The Journal of Finance

Sources of Entropy in Representative Agent Models

Published: 08/12/2013   |   DOI: 10.1111/jofi.12090

DAVID BACKUS, MIKHAIL CHERNOV, STANLEY ZIN

We propose two data‐based performance measures for asset pricing models and apply them to models with recursive utility and habits. Excess returns on risky securities are reflected in the pricing kernel's dispersion and riskless bond yields are reflected in its dynamics. We measure dispersion with entropy and dynamics with horizon dependence, the difference between entropy over several periods and one. We compare their magnitudes to estimates derived from asset returns. This exercise reveals tension between a model's ability to generate one‐period entropy, which should be large, and horizon dependence, which should be small.

On Time‐Variance Analysis: Reply

Published: 12/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb00074.x

ROBERT A. SCHWARTZ, DAVID K. WHITCOMB

The Stable Paretian Distribution, Subordinated Stochastic Processes, and Asymptotic Lognormality: An Empirical Investigation

Published: 09/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb03456.x

DAVID E. UPTON, DONALD S. SHANNON

Arbitrage, Continuous Trading, and Margin Requirements

Published: 12/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04357.x

DAVID C. HEATH, ROBERT A. JARROW

This paper studies the impact that margin requirements have on both the existence of arbitrage opportunities and the valuation of call options. In the context of the Black‐Scholes economy, margin restrictions are shown to exclude continuous‐trading arbitrage opportunities and, with two additional hypotheses, still to allow the Black‐Scholes call model to apply. The Black‐Scholes economy consists of a continuously traded stock with a price process that follows a geometric Brownian motion and a continuously traded bond with a price process that is deterministic.

Pay Me Later: Inside Debt and Its Role in Managerial Compensation

Published: 08/14/2007   |   DOI: 10.1111/j.1540-6261.2007.01251.x

RANGARAJAN K. SUNDARAM, DAVID L. YERMACK

Though widely used in executive compensation, inside debt has been almost entirely overlooked by prior work. We initiate this research by studying CEO pension arrangements in 237 large capitalization firms. Among our findings are that CEO compensation exhibits a balance between debt and equity incentives; the balance shifts systematically away from equity and toward debt as CEOs grow older; annual increases in pension entitlements represent about 10% of overall CEO compensation, and about 13% for CEOs aged 61–65; CEOs with high debt incentives manage their firms conservatively; and pension compensation influences patterns of CEO turnover and cash compensation.

Disasters Implied by Equity Index Options

Published: 11/14/2011   |   DOI: 10.1111/j.1540-6261.2011.01697.x

DAVID BACKUS, MIKHAIL CHERNOV, IAN MARTIN

We use equity index options to quantify the distribution of consumption growth disasters. The challenge lies in connecting the risk‐neutral distribution of equity returns implied by options to the true distribution of consumption growth. First, we compare pricing kernels constructed from macro‐finance and option‐pricing models. Second, we compare option prices derived from a macro‐finance model to those we observe. Third, we compare the distribution of consumption growth derived from option prices using a macro‐finance model to estimates based on macroeconomic data. All three perspectives suggest that options imply smaller probabilities of extreme outcomes than have been estimated from macroeconomic data.

Option Volume and Stock Prices: Evidence on Where Informed Traders Trade

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.194060

David Easley, Maureen O'Hara, P.S. Srinivas

This paper investigates the informational role of transactions volume in options markets. We develop an asymmetric information model in which informed traders may trade in option or equity markets. We show conditions under which informed traders trade options, and we investigate the implications of this for the linkage between markets. Our model predicts an important informational role for the volume of particular types of option trades. We empirically test our model's hypotheses with intraday option data. Our main empirical result is that negative and positive option volumes contain information about future stock prices.

Cream‐Skimming or Profit‐Sharing? The Curious Role of Purchased Order Flow

Published: 07/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02708.x

DAVID EASLEY, NICHOLAS M. KIEFER, MAUREEN O'HARA

Purchased order flow refers to the practice of dealers or trading locales paying brokers for retail order flow. It is alleged that such agreements are used to “cream skim” uninformed liquidity trades, leaving the information‐based trades to established markets. We develop a test of this hypothesis, using a model of the stochastic process of trades. We then estimate the model for a sample of stocks known to be used in order purchase agreements that trade on the New York Stock Exchange (NYSE) and the Cincinnati Stock Exchange. Our main empirical result is that there is a significant difference in the information content of orders executed in New York and Cincinnati, and that this difference is consistant with cream‐skimming.

Liquidation Value and Loan Pricing

Published: 11/03/2023   |   DOI: 10.1111/jofi.13291

FRANCESCA BARBIERO, GLENN SCHEPENS, JEAN‐DAVID SIGAUX

This paper shows that the liquidation value of collateral depends on the interdependency between borrower and collateral risk. Using transaction‐level data on short‐term repurchase agreements (repo), we show that borrowers pay a premium of 1.1 to 2.6 basis points when their default risk is positively correlated with the risk of the collateral that they pledge. Moreover, we show that borrowers internalize this premium when making their collateral choices. Loan‐level credit registry data suggest that the results extend to the corporate loan market as well.

