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Volume 58: Issue 1 (February 2003)


Front Matter

Pages: i-vi  |  Published: 2/2003  |  DOI: 10.1111/j.1540-6261.2003.tb00674.x  |  Cited by: 0


Back Matter

Pages: vii-xxxv  |  Published: 2/2003  |  DOI: 10.1111/j.1540-6261.2003.tb00675.x  |  Cited by: 0


The Quiet Period Goes out with a Bang

Pages: 1-36  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00517  |  Cited by: 113

Daniel J. Bradley, Bradford D. Jordan, Jay R. Ritter


Clearly Irrational Financial Market Behavior: Evidence from the Early Exercise of Exchange Traded Stock Options

Pages: 37-70  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00518  |  Cited by: 64

Allen M. Poteshman, Vitaly Serbin

This paper analyzes the early exercise of exchange‐traded options by different classes of investors over the 1996 to 1999 period. A large number of exercises are identified as clearly irrational without invoking any model of market equilibrium. Customers of discount brokers and customers of fullservice brokers both engage in a significant number of irrational exercises while traders at large investment houses exhibit no irrational early exercise behavior. Rational and irrational exercise is triggered for discount and full‐service customers by the underlying stock price attaining its highest level over the past year and by high returns on the underlying stock.


Why Do Managers Diversify Their Firms? Agency Reconsidered

Pages: 71-118  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00519  |  Cited by: 120

Rajesh K. Aggarwal, Andrew A. Samwick

We develop a contracting model between shareholders and managers in which managers diversify their firms for two reasons: to reduce idiosyncratic risk and to capture private benefits. We test the comparative static predictions of our model. In contrast to previous work, we find that diversification is positively related to managerial incentives. Further, the link between firm performance and managerial incentives is weaker for firms that experience changes in diversification than it is for firms that do not. Our findings suggest that managers diversify their firms in response to changes in private benefits rather than to reduce their exposure to risk.


Modeling Sovereign Yield Spreads: A Case Study of Russian Debt

Pages: 119-159  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00520  |  Cited by: 129

Darrell Duffie, Lasse Heje Pedersen, Kenneth J. Singleton

We construct a model for pricing sovereign debt that accounts for the risks of both default and restructuring, and allows for compensation for illiquidity. Using a new and relatively efficient method, we estimate the model using Russian dollar‐denominated bonds. We consider the determinants of the Russian yield spread, the yield differential across different Russian bonds, and the implications for market integration, relative liquidity, relative expected recovery rates, and implied expectations of different default scenarios.


Asset Pricing with Conditioning Information: A New Test

Pages: 161-196  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00521  |  Cited by: 60

Kevin Q. Wang

This paper presents a new test of conditional versions of the Sharpe‐Lintner CAPM, the Jagannathan and Wang (1996) extension of the CAPM, and the Fama and French (1993) three‐factor model. The test is based on a general nonparametric methodology that avoids functional form misspecification of betas, risk premia, and the stochastic discount factor. Our results provide a novel view of empirical performance of these models. In particular, we find that a nonparametric version of the Fama and French model performs well, even when challenged by momentum portfolios.


New Evidence on the Market for Directors: Board Membership and Pennsylvania Senate Bill 1310

Pages: 197-230  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00522  |  Cited by: 74

Jeffrey L. Coles, Chun-Keung Hoi

We examine the relation between a board' decision to reject antitakeover provisions of Pennsylvania Senate Bill 1310 and subsequent labor market opportunities of those same board members. Compared to directors retaining all provisions, directors rejecting all protective provisions of SB1310 are three times as likely to gain additional external directorships and are 30 percent more likely to retain their internal slot on the board of that same Pennsylvania company. For external board seats, the results are driven by nonexecutive directors who are not members of the management team; for internal board seats, the results are driven by executive directors.


Dynamic Asset Allocation with Event Risk

Pages: 231-259  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00523  |  Cited by: 159

Jun Liu, Francis A. Longstaff, Jun Pan

Major events often trigger abrupt changes in stock prices and volatility. We study the implications of jumps in prices and volatility on investment strategies. Using the event‐risk framework of Duffie, Pan, and Singleton (2000), we provide analytical solutions to the optimal portfolio problem. Event risk dramatically affects the optimal strategy. An investor facing event risk is less willing to take leveraged or short positions. The investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy‐and‐hold strategies. Jumps in prices and volatility both have important effects.


Dividend Taxes and Share Prices: Evidence from Real Estate Investment Trusts

Pages: 261-282  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00524  |  Cited by: 36

William M. Getry, Deen Kemsley, Christopher J. Mayer

Prior empirical evidence regarding the impact of dividend taxes on firm valuation is mixed. This study avoids some of the complications encountered in previous empirical work by exploiting institutional characteristics of REITs, such as their limited discretion over dividend policy and the relative transparency of REIT assets. We regress the market value of equity on the market value of assets and tax basis, which creates tax deductions that lower future dividend taxes without affecting future pretax cash flow. We find that firm value is positively related to tax basis, suggesting that future dividend taxes are capitalized into share prices.


