Showing papers on "Equity (finance) published in 2003"
TL;DR: In this paper, the authors test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998 and find that net equity issues track the financing deficit more closely than do net debt issues.
1,783 citations
TL;DR: In this paper, the authors investigate the impact of the founding family ownership structure on the agency cost of debt and find that it is common in large publicly traded firms and is related to a lower cost for debt financing.
1,279 citations
TL;DR: In this article, the authors proposed a measure of brand equity based on the revenue premium a brand generates compared with that of a private label product, which is a simple, objective, and managerially useful product-market measure.
Abstract: The authors propose that the revenue premium a brand generates compared with that of a private label product is a simple, objective, and managerially useful product-market measure of brand equity. The authors provide the conceptual basis for the measure, compute it for brands in several packaged goods categories, and test its validity. The empirical analysis shows that the measure is reliable and reflects real changes in brand health over time. It correlates well with other equity measures, and the measure’s association with a brand’s advertising and promotion activity, price sensitivity, and perceived category risk is consistent with theory.
958 citations
TL;DR: In this article, the authors show how risk aversion introduces skewness in the risk-neutral density and derive laws that decompose individual return skew into a systematic component and an idiosyncratic component.
Abstract: and relate it to variations in return skewness. Second, we show how risk aversion introduces skewness in the risk-neutral density. Third, we derive laws that decompose individual return skewness into a systematic component and an idiosyncratic component. Empirical analysis of OEX options and 30 stocks demonstrates that individual riskneutral distributions differ from that of the market index by being far less negatively skewed. This article explains the presence and evolution of risk-neutral skewness over time and in the cross section of individual stocks.
940 citations
TL;DR: This article investigated whether management stock ownership and large non-management blockholder share ownership are related to firm value across a sample of 1433 firms from 18 emerging markets and found that when a management group's control rights exceed its cash flow rights, the firm values are lower.
Abstract: This paper investigates whether management stock ownership and large non-management blockholder share ownership are related to firm value across a sample of 1433 firms from 18 emerging markets. When a management group's control rights exceed its cash flow rights, I find that firm values are lower. I also find that large non-management control rights blockholdings are positively related to firm value. Both of these effects are significantly more pronounced in countries with low shareholder protection. One interpretation of these results is that external shareholder protection mechanisms play a role in restraining managerial agency costs and that large non-management blockholders can act as a partial substitute for missing institutional governance mechanisms.
937 citations
TL;DR: In this paper, the authors explore the effect of stock market volatility on corporate bond yields and find that stock prices will increase much more than bond prices, since stockholders receive all residual profits, while bondholders receive no more than the promised payments of principal and interest.
Abstract: This paper explores the eiect of equity volatility on corporate bond yields. Panel data for the late 1990s show that idiosyncratic ¢rm-level volatility can explain as much cross-sectional variation in yields as can credit ratings. This ¢nding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields. DURING THE LATE 1990s, THE U.S. EQUITY and corporate bond markets behaved very diierently. As displayed in Figure 1, stock prices rose strongly, while at the same time, corporate bonds performed poorly. The proximate cause of the low returns on corporate bonds was a tendency for the yields on both seasoned and newly issued corporate bonds to increase relative to the yields of U.S.Treasury securities. These increases in corporate^Treasury yield spreads are striking because they occurred at a time when stock prices were rising; the optimism of stock market investors did not seem to be shared by investors in the corporate bond market. There are several reasons why the prices of corporate bonds might diverge from the prices of corporate equities. First, stock prices will increase if investors become more optimistic about future corporate pro¢ts. Optimistic expectations bene¢t stock prices much more than bond prices, since stockholders receive all residual pro¢ts, while corporate bondholders receive no more than the promised payments of principal and interest. This explanation does not account for the behavior of corporate bond yields in the late 1990s, however, because yield spreads on corporate bonds over Treasuries should fall, not rise, if investors become optimistic about corporate pro¢ts and thus reduce their expected probabilities of default. Second, there might be a composition eiect if corporate bonds are issued by diierent companies than those that dominate value-weighted equity indexes. Third, an increase in the liquidity premium on corporate bonds relative to Treasury bonds might drive down corporate bond prices without any eiect on equity prices. Fourth, the yields on newly issued corporate bonds might vary because of changes in the special features of these bonds, for example, an increase in the value of call provisions. Such an increase would drive down the prices and drive
927 citations
TL;DR: In this paper, the authors investigate whether institutional investors vote with their feet when dissatisfied with a firm's management by examining changes in equity ownership around forced CEO turnover and find that aggregate institutional ownership and the number of institutional investors decline in the year prior to forcing CEO turnover.
