We study the importance of peer effects among sell-side analysts who work at the same brokerage house, but cover different firms. By mapping the information network within each brokerage, we identify analysts who occupy central positions in the network. Central analysts incorporate more information from their coworkers and produce better research. Using shocks to network structures around brokerage mergers, we identify the influence of peer effects and the importance of industry expertise on analysts’ performance. A portfolio strategy that exploits the forecast revisions of central analysts earns up to 24% per annum.

Announcements of mergers very often discuss the immediate impact of the deal on the acquirer’s earnings per share (EPS). We argue that the focus on EPS reflects the difficulty of evaluating and communicating deal synergy in mergers and acquisitions (M&A) practice and provide supporting evidence. We show that the acquirer’s EPS focus affects how deals are structured, the premium that is paid, and the types of deals that are done. EPS-driven M&A decisions are also associated with costly distortions in the acquirer’s financial and investment policies.

This paper discusses the use of simulation as a means of studying the operations of securities markets. To place simulation's role in the proper context, Section I begins with a review of public policy, research, and teaching considerations that have combined in recent years to create a growing need to improve our understanding of the operations of these markets. Following this is a brief discussion of the limitations of traditional price theory models to meet this need. Section II demonstrates the significant, yet largely untapped, potential of simulation in this regard.

The purpose of this paper is to examine the intertemporal relationship between variations in the prices of individual common stocks and variations in the rest of the stock market. Empirical data are analyzed to determine the frequency with which stock prices precede, occur simultaneously, and follow movements in the market average.

We examine forward prices in a market where nonstorable inventory exacerbates the influence of seasonal and hourly variation in supply and demand, expected and unexpected, on the level and volatility of spot prices. We find strong evidence, unusual for a commodity, that the difference between contemporaneous forward and spot prices has power to forecast both the spot price change and the risk premium realized at delivery. Our evidence of a time-varying risk premium is consistent with expected hourly and seasonal variation in the needs of producers and retailers of electricity to hedge against extreme spot price decreases and increases, respectively.

This article studies dynamic compensation and risk management under cash-flow volatility shocks. The optimal contract depends critically on firms’ ability to make good on promised future payments to managers. When volatility is low, firms with full commitment ability implement high pay–performance sensitivity to motivate effort from managers, and they impose large penalties on the arrival of volatility shocks to incentivize prudent risk management. In contrast, firms with limited commitment may allow excessive risk taking in exchange for low pay–performance sensitivity. When volatility becomes high, firms with full commitment defer compensation more, whereas firms with limited commitment must expedite payments.

We study the effects of market incompleteness on speculation, investor survival, and asset pricing moments when investors disagree about the likelihood of jumps and have recursive preferences. We consider two models. In a model with jumps in aggregate consumption, incompleteness barely matters because the consumption claim resembles an insurance product against jump risk and effectively reproduces approximate spanning. In a long-run risk model with jumps in the long-run growth rate, market incompleteness affects speculation and investor survival. Jump and diffusive risks are more balanced regarding their importance, and therefore the consumption claim cannot reproduce approximate spanning.

The psychology literature suggests that individual commitment has a positive effect on team performance by mitigating the free-rider problem. With its detailed management-team information, the mutual fund industry provides a unique opportunity to study how individual managerial commitment is related to performance. Committed fund managers are defined as those who work only for one fund. With few incentives to acquire private information, teams with no committed members underperform those with committed members. These findings remain robust after we incorporate various controls. We also explore why non-committed teams have been used increasingly often despite their poor performance.

In this article, we show that statements of U.S. CEOs on contentious social issues are not necessarily an expression of their political views. Republican-donor CEOs are three times more likely to make social statements with a liberal slant. CEO activism is more likely if firms’ operating environment is politically polarized and employees are Democrat-leaning. Such statements are associated with a 3% increase in consumer visits to a firm’s Democrat County stores without significantly reducing them in Republican counties. CEO activism is associated with a 0.12% gain in firm value, increased quarterly sales, and a reduced likelihood of shareholder activism on social issues.

We examine diseconomies of scale for two different investment approaches: quantitative and fundamental. Using separate account (SA) data where the investment approach is self-identified, we find that fundamental SAs exhibit greater diseconomies of scale than quantitative SAs. Looking at liquidity costs, we find that quantitative SAs hold more diversified portfolios of higher liquidity stocks than fundamental SAs, thereby reducing their expected liquidity costs. We also find that consistent with lower information processing/hierarchy costs, the speed of information diffusion is higher for quant SAs. Accounting for these differences helps to explain the differences in diseconomies of scale.

Blockholder disclosure thresholds shape incentives for hedge fund activism, which are jointly determined with real investment and managerial behavior. Uninformed investors value lower thresholds (greater transparency) when the cost of trading against an informed activist outweighs the benefits of the activist’s disciplining of management. Conversely, activists may desire disclosure thresholds if the threat of their participation discourages managerial malfeasance, which is their source of profits. Hedge fund activism can be excessive: If market opacity sufficiently harms uninformed investors, the costs of reduced real investment outweigh the social benefits from managerial disciplining, and society benefits from lower thresholds.

In the literature dealing with bond price volatility, there have been two divergent approaches. On the one hand, theoretical papers have looked at bond price volatility in the instantaneous framework of the calculus. Using the derivative of bond price (P) with respect to yield to maturity (y), it has been shown that volatility is linearly related to this derivative (dP/dy). (See [10].)

