Do changes in stock market indicators, such as the short interest ratio, signal changes in stock prices? Popular stock market lore and numerous books and articles support the worth of “technical” analysis. On the other hand, to the extent that stock prices follow a random walk, technical indicators would seem to be of no value. The two positions can be reconciled to a degree by realizing that a variable can follow a random walk with respect to its own sequence and still be successfully predicated by some other variable(s). Furthermore, successful predications of stock prices can be made on the basis of available information, if that information is used in some unique manner that has not been fully developed by other market participants.

At any point in time a firm must decide both the level of working capital consistent with its productive assets and how to finance these assets. Academic theorists in business administration have traditionally approached decision making of the firm on a segmented rather than on a global basis and have been satisfied with developing suboptinizing decision rules. Thus there has been concern about managing working capital and concern about choosing the optimum capital structure, but traditionally the two decisions have not been made jointly. And even if they were made jointly, decisions would still remain in the working capital area involving inventories, credit granting, and marketable securities. This paper is an attempt to interrelate working capital and capital structure decisions with working capital used not only as a buffer to avoid ruin but also to affect sales via changing inventory levels and credit policies. The possibility of ruin introduces a discontinuity that precludes perfect elimination of leverage effects via a market.

In this paper, we compare the robustness in application of the Gaussian assumption of security return distributions to the robustness of the general stable assumption. Using actual stock return data to simulate the “real world,” a stock market is constructed in which stock returns conform to a Gaussian distribution as well as to a stable Pareto-Levy distribution. Using these two sets of stock returns, efficient frontiers are generated under both assumptions of parametric environments. It is shown that the Gaussian assumption, and its incumbent statistical techniques, is preferable to the general stable assumption.

Firms strategically borrow in different locations. Approximately one-quarter of Peruvian companies with operations in multiple areas source their financing from more than one province. Mining windfalls generate finance supply shocks, leading to the provision of more credit at lower average rates, and we show that firms exploit geographic financial flexibility by concentrating their borrowing in booming locations. Firms are less likely to initiate borrowing in new markets when their current borrowing provinces are thriving. The pursuit of flexibility in borrowing markets, however, degrades a firm’s relationships with its existing lenders, thereby heightening its risk of future financial distress.

We have proposed two additions to the theory of leverage optimization by firms operating in a competitively structured industry.

First, whether the capital market is or is not subject to leverage-related imperfections, the force of entry will cause the long-run relationship between profits, π, and leverage, γ, to be given by the equation

(17) π(γ) = 0.

Even if it is possible in the short run for firms to add positive increments to profits by increasing γ beyond its current level, competitive pressures will erode these increments completely.

Second, if the capital market is subject to leverage-related imperfections, firms will choose smaller leverage ratios than they would in the absence of these imperfections. If, in addition, the industry is subject to the force of entry, optimal leverage ratios will be even smaller. Put another way, each firm's leverage ratio in the long run will reflect not just the impact of imperfections on capital costs, but also the impact of entry on product price, output, and operating profits.

Current literature stresses that efficient funds do not exist when asset returns are continuously distributed. This paper shows that the existence of efficient funds can be restored if security returns are generated by a linear factor model.

This paper describes the development and testing of a model of bank portfolio selection that considers variability of both income and gross asset levels as the risks involved in banking. In particular, the model is formulated as maximizing expected profit subject to risk constraints on wealth losses and the availability of liquid assets. The parameters for these constraints include the covariance matrices of rates of return on bank assets and deposit changes. Included in the latter category are fluctuations in business loans which are treated as negative deposits because, due to deposit feedbacks and the like, these can reasonably be considered exogenous to the short-run portfolio decision. Basically, the model is an extension of Markowitz's work [11] to incorporate problems associated with portfolios that include assets having imperfect markets and liabilities that are not completely under the control of the economic unit. As such, it is applicable (with minor institutional modifications) to the entire spectrum of financial intermediaries.

The recent studies of Fisher and Lorie [10 and 11], Brigham and Pappas [2], and others have contributed significantly to our knowledge about overall rates of returns on common stocks. There is, in addition, a growing body of empirical evidence investigating the performance of alternative portfolio maintenance strategies [4, 8, 9, and 13]. However, to date, this evidence for rates of return under alternative portfolio strategies has been obtained for a “one-time” investment decision (with allowances for reinvestment of dividends and possible intraportfolio reallocation). In this paper the effects of alternative portfolio accumulation strategies on subsequent portfolio rates of returns are examined.

We use the staggered enactment of anti-recharacterization laws as a plausibly exogenous shock to the value of securitizing collateral through special purpose vehicles (SPVs) and test how collateral values impact corporate risk management. Following the laws’ enactment, we find increases in commodity, foreign exchange, and interest rate hedging, especially for firms with exposure to these risks and that rely on SPVs. Supporting the collateral constraints literature, the effect is weaker for firms that likely need the collateral for external financing, such as financially constrained firms. Our findings highlight fluctuations in collateral values as an important consideration in risk management decisions.

Firms with lower leverage are not only less likely to experience financial distress but are also better positioned to acquire assets from other distressed firms. With endogenous asset sales and values, each firm’s debt choice then depends on the choices of its industry peers. With indivisible assets, otherwise-identical firms may adopt different debt policies, with some choosing highly levered operations (to take advantage of ongoing debt benefits) and others choosing more conservative policies to wait for acquisition opportunities. Our key empirical implication is that the acquisition channel can induce firms to reduce debt when assets become more redeployable.

