The Journal of Finance

Changes in the Financial Market: Welfare and Price Effects and the Basic Theorems of Value Conservation

Published: 9/1982,  Volume: 37,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1982.tb03592.x  |  Cited by: 77

NILS H. HAKANSSON

This paper analyzes the impact, on both welfare and equilibrium prices, of changes in the financial market in a general equilibrium, two‐period context. Previous papers have focussed on the “securities effect,” tending to essentially ignore the equally important “endowment effect” that arises when market structure changes are implemented. Two forms of endowment neutrality and market structure changes which either preserve, expand, or shift allocational feasibility differentiate the main theorems, which are based on arbitrary preferences and beliefs and substantially extend and modify extant results; in particular, earlier statements identified with value conservation are sharply moderated. Very roughly, the paper yields the following implications for some of the more common changes in the market: nonsynergistic corporate spinoffs and the opening of option markets have, on balance, strongly positive welfare effects; nonsynergistic mergers tend to have strong negative welfare effects, while the welfare effects of alternative risky debt structures tend to be ambiguous. All of the preceding, however, may under plausible conditions be redistributive.

MULTI‐PERIOD MEAN‐VARIANCE ANALYSIS: TOWARD A GENERAL THEORY OF PORTFOLIO CHOICE*

Published: 9/1971,  Volume: 26,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1971.tb00924.x  |  Cited by: 27

Nils H. Hakansson

To Pay or Not to Pay Dividend*

Published: 5/1982,  Volume: 37,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1982.tb03564.x  |  Cited by: 15

NILS H. HAKANSSON

OPTIMAL INVESTMENT AND CONSUMPTION STRATEGIES FOR A CLASS OF UTILITY FUNCTIONS*

Published: 6/1968,  Volume: 23,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1968.tb00834.x  |  Cited by: 0

Nils H. Hakansson

DYNAMIC MARKET PROCESSES AND THE REWARDS TO UP‐TO‐DATE INFORMATION

Published: 5/1977,  Volume: 32,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1977.tb03269.x  |  Cited by: 17

Avraham Beja, Nils H. Hakansson

WELFARE ASPECTS OF OPTIONS AND SUPERSHARES

Published: 6/1978,  Volume: 33,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1978.tb02017.x  |  Cited by: 5

Michael Rothschild, Nils H. Hakansson

Gains from International Diversification: 1968–85 Returns on Portfolios of Stocks and Bonds

Published: 7/1987,  Volume: 42,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1987.tb04581.x  |  Cited by: 103

ROBERT R. GRAUER, NILS H. HAKANSSON

This paper applies the multi‐period investment model to a universe of international securities on the basis of the simple probability assessment approach. Our principal findings are: 1) the gains from including non‐U.S. asset categories in the universe were remarkably large (in some cases statistically significant), especially for the highly risk‐averse strategies, 2) the gains from removing the no leverage constraint were more substantial than they were in the absence of non‐U.S. securities, and 3) there is strong evidence of market segmentation in that the optimal levels of investment in U.S. securities were mostly zero in the presence of the non‐U.S. asset categories.

On the Feasibility of Automated Market Making by a Programmed Specialist

Published: 3/1985,  Volume: 40,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1985.tb04934.x  |  Cited by: 17

NILS H. HAKANSSON, AVRAHAM BEJA, JIVENDRA KALE

Securities trading is accomplished through the execution of orders. Admissible orders (e.g., market orders, limit orders) give rise to discontinuous aggregate demand functions, composed of many “steps.” Demand smoothing, or the balancing of excesses due to such discontinuities via intervention, is one of the most basic functions that could be assigned to a “specialist.” When the specialist's “affirmative obligation” is fully specified, his or her activity can in principle be automated. This paper is an attempt to assess, via simulation, some of the ramifications of using a “programmed specialist,” whose automated market making is limited to demand smoothing. A number of alternative rules of operation are simulated. Several of the rules performed well, especially the extremely simple rule that calls for the (computerized) specialist to minimize new absolute share holdings in each security at each trading point via “total” (as opposed to “local”) demand smoothing. Our results indicate that the underlying costs of demand smoothing are on the order of a fraction of a penny per share traded even in relatively thin markets.

