The Journal of Finance

Presidential Address: Collateral and Commitment

Published: 7/15/2019,  Volume: 74,  Issue: 4  |  DOI: 10.1111/jofi.12782  |  Cited by: 87

PETER M. DEMARZO

Optimal dynamic capital structure choice is fundamentally a problem of commitment. In a standard trade‐off setting with shareholder‐debtholder agency conflicts, full commitment counterfactually predicts the firm would rely almost exclusively on debt financing. Conversely, absent commitment a Modigliani‐Miller‐like value irrelevance and policy indeterminacy result holds. Thus, the content of dynamic trade‐off theory must depend on the commitment technology. In this context, collateral is valuable as a low‐cost commitment device. Because ex ante optimal commitments are likely to be suboptimal ex post, observed capital structure dynamics will exhibit hysteresis and depart significantly from standard predictions.

Optimal Security Design and Dynamic Capital Structure in a Continuous‐Time Agency Model

Published: 12/2006,  Volume: 61,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2006.01002.x  |  Cited by: 522

PETER M. DeMARZO, YULIY SANNIKOV

We derive the optimal dynamic contract in a continuous‐time principal‐agent setting, and implement it with a capital structure (credit line, long‐term debt, and equity) over which the agent controls the payout policy. While the project's volatility and liquidation cost have little impact on the firm's total debt capacity, they increase the use of credit versus debt. Leverage is nonstationary, and declines with past profitability. The firm may hold a compensating cash balance while borrowing (at a higher rate) through the credit line. Surprisingly, the usual conflicts between debt and equity (asset substitution, strategic default) need not arise.

Leverage Dynamics without Commitment

Published: 1/13/2021,  Volume: 76,  Issue: 3  |  DOI: 10.1111/jofi.13001  |  Cited by: 143

PETER M. DEMARZO, ZHIGUO HE

We characterize equilibrium leverage dynamics in a trade‐off model in which the firm can continuously adjust leverage and cannot commit to a policy ex ante. While the leverage ratchet effect leads shareholders to issue debt gradually over time, asset growth and debt maturity cause leverage to mean‐revert slowly toward a target. Investors anticipate future debt issuance and raise credit spreads, fully offsetting the tax benefits of new debt. Shareholders are therefore indifferent toward the debt maturity structure, even though their choice significantly affects credit spreads, leverage levels, the speed of adjustment, future investment, and growth.

Contracting in Peer Networks

Published: 7/28/2023,  Volume: 78,  Issue: 5  |  DOI: 10.1111/jofi.13260  |  Cited by: 21

PETER M. DEMARZO, RON KANIEL

We consider multiagent multifirm contracting when agents benchmark their wages to those of their peers, using weights that vary within and across firms. When a single principal commits to a public contract, optimal contracts hedge relative wage risk without sacrificing efficiency. But compensation benchmarking undoes performance benchmarking, causing wages to load positively on peer output, and asymmetries in peer effects can be exploited to enhance profits. With multiple principals, a “rat race” emerges: agents are more productive, with effort that can exceed the first best, but higher wages reduce profits and undermine efficiency. Wage transparency and disclosure requirements exacerbate these effects.

Diversification as a Public Good: Community Effects in Portfolio Choice

Published: 8/2004,  Volume: 59,  Issue: 4  |  DOI: 10.1111/j.1540-6261.2004.00676.x  |  Cited by: 133

Peter M. Demarzo, Ron Kaniel, Ilan Kremer

Within a rational general equilibrium model in which agents care only about personal consumption, we consider a setting in which, due to borrowing constraints, individuals endowed with local resources underparticipate in financial markets. As a result, investors compete for local resources through their portfolio choices. Even with complete financial markets and no aggregate risk, agents may herd into risky portfolios. This yields a Pareto‐dominated outcome as agents introduce “community” risk unrelated to fundamentals. Moreover, if some agents are behaviorally biased, or cannot completely diversify their holdings, rational agents may choose more extreme portfolios and amplify the effect.

Dynamic Agency and the q Theory of Investment

Published: 11/19/2012,  Volume: 67,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2012.01787.x  |  Cited by: 283

PETER M. DEMARZO, MICHAEL J. FISHMAN, ZHIGUO HE, NENG WANG

We develop an analytically tractable model integrating dynamic investment theory with dynamic optimal incentive contracting, thereby endogenizing financing constraints. Incentive contracting generates a history‐dependent wedge between marginal and average q, and both vary over time as good (bad) performance relaxes (tightens) financing constraints. Financial slack, not cash flow, is the appropriate proxy for financing constraints. Investment decreases with idiosyncratic risk, and is positively correlated with past profits, past investment, and managerial compensation even with time‐invariant investment opportunities. Optimal contracting involves deferred compensation, possible termination, and compensation that depends on exogenous observable persistent profitability shocks, effectively paying managers for luck.

