Owners of incentive options invariably hold undiversified portfolios. This paper derives a model for the subjective and objective values of such options. The subjective value—the value to the holder—is less than the market value because the option is held in an undiversified portfolio and because it is exercised suboptimally from the market perspective. The objective value is the cost to the firm of issuing the option and lies between the market and subjective values. This value recognizes the suboptimal exercise but not the undiversified discount. The model, which is the Black-Scholes model with modified parameters, is simple to use.

We examine incentives for nonconsolidating horizontal mergers in commercial media industries. In a model with differentiated media and products, we show that such a merger is profitable if merging media firms gain a relative bargaining advantage vis-à-vis advertisers in the negotiations for advertising space. Whether a bargaining advantage yields profitable conditions for a merger depends on the extent of competition for audiences among media firms. Higher levels of competition make media mergers more profitable. This result contrasts those implied by oligopoly models for traditional product markets, which suggest that mergers become less profitable for higher levels of competition.

I find strong evidence of economically and statistically significant predictability in Brady bonds, the most liquid emerging debt market, by implementing a new model for credit spreads. Active management provides U.S. investors in emerging markets with double the buy-and-hold returns at lower risk and the equivalent of free options on Brady bonds. My analysis suggests that predictability is primarily driven by credit spread deviations from fundamentals rather than time-varying risk or risk premia. This inefficiency results from the restrictions of a nontransparent, institutionally dominated, dealer market and the lack of a fully developed derivatives market for emerging country credit risk.

The paper examines the effects of the Riegle-Neal branching deregulation in the 1990s on banking market structure, service, and performance. While concentration at the regional level has increased, deregulation has left almost intact the structure of metropolitan markets, which have between two and three dominant banks—controlling over half of market deposits—both at the beginning and the end of the sample. A significant portion of the observed increase in branch networks can be traced to the deregulation, allowing consumers to enjoy larger fee-free networks locally and regionally. Costs, service fees, and credit risk increase, spreads fall, and profits are unaffected.

This study examines the level of unsecured borrowing done by the firms that ultimately rescued Long-Term Capital Management in the days leading up to the hedge fund’s rescue. Although these banks borrowed less at the height of the crisis, evidence suggests that this reduction in borrowing was demand-driven and did not result from rationing by the market. Further, it is shown that large banks that were not involved with the LTCM rescue saw the rates they pay for unsecured funds decline following the hedge fund’s resolution. This finding is consistent with an increase in the strength of a too-big-to-fail policy.

We study the impact of interest rate and revenue variability on the decision to carry out irreversible investment. We provide a mathematical characterization of the two-dimensional optimal stopping problem and show that interest rate variability has a decelerating or accelerating impact on investment depending on whether the current interest rate is below or above the long-run steady state. Allowing for interest rate volatility decelerates investment by raising both the required exercise premium of the investment opportunity and the value of waiting. Finally, increased revenue volatility is shown to strengthen the negative impact of interest rate volatility and vice versa.

In this paper, I provide new evidence of the out-of-sample predictability of stock returns. In particular, I find that the consumption-wealth ratio in conjunction with a measure of aggregate stock market volatility exhibits substantial out-of-sample forecasting power for excess stock market returns. Also, simple trading strategies based on the documented predictability generate returns of higher mean and lower volatility than the buy-and-hold strategy does, and this difference is economically important.

This paper considers the relationship between traded volume and volatility allowing for the impact of short sales. The evidence supports a nonlinear, bidirectional relationship between volume and volatility. Short selling is found to have a significant impact on this relationship, and our results suggest (i) that the Hong Kong market displays greater volatility following a period of short selling and (ii) that asymmetric responses to positive and negative innovations to returns appear to be exacerbated by short selling.

Designing novel proxies for temporal resolution of uncertainty (TRU), we find that the later the uncertainty facing the firm is resolved, the larger the yields on corporate debt issued between 1987 and 1996. This result is robust to different test specifications and is of nontrivial economic significance. An ordered probit test confirms that the speed at which uncertainty is resolved for a given firm is not incorporated in the grading process, although it is priced by the market. Further tests lend more support to the hypothesis of investors’ intrinsic timing preferences than to agency-driven increases in risk.

I examine the stock market timing ability of two samples of hybrid mutual funds. I find that the inclusion of bond indices and a bond timing variable in a multifactor Treynor-Mazuy model framework leads to substantially different conclusions concerning the stock market timing performance of these funds relative to the traditional Treynor-Mazuy model. Results from the multifactor Treynor-Mazuy model find less stock timing ability over the 1981–91 time period and provide evidence of significant stock timing ability across the second fund sample during the 1992–2000 time period.

