We use the 2015 Chinese stock market crash to study the effects of government stock purchases. The Chinese government purchased stocks to stabilize the markets through state-owned financial institutions known as the “National Team.” We find that the intervention led to reduced volatility and price informativeness. These impacts are driven by the disclosure of government portfolios. Consistent with investors having a stronger incentive to acquire government intervention information instead of fundamental news, we find reduced information production and information asymmetry following intervention disclosure. The article suggests that government stock purchases involve a trade-off between stability and informational efficiency.

Do language skills affect investment decisions? This article addresses this question by identifying the effect of English proficiency on the stock market participation of immigrants in the United States and Australia. To establish causality, we construct an instrumental variable for English proficiency by exploiting the phenomenon that younger children acquire languages more easily than older children. We find that English proficiency has a significant positive effect on stock ownership among immigrants in both countries. Moreover, we provide evidence that a reduction in information costs and an increase in trust may serve as the mechanisms underlying the language ability effect.

This paper examines the differential tax treatment of the borrower and lender at the time debt is called as a potential explanation for the widespread existence of call provisions in corporate debt. This tax effect alone cannot explain the standard call feature because greater tax benefits may be derived for bonds callable at market prices. The equilibrium implications of the model allowing for tax arbitrage opportunities both at the corporate level and the individual level also are considered.

The advent of the computer has permitted financial theorists to collect and analyze large amounts of financial data. In the field of investments some of the most important work has focused on historical rates of return in investments in common stocks. The classical study in this area is the Fisher-Lorie study [8,9] in which intern al rates of return were calculated for every security listed on the New York Stock Exchange from 1926–1965. Other studies related to the area have been complicated by Herzog [10], Fisher [6,7], Latané and Young [11], Soldofsky and Biderman [12], and Evans [3,4].

In a perfectly efficient market, after adjusting for drift, futures prices would follow a martingale model. The martingale property implies that the changes in futures prices should be serially uncorrelated. This study finds that the price changes of the S&P 500 futures contracts during 1983 and 1984 have negative serial correlation and are better described by a random walk model with reflecting barriers or by a random walk model with reflecting barriers and mean reversion.

We study the predictive power of option-implied moment risk premia embedded in the conventional variance risk premium. We find that although the second-moment risk premium predicts market returns in short horizons with positive coefficients, the third-moment (fourth-moment) risk premium predicts market returns in medium horizons with negative (positive) coefficients. Combining the higher-moment risk premia with the second-moment risk premium improves the stock return predictability over multiple horizons, both in sample and out of sample. The finding is economically significant in an asset-allocation exercise and survives a series of robustness checks.

Upon the revelation of corporate misconduct by firms in their portfolios, institutional investors experience a significant discount in the market value of their portfolios, excluding misconduct firms, creating a short-term spillover that averages $92.7 billion losses per year. We examine an expansive set of channels under which this spillover to nontarget firms can occur, and find that it reflects the loss of the embedded value of monitoring by a common institutional owner, enforcement wave activity, and industry peer and business relationships. Institutional investors also experience a significant abnormal outflow of funds in the year following the misconduct event.

We examine the value impact of independent directors nominated by activists (Activist IDs). Firms appointing Activist IDs experience larger value increases than firms appointing other directors, particularly when Activist IDs have private firm experience and when their nominators remain as shareholders. This value increase persists over a long period and is greater than that of activism events without director appointments. The increase is also higher among firms with greater monitoring needs and entrenched boards. Moreover, the appointments of Activist IDs are greeted more positively by the market, and Activist IDs obtain more favorable shareholder votes and additional future directorships.

Internal finance leads to a stalemate in innovation games; each firm wants to free-ride on the others’ costly experimentation. When instead innovation is financed externally (e.g., with venture capital or initial public offerings), there is an endogenous cost to delay. Waiting to make risky irreversible investment conveys pessimistic information. I characterize the relative sizes of waves of leaders and followers in innovation cycles, and the endogenous, intertemporal distribution of quality as each wave builds and crashes. Finally, old waves leave an adverse selection “hangover,” such that too much early innovation can cause the market for future innovation to break down.

We develop an intertemporal asset pricing model where cash-flow news, discount-rate news, and their second moments are priced by the market. This model generalizes the market-return decomposition framework, showing that intertemporal considerations imply a decomposition of squared market returns (coskewness risk). Our model accounts for 68% of the return variation across portfolios sorted by size, book-to-market ratio, momentum, investment, and profitability for a modern U.S. sample period. Further, our findings highlight the importance of covariation risk, that is, the risk of simultaneous unfavorable shocks to cash flows and discount rates, in understanding equity risk premia.