The Leverage Ratchet Effect

Published: 12/14/2017,  Volume: 73,  Issue: 1  |  DOI: 10.1111/jofi.12588  |  Cited by: 274

ANAT R. ADMATI, PETER M. DEMARZO, MARTIN F. HELLWIG, PAUL PFLEIDERER

Firms’ inability to commit to future funding choices has profound consequences for capital structure dynamics. With debt in place, shareholders pervasively resist leverage reductions no matter how much such reductions may enhance firm value. Shareholders would instead choose to increase leverage even if the new debt is junior and would reduce firm value. These asymmetric forces in leverage adjustments, which we call the leverage ratchet effect , cause equilibrium leverage outcomes to be history‐dependent. If forced to reduce leverage, shareholders are biased toward selling assets relative to potentially more efficient alternatives such as pure recapitalizations.

DEPOSIT‐RUN MODEL OF MEMBER BANK BORROWINGS*

Published: 6/1970,  Volume: 25,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1970.tb00540.x  |  Cited by: 0

Peter Formuzis

REPLY

Published: 6/1975,  Volume: 30,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1975.tb01868.x  |  Cited by: 0

Peter Fortune

A Note on the Pricing of Commodity‐Linked Bonds

Published: 9/1987,  Volume: 42,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1987.tb03928.x  |  Cited by: 13

PETER CARR

A THEORY OF OPTIMAL LIFE INSURANCE: DEVELOPMENT AND TESTS

Published: 6/1973,  Volume: 28,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1973.tb01381.x  |  Cited by: 17

Peter Fortune

The Valuation of Sequential Exchange Opportunities

Published: 12/1988,  Volume: 43,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1988.tb03967.x  |  Cited by: 180

PETER CARR

Sequential exchange opportunities are valued using the techniques of modern option‐pricing theory. The vehicle for analysis is the concept of a compound exchange option. This security is shown to exist implicitly in several contractual settings. A valuation formula for this option is derived. The formula is shown to generalize much previous work in option pricing. Several applications of the formula are presented.

The Boats That Did Not Sail: Asset Price Volatility in a Natural Experiment

Published: 5/11/2016,  Volume: 71,  Issue: 3  |  DOI: 10.1111/jofi.12312  |  Cited by: 70

PETER KOUDIJS

What explains short‐term fluctuations of stock prices? This paper exploits a natural experiment from the 18 century in which information flows were regularly interrupted for exogenous reasons. English shares were traded on the Amsterdam exchange and news came in on sailboats that were often delayed because of adverse weather conditions. The paper documents that prices responded strongly to boat arrivals, but there was considerable volatility in the absence of news. The evidence suggests that this was largely the result of the revelation of (long‐lived) private information and the (transitory) impact of uninformed liquidity trades on intermediaries' risk premia.

THE EFFECT OF FHLB BOND OPERATIONS ON SAVINGS INFLOWS AT SAVINGS AND LOAN ASSOCIATIONS: COMMENT

Published: 6/1976,  Volume: 31,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1976.tb01939.x  |  Cited by: 5

Peter Fortune

The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices

Published: 5/7/2010,  Volume: 65,  Issue: 3  |  DOI: 10.1111/j.1540-6261.2010.01564.x  |  Cited by: 440

PETER ILIEV

This paper exploits a natural quasi‐experiment to isolate the effects that were uniquely due to the Sarbanes–Oxley Act (SOX): U.S. firms with a public float under $75 million could delay Section 404 compliance, and foreign firms under $700 million could delay the auditor's attestation requirement. As designed, Section 404 led to conservative reported earnings, but also imposed real costs. On net, SOX compliance reduced the market value of small firms.

ANALYSIS OF THE LEASE‐OR‐BUY DECISION: COMMENT

Published: 9/1973,  Volume: 28,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1973.tb01425.x  |  Cited by: 2

Peter Lusztig

CALL FOR PAPERS FOR THE SEVENTH ANNUAL MEETING OF THE EUROPEAN FINANCE ASSOCIATION (EFA)

Published: 3/1980,  Volume: 35,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1980.tb03487.x  |  Cited by: 0

Peter Swoboda

Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry

Published: 9/1996,  Volume: 51,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1996.tb04064.x  |  Cited by: 1013

PETER TUFANO

This article examines a new database that details corporate risk management activity in the North American gold mining industry. I find little empirical support for the predictive power of theories that view risk management as a means to maximize shareholder value. However, firms whose managers hold more options manage less gold price risk, and firms whose managers hold more stock manage more gold price risk, suggesting that managerial risk aversion may affect corporate risk management policy. Further, risk management is negatively associated with the tenure of firms' CFOs, perhaps reflecting managerial interests, skills, or preferences.