921 citations
TL;DR: In this paper, the authors take a new look at the predictability of stock market returns with risk measures and find a signi cant positive relation between average stock variance (largely idiosyncratic) and the return on the market.
Abstract: This paper takes a new look at the predictability of stock market returns with risk measures. We ¢nd a signi¢cant positive relation between average stock variance (largely idiosyncratic) and the return on the market. In contrast, the variance of the market has no forecasting power for the market return. These relations persist after we control for macroeconomic variables known to forecast the stock market. The evidence is consistent with models of timevarying risk premia based on background risk and investor heterogeneity. Alternatively, our ¢ndings can be justi¢ed by the option value of equity in the capital structure of the ¢rms. MOSTASSET PRICING MODELS, starting with Merton’s (1973) ICAPM, suggest a positive relation between risk and return for the aggregate stock market. There is a long empirical literature that has tried to establish the existence of such a tradeoi between risk and return for stock market indices. 1 Unfortunately, the results have been inconclusive. Often the relation between risk and return has been found insigni¢cant, and sometimes even negative. The innovation in this paper is to look at average stock risk in addition to market risk.We measure average stock risk in each month similarly to Campbell et al. (2001; hereafter CLMX), as the cross-sectional average of the variances of all the stocks traded in that month.We then run predictive regressions of market returns on this variance measure as well as the variance of the market. Consistent with some previous studies, we ¢nd that market variance has no forecasting power for the market return. However, we do ¢nd a signi¢cant positive relation between average stock variance and the return on the market.
861 citations
TL;DR: This paper used a simple model to outline the conditions under which corporate investment will be sensitive to non-fundamental al movements in stock prices and found that firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile.
Abstract: We use a simple model to outline the conditions under which corporate investment will be sensitive to non-fundament al movements in stock prices. The key cross-sectional prediction of the model is that stock prices will have a stronger impact on the investment of firms that are “equity dependent” – firms that need external equity to finance their marginal investments. Using an index of equity dependence based on the work of Kaplan and Zingales (1997), we find strong support for this prediction. In particular, firms that rank in the top quintile of the KZ index have investment that is almost three times as sensitive to stock prices as firms in the bottom quintile. We also verify several other predictions of the model.
774 citations
TL;DR: Cronqvist et al. as mentioned in this paper investigated the agency costs of controlling minority shareholders (CMSs) in Swedish listed firms and found that increased ownership of votes by a controlling owner is associated with an economically and statistically significant decrease in firm value.
Abstract: Agency Costs of Controlling Minority Shareholders (coauthored with Henrik Cronqvist) estimates the agency costs of controlling minority shareholders (CMSs) using a panel of Swedish listed firms. CMSs are owners who have a control stake of the firm’s votes while owning only a minority fraction of the firm’s equity. The study documents that families in control are almost exclusively CMSs through an extensive use of dual-class shares. The results show that increased ownership of votes by a controlling owner is associated with an economically and statistically significant decrease in firm value, but that the decrease in firm value is significantly larger for firms with family CMSs than for firms with financial institutions or corporations in control. This indicates that the agency costs of family CMSs are larger than the agency costs of other controlling owners.Family Ownership, Control Considerations, and Corporate Financing Decisions: An Empirical Analysis analyzes the relation between concentrated family control and firms’ choice of capital structure for a panel of Swedish listed firms. The results suggest that the capital structure choices made by firms with families in control are influenced by the controlling families’ desire to protect their control, and that the resulting capital structures are likely to increase the agency costs of family control. The Choice between Rights Offerings and Private Equity Placements (coauthored with Henrik Cronqvist) analyzes the determinants of the choice between rights offerings and private equity placements using a sample of rights offerings and private placements made by listed Swedish firms. The results indicate that control considerations explain why firms make uninsured rights offerings. The evidence also suggest that private placements, and to some extent underwritten rights offerings, are made by potentially undervalued firms in order to overcome underinvestment problems resulting from asymmetric information about firm value. Furthermore, private placements are frequently made in conjunction with the establishment of a product market relationship between purchaser and seller, which is consistent with equity ownership reducing contracting costs in new product market relationships. Why Agency Costs Explain Diversification Discounts (coauthored with Henrik Cronqvist and Peter Hogfeldt) studies diversification within the real estate industry, in which firms can diversify over property types and geographical regions. Similar to previous studies, this essay documents the existence of a diversification discount. However, the major cause of the diversification discount is not diversification per se but anticipated costs due to rent dissipation in future diversifying acquisitions. Firms expected to pursue non-focusing strategies do indeed diversify more, are valued ex ante at a 20% discount over firms anticipated to follow a focusing strategy, and are predominantly family controlled. The ex ante diversification discount is, therefore, a measure of agency costs. The Difference in Acquirer Returns between Takeovers of Public Targets and Takeovers of Private Targets shows, for a sample of Swedish takeovers, that the average acquirer abnormal return is positive and significant when the target firm is privately held but insignificant when the target firm is listed on a stock exchange. These results are robust when controlling for sample selection problems and other variables capable of explaining acquirer returns. The evidence is consistent with greater acquirer bargaining power and resolution of information asymmetries in takeovers of private targets.
