Deposit variability in banking has received substantial attention in recent empirical studies [1], [2], [3], [4], [5], and [7], Most of these efforts have been cross-section analyses of the determinants of variability. However, the impact of branching on deposit variability has not been tested in any of these studies. Wacht suggests that branching could reduce deposit variability substantially, especially if geographical dispersion could be achieved through relaxing interstate restrictions on branching [6]. In this paper, Wacht's suggestions will be subject to empirical testing for one thrift institution located in a major eastern metropolitan area. In Section I, the test methodology is presented. Data sources and empirical results are discussed in Section II, while the study is summarized and the implications for future research are discussed in Section III.

We study household credit responses to Hurricane Harvey using new, geographically granular data on credit cards, mortgages, and flooding. Estimates from a differences-in-differences design that exploits the flooding gradient show that affected households only borrow at low-interest rates, often using promotional (zero interest) cards and that they quickly pay down balances. We also document that take-up of forbearance (borrowing by missing mortgage payments without penalty) increases with flooding. These results are attenuated in floodplains, particularly in structures subject by code to physical hardening. Our results indicate that credit acts as a substitute for the lack of physical hardening.

The cross section of options holds great promise for identifying return distributions and risk premia, but estimating dynamic option valuation models with latent state variables is challenging when using large option panels. We propose a particle Markov Chain Monte Carlo framework with a novel filtering approach and illustrate our method by estimating index option pricing models. Estimates of variance risk premiums, variance mean reversion, and higher moments differ from the literature. We show that these differences are due to the composition of the option sample. Restricting the option sample’s maturity dimension has the strongest impact on parameter inference and option fit in these models.

This study investigates whether the management earnings forecasts of Republican and Democratic CEOs differ due to systematic differences in their information disclosure preferences. We find that Republican CEOs prefer a less asymmetric information environment than Democrat CEOs, and thus make more frequent, timelier, and more accurate disclosures than Democrat CEOs. Results using the propensity score matched sample and difference-in-differences analysis show that our results are unlikely to be driven by potential endogeneity. Our results are robust to controlling for various CEO characteristics and are stronger for firms with higher levels of institutional ownership and litigation risk.

Recently, Cohen and Gujarati [2] have suggested that when multicollinearity is present there is “ …danger involved in mechanically dropping variables from multiple regression equations by t tests because t values of the regression coefficients may not be significantly different from zero when the true (population) values of these coefficients are in fact not zero…” The problem they discuss is not a new one and has been extensively treated in the existing literature. However, their approach is straightforward and will certainly aid the practitioner in his understanding of the problems associated with multicollinearity.

Stocks that hedge sustained market downturns should have low expected returns, but they do not. We use ex ante firm characteristics and covariances to construct a tradable safe minus risky (SMR) portfolio that hedges market downturns out of sample. Although downturns (peaks to troughs in market index levels at the business-cycle frequency) predict significant declines in gross domestic product growth, SMR has significant positive average returns and 4-factor alphas (both around 0.8% per month). Risk-based models do not explain SMR’s returns, but mispricing does. Risky stocks are overpriced when sentiment is high, resulting in subsequent returns of -0.9% per month.

By employing a novel, hand-collected sample of withdrawn and completed share issue privatizations, we show that both groups undergo comparable restructuring processes over the 3 years preceding the event. We employ matching procedures to explicitly control for the restructuring effect, isolating the effect of the ownership transfer from state to private investors on corporate policies and performance. We document that, absent the ownership transfer, most of the gains realized during the restructuring process are reabsorbed over the posttreatment period. The transition from state to private ownership thus represents a necessary condition for the long-term success of privatization programs.

We show that cross-border leveraged buyout investments involving U.S. rather than non-U.S. private equity (PE) investors are more likely to have a successful exit (initial public offering or acquisition). Exogenous increases in effective proximity following the signing of “open sky agreements” between the United States and target firms’ home countries increases both the propensity of U.S. PE firms to invest in these firms and the value addition by these investors. We show that such increases in value addition by U.S. PE investors following proximity increases are at least partially due to better monitoring, facilitated by the more efficient allocation of experienced U.S. PE managers to cross-border deals.