The financial experiences of the last two years impel a careful and wide-ranging review of the stability of our major types of financial institutions. That review ought to be followed by actions to redress weaknesses or proclivities that, upon analysis, are judged to contribute an undesirable degree of instability within the financial system.

The analysis has shown that insurer investment performance parallels that of other investors; greater returns are associated with greater variability. However, with the acquisition of higher levels of investment risk insurers generally reduce the level of underwriting risk which is undertaken. Thus, insurer management apparently attempts to keep ruin probabilities within some undefinable but clearly present limits. In the process of trading off between investment and underwriting risk, a higher rate of return to net worth is sacrificed.

The sacrifice of potentially higher rates of return to equity, however, does not place the insurer at a disadvantage relative to the capital market or make attractive the alternative of operating as an investment trust. Under reasonable conditions governing the risk and return associated with underwriting activities, the insurer return to net worth is in a more efficient position as the result of underwriting activities than that offered by the capital market alone. For a given risk position, the return to the insurer exceeds that available from the capital market alone. Thus, so long as marginal returns to underwriting are positive, the leveraging afforded by the expansion of premium volume produces a superior return over the traditional leveraging which might be employed by an investor in the capital market.

Models of return generation for securities are potentially important for a number of reasons, including their possible utility in normative portfolio construction. Multi-index models of the process are frequently suggested as an alternative to the familiar single-index models, but, while the multi-index models are intuitively appealing, their empirical superiority remains largely undemonstrated. This paper examines the extent to which three multi-index models succeed in eliminating dependence in the return residuals for a portfolio of common stocks. The relevance of this research lies in the promise that, while obviously requiring additional inputs to determine the efficient set of portfolios, multi-index models may succeed in identifying a more accurate set of efficient portfolios.

The rationality of compensating balance requirements has been widely debated in the literature and among participants in the market for loanable funds. Rationality in this context refers to a net gain in interest income for the lending bank in the transaction without, at the same time, an increase in interest cost to the borrowing firm; or, conversely, a decrease in interest expense to the borrower without, simultaneously, a decrease in income derived from interest on the transaction by the bank. The lack of consensus as to whether or not compensating balance requirements are rational is based on the absence of uniform assumptions regarding the imposition of these requirements as well as by their restrictive, if not unrealistic, nature. Thus, Davis and Guttentag [2] and Hodgman [9] come to the conclusion that compensating balance requirements (hereinafter also known as c.b.) are indeed rational. However, this conclusion is based on the assumption that the borrowing firm maintains voluntary demand deposits in the lending bank or in another bank (i.e., balances that the firm employs for transaction and/or precautionary purposes which do not serve to satisfy c.b. for any loan or service performed by either bank) and that these deposits are sufficient in quantity to meet c.b. On the other hand, Hellweg [8] finds the use of c.b. irrational inasmuch as he assumes a lack of voluntary balances in either bank. In between these two extremes, Gibson [7], Shapiro and Baxter [11], and Wrightsman [13] suggest that c.b. may either be rational or irrational depending on the proportion of these balances satisfied through the voluntary holdings of the borrowing firm.

Recently, agency theory has become popular as a means of explaining the structure of contracts between various classes of economic agents. Oftentimes the contracts of interest represent sharing rules for the payoffs that result from some production activity. In the usual two-party model of the contracting problem, one party designated the principal delegates authority for decisions affecting production to another party designated the agent. Typically, the assumptions made about the consequences of the agent's actions are that they are associated with effort on the part of the agent for which the agent (but not the principal) has disutility, and that greater effort will result in higher payoffs from production in every state of nature. Moral hazard is then introduced by assuming that the principal is unable to observe the agent's effort, or to infer what effort the agent applied through an ex post observation of the payoff that results.

Some recent works dealing with the subject of investment in common stocks have made cautious reference to the potential of some published, leading economic time series as inputs to stock price forecasting models. However, no prominent reports of systematic empirical research of the predictive usefulness of such series have appeared in the literature. Our study was designed to partially correct this seeming oversight.

One of the most important innovations in bond financing and in mortgage lending has been the rapid adoption of variable-rate instruments in recent years. Notes and bonds bearing an interest rate between one and two percentage points above the prime rate are becoming common in corporate financing. Similarly, variable-rate mortgages (VRM's) with the interest rate tied to the deposit rate of S&L's or linked to the changing yields on competing investments have spread beyond Florida and California to many states. The Federal Home Loan Bank Board has recently endorsed the variable-rate concept and the Federal Home Loan Mortgage Corporation is preparing guidelines for secondary market operations in VRM's. Portfolio managers are thus taking note of the possibility of acquiring long-term instruments providing some of the resiliency of yields and a measure of real value protection characteristic of short-term issues.

Most large companies develop formal or informal agreements with banks to cover anticipated seasonal or temporary cash needs and/or to provide assurance of the availability of funds against unanticipated cash requirements. We address the problem of determining the optimal limits of available funds a company should maintain under a revolving credit agreement. Typically a company will negotiate a legal commitment with a bank or group of banks for a specified period of time, usually one to three years, in which the bank agrees to extend credit up to a specified maximum amount. During the duration of the commitment, the bank must lend money to the company whenever the company wishes to borrow, provided the amount of money borrowed does not exceed the maximum amount noted in the agreement. The company must not be in default of any of the restrictive covenants of the agreement, such as working capital limits, compensating balances, limits on other indebtedness, etc. Although the agreement itself provides for intermediate-term financing, the agreement often takes the form of short-term (30-60-90 days) renewable notes.