708 citations
TL;DR: The authors studied nearly 7,000 retirement accounts during the April 1994-August 1998 period and found that most asset allocations are extreme (either 100 percent or zero percent in equities) and there is inertia in asset allocations.
Abstract: We study nearly 7,000 retirement accounts during the April 1994-August 1998 period. Several interesting patterns emerge. Most asset allocations are extreme (either 100 percent or zero percent in equities) and there is inertia in asset allocations. Equity allocations are higher for males, married investors, and for investors with higher earnings and more seniority on the job; equity allocations are lower for older investors. There is very limited portfolio reshuffling, in sharp contrast to discount brokerage accounts. Daily changes in equity allocations correlate only weakly with same-day equity returns and do not correlate with future equity returns.
TL;DR: Agency theory dominates research on equity holdings-firm performance relationships; however, extant studies provide no consensus about the direction and magnitude of such relationships as mentioned in this paper. But agency theory does not explain the relationship between stock holdings and firms.
Abstract: Agency theory dominates research on equity holdings-firm performance relationships; however, extant studies provide no consensus about the direction and magnitude of such relationships. Consistent ...
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TL;DR: In this article, the authors focus on the more narrow, but crucial, topic of stock-based compensation and incentives and highlight several fundamental questions that seem especially appropriate for future research.
Abstract: 1. INTRODUCTION Corporate governance is generally considered to be the set of complementary mechanisms that help align the actions and choices of managers with the interests of shareholders. Monitoring actions by the board of directors, debtholders, or institutional blockholders can have an important impact on the economic performance of an organization (for example, Jensen [1989], Mehran [1995], Core, Holthausen, and Larcker [1999], and Holderness [2003]). Another important and often debated component of the governance structure is the compensation contract selected for providing remuneration to managers (for example, the level of remuneration or choice of performance measures). Executive compensation has been the subject of extensive prior research, and excellent general reviews already exist for the interested reader (for example, Murphy [1999]). For our purposes here, we will not reproduce this discussion but rather focus on the more narrow, but crucial, topic of stock-based compensation and incentives. Stock and option compensation and the level of managerial equity incentives are aspects of corporate governance that are especially controversial to shareholders, institutional activists, and governmental regulators. Similar to much of the corporate finance and corporate governance literature, research on stock-based compensation and incentives has generated not only useful insights, but also has produced many contradictory findings. Not surprisingly, many fundamental questions remain unanswered, and one of our goals is to highlight topics that seem especially appropriate for future research. Within the corporate governance literature, and more specifically within the executive compensation literature, there are alternative views on the efficiency of observed contracting arrangements between firms and their executives. For the purposes of this survey and as an organizing principle of our literature review, we follow a traditional agency-theory framework and define an efficient contract as one that maximizes the net expected economic value to shareholders after transaction costs (such as contracting costs) and payments to employees. An equivalent way of saying this is that we assume that contracts minimize agency costs. Clearly, the types of contracts that are efficient at any particular time or in a particular sector of the economy are a function of various transaction costs. For instance, a contract that was efficient in the United States fifty years ago may not be efficient today because information costs have fallen greatly and the optimal organizational form has changed as a result. Over time, optimal contracting arrangements evolve with changes in contracting technology. As part of this evolutionary process, firms are experimenting with new contracting technologies. Some experiments succeed and others fail as firms update their beliefs and learn about the efficiency of their governance structures. Throughout this process, firms may be uncertain about the optimal contracting technology. As a result of this uncertainty and because of differences in beliefs about optimal incentive levels, one would expect variation in the observed contracts across firms. However, unless beliefs are systematically biased, we expect that compensation contracts are efficient, on average, and that average equity incentive levels across firms are neither "too high" nor "too low." (For an example and discussion of how an evolutionary process converges to an efficient outcome, see Lazear [1995, pp. 8-10].) In contrast to this economic perspective, a number of scholars and practitioners either implicitly or explicitly take the view that contracting arrangements are largely inefficient and do not minimize agency costs (for example, Morck, Shleifer, and Vishny [1988], Crystal [1991], and Jensen [1993]). A view that sees most firms behaving inefficiently is hard to support. At the opposite extreme is the view that transaction costs in the labor market, the stock market, and the market for corporate control are so small that all agency costs are eliminated. …
TL;DR: In this paper, a simple recursive residuals (out-of-sample) graphical approach is proposed to evaluate the predictive power of popular equity premium and stock market time-series forecasting regressions.
