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Volume 35: Issue 5 (December 1980)


Front Matter

Pages: i-vi  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb00627.x  |  Cited by: 0


Back Matter

Pages: vii-xxxi  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb00628.x  |  Cited by: 0


An Empirical Investigation of the Arbitrage Pricing Theory

Pages: 1073-1103  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02197.x  |  Cited by: 280

RICHARD ROLL, STEPHEN A. ROSS

Empirical tests are reported for Ross' [48] arbitrage theory of asset pricing. Using data for individual equities during the 1962–72 period, at least three and probably four priced factors are found in the generating process of returns. The theory is supported in that estimated expected returns depend on estimated factor loadings, and variables such as the own standard deviation, though highly correlated (simply) with estimated expected returns, do not add any further explanatory power to that of the factor loadings.


Heterogeneous Expectations, Restrictions on Short Sales, and Equilibrium Asset Prices

Pages: 1105-1113  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02198.x  |  Cited by: 71

ROBERT JARROW

Under heterogeneous expectations, the mean–variance model of capital market equilibrium is employed to determine the effect restricting short sales has on equilibrium asset prices. Two equivalent markets differing only with respect to short sale restrictions are compared. It is shown that, in general, risky asset prices can either rise or fall due to short sale constraints. However, under a homogeneity of beliefs for the covariance matrix of future prices, short sale constraints will only increase risky asset prices.


The Investment Banking Contract For New Issues Under Asymmetric Information: Delegation And The Incentive Problem

Pages: 1115-1138  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02199.x  |  Cited by: 49

DAVID P. BARON, BENGT HOLMSTRÖM

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.


Deposit Rate-Setting, Risk Aversion, and the Theory of Depository Financial Intermediaries

Pages: 1139-1154  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02200.x  |  Cited by: 30

C. W. SEALEY


The Demand for Life Insurance: An Application of the Economics of Uncertainty

Pages: 1155-1172  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02201.x  |  Cited by: 44

RITCHIE A. CAMPBELL

Financial economists typically assume that capital income uncertainty, derived from investments in uncertain returned marketable securities, represents the major source of household consumption uncertainty. But, for many households, if not most, labor income uncertainty dominates capital income uncertainty.


Asset Accumulation In Early Married Life

Pages: 1173-1188  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02202.x  |  Cited by: 4

ROBERT FERBER, LUCY CHAO LEE

This longitudinal study of the factors influencing the accumulation of financial assets by young married couples in three metropolitan areas of Illinois, finds that couples that start out with a strong financial base tend to improve their relative financial position over time. Especially intriguing is the finding that those couples that acquired initially substantial amounts of debt were more likely to be well off financially at a later time, possibly because the principal asset purchased with these debts, own home, appreciated substantially during the period studied.


A Catastrophe Model of Bank Failure

Pages: 1189-1207  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02203.x  |  Cited by: 14

THOMAS HO, ANTHONY SAUNDERS

Most models of bank failure have assumed that the path towards bankruptcy or insolvency is smooth and continuous. As a consequence a number of early‐warning systems have been suggested in the banking and financial literature to aid regulators in the identification of potential problem banks. However, these systems may be of little use when the path towards failure is explosive, involving a sudden crash or catastrophe. This paper seeks to examine such cases by applying the theory of catastrophes to bank failure. A model is developed to show how the interaction between bank management, regulators and depositors can induce catastrophic failure. It is argued that there is a crucial relationship between the power of regulatory intervention and depositors confidence levels which is both necessary and sufficient for catastrophe to occur. It is also argued that catastrophe appears to be more likely for large money market banks rather than small banks. Finally, some suggestions are made for regulatory policy and for further research in the area.


On the Valuation of Federal Loan Guarantees to Corporations

Pages: 1209-1221  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02204.x  |  Cited by: 14

HOWARD B. SOSIN

Since 1956, Federal Loan Guarantee Programs have expanded to the point where recipients of guarantees represent most segments of the economy. Considerable debate centers on the determination of the magnitude of the liability of the Federal Government that is represented by these programs. This paper illustrates how option pricing techniques may be used to obtain estimates of the purely pecuniary costs of loan guarantees, interest saving to the firm on senior and junior debt, and implicit present value profitability indices of projects.


A RATIONALE FOR DEBT MATURITY STRUCTURE AND CALL PROVISIONS IN THE AGENCY THEORETIC FRAMEWORK

Pages: 1223-1234  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02205.x  |  Cited by: 130

AMIR BARNEA, ROBERT A. HAUGEN, LEMMA W. SENBET

The agency costs of debt are introduced in this paper to explain the existence of complex financial instruments. Two areas of complexities are discussed in detail: the call provision and the maturity structure of debt. Their existence is rationalized as a means of resolving agency problems associated with informational asymmetry, managerial (stockholder) risk incentives, and foregone growth opportunities. It is also demonstrated that both features of corporate debt serve identical purposes in solving agency problems. Complex financial instruments are required because markets fail to provide complete and costless solutions to the agency problems discussed in the paper.


Regulation of Bank Capital and Portfolio Risk

Pages: 1235-1244  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02206.x  |  Cited by: 206

MICHAEL KOEHN, ANTHONY M. SANTOMERO


Debt, Taxes and Leasing A Note

Pages: 1245-1250  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02207.x  |  Cited by: 1

R. A. BREALEY, C. M. YOUNG

This paper discusses the implications of Miller's paper “Debt and Taxes” for the valuation of leases. It shows that if Miller's equilibrium holds, leasing is only likely to dominate debt and equity for companies in temporary nontaxpaying positions.


A Note on Ambiguity in Portfolio Performance Measures

Pages: 1251-1256  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02208.x  |  Cited by: 7

DAVID PETERSON, MICHAEL L. RICE


The Financial Consequences of Corporate Growth

Pages: 1257-1265  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02209.x  |  Cited by: 1

BENTON E. GUP


Error Rates in CRSP and COMPUSTAT: A Second Look

Pages: 1267-1271  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02210.x  |  Cited by: 13

ROBERT BENNIN


The Hedging Performance of the New Futures Markets: Comment

Pages: 1273-1279  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02211.x  |  Cited by: 45

CHARLES T. FRANCKLE


Erratum

Pages: 1281-1283  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02212.x  |  Cited by: 0


Book Reviews

Pages: 1285-1295  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02213.x  |  Cited by: 0

Book reviewed in this article:


Miscellanea

Pages: 1297-1297  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb02214.x  |  Cited by: 0


INDEX TO VOLUME XXXV

Pages: 1299-1303  |  Published: 12/1980  |  DOI: 10.1111/j.1540-6261.1980.tb00626.x  |  Cited by: 0