We develop an asset pricing model with stochastic transaction costs and investors with heterogeneous horizons. Depending on their horizon, investors hold different sets of assets in equilibrium. This generates segmentation and spillover effects for expected returns, where the liquidity (risk) premium of illiquid assets is determined by investor horizons and the correlation between liquid and illiquid asset returns. We estimate our model for the cross-section of U.S. stock returns and find that it generates a good fit, mainly due to a combination of a substantial expected liquidity premium and segmentation effects, while the liquidity risk premium is small.

We analyze whether industry competition influences analyst coverage decisions and whether analysts benefit from covering product market competitors. We find that analysts are more likely to cover a firm when this firm competes with more firms already covered by the analyst. We also find that the intensity of competition among these competitors is additionally important to the coverage decision. Moreover, we find that analysts who cover product market competitors are more likely to obtain analyst star status. These results are consistent with the importance to analysts of industry competition and product market knowledge accumulated through covering product market competitors.

Articles by Sharpe [1], Lintner [2], and Hastie [3] introduce concepts of systematic and unsystematic risk associated with portfolio rate of return. Defining risk as variation in portfolio return, such risk comprises two elements:

1. Systematic risk or variation, which is the covariation of portfolio rate of return with market rate of return.

2. Unsystematic risk or variation, which is the difference between total portfolio variation and systematic variation. Unsystematic variation is therefore variation due to attributes of individual securities.

We study the implications of predictability on the optimal asset allocation of ambiguity-averse long-term investors and analyze the term structure of the multivariate risk–return trade-off considering parameter uncertainty. We calibrate the model to real returns of U.S. stocks, long-term bonds, cash, real estate, and gold using the term spread and the dividend–price ratio as additional predictive variables, and we show that over long horizons, the optimal asset allocation is significantly influenced by the covariance structure induced by estimation errors. The ambiguity-averse long-term investor optimally tilts his or her portfolio toward a seemingly inefficient portfolio, which shows maximum robustness against estimation errors.

The weighted average cost of capital (Ko) is presented in virtually all textbooks in financial management and capital budgeting as a practical concept fundamental to the actual selection of optimal financial and investment alternatives. As often employed Ko can be defined as

where

Ko = the weighted average cost of capital,

Ks = the cost of equity capital,

Kb = the cost of debt capital,

S = the market value of the firm's equity,

B = the market value of the firm's debt, and

V = S + B, the total market value of the firm.

Early studies on the effect of holding company affiliation on bank performance yield some curious results (see [9], [11], [12]). Specifically, these studies did not find that holding company affiliation results in changes in capital-asset ratios or bank profitability.

There has been a long-standing doctrine that high levels of employment tend to be accompanied by inflation. Closely related is the view that unemployment or slack economic conditions in general can be relieved by increases in the supply of money. These views have been held by economists of widely varying persuasions and particularly with widely varying views on appropriate economic policy. During the postwar period, the concept of a trade-off between inflation and unemployment was studied empirically and also used an extension of the basic Keynesian framework of analysis (a needed supplement since the General Theory had little to say about price movements in the absence of full employment).

This paper demonstrates a tradeoff between the risk-shifting and hedging incentives of firms and identifies conditions under which each dominates. A firm may have the incentive to hedge in a multi-period context, even if no such incentive exists in a single-period one. Unrestricted access to swaps in the presence of asymmetric information about firm type and the swapping motive would lead to unbounded speculation resulting in breakdowns in swap and debt markets. Price-based methods are unable to control this and market makers have to rely upon additional exposure information or credit enhancement devices to preserve equilibrium.

A number of recent articles have explored the reasons underlying observed differences in deposit variability among commercial banks. The variability of deposits at individual banks is of interest to bank management, the Federal Reserve, and the general public for several reasons:

1. Deposit variability is frequently included as an important determinant of portfolio strategy. The more volatile a bank's deposits are, the more liquid its mix of assets will be.

The finance literature documents a relation between labor income and the cross section of stock returns. One possible explanation for this is the hedging decisions of investors with relative wealth concerns. This implies a negative risk premium associated with stock returns correlated with local undiversifiable wealth because investors are willing to pay more for stocks that help their hedging goals. We find evidence that is consistent with these regularities. In addition, we show that the effect varies across geographic areas depending on the size and variability of undiversifiable wealth, proxied by labor income.