Abstract: Our paper suggests a simple, recursive residuals (out-of-sample) graphical approach to evaluating the predictive power of popular equity premium and stock market time-series forecasting regressions. When applied, we find that dividend ratios should have been known to have no predictive ability even prior to the 1990s, and that any seeming ability even then was driven by only two years, 1973 and 1974. Our paper also documents changes in the time-series processes of the dividends themselves and shows that an increasing persistence of dividend-price ratio is largely responsible for the inability of dividend ratios to predict equity premia. Cochrane's (1997) accounting identity--that dividend ratios have to predict long-run dividend growth or stock returns--empirically holds only over horizons longer than 5--10 years. Over shorter horizons, dividend yields primarily forecast themselves.
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TL;DR: In this article, the authors quantified the magnitude and time-varying nature of volatility spillovers from the aggregate European (EU) and US market to 13 local European equity markets.
Abstract: This paper quantifies the magnitude and time-varying nature of volatility spillovers from the aggregate European (EU) and US market to 13 local European equity markets. I develop a shock spillover model that decomposes local unexpected returns into a country specific shock, a regional European shock, and a global shock from the US. The innovation of the model is that regime switches in the shock spillover parameters are accounted for. I find that these regime switches are both statistically and economically important. While both the EU and US shock spillover intensity has increased over the 1980s and 1990s, the rise is more pronounced for EU spillovers. For most countries, the largest increases in shock spillover intensity are situated in the second half of 1980s and the first half of the 1990s. Increased trade integration, equity market development, and low inflation are shown to have contributed to the increase in EU shock spillover intensity. Finally, I find some evidence for contagion from the US market to a number of local European equity markets during periods of high world market volatility.
TL;DR: In this article, the authors argue and show that equity plays a very different role in affecting customer loyalty as one moves from transaction-specific to cumulative evaluations, whereas equity is more of a postsatisfaction evaluation when modeling cumulative satisfaction.
Abstract: Perceived equity is a key psychological reaction to the value that a service company provides. Yet equity research has focused on a customer’s satisfaction with relatively well-defined service episodes or transactions. The authors argue and show that equity plays a very different role in affecting customer loyalty as one moves from transaction-specific to cumulative evaluations. Whereas equity is an important driver of transaction-specific satisfaction, equity is more of a postsatisfaction evaluation when modeling cumulative satisfaction. The research also demonstrates the superiority of cumulative evaluations toward explaining service loyalty and providing a balanced view of loyalty drivers. The results have important implications for how equity, satisfaction, and loyalty are modeled and managed in a service context.
TL;DR: In this paper, the determinants and performance consequences of equity grants to senior-level executives, lower-level managers, and non-exempt employees of "new economy" firms were examined.
Book•
01 Jan 2003
TL;DR: In his best-selling "Irrational Exuberance", Shiller cautioned that society's obsession with the stock market was fueling the volatility that has since made a roller coaster of the financial system.
