An unintended consequence of recent governance reforms in the United States is firms’ greater reliance on older director candidates, resulting in noticeable board aging. We investigate this phenomenon’s implications for corporate governance. We document that older independent directors exhibit poorer board meeting attendance, are less likely to serve on or chair key board committees, and receive less shareholder support in annual elections. These directors are associated with weaker board oversight in acquisitions, CEO turnovers, executive compensation, and financial reporting. However, they can also provide particularly valuable advice when they have specialized experience or when firms have greater advisory needs.

We hypothesize that corporate takeover markets create significant constraints for short sellers. Both short sellers and corporate bidders often target firms with declining economic prospects. Yet, a target firm’s stock price generally increases upon a takeover announcement, resulting in losses for short sellers. Therefore, short sellers should require higher rates of return when the takeover likelihood is higher. Consistent with this prediction, the return predictability of monthly short interest increases with industry-level takeover probability and decreases as takeover defenses are implemented. Our results suggest that efficient takeover markets create trading frictions for short sellers and can therefore inhibit overall market efficiency.

We consider a model in which the correlation between shocks to consumption and to expected future consumption growth is nonzero and varies over time. We validate this assumption empirically using the model’s implication that time variation in consumption growth persistence (CGP) drives the correlation between stock and bond returns. Our model implies that the stock–bond correlation is also related to the predictive relation between bond yields and future stock returns. Finally, we provide suggestive evidence that asset price fluctuations are the primary driver of changes in CGP.

The well known Sharpe-Lintner-Mossin capital asset pricing model (CAPM) assumes the existence of stability in the price level so that the market price of risk (MPR) measured in nominal terms is the same for all risky assets in an equilibrium market. Friend, Landskroner and Losq [5, hereafter F-L-L] have recently shown that CAPM measured in nominal terms understates the MPR if an uncertain inflation is expected and if a covariance between the rate of return on the market and the rate of inflation is positive (p. 1287).

The Capital Asset Pricing Model predicts that investors will hold diversified portfolios, but many households actually hold very few assets. The paper examines the asset pricing implications of one possible explanation for this phenomenon, fixed costs of holding assets. While earlier authors found the exact asset pricing effects of such costs in single-period models under restrictive assumptions, I derive a general upper bound on these effects that is also valid in continuous time. Illustrative calculations reveal that large holding costs must be postulated to generate significant asset pricing effects.

This paper points out errors in the stable variate generator used by Frankfurter and Lamoureux (1987) in a recent simulation study. The study was aimed at determining whether or not the assumption of the distributional form of stock returns is important in the construction of optimal portfolios.

Considerable attention has been focused recently on models of firms under uncertainty in which there is an incomplete set of securities markets. In these models, each firm can issue only one security and consumers can generate consumption plans only through the purchase of firms' securities. Consequently, if the economy is competitive, each stockholder of a firm will impute the same value to the firm in equilibrium, where this value is given by the market price of the firm's security. However, stockholders will not, in general, have the same implicit prices for state-contingent consumption. Since the financial market is said to be incomplete if the number of independent securities is less than the number of states of nature, consumers cannot hedge perfectly, whichimplies that unconstrained Pareto-optimal allocations are not generally attainable (see [2] and [3]). Finally, it is unclear what firms' objectives should be in these models because profit maximization is not well defined; firms' profits in different states cannot be aggregated into a single index. It is still generally accepted, however, that firms should operate in their own stockholders'interests, a necessary condition for allocative efficiency.

The structure and analytical representation of investors' utility-of-wealth functions has long been of interest in portfolio theory. In proposing convenient analytical utility functions most economists have used (i) constant elasticity (power) functions, (ii) the negative exponential function. Both (i) and (ii), of course, restrict the preference structure; Moreover, one may object to (i) because such functions are not uniformly bounded on [0, ∞). And, as has been shown by Arrow [1], this is undesirable in an axiomatic system. The negative exponential function has no such disadvantage, but objections may be raised on empirical grounds. Thus, no simple convenient specification of bounded utility functions on [a, ∞) is available. In fact, even polynomials in wealth of arbitrary order are restrictive since they immediately impose the requirement that moments of wealth are finite. (If the polynomial is of order n, then the nth moment must be finite.)

I report evidence that shareholders holding a combined 15% of shares are inattentive or partially inattentive when confronted with the decision to receive cash or stock for their shares in acquisitions. The average cost of such inattention is 2%, and it increases to 6% for the tertile of transactions with the greatest difference between the cash and stock values. Most interestingly, I show that inattention affects stock prices because attentive shareholders bid up the stock price in anticipation of a wealth transfer from inattentive shareholders.

Since the seminal article by Black and Scholes on the pricing of corporate liabilities, the importance in finance of contingent claims has become widely recognized. The key to the valuation of such claims has been found to lie in the solution to certain partial differential equations, the best known of which is that derived by Black and Scholes in their original article from the assumption that the value of the asset underlying the contingent claim follows a geometric Brownian motion.

Miller has analyzed capital structure in the presence of both corporate and personal taxes. The present work investigates the effect of inflation on both interest rates and equity returns when the Miller equilibrium condition is employed in a loanable funds model. Both an interest rate effect and a redistribution effect are derived. The interest rate effect forces the responsiveness of the interest rate to the inflation rate to be below that hypothesized by Darby. However, the redistribution effect may change this responsiveness in either direction.