The Determinants of Stock Price Exposure: Financial Engineering and the Gold Mining Industry

Published: 6/1998,  Volume: 53,  Issue: 3  |  DOI: 10.1111/0022-1082.00042  |  Cited by: 197

Peter Tufano

This paper studies the exposure of North American gold mining firms to changes in the price of gold. The average mining stock moves 2 percent for each 1 percent change in gold prices, but exposures vary considerably over time and across firms. As predicted by valuation models, gold firm exposures are significantly negatively related to the firm's hedging and diversification activities and to gold prices and gold return volatility, and are positively related to firm leverage. Simple discounted cash flow models produce useful exposure predictions but they systematically overestimate exposures, possibly due to their failure to reflect managerial flexibility.

A Transactions Data Test of Stock Index Futures Market Efficiency and Index Arbitrage Profitability

Published: 12/1991,  Volume: 46,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1991.tb04644.x  |  Cited by: 110

Y. PETER CHUNG

This paper investigates the efficiency of the market for stock index futures and the profitability of index arbitrage for The Chicago Board of Trade's Major Market Index contracts. The spot value of the index is computed with transactions prices for the component shares of the index obtained from the Fitch database. The tests account for transaction costs, execution lags, and the uptick rule for short sales of stocks. Results indicate that the size and frequency of boundary violations are substantially smaller than those reported by earlier studies and have declined sharply with time.

COMPONENTS OF A MEASUREMENT MODEL: RATE OF RETURN, RISK, AND TIMING

Published: 5/1968,  Volume: 23,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1968.tb00802.x  |  Cited by: 17

Peter O. Dietz

On Option Pricing Bounds

Published: 9/1985,  Volume: 40,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1985.tb02373.x  |  Cited by: 109

PETER H. RITCHKEN

The purpose of this article is to compare the Perrakis and Ryan bounds of option prices in a single‐period model with option bounds derived using linear programming. It is shown that the upper bounds are identical but that the lower bounds are different. A comparison of these bounds, together with Merton's bounds and the Black‐Scholes prices in a lognormal securities market, is presented.

FOREIGN CENTRAL BANKING, 1946–1957: THE INSTRUMENTS AND EFFECTIVENESS OF MONETARY POLICY*

Published: 12/1960,  Volume: 15,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1960.tb02773.x  |  Cited by: 0

Peter G. Fousek

Common Stock Offerings and Earnings Expectations: A Test of the Release of Unfavorable Information

Published: 9/1992,  Volume: 47,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1992.tb04668.x  |  Cited by: 88

PETER ALAN BROUS

This paper examines the revisions of analysts' forecasts of future earnings around announcements of common stock offerings. The forecasts of the current year earnings are, on average, decreased when firms announce plans to issue additional common stock. The size of the decrease is significantly related to announcement period abnormal stock returns. In contrast, forecasts of the five‐year growth rate of earnings are, on average, unchanged. We interpret these results as being consistent with the claim that equity offering announcements convey unfavorable information regarding the firm's short‐term but not its long‐term earnings prospects.

CIGARETTES AS CURRENCY

Published: 9/1951,  Volume: 6,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1951.tb04473.x  |  Cited by: 2

Peter R. Senn

DISCUSSION

Published: 7/1985,  Volume: 40,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1985.tb05005.x  |  Cited by: 2

PETER L. BERNSTEIN

INFORMATION EXCHANGE IN SECURITY MARKETS AND THE ASSUMPTION OF “HOMOGENEOUS BELIEFS”*

Published: 9/1974,  Volume: 29,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1974.tb03099.x  |  Cited by: 0

Peter S. Albin

RESERVE SETTLEMENT PERIODS OF MEMBER BANKS: COMMENT

Published: 3/1964,  Volume: 19,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1964.tb00747.x  |  Cited by: 1

Peter D. Sternlight

DISCUSSION

Published: 5/1971,  Volume: 26,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1971.tb00903.x  |  Cited by: 0

Peter L. Bernstein

MEMBER BANK RESERVE SETTLEMENT PERIODS: A FURTHER COMMENT

Published: 9/1964,  Volume: 19,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1964.tb02872.x  |  Cited by: 0

Peter D. Sternlight

UNITED STATES CREDIT POLICY IN THE 1954–57 PERIOD*

Published: 3/1961,  Volume: 16,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1961.tb02800.x  |  Cited by: 0

Peter D. Sternlight

THE PORTFOLIO BEHAVIOUR OF SELECTED CANADIAN FINANCIAL INTERMEDIARIES: AN ECONOMETRIC ANALYSIS

Published: 3/1973,  Volume: 28,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1973.tb01369.x  |  Cited by: 0

