is no different than their benchmarks. Those failed targets that increase their leverage the least, and fail to get taken over in the future, realize significant negative stock returns following their initial failed takeovers. The evidence is consistent with the hypothesis that debt helps firms remain independent not because it entrenches managers, but because it commits the manager to making the improvements that would be made by potential raiders.

Abstract:
In a sample of 573 unsuccessful takeovers we find that, on average, the failed targets significantly increase their debt levels. Failed targets that increase their debt levels more than the median are less likely to be taken over in the future, invest less, and have better operating performance in the five years after the takeover attempt than failed target firms that increase their debt levels less than the median. In addition, those failed targets that increase their leverage the most outperform their benchmarks in the five years following the failed offer. The stock prices of those failed targets that increase their leverage less than the median do very poorly over the following five years if they are not subsequently taken over. The evidence in this paper suggests that debt helps firms remain independent not because it entrenches managers, but because it commits the managers to make the improvements that would have been made by the bidding firm.

Abstract:
U.S. corporations hold significant amounts of cash on their balance sheets, and these cash holdings have been justified in the existing empirical literature by transaction costs and precautionary motives. An additional explanation, considered in this study, is that U.S. multinational firms hold cash in their foreign subsidiaries because of the tax costs associated with repatriating foreign income. Consistent with this hypothesis, firms that face higher repatriation tax burdens hold higher levels of cash, hold this cash abroad, and hold this cash in affiliates that trigger high tax costs when repatriating earnings. Estimates indicate that a one standard deviation increase in the tax burden from repatriating foreign income is associated with a 7.9% increase in the ratio of cash to net assets. In addition, certain firms, specifically those that are less financially constrained domestically and those that are more technology intensive, exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.

Abstract:
We develop equilibrium models of an exhaustible resource market where both prices and extraction choices are determined endogenously. Our analysis highlights a role for adjustment costs in generating price dynamics that are consistent with observed oil and gas forward prices as well as with the two-factor prices processes that were calibrated in Schwartz and Smith (2000). Stochastic volatility aries in our two-factor model as a natural consequence of production for oil and natural gas prices. Differences between the endogenous price processes considered in earlier papers can generate significant differences in both financial and real option values.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Recent empirical evidence indicates that capital structure changes affect pricing strategies. In most cases, prices increase following the implementation of a leveraged buyout of a major firm in an industry, with the more levered firm charging higher prices on average. Notable exceptions exist when rival firms are relatively unlevered. The first observation is consistent with a relatively simple model where firms compete for market share on the basis of price. To explain the second observations (i.e. the exceptions) the model must be extended to allow for reputation effects related to product quality. The extended model illustrates how product market imperfections in combination with high leverage can make firms vulnerable to predatory pricing.

Abstract:
Recent empirical evidence indicates that capital structure changes affect pricing strategies. In most cases, prices increase following the implementation of a leveraged buyout of a major firm in an industry, with the more levered firm charging higher prices on average. Notable exceptions exist when rival firms are relatively unlevered. The first observation is consistent with a relatively simple model where firms compete for market share on the basis of price. To explain the second observations (i.e. the exceptions) the model must be extended to allow for reputation effects related to product quality. The extended model illustrates how product market imperfections in combination with high leverage can make firms vulnerable to predatory pricing.

Abstract:
This study investigates the relation between firms' investment choices and various governance mechanisms, using a sample of real estate investment trusts (REITs). We find evidence that the responsiveness of REITs' investment expenditures to their opportunities depends on their corporate governance structures. Within the set of governance mechanisms that we examine, we find particularly strong links between investment behavior and ownership. Specifically, we find that the investment choices of REITs are more closely tied to Tobin's q if they have greater institutional ownership or if they have lower director and officer stock ownership. These results are consistent with institutional owners monitoring the firm's investment policies as well as with high insider ownership allowing managers to follow their own investment agendas.

Abstract:
This article presents a simple framework for understanding the impact of oil dependence on growth in terms of an optimal savings and investment strategy. Among the more important factors underlying this strategy is the extent to which oil price changes are temporary or permanent. This in turn determines whether a country should rely on stabilization and savings funds or the use of financial instruments to manage oil revenues - or both. Country experiences with stabilization and savings funds are surveyed, and the case is presented for using financial instrument to manage oil price risk. Policy implications for enhancing the use of financial instruments are explored, including an expanded role for international financial institutions.

Abstract:
This paper presents a theory of location choice that draws on insights from the incomplete contracts and investment flexibility (real option) literatures. Our analysis indicates that the choice of locating within rather than away from industry clusters is influenced by the extent to which training costs are borne by firms versus employees. In addition, the uncertainty about future productivity shocks and the ability of firms to modify the scale of their operations also influence location choice. In particular, we show that locating in clusters is preferred when training costs are borne by workers and when firm-specific productivity shocks can potentially be large. However, there is an incentive for firms to choose isolated locations when significant training costs are borne by firms.