EVIDENCE ON THE ACQUISITION‐RELATED PERFORMANCE OF CONGLOMERATE FIRMS

Published: 03/01/1974   |   DOI: 10.1111/j.1540-6261.1974.tb00030.x

Ronald W. Melicher, David F. Rush

THE TIME‐VARIANCE RELATIONSHIP: EVIDENCE ON AUTOCORRELATION IN COMMON STOCK RETURNS

Published: 03/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03240.x

Robert A. Schwartz, David K. Whitcomb

A Capital Budgeting Analysis of Life Insurance Costs in the United States: 1950–1979

Published: 03/01/1983   |   DOI: 10.1111/j.1540-6261.1983.tb03632.x

DAVID F. BABBEL, KIM B. STAKING

A capital budgeting procedure is applied in developing a real price index for life insurance over three decades. Individual life policies of three types are analyzed. The analysis reveals that although the cost of whole life insurance, measured in nominal values, has decreased over the past thirty years, when properly measured in present value or constant dollar terms, the cost has risen substantially. Term life insurance has been characterized by decreasing costs in both nominal and real terms. The amounts of the cost variations attributable to improving survival rates, changing policy terms, varying discount rates and differing tax status are identified.

Debt Management under Corporate and Personal Taxation

Published: 12/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb04366.x

DAVID C. MAUER, WILBUR G. LEWELLEN

The presence of long‐term debt in a corporation's capital structure is shown to give rise to a valuable tax‐timing option that can be exercised by the firm on behalf of its shareholders. This option, which is not available if the firm is fully equity financed, implies that leverage will have a positive tax effect on total firm value even if there is no such effect associated with the tax deductibility of the coupon interest payments on debt. The more volatile interest rates and bond prices are, the more valuable the tax‐timing option and the larger the favorable impact of debt on shareholder wealth.

Performance Changes Following Top Management Dismissals

Published: 09/01/1995   |   DOI: 10.1111/j.1540-6261.1995.tb04049.x

DAVID J. DENIS, DIANE K. DENIS

We document that forced resignations of top managers are preceded by large and significant declines in operating performance and followed by large improvements in performance. However, forced resignations are rare and are due more often to external factors (e.g., blockholder pressure, takeover attempts, etc.) than to normal board monitoring. Following the management change, these firms significantly downsize their operations and are subject to a high rate of corporate control activity. Normal retirements are followed by small increases in operating income and are also subject to a slightly higher than normal incidence of postturnover corporate control activity.

Market Orders and Market Efficiency

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb03816.x

DAVID P. BROWN, ZHI MING ZHANG

This work compares a dealer market and a limit‐order book. Dealers commonly observe order flow and collect information from multiple market orders. They may be better informed than other traders, although they do not earn rents from this information. Dealers earn rents as suppliers of liquidity, and their decisions to enter or exit the market are independent of the degree of adverse selection. Introduction of a limit‐order book lowers the execution‐price risk faced by speculators and leads them to trade more aggressively on their information. Introduction of the book also lowers dealer profits, but increases the informational efficiency of prices.

Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986 to 1999

Published: 03/02/2005   |   DOI: 10.1111/j.1540-6261.2005.00740.x

PAUL GOMPERS, JOSH LERNER, DAVID SCHARFSTEIN

We examine two views of the creation of venture‐backed start‐ups, or “entrepreneurial spawning.” In one, young firms prepare employees for entrepreneurship, educating them about the process, and exposing them to relevant networks. In the other, individuals become entrepreneurs when large bureaucratic employers do not fund their ideas. Controlling for firm size, patents, and industry, the most prolific spawners are originally venture‐backed companies located in Silicon Valley and Massachusetts. Undiversified firms spawn more firms. Silicon Valley, Massachusetts, and originally venture‐backed firms typically spawn firms only peripherally related to their core businesses. Overall, entrepreneurial learning and networks appear important in creating venture‐backed firms.

Overconfidence, Arbitrage, and Equilibrium Asset Pricing

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00350

Kent D. Daniel, David Hirshleifer, Avanidhar Subrahmanyam

This paper offers a model in which asset prices reflect both covariance risk and misperceptions of firms' prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures (e.g., fundamental/price ratios). With many securities, mispricing of idiosyncratic value components diminishes but systematic mispricing does not. The theory offers untested empirical implications about volume, volatility, fundamental/price ratios, and mean returns, and is consistent with several empirical findings. These include the ability of fundamental/price ratios and market value to forecast returns, and the domination of beta by these variables in some studies.

Managerial Entrenchment and Capital Structure Decisions

Published: 04/18/2012   |   DOI: 10.1111/j.1540-6261.1997.tb01115.x

PHILIP G. BERGER, ELI OFEK, DAVID L. YERMACK

We study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross‐sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment‐reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.

PUBLIC REGULATION AND OPERATING CONVENTIONS AFFECTING SOURCES OF FUNDS OF COMMERCIAL BANKS AND THRIFT INSTITUTIONS*

Published: 05/01/1962   |   DOI: 10.1111/j.1540-6261.1962.tb04281.x

Clifton H. Keeps, David T. Lapkin

Expectations, Tobin's q, and Investment: A Note

Published: 03/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb01106.x

HENRY W. CHAPPELL, DAVID C. CHENG