The Journal of Finance

DISCUSSION

Published: 07/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04584.x

CHESTER S. SPATT

DISCUSSION

Published: 07/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb05013.x

CHESTER S. SPATT

Incentive Conflicts, Bundling Claims, and the Interaction among Financial Claimants

Published: 06/01/1993   |   DOI: 10.1111/j.1540-6261.1993.tb04725.x

CHESTER S. SPATT, FREDERIC P. STERBENZ

We show that for certain capital structures equity has an incentive to buy out another claim and alter the firm's investment strategy so as to maximize the combined value of equity and the acquired claim. This restructuring may reintroduce agency problems into capital structures which appear to avoid agency conflicts. By bundling claims, it is possible to avoid this agency problem. The agency problem is also eliminated by dispersed ownership of the claims.

An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris Bourse

Published: 12/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb05192.x

BRUNO BIAIS, PIERRE HILLION, CHESTER SPATT

As a centralized, computerized, limit order market, the Paris Bourse is particularly appropriate for studying the interaction between the order book and order flow. Descriptive methods capture the richness of the data and distinctive aspects of the market structure. Order flow is concentrated near the quote, while the depth of the book is somewhat larger at nearby valuations. We analyze the supply and demand of liquidity. For example, thin books elicit orders and thick books result in trades. To gain price and time priority, investors quickly place orders within the quotes when the depth at the quotes or the spread is large. Consistent with information effects, downward (upward) shifts in both bid and ask quotes occur after large sales (purchases).

Call Options, Points, and Dominance Restrictions on Debt Contracts

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00190

Kenneth B. Dunn, Chester S. Spatt

We analyze the impact of a contract's length, callability, amortization, and original discount by arbitrage methods. Among instruments that are callable without penalty, longer instruments command a higher interest rate because the borrower possesses the option of repaying relatively more slowly. However, the rate on longer self‐amortizing loans cannot be substantially larger than for shorter ones because the payments decrease with contract length. Bounds on the trade‐off between points and rate for callable debt are characterized using the trade‐off for noncallable debt and the property that the value of the prepayment option increases with the loan's interest rate.

An Option‐Theoretic Approach to the Valuation of Dividend Reinvestment and Voluntary Purchase Plans

Published: 03/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb03988.x

ROBERT M. DAMMON, CHESTER S. SPATT

Many firms with dividend reinvestment plans also allow their shareholders to voluntarily invest supplemental funds to purchase additional shares. The purchase price for newly‐issued shares often is determined by the average stock price over a prespecified time period preceding the investment date. This gives the firm's shareholders an option to invest in additional shares only when the stock price exceeds the computed average. This paper uses both theoretical and numerical methods to analyze the value of these voluntary purchase options in theory and practice.

An Analysis of Mortgage Contracting: Prepayment Penalties and the Due‐on‐Sale Clause

Published: 03/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04950.x

KENNETH B. DUNN, CHESTER S. SPATT

The due‐on‐sale clause contained in most conventional home mortgage contracts is equivalent to a prepayment penalty equal to the difference between the face value and market value of the loan. We analyze a bilateral game with asymmetric information and show that the bank demands the full penalty unless the market value of the loan is sufficiently low. In that case, the bank demands a prepayment penalty which is independent of the market value of the loan in order to induce additional prepayments. We also demonstrate, by a risk‐sharing argument, that the due‐on‐sale clause is optimal in some settings, even though it eliminates some beneficial home sales.

Warrant Exercise, Dividends, and Reinvestment Policy

Published: 06/01/1988   |   DOI: 10.1111/j.1540-6261.1988.tb03951.x

CHESTER S. SPATT, FREDERIC P. STERBENZ

In this paper, we examine sequential exercise strategies by warrantholders and the gain from hoarding warrants. We analyze several obstacles to acquiring large blocks in order to exploit sequential strategies. First, we identify several reinvestment policies for which sequential exercise is not advantageous, thereby eliminating the gain from hoarding. However, sequential exercise strategies may be advantageous for monopoly or oligopoly warrantholders, even absent dividends, because using exercise proceeds to repurchase stock or to expand the firm's scale increases the riskiness of an equity share. Second, oligopoly warrantholders can receive a smaller warrant value than perfectly competitive warrantholders, suggesting a potential cost to unsuccessful hoarding.

Equilibrium Forward Curves for Commodities

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00248

Bryan R. Routledge, Duane J. Seppi, Chester S. Spatt

We develop an equilibrium model of the term structure of forward prices for storable commodities. As a consequence of a nonnegativity constraint on inventory, the spot commodity has an embedded timing option that is absent in forward contracts. This option's value changes over time due to both endogenous inventory and exogenous transitory shocks to supply and demand. Our model makes predictions about volatilities of forward prices at different horizons and shows how conditional violations of the ‘Samuelson effect’ occur. We extend the model to incorporate a permanent second factor and calibrate the model to crude oil futures data.

Optimal Asset Location and Allocation with Taxable and Tax‐Deferred Investing

Published: 11/27/2005   |   DOI: 10.1111/j.1540-6261.2004.00655.x

Robert M. Dammon, Chester S. Spatt, Harold H. Zhang

We investigate optimal intertemporal asset allocation and location decisions for investors making taxable and tax‐deferred investments. We show a strong preference for holding taxable bonds in the tax‐deferred account and equity in the taxable account, reflecting the higher tax burden on taxable bonds relative to equity. For most investors, the optimal asset location policy is robust to the introduction of tax‐exempt bonds and liquidity shocks. Numerical results illustrate optimal portfolio decisions as a function of age and tax‐deferred wealth. Interestingly, the proportion of total wealth allocated to equity is inversely related to the fraction of total wealth in tax‐deferred accounts.