Sufficient and Necessary Conditions for Information to have Social Value in Pure Exchange

Published: 12/1982,  Volume: 37,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1982.tb03610.x  |  Cited by: 89

NILS H. HAKANSSON, J. GREGORY KUNKEL, JAMES A. OHLSON

This paper extends, corrects, and unifies earlier statements concerning the social value of public information as well as the no‐trading conditions in pure exchange. Sufficient and necessary conditions are provided for both the single‐period and two‐period cases in a postsignal trading model. The social value of information is shown to be closely linked to the allocational efficiency of the market, the degree of homogeneity of prior beliefs, and of information structures, the time‐additivity of preferences, and the efficiency of endowments. We conclude that the case in favor of public information is much stronger than previously suggested.

Over‐the‐Counter Market Frictions and Yield Spread Changes

Published: 7/15/2019,  Volume: 74,  Issue: 6  |  DOI: 10.1111/jofi.12827  |  Cited by: 108

NILS FRIEWALD, FLORIAN NAGLER

We empirically study whether systematic over‐the‐counter (OTC) market frictions drive the large unexplained common factor in yield spread changes. Using transaction data on U.S. corporate bonds, we find that marketwide inventory, search, and bargaining frictions explain 23.4% of the variation in the common component. Systematic OTC frictions thus substantially improve the explanatory power of yield spread changes and account for one‐third of their total explained variation. Search and bargaining frictions combined explain more in the common dynamics of yield spread changes than inventory frictions. Our findings support the implications of leading theories of intermediation frictions in OTC markets.

Debt Refinancing and Equity Returns

Published: 6/15/2022,  Volume: 77,  Issue: 4  |  DOI: 10.1111/jofi.13162  |  Cited by: 40

NILS FRIEWALD, FLORIAN NAGLER, CHRISTIAN WAGNER

This paper presents empirical evidence that the maturity structure of financial leverage affects the cross‐section of equity returns. We find that short‐term leverage is associated with a positive premium, whereas long‐term leverage is not. The premium for short‐term compared to long‐term leverage reflects higher exposure of equity to systematic risk. To rationalize our findings, we show that the same patterns emerge in a model of debt rollover risk with endogenous leverage and debt maturity choice. Our results suggest that analyses of leverage effects in asset prices and corporate financial applications should account for the maturity structure of debt.

The Cross‐Section of Credit Risk Premia and Equity Returns

Published: 11/10/2014,  Volume: 69,  Issue: 6  |  DOI: 10.1111/jofi.12143  |  Cited by: 164

NILS FRIEWALD, CHRISTIAN WAGNER, JOSEF ZECHNER

We explore the link between a firm's stock returns and credit risk using a simple insight from structural models following Merton (): risk premia on equity and credit instruments are related because all claims on assets must earn the same compensation per unit of risk. Consistent with theory, we find that firms' stock returns increase with credit risk premia estimated from CDS spreads. Credit risk premia contain information not captured by physical or risk‐neutral default probabilities alone. This sheds new light on the “distress puzzle”—the lack of a positive relation between equity returns and default probabilities—reported in previous studies.

Size, Returns, and Value: Do Private Equity Firms Allocate Capital According to Manager Skill?

Published: 4/3/2026,  Volume: 81,  Issue: 3  |  DOI: 10.1111/jofi.70036  |  Cited by: 1

REINER BRAUN, NILS DORAU, TIM JENKINSON, DANIEL URBAN

Using a novel data set linking private equity (PE) deals to individual managers, we document evidence of manager skill in terms of generating net present value (NPV), a performance measure that captures both scale and returns. PE firms have strong economic incentives to raise larger funds and execute larger deals. While relative returns decline with scale, NPV persists and even increases. Skilled managers are entrusted with more capital and achieve better career outcomes, and approximately 40% of NPV is attributable to internal capital allocation decisions. These findings highlight the role of PE firms in creating value through performance‐based capital deployment.