This paper examines the relationship between the stock and futures markets in terms of lead-lag relationship, correlation, and the hedge ratio using wavelet analysis. Empirical results show that (1) there is a feedback relationship between the stock and futures markets regardless of time scales, (2) wavelet correlation between two markets varies over investment horizons but remains very high, and (3) hedge ratio and the effectiveness of hedging strategies increase as the wavelet time scale increases. Simulation for utility comparisons shows that hedging effectiveness depends not only on the time scale but also on the risk aversion coefficient of an individual investor.

We study job movements of professional football coaches. The likelihood of an external promotion is strongly related to measures of individual performance and only weakly related to team performance. In contrast, the likelihood of an internal promotion is not related to individual performance. This difference arises from the process governing internal job openings, since openings are negatively related to performance. Conditional on the presence of an opening, promotion likelihood is increasing in individual performance. Relationships matter, as coaches are often hired and fired as a group. These findings have implications for several issues related to incentives and organizational design.

We show that a firm’s ability to reap growth opportunities from R&D investments depends on its size, leverage, and the industry concentration. While the direct effects of these factors are significant, the size-leverage interaction reveals further important insights. Large firms’ advantages over small firms disappear as their leverage increases. Specifically, small firms with high leverage reap the greatest growth opportunities. Our results provide explanations for inconsistent findings observed when size and leverage are considered independently in existing studies on value and stock return relevance of R&D investment. We also highlight firm-specific factors that guide investors’ valuation of R&D.

We use industry commodity flows information to measure vertical relations in completed mergers from 1962 to 1996. Almost one-third of the mergers display vertical relatedness. Vertical merger activity is more intensive in the 1980s and 1990s and less so in the 1960s and the 1970s. Vertical mergers generate positive wealth effects that are significantly larger than those for diversifying mergers; the wealth effects in vertical mergers are comparable to those in pure horizontal mergers.

Mutual fund managers are the agents of investors, and their efforts to improve their performance are influenced by either explicit or implicit incentive structures within fund organizations. An efficient fund evaluation should control for organizational elements that affect managerial incentives in evaluating their performance. I propose an incentive-compatible portfolio performance evaluation measure in which managers are to maximize investors’ gross returns net of managerial compensation. I consider the effect of organizational elements such as economies of scale on incentive and thus on performance. Finally, I compare this new measure with the Sharpe ratio.

A growing literature contends that, since returns are not normal, higher-order comoments matter to risk-averse investors. Fama and French (1993, 1995) find that nonmarket risk factors based on size and book-to-market ratio are priced by investors. We test the hypothesis that the Fama-French factors simply proxy for the pricing of higher-order comoments. Using portfolio returns over various time horizons, we show that adding a set of systematic comoments (but not standard moments) of order 3–10 reduces the explanatory power of the Fama-French factors to insignificance in almost every case.

In this paper, we construct a new variance bound on any stochastic discount factor (SDF) of the form [FORMULA], with x being a vector of state variables, which tightens the well-known Hansen-Jagannathan bound by a ratio of one over the multiple correlation coefficient between x and the standard minimum variance SDF, [FORMULA]. In many applications, the correlation is small, and hence the bound is much improved. For example, when x is the growth rate of consumption, the new variance bound can be 25 times greater than the Hansen-Jagannathan bound, making it much more difficult to explain the equity-premium puzzle.

In a massive intervention designed to deter speculators, the Hong Kong Monetary Authority (HKMA) bought Hang Seng index stocks in August 1998. These stocks experienced a 24% abnormal return during the intervention period. The abnormal returns are not reversed over the next eight weeks, refuting the hypothesis that returns are due to temporary liquidity effects. Cross-sectional analysis of daily abnormal returns during the intervention period reveals that these returns are related to overall intervention activity rather than stock-specific intervention. This evidence is consistent with information effects rather than price pressure effects.

This paper examines the effects of mergers on bidding firms’ stock prices. I find evidence of merger momentum: bidder stock prices are more likely to increase when a merger is announced if recent mergers by other firms have been received well (a “hot” merger market) or if the overall stock market is doing better. However, there is long-run reversal. Long-run bidder stock returns are lower for mergers announced when either the merger or stock markets were hot at the time of the merger than for those announced at other times.

Signaling strategies that sellers of higher-quality products or securities employ to differentiate their products include (1) development of a reputation for quality, (2) third-party certification, (3) warranties, and (4) information disclosure. These signaling strategies are compared using data from the online auction market for classic comic books. This market’s advantages include that (1) the information asymmetry is substantial, (2) good measures of reputation are available, and (3) all four signals are common. We explore which signals are strongest and why, which are substitutes or complements, and how choice among the other three strategies depends on the reputation of the seller.