The rising cost of funds internationally is forcing multinational corporations to pay more attention to effective cash management on a global basis. However, the available literature is preoccupied with cash management in only one currency. This is a serious oversight given the heavy involvement of U.S. firms overseas. In 1970, for example, the ratio of foreign source earnings plus income from abroad (royalties, fees, service charges) to total U.S. corporate after-tax profits was over 25 percent [14]. If export and import activities were included, this statistic would be more impressive yet.

The FINSIM model provides a fundamental and analytical basis for security evaluation. The methodology presented includes the relevant economic and firm variables in an efficient computational scheme and is useful for:

1. reducing the analysts' judgments about the future to a specific stock price (the model described does not replace the analyst, rather it provides the analyst with a vehicle to determine the implications of his critical assumptions);

2. testing the probable impact of changed expectations concerning the firm and/or the level of the market on stock value;

3. getting at what “the markets” expectations must be to justify the current price;

4. determining the value of additional information (are results changed significantly to pay for the expense of refined estimates?);

5. determining the impact of alternative growth horizons on value; and

6. determining what the actual growth rate of total earnings must be to overcome the dilution effects of financing with external equity.

While the security analyst still faces the problems associated with decision making under uncertainty, the methodology presented facilitates the use of sensitivity analysis to study the implications of uncertain knowledge of parameters.

In placing a new security issue, an investment banker has an opportunity to obtain private information by conducting preselling activities during the registration period. The task of the issuer is to design a contract that both induces the banker to use this information to the issuer's advantage and provides a disincentive for the banker to price the issue too low in order to reduce the effort required to sell the issue. This paper characterizes the class of price response functions that the issuer can induce the banker to choose under a delegation scheme and demonstrates that delegating the pricing decision to the banker can be optimal.

In [2], I gave a solution of an extended cash balance problem which disallows overdrafts and shortselling. This solution is incorrect. To show this, we produce a counterexample constructed by Carl Norstrøm. In the notation of the note [2], let x0 = 0, y0 = 3, d(t) = 0, α = 0, T = 10, M1 = M2 = ∞

and r2 (t) = .1. Applying the procedure in [2] to this problem, we obtain the policy of impulse-selling all the securities at t = 0. On the other hand, it is obvious by inspection that the optimal policy is to keep the securities until t = 5, at which time, turn them into cash by an impulse-sale. We note, in passing, that the solution by inspection in this case is possible because there is no bounds on the control variable.

This study examines the historic security market performance of REIT shares during the six-year period 1968–1973. Performance measures suggested by Sharpe, Treynor, and Jensen were calculated for a sample of 30 larger and older REITs on both a pre- and post-tax basis. Principal conclusions are: 1) The average mortgage trust sampled had “outperformed” the S&P 500 while equity and hybrid trusts have fared poorer than the S&P 500. 2) The differences in performance levels are due principally to return levels and not risk differentials. 3) A substantial portion of the risk inherent in an REIT is diversifiable risk. This together with other evidence suggests that most REITs have not diversified risk exposure to the extent they indicated they would and were able to. 4) Performance rankings using before- and after-tax returns were identical, suggesting that certain espoused tax advantages unique to REITs have been virtually meaningless on a practical level.

During the “credit crunch” of 1966, starts of single-family residences fell 19.2 per cent, from 964,000 to 779,000. At that time, 10 states had usury laws limiting the maximum nominal interest rate that could be charged to individuals on residential mortgages to 6 per cent. When interest rates rose to high levels in 1966, there were widespread complaints that this artificial restriction caused residential construction to decline by even larger amounts in those states having 6 per cent usury laws as lenders shifted funds to other states not having this restriction. However, when nominal interest rates rise to the legal maximum, mortgages trade at a discount and the effective yield rises above the legal rate. Presumably, it is the effective yield, not the nominal rate, that is relevant for directing the flow of funds into alternative investments. Thus, there is good reason to doubt that the usury laws did restrict residential construction in spite of the contention by those in the mortgage and construction industries. The purpose of this study is to determine if—and if so, to what extent—state usury laws caused a decline in residential construction in 1966.

This paper examines the quantitative aspects of the small business investment company program. The total amount of investments made by SBICs is compared with the amounts of capital and loan funds which have been put into the SBIC program. Next, an attempt is made to determine the total direct dollar costs of administrating the program and the indirect costs associated with making SBIC investments. While the paper does not examine in detail all the qualitative aspects of SBIC investments, it does examine those qualitative features which affect the quantity of “legitimate” SBIC investments.

The concept of profit sharing—whereby a company provides employees with a contribution above and beyond their regular wages based upon business profits—is very old indeed. Implementation of this concept is witnessed by the many profit sharing plans of all kinds in existence today. However, even though the concept is old and the use widespread, there is a complete void in published literature on the nature of optimal profit sharing plans. It is the purpose of this paper to investigate this subject.

I study the effect of patent-infringement claims by patent trolls on acquisitions of small firms. Exploiting staggered adoption of state anti-patent troll laws, I find that the laws have two effects. First, the number of acquisitions of small firms declines after these laws are adopted. Second, the anti-troll laws increase the acquisition price for acquirers. The market reflects the increased cost of acquisition as measured by lower acquisition announcement returns. Large firms increase R&D after the adoption of state laws, replacing external innovation. Using a sample of acquisitions that are plausibly unaffected by the laws, I disentangle alternative explanations.