This paper investigates optimal consumption and portfolio mixture for a new discrete-time, discrete-state preference model. In this model, the investor's preferences for future consumption depend on current wealth and on past consumption experience through a summary descriptor of past consumption. Relations between the optimal consumption/investment decisions and the wealth and summary descriptor states are found.

As an extension of previous works, we develop a theoretical framework for the relationship between monetary changes and market risk premia. The wealth effect and the return variability effect of money are shown to be the two important channels of the monetary impact on the market risk premium for three representative classes of utility functions. The theory also states that the market risk premium will be an increasing function of monetary changes given that the two component effects of money are positive.

Protection of pensions is a most important subject. The date that the Employee Retirement Income Security Act (ERISA) was signed, September 2, 1974, is considered the second most important date in social legislation in the United States--second only to the enactment of Social Security.

This study deals with the problem of debt — composition of the firm — specifically, the optimal mix of short- and long-term debt, or the optimal maturity composition of the total debt. It can be viewed as a subproblem of the more familiar determination of the optimal mix between total debt and owner's equity (Modigliani and Miller [15 and 16], Durand [3], Schwartz [18], Solomon [20], etc.).

Speculative bubbles have been offered to explain the excess volatility results by Shiller (1981) and LeRoy and Porter (1981). Recent work by Flood, Hodrick, and Kaplan has shown that rational speculative bubbles cannot be the explanation for the excess volatility results. This paper provides an analytical framework for examining the hypothesis that the simple present value model used for the excess volatility studies is a misspecification of the true model. The method is applied to data from a market index and four large corporations. The results are consistent with the hypothesis that the simple present value model is not the correct specification for stock market pricing.

Existing theory suggests that, in an unregulated market for corporate control, the level of takeovers is suboptimal because shareholders do not receive the full benefit from them. However, existing theory neglects that the threat of takeover may divert managerial effort from productive to defensive activities. This paper shows that, when this is considered, takeovers may, in fact, be excessive.

One of the most vexing areas of business finance is empirical validation of theory. Many problems arise that the investigator cannot avoid. The purpose of this paper is to define a class of problems that can be avoided but that have caused many previous investigators difficulty, even though they may not have realized it. In what follows, the concept of dimensional analysis, borrowed from the physical sciences, is introduced. Then dimensional analysis is extended to the interpretation of estimated regression coefficients.

This is the first comprehensive study of the distribution of voting rights to shareholders. Only individuals owning stock on a record date may vote. Firms, however, reveal record dates after the fact 91% of the time. With controversial votes, firms are more likely to do the opposite, and this tendency is associated with a lower passage rate for shareholder-initiated proposals. The New York Stock Exchange sells nonpublic record-date information to select investors. When stocks go ex vote, prices decline and trading volume surges, suggesting that activist investors are buying marginal votes. These trends are most pronounced with controversial votes.

We investigate how men and women fare in the managerial labor market in the plausibly exogenous circumstance of their firms being acquired when most target-firm managers (about 90%) are displaced. These career disruptions result in a larger drop in rank and compensation for female managers, despite similar job search attributes. Gender differences are mitigated when hiring firms have more women in upper-echelon positions. Rich managerial experience and external board service also reduce gender-related differences. Overall, results point to a (implicit) “gender penalty” in terms of managerial job mobility, but also indicate contexts in which penalty is alleviated, and even reversed.

In recent years, large commercial banks in the United States have turned to so-called “liability management” as a way to acquire additional funds. The use of Certificates of Deposit (CD's), Eurodollar balances, debentures, and recently the issuing of commercial paper through their holding companies represent an extension of the more traditional secondary reserve asset management approach to bank liquidity and reserve adjustment.

This paper analyzes risk-return relationships in regional and national securities markets. Specifically, it presents methods and results of an investigation of simulated portfolios of common stocks traded on the Minnesota over-the-counter (OTC) market and the New York Stock Exchange (NYSE).

