The Journal of Finance

A Nonparametric Model of Term Structure Dynamics and the Market Price of Interest Rate Risk

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb02748.x

RICHARD STANTON

This article presents a technique for nonparametrically estimating continuous‐time diffusion processes that are observed at discrete intervals. We illustrate the methodology by using daily three and six month Treasury Bill data, from January 1965 to July 1995, to estimate the drift and diffusion of the short rate, and the market price of interest rate risk. While the estimated diffusion is similar to that estimated by Chan, Karolyi, Longstaff, and Sanders (1992), there is evidence of substantial nonlinearity in the drift. This is close to zero for low and medium interest rates, but mean reversion increases sharply at higher interest rates.

Managerial Ability, Compensation, and the Closed‐End Fund Discount

Published: 03/20/2007   |   DOI: 10.1111/j.1540-6261.2007.01216.x

JONATHAN B. BERK, RICHARD STANTON

This paper shows that the existence of managerial ability, combined with the labor contract prevalent in the industry, implies that the closed‐end fund discount should exhibit many of the primary features documented in the literature. We evaluate the model's ability to match the quantitative features of the data, and find that it does well, although there is some observed behavior that remains to be explained.

Financial Flexibility, Bank Capital Flows, and Asset Prices

Published: 09/12/2012   |   DOI: 10.1111/j.1540-6261.2012.01770.x

CHRISTINE A. PARLOUR, RICHARD STANTON, JOHAN WALDEN

In our parsimonious general‐equilibrium model of banking and asset pricing, intermediaries have the expertise to monitor and reallocate capital. We study financial development, intraeconomy capital flows, the size of the banking sector, the value of intermediation, expected market returns, and the risk of bank crashes. Asset pricing implications include: a market's dividend yield is related to its financial flexibility, and capital flows should be important in explaining expected returns and the risk of bank crashes. Our predictions are broadly consistent with the aggregate behavior of U.S. capital markets since 1950.

Human Capital, Bankruptcy, and Capital Structure

Published: 05/07/2010   |   DOI: 10.1111/j.1540-6261.2010.01556.x

JONATHAN B. BERK, RICHARD STANTON, JOSEF ZECHNER

We derive the optimal labor contract for a levered firm in an economy with perfectly competitive capital and labor markets. Employees become entrenched under this contract and so face large human costs of bankruptcy. The firm's optimal capital structure therefore depends on the trade‐off between these human costs and the tax benefits of debt. Optimal debt levels consistent with those observed in practice emerge without relying on frictions such as moral hazard or asymmetric information. Consistent with empirical evidence, persistent idiosyncratic differences in leverage across firms also result. In addition, wages should have explanatory power for firm leverage.

Employee Stock Option Exercise and Firm Cost

Published: 12/16/2018   |   DOI: 10.1111/jofi.12752

JENNIFER N. CARPENTER, RICHARD STANTON, NANCY WALLACE

We develop an empirical model of employee stock option exercise that is suitable for valuation and allows for behavioral channels. We estimate exercise rates as functions of option, stock, and employee characteristics using all employee exercises at 88 public firms, 27 of them in the S&P 500. Increasing vesting frequency from annual to monthly reduces option value by 11% to 16%. Men exercise faster, reducing value by 2% to 4%, while top employees exercise slower, increasing value by 2% to 7%. Finally, we develop an analytic valuation approximation that is more accurate than methods used in practice.