https://www.sfu.ca/~wainwrig/Econ400/jensen-meckling.pdf

Theory of the firm: Managerial behavior, agency costs and ownership structure

计量经济分析 = Econometric analysis

Managerial discretion and optimal financing policies

This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem. The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company. — Adam Smith (1776)

Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure

https://teach.business.uq.edu.au/courses/FINM6900/files/module-2/readings/BreedenJFE.pdf

An intertemporal asset pricing model with stochastic consumption and investment opportunities

An important determinant of option prices is the elasticity of the pricing kernel used to price all claims in the economy. In this paper, we first show that for a given forward price of the underlying asset, option prices are higher when the elasticity of the pricing kernel is declining than when it is constant. We then investigate the implications of the elasticity of the pricing kernel for the stochastic process followed by the underlying asset. Given that the underlying information process follows a geometric Brownian motion, we demonstrate that constant elasticity of the pricing kernel is equivalent to a Brownian motion for the forward price of the underlying asset, so that the Black-Scholes formula correctly prices options on the asset. In contrast, declining elasticity implies that the forward price process is no longer a Brownian motion: it has higher volatility and exhibits autocorrelation. In this case, the Black-Scholes formula underprices all options.

/pdf/when-are-options-overpriced-the-black-scholes-model-and-3urjhnofgm.pdf

When are Options Overpriced? The Black-Scholes Model and Alternative Characterisations of the Pricing Kernel

We document the effects of group affiliation on the initial performance of the 2,713 Initial Public Offerings (IPOs) in India under three regulatory regimes during the period 1990-2004. We distinguish between two competing hypotheses regarding group affiliation and a firm’s initial stock market performance: the certification hypothesis and the “tunneling” hypothesis. We show that the underpricing of group companies is higher than that of stand-alone companies, lending support to the tunneling hypothesis. However, on an ex post basis, we find that group-affiliated companies have a higher probability of survival than their stand-alone counterparts: groups appear to support their affiliates to maintain their reputation.

/pdf/group-affiliation-and-the-performance-of-initial-public-i2b6ofer7j.pdf

Group Affiliation and the Performance of Initial Public Offerings in the Indian Stock Market

The Geske-Johnson approach provides an efficient and intuitively appealing technique for the valuation and hedging of American-style contingent claims. Here, we generalize their approach to a stochastic interest rate economy. The method is implemented using options exercisable on one of a finite number of dates. We illustrate how the value of an American-style option increases with interest rate volatility. The magnitude of this effect depends on the extent to which the option is in the money, the volatilities of the underlying asset and the interest rates, as well as the correlation between them.

https://www.jstor.org/stable/pdfplus/2329500.pdf

The valuation of american options with stochastic interest rates: a generalization of the Geske-Johnson technique

We examine the pricing and hedging performance of interest rate option pricing models using dailydata on US dollar cap and floor prices across both strike rates and maturities. Our results show that fitting the skew of the underlying interest rate probability distribution provides accurate pricing results within a one-factor framework. However, for hedging performance, introducing a second stochastic factor is more important than fitting the skew of the underlying distribution. This constitutes evidence against claims in the literature that correctly specified and calibrated one-factor models could replace multi-factor models for consistent pricing and hedging of interest rate contingent claims. � 2004 Elsevier B.V. All rights reserved.

http://people.stern.nyu.edu/msubrahm/papers/Cap_paper_old.pdf

Marti G. Subrahmanyam

Papers

When are Options Overpriced? The Black-Scholes Model and Alternative Characterisations of the Pricing Kernel

Group Affiliation and the Performance of Initial Public Offerings in the Indian Stock Market

The valuation of american options with stochastic interest rates: a generalization of the Geske-Johnson technique

Pricing and hedging interest rate options: Evidence from cap-floor markets

A Simple Approach to Option Valuation and Hedging in the Black-Scholes Model