Abstract:
This paper presents a theory of location choice that draws on insights from the incomplete contracts and investment flexibility (real option) literatures. We provide conditions under which human capital is more efficiently created and better utilized within industrial clusters that contain similar firms. Our analysis indicates that location choices are influenced by the extent to which training costs are borne by firms versus employees as well as by the uncertainty about future productivity shocks and the ability of firms to modify the scale of their operations. Extensions of our model consider, among other things, endogenous technological choices by firms in clusters and how behavioral biases (i.e., managerial overconfidence about their firms' prospects) can affect firms' location choices.

Abstract:
We develop a model of a firm whose production process requires it to start and nurture a relationship with its stakeholders. Because there are spillover benefits associated with being associated with a winner, the perceptions of stakeholders and potential stakeholders can affect firm value. Our analysis indicates that while transparency (i.e., generating information about a firm's quality) may improve the allocation of resources, a firm may have a higher ex ante value if information about its quality is not prematurely generated. The costs associated with transparency arise because of asymmetric information regarding the extent to which stakeholders benefit from having a relationship with a high quality firm. These costs are higher when firms can initiate non-contractible innovative investments that enhance the value of their stakeholder relationships. Stakeholder effects of transparency are especially important for younger firms with less established track records (e.g., start-ups).

Abstract:
This article proposes a practicable method for calculating the cost of capital that produces different discount rates for investment projects with different risks while minimizing the influence costs that arise when managers have discretion in the choice of discount rates. The proposed approach makes use of market information (in the form of the firm-wide costs of debt and equity), thereby limiting managerial discretion, while typically still providing a good approximation of theoretically correct, project-specific discount rates. The key to the method's effectiveness is its use of a project's debt capacity to define the capital structure weights, where debt capacity is defined by the amount of debt financing the project will support without lowering the firm's credit rating. Most finance textbooks suggest that companies evaluate investment projects using discount rates that reflect both the debt capacity and the unique risks of the project. In practice, however, companies often use their company-wide WACC to evaluate such investments because of the difficulty of (and subjectivity involved in) estimating the risk of individual projects, and the potential for managerial bias and influence to distort the estimates. This article proposes a practicable method for calculating the cost of capital that produces different discount rates for investment projects with different risks while minimizing the influence costs that arise when managers have discretion in the choice of discount rates. The proposed approach makes use of market information (in the form of the firm-wide costs of debt and equity), thereby limiting managerial discretion, while typically still providing a good approximation of theoretically correct, project-specific discount rates. The key to the method's effectiveness is its use of a project's debt capacity to define the capital structure weights, where debt capacity is defined by the amount of debt financing the project will support without lowering the firm's credit rating.

Abstract:
Via the well-known financial leverage effect, decreases in stock prices cause an increase in the levered equity beta for a given unlevered equity beta. However, as growth options are more volatile and have higher risk than assets in place, a price decrease may decrease the unlevered equity beta via an “operating leverage” effect. This is because decreases in prices can be associated with a proportionately higher loss in growth options than in assets in place. Most of the existing literature focuses on the financial leverage effect. This paper examines both effects. Our empirical results show that, contrary to common belief, the operating leverage effect largely dominates the financial leverage effect, even for highly levered firms that presumably have few growth options. We link variations in betas to measurable firm characteristics that proxy for the proportion of the firm invested in growth options. We show that these proxies jointly predict a large fraction of cross-sectional differences in betas. These results have important implications on the predictability of equity betas, hence on empirical asset pricing and on portfolio optimization that controls for systematic risk.

financial leverage effect, growth options, risk

Abstract:
We develop a model of a firm whose production process requires it to initiate and nurture a relationship with its stakeholders. Because there are spillover benefits of being associated with a “winner,” the perceptions of stakeholders and potential stakeholders can affect firm value. Our analysis indicates that while transparency (i.e., generating information about a firm's quality) may improve the allocation of resources, a firm may have a higher ex ante value if information about its quality is not prematurely generated. Transparency costs arise because of asymmetric information regarding the extent to which stakeholders benefit from having a relationship with a high-quality firm. These costs are higher when firms can undertake noncontractible innovative investments that enhance the value of their stakeholder relationships. Stakeholder effects of transparency are especially important for younger firms with less established track records.

Abstract:
The negative relation between capital investments and subsequent stock returns, found in the United States, is not observed in Japan, which is inconsistent with the risk-based explanation. More specifically, we find no significant relation between capital expenditures (CE) and subsequent stock returns for either the entire sample or for keiretsu firms. However, in the pre-1990 subperiod, there is a positive relation between increased CE and subsequent risk-adjusted returns among independent firms, especially for those firms that have high cash flows and/or low leverage. These results are consistent with existing evidence that independent firms are financially constrained in the pre-1990 period and that keiretsu main bank monitoring effectively controls the overinvestment problem.