We document a strong decline in corporate-diversification activity since the late 1970s, and we develop a dynamic model that explains this pattern, both qualitatively and quantitatively. The key feature of the model is that synergies endogenously decline with technological specialization, leading to fewer diversified firms in equilibrium. The model further predicts that segments inside a conglomerate should become more related over time, which is consistent with the data. Finally, the calibrated model also matches other empirical magnitudes well: output growth rate, market-to-book ratios, diversification discount, frequency and returns of diversifying mergers, and frequency of refocusing activity.

In recent articles, Myers, Dill, and Bautista [15] (MDB) and Franks and Hodges [7] (FH) provide valuable contributions to the leasing literature. MDB derive a simple formula for lease valuation in a Modigliani-Miller world with corporate taxes. The paper by FH presents a simpler derivation of the same formula. FH also extend MDB's analysis to consider the empirically significant case of a lessee company currently in a non-tax-paying position, but which expects to resume paying taxes at some (specified) future date. The work of FH is important here in laying bare the economics of leasing. Temporary non-tax-paying lessees joining tax-paying lessors in non-zero-sum contracts; however, their paper leaves the problem as a programming application. This paper explores the difference equations underlying the MDB-FH approach for finding the adjusted present value of the lease contract. It is found that the order of the system of difference equations depends on the treatment of taxation complexities. Also described is a simple procedure for solving these higher-order difference equations to find the appropriate adjusted discount rates to use in MDB's lease valuation formula, extending its application to these more complex tax situations. The paper is set out in six sections.

In an earlier note in this Journal Strangways and Yandle (S-Y) [2] reported the results of a series of statistical tests on the effects of state usury laws on housing starts in 1966. Using cross sectional analysis, they focused on both the absolute level of single family housing starts in 1966 and the change in housing starts from 1965 to 1966.

A review of the textbooks and syllabi used in courses on international financial management in several Eastern and Midwestern business schools reveals the existence of a number of common topics but substantial differences in the relative emphasis accorded to issues. Some concentrate on the financial and foreign exchange markets and on exchange rate forecasting; some on the measurement and hedging of exposure; some on the financing of international transactions; some on international accounting and control; and some on portfolio theory and capital market issues. Why do they differ? In part, because the educational objectives of institutions are different, some being much more practiceoriented than others. The M.B.A. students at Chicago, for example, are much more willing to engage in a theoretical discussion than are those at Columbia, who have a stronger decision-making orientation. Other differences arise from the pedagogical approach–the heavy use of cases, for example, tends to require a concentration on applicable techniques.

Empirical tests of the Sharpe [36]–Lintner [23]–Black [3] Capital Asset Pricing Model (CAPM) have generally concluded that there is a positive, approximately linear, trade-off between average return and systematic risk (beta) for portfolio returns of common stocks. Most of the empirical studies, however, have reported data for short, usually monthly, time intervals. Exceptions to this rule include Blume and Friend [8] and Sharpe [38, pp. 289–292]. Their data provide evidence that long-term wealth ratios are concave, possibly nonmonotonic, functions of beta. These data are surprising since, if returns are intertemporally independent and the linear return model of CAPM is correct, expected multiperiod terminal wealth is a convex, monotone increasing function of beta. The results of this paper provide a theoretical framework for interpreting the long-term empirical data which does not violate the notion of a monotone increasing expected terminal wealth-beta relationship.