Peter G. Kirkham

BANKS' DEMAND FOR EXCESS RESERVES*

Published: 6/1968,  Volume: 23,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1968.tb00831.x  |  Cited by: 0

Peter A. Frost

COMPANY CONTRIBUTIONS TO DISCRETIONARY PROFIT‐SHARING PLANS: COMMENT

Published: 6/1976,  Volume: 31,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1976.tb01945.x  |  Cited by: 1

ULF PETER WELAM

THE EFFECTS ON MONETARY POLICY OF RISING COSTS IN COMMERCIAL BANKS*

Published: 3/1963,  Volume: 18,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1963.tb01620.x  |  Cited by: 0

H. Peter Gray

DETERMINANTS OF THE AGGREGATE PROFIT MARGIN: COMMENT

Published: 3/1976,  Volume: 31,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1976.tb03209.x  |  Cited by: 0

H. Peter Gray

Stock Market Liberalization, Economic Reform, and Emerging Market Equity Prices

Published: 4/2000,  Volume: 55,  Issue: 2  |  DOI: 10.1111/0022-1082.00219  |  Cited by: 853

Peter Blair Henry

A stock market liberalization is a decision by a country's government to allow foreigners to purchase shares in that country's stock market. On average, a country's aggregate equity price index experiences abnormal returns of 3.3 percent per month in real dollar terms during an eight‐month window leading up to the implementation of its initial stock market liberalization. This result is consistent with the prediction of standard international asset pricing models that stock market liberalization may reduce the liberalizing country's cost of equity capital by allowing for risk sharing between domestic and foreign agents.

THE PAYMENTS IMPACT OF FOREIGN INVESTMENT CONTROLS

Published: 12/1971,  Volume: 26,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1971.tb01750.x  |  Cited by: 6

Peter H. Lindert

EVALUATING THE INVESTMENT PERFORMANCE OF NONINSURED PENSION FUNDS*

Published: 12/1965,  Volume: 20,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1965.tb02942.x  |  Cited by: 0

Peter O. Dietz

BANKING SERVICES, MINIMUM CASH BALANCES, AND THE FIRM'S DEMAND FOR MONEY

Published: 12/1970,  Volume: 25,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1970.tb00866.x  |  Cited by: 8

Peter A. Frost

SOME EVIDENCE ON TWO IMPLICATIONS OF HIGHER INTEREST‐RATES ON TIME DEPOSITS

Published: 3/1964,  Volume: 19,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1964.tb00745.x  |  Cited by: 6

H. Peter Gray

“THE PAYMENTS IMPACT OF FOREIGN INVESTMENT CONTROLS: REPLY.”

Published: 12/1976,  Volume: 31,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1976.tb03230.x  |  Cited by: 0

Peter H. Lindert

RATES OF RETURN ON FILTER TESTS

Published: 3/1976,  Volume: 31,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1976.tb03197.x  |  Cited by: 11

Peter D. Praetz

ON THE METHODOLOGY OF TESTING FOR INDEPENDENCE IN FUTURE PRICES: COMMENT

Published: 6/1976,  Volume: 31,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1976.tb01942.x  |  Cited by: 11

Peter D. Praetz

PREREQUISITES FOR THE GROWTH OF CONSUMER INSTALMENT CREDIT

Published: 5/1958,  Volume: 13,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1958.tb04187.x  |  Cited by: 1

Peter G. Fousek

On The Predictability of Corporate Earnings Per Share Behavior

Published: 3/1980,  Volume: 35,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1980.tb03467.x  |  Cited by: 20

PETER D. CHANT

HIGHER INTEREST RATES ON TIME DEPOSITS: REPLY

Published: 3/1965,  Volume: 20,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1965.tb00187.x  |  Cited by: 0

H. Peter Gray

COMPENSATORY CYCLICAL BANK ASSET ADJUSTMENTS: COMMENT

Published: 12/1962,  Volume: 17,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1962.tb04338.x  |  Cited by: 0

H. Peter Gray

Testing for a Flat Spectrum on Efficient Market Price Data

Published: 6/1979,  Volume: 34,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1979.tb02131.x  |  Cited by: 21

PETER D. PRAETZ

Is Disinflation Good for the Stock Market?

Published: 8/2002,  Volume: 57,  Issue: 4  |  DOI: 10.1111/1540-6261.00473  |  Cited by: 24

Peter Blair Henry

The stock market appreciates by an average of 24 percent in real dollar terms when countries attempt to stabilize annual inflation rates that are greater than 40 percent. In contrast, the average market response is 0 when the prestabilization rate of inflation is less than 40 percent. These results suggest that the potential long‐run benefits of stabilization may dominate shortrun costs at high levels of inflation, but at low to moderate levels of inflation, benefits may be offset by costs in a present value sense. Stock market responses also help predict the change in inflation and output in the year following all 81 stabilization efforts.