Abstract:
Credit ratings can be viewed as a summary statistic that captures various elements of a firm’s capital structure. They incorporate a firm’s debt ratio, the maturity and priority structure of its debt, as well as the volatility of its cash flows. However, regressions of credit ratings on firm characteristics provide inferences that are not always consistent with the interpretations of extant regressions that include various debt ratios as independent variables. In particular, we find that coefficients of variables that have been viewed as proxies for the uniqueness and the extent that assets can be redeployed, e.g., R&D expenses and asset tangibility, have different effects in the credit rating regressions than in the debt ratio regressions. In addition, we find that after controlling for whether or not firms have debt ratings, the extant evidence of a positive relation between debt ratios and size is reversed. Finally, using regression-based proxies for target ratings and debt ratios, we find that deviations from rating targets as well as debt ratio targets influence subsequent corporate finance choices. When observed ratings are below (above) the target, firms tend to make security issuance and repurchase decisions that reduce (increase) leverage. In addition, firms are more likely to decrease (increase) dividend payouts when they have below (above) target ratings and make more (fewer) acquisitions when they have above (below) target ratings.

credit rating, capital structure, target capital structure, tradeoff theory, managerial discretion, governance

Abstract:
This paper presents a model of tender offers in which the bid perfectly reveals the bidder's private information about the size of the value improvement that can be generated by a takeover. We argue that bidders with greater improvements will offer higher premia to ensure that sufficient shares are tendered to obtain control. The model relates announcement date returns and takeover success or failure to the amount bid, the initial shareholdings of the bidder, the number of shares the bidder attempts to purchase, the dilution of minority shareholders, and managerial opposition. We show that managerial defensive measures will sometimes increase the probability of the offer's success, either by raising the incentive to bid high or by decreasing the asymmetry of information about the improvement.

Abstract:
In existing models of information acquisition, all informed investors receive their information at the same time. This article analyzes trading behavior and equilibrium information acquisition when some investors receive common private information before others. The model implies that, under some conditions, investors will focus only on a subset of securities ("herding"), while neglecting other securities with identical exogenous characteristics. In addition, the model is consistent with empirical correlations that are suggestive of oft-cited trading strategies such as profit taking (short-term position reversal) and following the leader (mimicking earlier trades).

Abstract:
A widely cited survey of financial executives reported that more than 50% of the surveyed companies used a single, company-wide discount rate to evaluate all investment proposals. The shortcomings of this approach are well known and reported in virtually every introductory finance text. Yet despite technological improvements and the legions of MBAs who are fully aware of the importance of matching project risk with risk-adjusted discount rates, corporate executives tend to prefer evaluating investment opportunities using very simple approaches that provide managers with very few degrees of freedom.

In this article we discuss political and organizational problems that tend to discourage the use of multiple discount rates. More importantly, we provide a relatively straightforward method for choosing discount rates that captures much of the differences in the risk of individual investment projects while at the same time limiting the effect of these organizational impediments to risk-adjusted capital budgeting.

Cost of Capital, Influence Costs

Abstract:
Most of the recent literature on risk management and capital structure examines settings where the markets for different securities, (e.g., debt, equity, and derivative markets) are perfectly integrated. This paper presents anecdotal evidence that suggests that financial markets often are not integrated and discusses the implications of this lack of integration on corporate financing strategies. In particular, I argue that "market conditions," which are determined by the preferences of individuals and institutions that supply capital, can have an important effect on how firms raise capital and the extent to which they hedge.

Abstract:
This paper compares the characteristics of U.S. firms which issued equity between 1976 and 1993 to those which increased their use of debt financing. We find that fims are most likely to issue debt when they have less debt than ispredicted by a cross-sectional model. In addition, firms that were very profitable prior to the issue were more likely to increase their use of debt financing and those that accumulated loses tended to issue equity. Our results also confirm previous findings that firms are most likely to issue equity after experiencing a rise in their share price. In contrast to our other findings, this last result appears to be inconsistent with the hypothesis that firms select their capital structures by trading off tax and other advantages of debt financing with financial distress and other costs associated with debt. Results on samples stratified by different proxies for asymmetric information fails to support asymmetric information based explanations for this phenomena.

Abstract:
In existing models of information acquisition, all informed investors receive their information at the same time. This paper analyzes trading behavior and equilibrium information acquisition when some investors receive common private information before others. The model implies that under some conditions, investors will focus only on a subset of securities (herding), while neglecting other securities withidentical exogenous characteristics. In addition, the model is consistent with empirical correlations that are suggestive of the oft-cited trading strategies such as profit-taking (short-term position reversal) and following- the-leader (mimicking earlier trades).

