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Volume 53: Issue 4 (August 1998)

Agency Costs, Risk Management, and Capital Structure

Pages: 1213-1243  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00051  |  Cited by: 1034

Hayne E. Leland

The joint determination of capital structure and investment risk is examined. Optimal capital structure reflects both the tax advantages of debt less default costs (Modigliani and Miller (1958, 1963)), and the agency costs resulting from asset substitution (Jensen and Meckling (1976)). Agency costs restrict leverage and debt maturity and increase yield spreads, but their importance is small for the range of environments considered.

Optimal Financial Crises

Pages: 1245-1284  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00052  |  Cited by: 600

Franklin Allen, Douglas Gale

Empirical evidence suggests that banking panics are related to the business cycle and are not simply the result of “sunspots.” Panics occur when depositors perceive that the returns on bank assets are going to be unusually low. We develop a simple model of this. In this setting, bank runs can be first‐best efficient: they allow efficient risk sharing between early and late withdrawing depositors and they allow banks to hold efficient portfolios. However, if costly runs or markets for risky assets are introduced, central bank intervention of the right kind can lead to a Pareto improvement in welfare.

An Asymptotic Theory for Estimating Beta‐Pricing Models Using Cross‐Sectional Regression

Pages: 1285-1309  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00053  |  Cited by: 246

Ravi Jagannathan, Zhenyu Wang

Without the assumption of conditional homoskedasticity, a general asymptotic distribution theory for the two‐stage cross‐sectional regression method shows that the standard errors produced by the Fama–MacBeth procedure do not necessarily overstate the precision of the risk premium estimates. When factors are misspecified, estimators for risk premiums can be biased, and the t‐value of a premium may converge to infinity in probability even when the true premium is zero. However, when a beta‐pricing model is misspecified, the t‐values for firm characteristics generally converge to infinity in probability, which supports the use of firm characteristics in cross‐sectional regressions for detecting model misspecification.

The Dow Theory: William Peter Hamilton's Track Record Reconsidered

Pages: 1311-1333  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00054  |  Cited by: 96

Stephen J. Brown, William N. Goetzmann, Alok Kumar

Alfred Cowles' test of the Dow Theory apparently provides strong evidence against the ability of Wall Street's most famous chartist to forecast the stock market. Cowles (1934) analyzes editorials published by the chief exponent of the Dow Theory, William Peter Hamilton. We review Cowles' evidence and find that it supports the contrary conclusion. Hamilton's timing strategies actually yield high Sharpe ratios and positive alphas for the period 1902 to 1929. Neural net modeling to replicate Hamilton's market calls provides interesting insight into the Dow Theory and allows us to examine the properties of the theory itself out of sample.

The Influence of Institutions on Corporate Governance through Private Negotiations: Evidence from TIAA‐CREF

Pages: 1335-1362  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00055  |  Cited by: 535

Willard T. Carleton, James M. Nelson, Michael S. Weisbach

This paper analyzes the process of private negotiations between financial institutions and the companies they attempt to influence. It relies on a private database consisting of the correspondence between TIAA‐CREF and 45 firms it contacted about governance issues between 1992 and 1996. This correspondence indicates that TIAA‐CREF is able to reach agreements with targeted companies more than 95 percent of the time. In more than 70 percent of the cases, this agreement is reached without shareholders voting on the proposal. We verify independently that at least 87 percent of the targets subsequently took actions to comply with these agreements.

Credit Risk in Private Debt Portfolios

Pages: 1363-1387  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00056  |  Cited by: 144

Mark Carey

Default, loss severity, and average loss rates for a large sample of privately placed bonds are presented and compared with loss experience for publicly issued bonds. The chance of very large portfolio losses is estimated and some determinants of such losses are analyzed. Results show ex ante riskier classes of private debt perform better on average than public debt. Both diversification and the riskiness of individual portfolio assets influence the bad tail of the portfolio loss distribution. Private placements are similar to corporate loans in that both are monitored private debt. The results are thus relevant to management and securitization of private debt portfolios generally.

The Declining Credit Quality of U.S. Corporate Debt: Myth or Reality?

Pages: 1389-1413  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00057  |  Cited by: 518

Marshall E. Blume, Felix Lim, A. Craig Mackinlay

In recent years, the number of downgrades in corporate bond ratings has exceeded the number of upgrades, leading some to conclude that the credit quality of U.S. corporate debt has declined. However, an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings. An ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent, implying that at least part of the downward trend in ratings is the result of changing standards.

Minutes of the Annual Membership Meeting

Pages: 1415-1416  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00058  |  Cited by: 0

Michael Keenan

Report of the Executive Secretary and Treasurer

Pages: 1417-1420  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00059  |  Cited by: 0

Michael Keenan

Report of the Editor of The Journal of Finance for the Year 1997

Pages: 1421-1434  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00060  |  Cited by: 0

René M. Stulz

Report of the Representative to the National Bureau of Economic Research*

Pages: 1435-1436  |  Published: 8/1998  |  DOI: 10.1111/0022-1082.00061  |  Cited by: 0

Robert S. Hamada

Association Meetings

Pages: 1437-1438  |  Published: 8/1998  |  DOI: 10.1111/j.1540-6261.1998.tb00533.x  |  Cited by: 0


Pages: 1439-1440  |  Published: 8/1998  |  DOI: 10.1111/j.1540-6261.1998.tb00534.x  |  Cited by: 0

From the ExSec's Notebook

Pages: 1441-1442  |  Published: 8/1998  |  DOI: 10.1111/j.1540-6261.1998.tb00535.x  |  Cited by: 0