The Journal of Finance

Who Should Buy Portfolio Insurance?

Published: 5/1980,  Volume: 35,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1980.tb02190.x  |  Cited by: 275

HAYNE E. LELAND

Agency Costs, Risk Management, and Capital Structure

Published: 8/1998,  Volume: 53,  Issue: 4  |  DOI: 10.1111/0022-1082.00051  |  Cited by: 1152

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. Risk management is also examined. Hedging permits greater leverage. Even when a firm cannot precommit to hedging, it will still do so. Surprisingly, hedging benefits often are greater when agency costs are low.

Financial Synergies and the Optimal Scope of the Firm: Implications for Mergers, Spinoffs, and Structured Finance

Published: 3/20/2007,  Volume: 62,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2007.01223.x  |  Cited by: 208

HAYNE E. LELAND

Multiple activities may be separated financially, allowing each to optimize its financial structure, or combined in a firm with a single optimal financial structure. We consider activities with nonsynergistic operational cash flows, and examine the purely financial benefits of separation versus merger. The magnitude of financial synergies depends upon tax rates, default costs, relative size, and the riskiness and correlation of cash flows. Contrary to accepted wisdom, financial synergies from mergers can be negative if firms have quite different risks or default costs. The results provide a rationale for structured finance techniques such as asset securitization and project finance.

Corporate Debt Value, Bond Covenants, and Optimal Capital Structure

Published: 9/1994,  Volume: 49,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1994.tb02452.x  |  Cited by: 2155

HAYNE E. LELAND

This article examines corporate debt values and capital structure in a unified analytical framework. It derives closed‐form results for the value of long‐term risky debt and yield spreads, and for optimal capital structure, when firm asset value follows a diffusion process with constant volatility. Debt values and optimal leverage are explicitly linked to firm risk, taxes, bankruptcy costs, risk‐free interest rates, payout rates, and bond covenants. The results elucidate the different behavior of junk bonds versus investment‐grade bonds, and aspects of asset substitution, debt repurchase, and debt renegotiation.

Option Pricing and Replication with Transactions Costs

Published: 12/1985,  Volume: 40,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1985.tb02383.x  |  Cited by: 713

HAYNE E. LELAND

Transactions costs invalidate the Black‐Scholes arbitrage argument for option pricing, since continuous revision implies infinite trading. Discrete revision using Black‐Scholes deltas generates errors which are correlated with the market, and do not approach zero with more frequent revision when transactions costs are included. This paper develops a modified option replicating strategy which depends on the size of transactions costs and the frequency of revision. Hedging errors are uncorrelated with the market and approach zero with more frequent revision. The technique permits calculation of the transactions costs of option replication and provides bounds on option prices.

DYNAMIC PORTFOLIO THEORY*

Published: 6/1969,  Volume: 24,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1969.tb00376.x  |  Cited by: 0

Hayne E. Leland

Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads

Published: 7/1996,  Volume: 51,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1996.tb02714.x  |  Cited by: 1450

HAYNE E. LELAND, KLAUS BJERRE TOFT

This article examines the optimal capital structure of a firm that can choose both the amount and maturity of its debt. Bankruptcy is determined endogenously rather than by the imposition of a positive net worth condition or by a cash flow constraint. The results extend Leland's (1994a) closed‐form results to a much richer class of possible debt structures and permit study of the optimal maturity of debt as well as the optimal amount of debt. The model predicts leverage, credit spreads, default rates, and writedowns, which accord quite closely with historical averages. While short term debt does not exploit tax benefits as completely as long term debt, it is more likely to provide incentive compatibility between debt holders and equity holders. Short term debt reduces or eliminates “asset substitution” agency costs. The tax advantage of debt must be balanced against bankruptcy and agency costs in determining the optimal maturity of the capital structure. The model predicts differently shaped term structures of credit spreads for different levels of risk. These term structures are similar to those found empirically by Sarig and Warga (1989). Our results have important implications for bond portfolio management. In general, Macaulay duration dramatically overstates true duration of risky debt, which may be negative for “junk” bonds. Furthermore, the “convexity” of bond prices can become “concavity.”

INFORMATIONAL ASYMMETRIES, FINANCIAL STRUCTURE, AND FINANCIAL INTERMEDIATION

Published: 5/1977,  Volume: 32,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1977.tb03277.x  |  Cited by: 419

Richard Brealey, Hayne E. Leland, David H. Pyle

Symposium on Public Policy Issues in Finance

Published: 7/1997,  Volume: 52,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1997.tb02729.x  |  Cited by: 1

HAYNE E. LELAND, MARTIN FELDSTEIN, ROBERT R. GLAUBER, DAVID W. MULLINS, STEVEN M. H. WALLMAN

The thesis of this symposium, organized by James Bicksler, was that while finance theory will surely inform practitioners, it seems appropriate to pay some attention to the opposite flow: practitioners can inform theory. Contributors include a distinguished group of practitioners with extensive backgrounds in economics, and economists with extensive public policy experience: Martin Feldstein, Robert Glauber, David Mullins, and Steven Wallman. Their topics range from privatizing social security, to managing market crashes, to the regulatory agency cost problem, to regulatory constraints in a technologically advanced world.