Abstract:
We examine the investment strategies of 155 mutual funds over the 1975-84 period to determine the extent to which the funds purchased stocks based on their past returns, and to determine the relation of this behavior to their observed portfolio performance. We find that about 77% of these mutual funds were "momentum investors", buying stocks that were past winners; however, they did not systematically sell past losers. On average, these "trend-followers" realized significantly better performance than the remaining funds. We also find that the mutual funds exhibited herding behavior, and that the tendency of a fund to herd in its trades was strongly correlated with its tendency to buy past winners as well as with its portfolio performance. Consistent with the evidence on trend-following, herding into past winners was stronger than herding into past losers.

Abstract:
This study finds that highly levered firms lose substantial market share to their more conservatively financial competitors in industry downturns. Specifically, firms in the top leverage decile which experience output contractions see their sales decline by 26 percent more than do firms in the bottom leverage decile. A similar decline takes place in the market value of equity. These findings are consistent with the view that the indirect costs of financial distress are significant and positive. Consistent with the theory that firms with specialized products are especially vulnerable to financial distress, we find that highly leveraged firms which engage in research and development suffer the most in economically distressed periods. We also find that the adverse consequences of leverage are more pronounced in concentrated industries.

Abstract:
The relationship between stock prices and real estate prices has been the subject of substantial debate in both the academic and practitioner literatures. Existing studies have focused on the time-series of stock and real estate returns using data from a single country, like the US. By necessity, these studies examine return and price changes over short intervals, creating a bias when property values are smoothed from year to year. Using data from 17 countries over 14 years, this paper examines the relation between stock returns and changes in property values and rents. Consistent with other country-specific studies, we find that, with the exception of Japan, the contemporaneous relation between yearly real estate price changes and stock returns is not statistically significant. However, when the data are pooled across countries and when we look at longer measurment intervals, a significant relation between stock returns and both rents and value changes becomes apparent. Real estate prices are also found to be significantly influenced by GDP growth rates and provide a good long-run hedge against inflation but a poor year-to-year hedge.

Abstract:
We show that the pattern of short-term negative serial covariances for stock returns over different return measurement intervals is consistent with the implications of inventory-based market microstructure models. We develop additional testable implications of these models and document supporting evidence. Our findings indicate that to a large extent the short-horizon return reversals can be explained by dealer-inventory-related market microstructure effects.

Abstract:
This paper examines the contribution of stock price overreaction and delayed reaction to the profitability of contrarian strategies. The evidence indicates that stock prices overreact to firm-specific information but react with a delay to common factors. Delayed reactions to common factors give rise to size-related lead-lag effect in stock returns. In sharp contrast with the conclusions in the extant literature, however, this paper finds that most of the contrarian profit is due to stock price overreaction and a very small fraction of the profit can be attributed to the lead-lag effect.

Abstract:
This paper explores the linkages between the informational efficiency of stock prices, corporate investment and financing decisions, and the development of equity markets in emerging economies. We begin with the premise that investors obtain information costlessly and purely by chance (i.e., "serendipitously"), as well as by expending scarce resources, and show that publicly financed firms generally make better investment decisions than privately financed firms when the influence of serendipitous information on firm values is sufficiently strong. In this case, resources are allocated more efficiently in an economy where most firms are publicly rather than privately financed. However, because of externalities, an inferior equilibrium can exist where most firms remain privately financed.

Abstract:
This paper compares U.S. firms that issued or repurchased significant amounts of equity between 1978 and 1993 to those that issued or repurchased debt. We find that firms are most likely to increase debt and repurchase equity when they have less debt than is predicted by a cross-sectional leverage regression. In addition, the likelihood of issuing debt rises with the firms' past profitability. Our results confirm previous findings that firms are most likely to issue equity after experiencing a share price increase. In contrast to our other findings, this last result appears to be inconsistent with the hypothesis that firms make choices that move them towards a target debt ratio. The paper concludes by exploring a variety of explanations for the positive relation between share price runups and equity issuance.

Abstract:
The movement towards the "globalization" of institutional investments necessitates an understanding of the historical relationship between international commercial real estate price changes and stock returns. Existing studies have focused on the time-series of stock and real estate returns using data from a single country, like the U.S. By necessity, these studies examine returns and price changes over short intervals creating a bias when property values are smoothed from year to year. This paper examines the relation between stock returns and changes in property values and rents on data from 17 different countries. Although we find no relation between real estate values and rents and stock returns in the U.S., we find significant relations in a number of different countries. When the data is pooled, we find a very strong relation between stock returns and both value changes and changes in rental rates.