Two-pass cross-sectional regression (TPCSR) is frequently used in estimating factor risk premia. Recent papers argue that the common practice of grouping assets into portfolios to reduce the errors-in-variables (EIV) problem leads to loss of efficiency and masks potential deviations from asset pricing models. One solution that allows the use of individual assets while overcoming the EIV problem is iterated TPCSR (ITPCSR). ITPCSR converges to a fixed point regardless of the initial factors chosen. ITPCSR is intimately linked to the asymptotic principal components (APC) method of estimating factors since the ITPCSR estimates are the APC estimates, up to a rotation.

We examine the role of government in the labor–creditor relationship using the case of the Chrysler bankruptcy. As a result of the government intervention, firms in more unionized industries experienced lower event-window abnormal bond returns, higher abnormal bond yields, and lower cumulative abnormal bond returns. The results are stronger for firms closer to distress. We also observe the effect in firms in which labor bargaining power is stronger and those with larger pension liabilities. Overall, the results underline the importance of government as a significant force in shaping the agency conflict between creditors and workers.

We compare the stock return forecasting performance of alternative payout yields. The net payout yield produces more accurate forecasts relative to alternatives, including the traditional dividend yield. This remains true even after excluding several years during the Great Depression when issuance was unusually high. The measure of cash flow used to form the yield matters economically. Long-term investors’ hedging demand for stock is considerably reduced when net payout, rather than dividends, serves as the cash-flow measure. An agent relying on an incorrect payout measure is willing to pay an economically significant “management fee” to switch to the optimal policy.

This article investigates the short-side anomaly trading behavior of alternative mutual funds (AMFs) based on their short positions in U.S. domestic equities. In aggregate, AMFs demonstrate the ability to exploit well-documented stock market anomalies on the short side, and the overpriced stocks sold short by AMFs generate significant negative alpha. Further, AMFs’ short-side trades exhibit significant return predictability, which can at least partially derive from their ability to process public information on firm and anomaly characteristics. Finally, AMFs’ short-side anomaly-based trading activity and profitability appear to be more pronounced among the stocks with higher credit risk or dynamic short-selling risk.

Theory predicts that capping brokers’ compensation exacerbates the exploitation of retail investors. We show that regulated caps on mutual fund 12b-1 fees, effectively sales commissions, are associated with negative equity fund performance, but only after a structural shift toward maximum permitted levels of the fees around 2000. Past this break point, flow–performance sensitivity shifts from the middle- to the highest-performing funds, suggesting that the fee cap increases performance-chasing behavior by constraining brokers’ incentives to learn about lower-ranked funds. The policy implication is that regulators must reevaluate the efficacy of caps on brokerage fees.

The U.S. Consumer Financial Protection Bureau has released a database of consumer complaints about banks’ financial products to the public since 2013. We find a greater reduction in mortgage applications to banks that receive more mortgage complaints in local markets after the disclosures. The effect is stronger in areas with more sophisticated consumers and higher credit competition, and for banks receiving more severe complaints. The number of monthly mortgage complaints per bank exhibits faster mean reversion after the publication of the database. These findings suggest that the public disclosure of mortgage complaints enhances product market discipline and consumer financial protection.

We study 6,083 European firms that were acquired between 1999 and 2015. Soon after the acquisition, the acquired firms promptly and substantially close the gap between their actual leverage ratios and their target (optimal) ratios. Firms that were over- (under-) leveraged at the start of their acquisition year move their debt-to-assets ratio from 34.1% to 20% (10% to 18.5%) by the end of the following year. Under-leveraged firms expand their assets rapidly following acquisition, as they gain improved access to investable resources. Our results are consistent with the trade-off theory of capital structure and with the existence of firm-specific target leverage ratios.

We began this paper by posing four questions about the characteristics of optimal geometric mean portfolios. Tentative answers to these questions were obtained from an examination of the solutions to a relatively large number of geometric mean portfolio problems generated from a Monte Carlo simulation of ex-ante security return data. The results of this examination can be summarized as follows. First, the number of risky securities contained in an optimal geometric mean portfolio depends on one's expectations concerning future market conditions and on the conditions under which borrowing is permitted. If all capital must be invested, the investor who believes the market will fall should invest in just one security, he who believes the market will remain unchanged should diversify among two securities, while he who believes the market will rise should diversify among four to seven securities. In the event that some capital must be withheld from investment, the investor who believes the market will rise and who can borrow on reasonable terms will again diversify among four to seven securities, choosing the same securities in the same relative proportions as in the preceding situation. Should the investor be permitted neither to borrow nor to invest all his capital, his best portfolio consists of two to four securities, assuming he expects the market to rise.

This paper investigates how the addition of debt to the capital structure of a corporation affects the risk of the stockholders. In the first instance, we will hold the size of the firm constant and substitute debt for common stock. In the second situation, we will allow firm size to change, and will accomplish the increase in size by issuing debt. For both situations, we will first observe the effect of debt on the earnings per dollar of common stock investment. The analysis could also be made using the number of shares of common stock. Since the number of shares of common stock may be changed quite arbitrarily (as, for example, by stock dividends), we want to make the measure invariant to the number of shares outstanding. We will do this by using value of common stock and value of debt. We are then computing the variance of return on common stock investment when we compute variance of earnings per dollar of common stock investment. After considering how debt affects earnings per dollar of stockholders' investment, we will investigate the effect of debt on the total earnings of the stockholders, and on the probability of a deficit.

We decompose long-term nominal bond yields into real and inflation components in an international context using inflation-linked and nominal bonds. In contrast to extant results, real rate variation dominates the variation in inflation-linked and nominal yields. Cross-country nominal and inflation-linked yield correlations have declined since the Great Recession. Real rates are the main source of the correlation between nominal yields. Our results are robust to various alternative measurements of inflation expectations and the liquidity premium. They continue to hold when a no-arbitrage term structure model with real, nominal, and inflation factors is used to effect the yield decomposition.