Abstract: In his best-selling "Irrational Exuberance", Robert Shiller cautioned that society's obsession with the stock market was fueling the volatility that has since made a roller coaster of the financial system Less noted was Shiller's admonition that our infatuation with the stock market distracts us from more durable economic prospects These lie in the hidden potential of real assets, such as income from our livelihoods and homes But these "ordinary riches," so fundamental to our well-being, are increasingly exposed to the pervasive risks of a rapidly changing global economy This compelling and important new book presents a fresh vision for hedging risk and securing our economic future Shiller describes six fundamental ideas for using modern information technology and advanced financial theory to temper basic risks that have been ignored by risk management institutions - risks to the value of our jobs and our homes, to the vitality of our communities, and to the very stability of national economies Informed by a comprehensive risk information database, this new financial order would include global markets for trading risks and exploiting myriad new financial opportunities, from inequality insurance to intergenerational social security Just as developments in insuring risks to life, health, and catastrophe have given us a quality of life unimaginable a century ago, so Shiller's plan for securing crucial assets promises to substantially enrich our condition Once again providing an enormous service, Shiller gives us a powerful means to convert our ordinary riches into a level of economic security, equity, and growth never before seen And once again, what Robert Shiller says should be read and heeded by anyone with a stake in the economy
TL;DR: In this paper, the authors show that underperformance is very likely to be observed ex-post in an efficient market and use calendar-time returns to solve the problem of underperformance.
Abstract: Numerous studies document long-run underperformance by firms following equity offerings. This paper shows that underperformance is very likely to be observed ex-post in an efficient market. The premise is that more firms issue equity at higher stock prices even though they cannot predict future returns. Ex-post, issuers seem to time the market because offerings cluster at market peaks. Simulations based on 1973 through 1997 data reveal that when ex-ante expected abnormal returns are zero, median ex-post underperformance for equity issuers will be significantly negative in event-time. Using calendar-time returns solves the problem.
TL;DR: In this paper, the authors analyzed the neglected issues concerning the structuring and management of syndicated venture capital investments from the perspectives of both lead and non-lead syndicate members using two surveys of venture capital firms and examination of syndication documents.
Abstract: Syndicates are a form of inter-firm alliance in which two or more venture capital firms co-invest in an investee firm and share a joint pay-off. Syndication is a significant part of the venture capital market yet little research has been conducted into the process of structuring syndicate deals and the management of syndicates following deal completion. This paper analyses the neglected issues concerning the structuring and management of syndicated venture capital investments from the perspectives of both lead and non-lead syndicate members using two surveys of venture capital firms and examination of syndication documents. Lead investors typically have larger equity stakes and the syndicated investment agreement is a document that enshrines the rights of participants rather than specifying behaviour. Contractual arrangements typically serve as a back drop to relationships as non-legal sanctions are important and decisions are typically reached following discussion and consensus, but lead venture capital investors’ residual and specific powers are important in ensuring timely decision-making. The findings extend previous work on alliances by emphasizing the importance of non-legal sanctions, especially reputation effects, in mitigating opportunistic behaviour by dominant equity holders. The paper also adds to the limited research on the dynamics of alliances by highlighting the role of repeat syndicates.
TL;DR: This paper showed that middle-class American families (from roughly the fortieth to the eightieth percentile of the wealth distribution) have more than half their assets in the form of housing.
Abstract: The portfolio of the typical American household is quite unlike the diversie ed portfolio of liquid assets discussed in e nance textbooks. The major asset in the portfolio is a house, a relatively illiquid asset with an uncertain capital value. The value of the house generally exceeds the net worth of the household, which e nances its homeownership through a mortgage contract to create a leveraged position in residential real estate. Other e nancial assets and liabilities are typically far less important than the house and its associated mortgage contract. The importance of housing in household wealth is illustrated in Figure I. This e gure plots the fraction of household assets in housing and in equities against the wealth percentile of the household. Poor households appear at the left of the e gure, and wealthy households at the right. Data come from the 1989 and 1998 Survey of Consumer Finances. The e gure shows that middle-class American families (from roughly the fortieth to the eightieth percentile of the wealth distribution) have more than half their assets in the form of housing. Even after the expansion of equity ownership during the 1990s, equities are of negligible importance for these households. 1
TL;DR: In this paper, the authors compared the extent to which aggregate capital demands of private firms, adverse-selection costs of issuing equity, and the level of investor optimism can explain these fluctuations.
TL;DR: In this article, the authors describe the broad trends in international financial integration for a sample of industrial countries, and seek to explain the cross-country and time-series variation in the size of international balance sheets.