Delegated Portfolio Management and Rational Prolonged Mispricing

Pages: 283-311  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00525  |  Cited by: 17

Eitan Goldman, Steve L. Slezak

This paper examines how information becomes reflected in prices when investment decisions are delegated to fund managers whose tenure may be shorter than the time it takes for their private information to become public. We consider a sequence of managers, where each subsequent manager inherits the portfolio of their predecessor. We show that the inherited portfolio distorts the subsequent manager's incentive to trade on long‐term information. This allows erroneous past information to persist, causing mispricing similar to a bubble. We investigate the magnitude of the mispricing. In addition, we examine endogenous information quality. In some cases, information quality increases when the manager's expected tenure decreases.


Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts

Pages: 313-351  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00526  |  Cited by: 365

Harrison Hong, Jeffrey D. Kubik

We examine security analysts' career concerns by relating their earnings forecasts to job separations. Relatively accurate forecasters are more likely to experience favorable career outcomes like moving up to a high‐status brokerage house. Controlling for accuracy, analysts who are optimistic relative to the consensus are more likely to experience favorable job separations. For analysts who cover stocks underwritten by their houses, job separations depend less on accuracy and more on optimism. Job separations were less sensitive to accuracy and more sensitive to optimism during the recent stock market mania. Brokerage houses apparently reward optimistic analysts who promote stocks.


Trade Credit, Financial Intermediary Development, and Industry Growth

Pages: 353-374  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00527  |  Cited by: 235

Raymond Fisman, Inessa Love

Recent work suggests that financial development is important for economic growth, since financial markets more effectively allocate capital to firms with high value projects. For firms in poorly developed financial markets, implicit borrowing in the form of trade credit may provide an alternative source of funds. We show that industries with higher dependence on trade credit financing exhibit higher rates of growth in countries with weaker financial institutions. Furthermore, consistent with barriers to trade credit access among young firms, we show that most of the effect that we report comes from growth in the size of preexisting firms.


Financial Distress and Bank Lending Relationships

Pages: 375-399  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00528  |  Cited by: 59

Sandeep Dahiya, Anthony Saunders, Anand Srinivasan

We use a unique data set of bank loans to examine the wealth effects on lead lending banks when their borrowers suffer financial distress. We find a significant negative announcement return for the lead lending bank when a major corporate borrower announces default or bankruptcy. Banks with higher exposure to the distressed firm have larger negative announcement‐period returns. The existence of a past lending relationship with the distressed firm results in larger wealth declines for the bank shareholders. Finally, financial distress also has a significant negative effect on borrower's returns.


A Monte Carlo Method for Optimal Portfolios

Pages: 401-446  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00529  |  Cited by: 107

Jérôme B. Detemple, Ren Garcia, Marcel Rindisbacher

This paper proposes a new simulation‐based approach for optimal portfolio allocation in realistic environments with complex dynamics for the state variables and large numbers of factors and assets. A first illustration involves a choice between equity and cash with nonlinear interest rate and market price of risk dynamics. Intertemporal hedging demands significantly increase the demand for stocks and exhibit low volatility. We then analyze settings where stock returns are also predicted by dividend yields and where investors have wealth‐dependent relative risk aversion. Large‐scale problems with many assets, including the Nasdaq, SP500, bonds, and cash, are also examined.


Capital Gains, Dividend Yields, and Expected Inflation

Pages: 447-466  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00530  |  Cited by: 7

Eugene A. Pilotte

One explanation for the negative relationship between short‐horizon stock returns and inflation is that inflation proxies (inversely) for expected future real output. In this paper, I examine the possibility that inflation also proxies for variation in real price/dividend ratios (excess returns). I show that when the covariance between real price/dividend ratios and inflation is nonzero, the relationship between returns and expected inflation differs for the two components of returns: dividend yields and capital gains returns. My empirical evidence demonstrates that dividend yields and capital gains are related differently to expected inflation in U.S. and foreign markets.


Book Reviews

Pages: 467-473  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00531  |  Cited by: 0

Book reviewed:


Miscellanea

Pages: 475-476  |  Published: 2/2003  |  DOI: 10.1111/1540-6261.00532  |  Cited by: 0


ANNOUNCEMENTS

Pages: 477-480  |  Published: 2/2003  |  DOI: 10.1111/j.1540-6261.2003.tb00672.x  |  Cited by: 0


ASSOCIATION MEETINGS

Pages: 481-481  |  Published: 2/2003  |  DOI: 10.1111/j.1540-6261.2003.tb00673.x  |  Cited by: 0