Recent literature, as it has been developing in this journal and others, suggests that a significant change has taken place in the field of finance. The “new finance” has broader and deeper analytic and empirical content. Its relevant characteristics are: (1) a weakening of the traditional distinction between security analysis and corporation finance; (2) an increased emphasis upon financial management as an integral part of the overall management function; (3) greater emphasis upon the relevance of economic theory in the analysis of financial relations; and (4) more attention to the measurement and testing of hypotheses.

In their present paper. Professors Cheng and Deets (hereafter C-D) attempt to derive a measure of instantaneous systematic risk for securities and portfolios which is consistent with the Sharpe-Lintner-Mossin capital asset pricing model when the true market horizon is infinitesimally short. In so doing, they assert that Jensen's resolution of the horizon problem for such a market horizon is incorrect. In the comments which follow, I shall attempt first to indicate explicitly the causes for the differences in the Jensen and C–D results, and second, to evaluate their relative merits.

The arithmetic formulas appearing in the mathematics of finance are practically useless unless one has available either excellent tables and infinite patience, or working computer programs, a machine, and a budget. The present article shows how a number of useful topics in this area can be dealt with effectively by the more tractable mathematics of continuous processes. The methods yield approximate answers of high quality, and in some cases exact answers as well, with small effort, and have obvious applications in “truth in lending” investigations.

The capital asset pricing model of Sharpe [39], Lintner [28], and Mossin [33] has been the basis for many theoretical and empirical studies in capital markets. One criticism of the model hasbeen directed at the assumption that investors optimize in a one-period framework. Fama [7] and Merton [30] have shown that the results of this one-period optimization model are consistent with the results for an intertemporal optimization model if the investment opportunity set is constant over time. Specifically, the relevant parameters for the distributions of risky securities (i.e., conditional means and variances) must be constant over time. Merton has argued that this is a restrictive assumption, but there has been very little empirical evidence to suggest that changes in the investment opportunity set are significant.

In a recent paper published in this journal [1], Bierman and Hass (BH) developed a model in which the risk differential that an investor would require to compensate him for the risk of default is stated as a function of the following variables: the probability of default on annual interest payments, (1-P1); the probability of default on the principal payment at the end of the maturity of the bond, (1-P2); the default-free rate, i, and the maturity, N.

Econometric research in the past two decades has vitnessed a considerable use of dummy variables in regression analysis. The analysis of covariance has long been a standard statistical technique to test the equality of coefficients in linear regressions. While students and researchers are generally aware of the close relationship between the two methods, they are often frustrated at choosing one method instead of the other in practice and wonder whether the two methods lead to the same test results. This note shows that the two methods are equivalent from the point of view of hypothesis testing.

This paper presents a descriptive theory of risk that may be applied to capital budgeting decisions. The proposed theory is actually much more general than a theory of financial risk and is consistent with reported laboratory experiments. The essential feature of this theory is the role that risk descriptively plays as a constraint in the decision-making process. Specifically, risk is modeled as a chance constraint such that projects are rejected if the probability of “failure” is larger than some prescribed level. This has the effect of making all investment decisions chance-constrained programming problems, although some classes of problems have trivial solution procedures. In this context, risk serves to “strike out” or eliminate alternatives from consideration.

While the value of listing equity securities has been researched extensively, no studies have examined the market reaction to the decision to list corporate debt. Since the listing of corporate bonds on the major exchanges is a significant corporate activity, this study examines the impact of bond listing on shareholder wealth. Using a variety of possible announcement dates as well as cumulative abnormal returns between dates, no detectable market reaction to debt listing is found. Therefore, the listing of corporate bonds does not appear to be valued by the common shareholders of those same firms.

A number of studies have recently attempted to explain cross sectional variations in selected characteristics of commercial bank operations through least squares regression analysis.1 Generally, whether the particular study objective was to explain inter bank differences in costs, revenues, profits, or loan rates, several explanatory variables were isolated which varied systematically among banks, and which at least partially explained differences in the dependent variable. The explanatory variables which were shown to be theoretically relevant, and statistically significant, were then interpreted literally and designated as having causal characteristics.