Abstract: In recent decades, foreign assets and liabilities in advanced countries have grown rapidly relative to GDP, with the increase in gross cross-holdings far exceeding the size of net positions. Moreover, the portfolio equity and FDI categories have grown in importance relative to international debt stocks. In this paper, we describe the broad trends in international financial integration for a sample of industrial countries, and seek to explain the cross-country and time-series variation in the size of international balance sheets. We also examine the behavior of the rates of return on foreign assets and liabilities, relating them to 'market' returns.
TL;DR: In this article, an analysis of insider trading patterns shows that low valuation (value) firms are regarded as undervalued by their own managers relative to high valuation (growth) firms, and that managers in value firms actively purchase additional equity on the open market despite substantial prior exposure to firm risk through stock and option holdings, equity-based compensation and firm-specific human capital.
Abstract: This paper provides evidence that top managers have contrarian views on firm value. Managers' perceptions of fundamental value diverge systematically from market valuations, and perceived mispricing seems an important determinant of managers' decision making. An analysis of insider trading patterns shows that low valuation (value) firms are regarded as undervalued by their own managers relative to high valuation (growth) firms. This finding is robust to controlling for non-information motivated trading. Managers in value firms actively purchase additional equity on the open market despite substantial prior exposure to firm risk through stock and option holdings, equity-based compensation and firm-specific human capital. Further evidence links managers' private portfolio decisions directly to changes in corporate capital structures, suggesting that managers actively time the market both in their private trades and in firm-wide decisions. Keywords: Market timing, Insider trading
TL;DR: This paper found that executives who jump to chief executive officer (CEO) positions at new employers come from firms that exhibit above average stock price performance, and the existence of an "heir apparent" on the management team increases the likelihood that executives will leave for non-CEO positions elsewhere.
Abstract: We find that executives who jump to chief executive officer (CEO) positions at new employers come from firms that exhibit aboveaverage stock price performance. This relationship is more pronounced for more senior executives. No such relationship exists for jumps to non-CEO positions. Stock options and restricted stock do not appear to significantly affect the likelihood of jumping ship, but the existence of an "heir apparent" on the management team increases the likelihood that executives will leave for non-CEO positions elsewhere. Hiring grants used to attract managers are correlated with the equity position forfeited at the prior employer and with the prior employer's performance. Copyright 2003, Oxford University Press.
TL;DR: In this article, the authors analyze 736 dividend change announcements in Germany over the period 1992-1998 and find significantly larger negative wealth effects in the order of two percentage points for companies where the ownership and control structure makes the expropriation of minority shareholders more likely than for other firms.
TL;DR: For example, data from the Federal Reserve Board's Survey of Consumer Finances show a striking pattern of growth in family income and net worth between 1998 and 2001 as mentioned in this paper, with the median value of family net worth growing faster than that of income, but as with income, the growth rates of net worth were fastest for groups above the median.
Abstract: Data from the Federal Reserve Board's Survey of Consumer Finances show a striking pattern of growth in family income and net worth between 1998 and 2001. Inflation-adjusted incomes of families rose broadly, although growth was fastest among the group of families whose income was higher than the median. The median value of family net worth grew faster than that of income, but as with income, the growth rates of net worth were fastest for groups above the median. The years between 1998 and 2001 also saw a rise in the proportion of families that own corporate equities either directly or indirectly (such as through mutual funds or retirement accounts); by 2001 the proportion exceeded 50 percent. The growth in the value of equity holdings helped push up financial assets as a share of total family assets despite a decline in the overall stock market that began in the second half of 2000. ; The level of debt carried by families rose over the period, but the expansion in equities and the increased values of principal residences and other assets were sufficient to reduce debt as a proportion of family assets. The typical share of family income devoted to debt repayment also fell over the period. For some groups, however--particularly those with relatively low levels of income and wealth--a concurrent rise in the frequency of late debt payments indicated that their ability to service their debts had deteriorated.
TL;DR: In this paper, the authors evaluate the equity premium using novel data on the consumption of luxury goods and derive pricing equations and evaluate the risk of holding equity, showing that for the very rich, the risk aversion implied by consumption of the luxury goods is more than an order of magnitude less than that implied by national accounts data.