This paper examines how the progressive personal tax rate affects the equilibrium asset pricing model. In a continuous-time framework with progressive taxation, it can be shown that the expected excess rate of return on a risky asset is an increasing function of (i) the covariance of asset return with aggregate consumption rate changes, and (ii) the covariance of asset return with the aggregation of individual wealth change, weighted by the investor's tax scheme progressivity index. The capital asset pricing model derived in the absence of tax is shown to understate the expected excess rate of return and to have a misspecification error under the progressive tax scheme. Furthermore, the expected excess rate of return can be decomposed as the consumption risk premium and tax premium. The tax premium depends on the tax structure prevailing in the economy.

Although they did not affect the individual rates of return per inflationary period that were the main concern of our study previously published in the Journal, it has recently come to our attention that there were computational errors in the summary weighted average real returns. Thus, we are taking this opportunity to correct the original errors and also to update the study results for the period from December 31, 1968, through December 31, 1973. In the analysis and discussion which follows it is assumed that the reader is familiar with the previous study and the methodology employed. Therefore, Table 1 is simply a correction of Table 4 in the 1971 article. This is followed by a discussion of the revised results and changes in conclusions prompted by the adjusted results. Table 2 contains nominal and real rates of return for the period from December 31, 1968, to December 31, 1973, nominal and real rates of returns for the full period from December 31, 1965, to December 31, 1973, and finally, a new set of weighted average returns using the figures updated through 1973.

The striking and powerful conclusions of the capital asset pricing model (CAPM) [13,8] arise from imposing the requirement that optimal individual portfolio decisions must be consistent with a market equilibrium for securities. That simple requirement–of market balance–produces the strong results that have been the centerpiece of research in finance in the last fifteen years. But despite the huge payoffs to imposing equilibrium requirements on financial markets, the CAP model remains a partial equilibrium result. The risks which are attributed to securities are strictly exogenous. Securities are risky because their prices fluctuate, but the cause of those price fluctuations is rarely specified. The literature seems to associate “market risk” with the business cycle and individual security risk with either random technological change or demand uncertainty. But whatever attribution is made, such risk remains outside of the model itself. Since the keystone of the CAPM is its important distinction between “real” or nondiversifiable risk and purely financial uncertainty, it is disconcerting to recognize that it is a model in which real quantities do not appear at all.

An individual is repeatedly offered the opportunity to invest in a risky asset whose return distribution is unknown. Because the return distribution is constant over time, however, he is able to learn about that distribution by observing investment outcomes. Results are presented regarding the asymptotically optimal investment behavior of a risk-averse individual under these circumstances when his aim is to maximize the expected utility of his end-of-horizon wealth. For the class of isoelastic utility functions with constant relative risk averson less than one, the optimal investment approaches a constant proportion of wealth. The limiting proportion is the same as the proportion put up by the most optimistic individual when the investment opportunity is offered only once. These results are then extended by generalizing the class of utility functions under consideration and, at the same time, restricting the class of possible investment schemes. This paper is distinguished from the previous literature by the assumption of conditional independence of returns across periods.

In a recent article in this Journal, Haugen and Pappas (H-P, hereafter) [1] attempted to prove, within the framework of the capital asset pricing model, the already proven proposition that the cost of capital is invariant with respect to leverage even with risky debt. The H-P proof contains a serious error which we would like to point out in this note.

A firm periodically makes three major classes of decisions that determine its structure as reflected on its balance sheet. The first relates to the total amount of investment as well as the distribution of this total amount among different types of assets. This decision determines the size of the firm and the structure of the “assets” side of its balance sheet. The second is concerned with the relative proportion of equity versus debt capital to be used in financing the firm. This decision determines the structure of the “sources” side of the balance sheet by establishing relative sizes of liabilities and stockholders' worth. The third is the choice of the proportion of the equity which should be raised through the retention of earnings and the proportion to be raised through the sale of new stock. This decision determines the dividends that will be distributed and the composition of the stockholders' worth portion of the balance sheet.

Most insurance companies are involved in reinsurance activities. For the majority, reinsurance means laying-off portions of the risk that they have assumed in the primary insurance market. A few other companies assume these laid-off risks. Our concern is with the former companies; that is, those seeking to cede a portion of their risk.