The Journal of Finance

The Bank Capital Decision: A Time Series—Cross Section Analysis

Published: 09/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb02292.x

ALAN J. MARCUS

This paper seeks to explain the dramatic decline in capital to asset ratios in U.S. commercial banks during the last two decades. It is hypothesized that the rise in nominal interest rates during this period might have contributed substantially to the fall in capital ratios. Time series‐cross section estimation supports the hypothesis regarding the interest rate.

Spinoff/Terminations and the Value of Pension Insurance

Published: 07/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb05018.x

ALAN J. MARCUS

This paper derives the value of Pension Benefit Guarantee Corporation (PBGC) pension insurance under two scenarios of interest. The first allows for voluntary plan termination, which appears to be legal under current statutes. In the second scenario, termination is prohibited unless the firm is bankrupt. Empirical estimates of PBGC liabilities are calculated. These show that prospective PBGC liabilities greatly exceed current reserves for plan terminations, that even under a bankruptcy‐only termination rule, PBGC liabilities still would be quite sensitive to discretionary funding policy, and that the increasingly common practice of pension spinoff/terminations, substantially increases the present value of the PBGC's contingent liabilities.

Valuation and Optimal Exercise of the Wild Card Option in the Treasury Bond Futures Market

Published: 03/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04499.x

ALEX KANE, ALAN J. MARCUS

The Chicago Board of Trade Treasury Bond Futures Contract allows the short position several delivery options as to when and with which bond the contract will be settled. The timing option allows the short position to choose any business day in the delivery month to make delivery. In addition, the contract settlement price is locked in at 2:00 p.m. when the futures market closes, despite the facts that the short position need not declare an intent to settle the contract until 8:00 p.m. and that trading in Treasury bonds can occur all day in dealer markets. If bond prices change significantly between 2:00 and 8:00 p.m., the short has the option of settling the contract at a favorable 2:00 p.m. price. This phenomenon, which recurs on every trading day of the delivery month, creates a sequence of 6‐hour put options for the short position which has been dubbed the “wild card option.” This paper presents a valuation model for the wild card option and computes estimates of the value of that option, as well as rules for its optimal exercise.

How Big is the Tax Advantage to Debt?

Published: 07/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03678.x

ALEX KANE, ALAN J. MARCUS, ROBERT L. McDONALD

This paper uses an option valuation model of the firm to answer the question, “What magnitude tax advantage to debt is consistent with the range of observed corporate debt ratios?” We incorporate into the model differential personal tax rates on capital gains and ordinary income. We conclude that variations in the magnitude of bankruptcy costs across firms can not by itself account for the simultaneous existence of levered and unlevered firms. When it is possible for the value of the underlying assets to jump discretely to zero, differences across firms in the probability of this jump can account for the simultaneous existence of levered and unlevered firms. Moreover, if the tax advantage to debt is small, the annual rate of return advantage offered by optimal leverage may be so small as to make the firm indifferent about debt policy over a wide range of debt‐to‐firm value ratios.