Abstract: This paper evaluates the equity premium using novel data on the consumption of luxury goods. Specifying utility as a nonhomothetic function of both luxury and basic consumption goods, we derive pricing equations and evaluate the risk of holding equity. Household survey and national accounts data mostly reflect basic consumption and therefore overstate the risk aversion necessary to match the observed equity premium. The risk aversion implied by the consumption of luxury goods is more than an order of magnitude less than that implied by national accounts data. For the very rich, the equity premium is much less of a puzzle.
TL;DR: In this article, the authors analyze the controversy surrounding takeovers and provide both theory and evidence to explain the central phenomena at issue, including the role of debt in bonding management's promises to pay out future cash flows, to reduce costs, and to reduce investments in low-return projects.
Abstract: The market for corporate control is fundamentally changing the corporate landscape. Transactions in this market in 1985 were at a record level of $180 billion. These transactions involve takeovers, mergers, and leveraged buyouts. Closely associated are corporate restructurings involving divestitures, spinoffs, and large stock repurchases for cash and debt. The changes associated with these control transactions are causing considerable controversy. Some argue that takeovers are damaging to the morale and productivity of organizations and are therefore damaging to the economy. Others argue that takeovers represent productive entrepreneurial activity that improves the control and management of assets and helps move assets to more productive uses. The controversy has been accompanied by strong pressure on regulators and legislatures to enact restrictions that would curb activity in the market for corporate control. In the spring of 1985 there were over 20 bills under consideration in Congress that proposed new restrictions on takeovers. Within the past several years the legislatures of New York, New Jersey, Maryland, Pennsylvania, Connecticut, Illinois, Kentucky, and Michigan has passed antitakeover laws. The Federal Reserve Board entered the fray early in 1986 when it issued its controversial new interpretation of margin rules that restricts the use of debt in society. This paper analyzes the controversy surrounding takeovers and provides both theory and evidence to explain the central phenomena at issue. The paper is organized as follows. Section 2 contains basic background analysis of the forces operating in the market for corporate control -- analysis which provides an understanding of the conflicts and issues surrounding takeovers and the effects of activities in this market. Section 3 discusses the conflict between managers and shareholders over the payout of free cash flow and how takeovers represent both a symptom and a resolution of the conflict. Sections 4, 5, and 6 discuss the relatively new phenomena of, respectively, junk-bond financing, the use of golden parachutes, and the practice of greenmail. Section 7 analyzes the problems the Delaware court is having in dealing with the conflicts that arise over control issues and its confused application of the business judgment rule to these cases. The following topics are discussed: - The reasons for takeovers and mergers in the petroleum industry and why they increase efficiency and thereby promote the national interest. - The role of debt in bonding management's promises to pay out future cash flows, to reduce costs, and to reduce investments in low-return projects. - The role of high-yield debt (junk bonds) in helping to eliminate mere size as a takeover deterrent. - The effects of takeovers on the equity markets and claims that managers are pressured to behave myopically. - The effects of antitakeover measures such as poison pills. - The misunderstandings of the important role that golden parachutes play in reducing the conflicts of interests associated with takeovers and the valuable function they serve in alleviating some of the costs and uncertainty facing managers. - The damaging effects of the Delaware court decision in Unocal vs. Mesa that allowed Unocal to make a self-tender offer that excluded its largest shareholder (reverse greenmail). - The problems the courts are facing in applying the model of the corporation subsumed under the traditional business judgment rule to the conflicts of interest involved in corporate controversies.
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TL;DR: In this paper, the authors review the international finance literature to assess the extent to which international factors affect financial asset demands and prices, and find that the theoretical asset-pricing literature relying on mean-variance optimizing investors fails in explaining the portfolio holdings of investors, equity flows, and the time-varying properties of correlations across countries.
Abstract: We review the international finance literature to assess the extent to which international factors affect financial asset demands and prices. International asset-pricing models with mean-variance investors predict that an asset's risk premium depends on its covariance with the world market portfolio and, possibly, with exchange rate changes. The existing empirical evidence shows that a country's risk premium depends on its covariance with the world market portfolio and that there is some evidence that exchange rate risk affects expected returns. However, the theoretical asset-pricing literature relying on mean-variance optimizing investors fails in explaining the portfolio holdings of investors, equity flows, and the time-varying properties of correlations across countries. The home bias has the effect of increasing local influences on asset prices, while equity flows and cross-country correlations increase global influences on asset prices.