Event Risk: An Analysis of Losses to Bondholders and “Super Poison Put” Bond Covenants

Published: 6/1991,  Volume: 46,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1991.tb02680.x  |  Cited by: 8

LELAND CRABBE

Ten percent of the investment‐grade industrial bonds that were associated with major capital restructurings between 1983 and 1988 had already been downgraded to speculative grade as of August 1989. In response to these downgrades, and the corresponding wealth losses for bondholders, over 40 percent of recently issued investment‐grade industrial bonds are protected from this type of “event risk” by virtue of specialized covenants. These event‐risk convenants may have initially reduced interest costs for borrowers by roughly 20 to 30 basis points. However, the magnitude of the effect appears to have declined along with the general decline in corporate restructurings.

BOOTSTRAP INFLATION

Published: 3/1976,  Volume: 31,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1976.tb03200.x  |  Cited by: 0

Leland Yeager

THE GOVERNMENT, THE BANKS AND THE NATIONAL DEBT*

Published: 8/1946,  Volume: 1,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1946.tb01547.x  |  Cited by: 1

Simeon E. Leland

TOWARD A MORE MEANINGFUL STATISTICAL CONCEPT OF THE MONEY SUPPLY

Published: 3/1954,  Volume: 9,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1954.tb01204.x  |  Cited by: 0

Leland J. Pritchard

THE MISCONCEIVED PROBLEM OF INTERNATIONAL LIQUIDITY

Published: 9/1959,  Volume: 14,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1959.tb00121.x  |  Cited by: 0

Leland B. Yeager

A Reply

Published: 3/1955,  Volume: 10,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1955.tb01562.x  |  Cited by: 0

Leland J. Pritchard

THE IMPACT OF COMPENSATING BALANCE REQUIREMENTS ON THE CASH BALANCES OF MANUFACTURING CORPORATIONS: AN EMPIRICAL STUDY*

Published: 3/1977,  Volume: 32,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1977.tb03239.x  |  Cited by: 4

Tim Campbell, Leland Brendsel

The Effect of a Rating Downgrade on Outstanding Commercial Paper

Published: 3/1994,  Volume: 49,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1994.tb04419.x  |  Cited by: 37

LELAND CRABBE, MITCHELL A. POST

Diamond (1991) argues that a firm's reputation determines whether it borrows directly or through an intermediary. We test the Diamond model by examining the quantity response of commercial paper issued by bank holding companies to a rating downgrade. From 1986 to 1991, cumulative abnormal declines averaged 6.69 percent in the first two weeks after the downgrade and 11.05 percent in the subsequent 12 weeks. In contrast to commercial paper issued by bank holding companies, large CDs issued by affiliated banks did not change significantly in the period around a downgrade, suggesting that deposit insurance may have removed market discipline from the CD market.

Does the Liquidity of a Debt Issue Increase with Its Size? Evidence from the Corporate Bond and Medium‐Term Note Markets

Published: 12/1995,  Volume: 50,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1995.tb05194.x  |  Cited by: 54

LELAND E. CRABBE, CHRISTOPHER M. TURNER

To investigate the liquidity of large issues, this study tests for yield differences between corporate bonds and medium‐term notes (MTNs). In the sample, MTNs have an average issue size of $4 million, compared with $265 million for bonds. Among MTNs that have the same issuance date, the same maturity date, and the same corporate issuer, we find no relation between size and yields. Moreover, bonds and MTNs have statistically equivalent yields. Thus, rather than suggesting that large issues have greater liquidity, these findings indicate that large and small securities issued by the same borrower are close substitutes.

Pockets of Predictability

Published: 5/9/2023,  Volume: 78,  Issue: 3  |  DOI: 10.1111/jofi.13229  |  Cited by: 87

LELAND E. FARMER, LAWRENCE SCHMIDT, ALLAN TIMMERMANN

For many benchmark predictor variables, short‐horizon return predictability in the U.S. stock market is local in time as short periods with significant predictability (“pockets”) are interspersed with long periods with no return predictability. We document this result empirically using a flexible time‐varying parameter model that estimates predictive coefficients as a nonparametric function of time and explore possible explanations of this finding, including time‐varying risk premia for which we find limited support. Conversely, pockets of return predictability are consistent with a sticky expectations model in which investors slowly update their beliefs about a persistent component in the cash flow process.

Business News and Business Cycles

Published: 8/9/2024,  Volume: 79,  Issue: 5  |  DOI: 10.1111/jofi.13377  |  Cited by: 158

LELAND BYBEE, BRYAN KELLY, ASAF MANELA, DACHENG XIU

We propose an approach to measuring the state of the economy via textual analysis of business news. From the full text of 800,000 Wall Street Journal articles for 1984 to 2017, we estimate a topic model that summarizes business news into interpretable topical themes and quantifies the proportion of news attention allocated to each theme over time. News attention closely tracks a wide range of economic activities and can forecast aggregate stock market returns. A text‐augmented vector autoregression demonstrates the large incremental role of news text in forecasting macroeconomic dynamics. We retrieve the narratives that underlie these improvements in market and business cycle forecasts.