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Abstract:
We examine the risk shifting problem of capital investments in a dynamic context. We find that when a firm has a long- lived project and may issue debt in the future, the risk- shifting problem is partially ameliorated early in the project life. In fact, if the potential future cash flows associated with the firm are sufficiently large relative to current cash flows, then the firm may actually underinvest in the risky asset early in the project life. We also consider the case when the firm issues both short- and long-term debt upfront, and find implications for the optimal strategy of debt negotiation. Four debt issuance strategies are considered and the optimal debt maturity mix is derived for each. These strategies are rank-ordered. Rolled-over debt is most efficient, simultaneous debt issuance is next preferred, followed by the two policies of sequentially issuing short and long-term debt. The policy of issuing long-term debt before short-term debt is typically the least preferred.

Abstract:
Recently, spread futures, a futures contract whose underlying
asset is the difference of two futures contracts with different
delivery dates, have been successfully introduced for four
different financial futures contracts traded on the Chicago
Board of Trade. A spread futures contract is a derivative on a
derivative: a spread futures position can be replicated by
taking positions in the two underlying futures contracts, both
of which may already be quite liquid. This paper examines how
the introduction of spread futures can nevertheless change the
welfare and the trading patterns of hedgers, and improve
aggregate hedger welfare.

Abstract:
We explore equilibrium corporate capital structure under the tradeoff that additional debt generates the familiar corporate tax benefit, while additional equity generates more information about the value of growth opportunities, allowing a more precise estimate of the return on real investment. This precision creates value by leading to better real investment decisions. Unlike agency costs of debt, whose magnitude can be expected to be small at low leverage levels, this information benefit of equity need not necessarily be small at low leverage levels. Therefore, an all-equity corner solution for optimal capital structure may reasonably arise. Such an outcome is most likely to occur for firms that are profitable, have many growth opportunities, or are relatively unique. The model provides valuable insight in the most important cases for which capital structure tradeoff theories have failed to predict corporate practice.

Capital structure

Abstract:
This paper tests a theoretical model of the basis and open interest of stock index futures. The model is based on the differences between stock and futures in terms of investors' ability to customize stock portfolios and liquidity. Empirical evidence confirms the model's prediction that increased volatility decreases the basis and increases open interest.

Abstract:
Corporate finance researchers have long been puzzled by low corporate debt rations, given debt's corporate tax advantage. This paper recognizes that firm value typically reflects a growing stream of earnings, while current debt reflects a non-growing stream of interest payments. Debt-to-value is therefore a distorted measure of corporate tax shielding. Even with very small debt-related costs, this may explain the observed magnitude and cross-sectional variation of debt ratios. Since this variation may be independent of tax shielding, debt ratios provide an inappropriate framework for empirically examining the tradeoff theory of capital structure.

Abstract:
A re-entry theory for abnormal behavior of financial markets in January is derived and tested. The model predicts that, by optimally shifting portfolios to mimic a benchmark, successful investment managers lock in superior performance, while unsuccessful investment managers lock out possible termination. Price pressure, ensuing from re-entry, occurs at the turn of the year, when managers uniformly prefer to reverse benchmark matching strategies. Analysis of professionally managed portfolios over the period 1969-1989 provides mixed support for the theory. At year-end, extreme performers exhibit some movement toward the S&P 500 index. This pattern reverses shortly after the turn of the year.