A multiperiod model of optimal capital structure is developed under the assumption that earnings follow an autoregressive process. Firm value and leverage vary through time and, at each date, the firm achieves an optimal debt level that is a function of the full state contingent debt policy. The reversion parameter of the earnings series is shown to be positively related to various measures of variability and negatively related to leverage. If earnings processes are not homogeneous across firms, then standard earnings risk measures in capital structure studies do not adequately represent crosssectional differences in variability in firm value.

This paper corrects the bond option formula presented by R. Rabinovitch ((1989), Equation (10)). With just one state variable driving the economy, the formula should be the same as the ones presented by Jamshidian (1989) and Chaplin (1987).

We develop a closed-form general equilibrium model of stock index futures prices in a continuous-time economy with stochastic interest rates and market volatility. We show that futures prices implied by the model have very different properties from those of the cost of carry model. Using NYSE stock index futures data, we examine the restrictions imposed on futures prices by both the equilibrium and cost of carry models. Consistent with the equilibrium model, we find that stock index futures prices are related to market volatility and that their interest-rate sensitivity is a nonlinear function of contract maturity.

This paper examines the pricing of exchange rate risk in the U.S. stock market, using two factor and multi-factor arbitrage pricing models. Evidence is presented that the relation between stock returns and the value of the dollar differs systematically across industries. The empirical results, however, do not suggest that exchange risk is priced in the stock market. The unconditional risk premium attached to foreign currency exposure appears to be small and never significant. As a result, active hedging policies by financial managers cannot affect the cost of capital, and other reasons must explain why firms decide to hedge.

This study examines the valuation consequences of control-related outcomes that follow toehold acquisitions. We find evidence that toehold acquisitions facilitate value enhancing control transfers. The types of control transfers not only include takeovers, but also internal mechanisms, such as proxy fights and management turnovers. We find that toehold targets experiencing such control transfers exhibit an abnormal increase in share value, while those not experiencing such control transfers exhibit an abnormal decrease in share value. The results suggest that the positive valuation effect associated with toehold acquisitions reflects the expected benefits of subsequent control transfers.

The appropriate set of parameters determining the volatility of the value of a portfolio of fixed cash flows of arbitrary maturities is the covariance matrix of unexpected interest rate changes over the term. Equilibrium models of the term structure limit the rank of the covariance matrix and implicitly impose restrictions on covariance estimation. The “full information” approach to risk measurement imposes only time stationarity assumptions on covariance matrix estimators and can result in sample matrices of full rank. Hilliard and Jordan (1989) develop a structured full rank covariance matrix that depends on only two parameters. This paper tests the Hilliard-Jordan model using likelihood ratios and criteria of forecast accuracy.

This paper presents a numerical method for valuing complex investments with multiple interacting options. The method is a log-transformed variation of binomial option pricing designed to overcome problems of consistency, stability, and efficiency encountered in the Cox, Ross, and Rubinstein (1979) and other numerical methods. This method handles well options with a series of exercise prices (compound options), nonproportional dividends, and interactions among a variety of real options. Comparisons with several existing numerical methods regarding accuracy, consistency, stability, and efficiency are given.

When futures contracts are settled with respect to underlying asset prices, received theory suggests that the differences between futures prices and implied forward prices (from the term structure) are strictly due to marking to market, ceteris paribus. Empirical evidence appears to indicate that such differences are small for contracts with short maturities. What happens when the futures contract settles to yields implied by future prices of underlying assets? The Eurodollar futures contract, which is the most actively traded futures contract in the United States, settles to yield as opposed to prices. This unique settlement feature is shown to imply that the implied forward prices from the LIBOR term structure should differ from the futures prices even in the absence of marking to market. Differences due to marking to market effect are small: they are shown to vary between 2 to 45 basis points (less than one-half percent of futures prices). On the other hand, differences between implied forward prices and futures prices are shown to be relatively large.

We examine the price behavior of the firm's common stock associated with cancelled straight debt offerings. Excluding utilities, we find negative excess returns associated with offering and cancellation announcements. Further, the stronger withdrawal reactions we find, when the funds were to be used for capital expenditures, may signal a decline in profitable investment opportunities. These results are consistent with Miller and Rock's (1985) hypothesis.

Organizational participants learn that “getting ahead” in organizational life comes from dramatizing a fantasy about the organization's perfection. The fantasy is the return to narcissism, in which the organization and its highest participants are seen as the center of a loving world. Since the return to narcissism is impossible, orienting the organization to the dramatization of this fantasy means that the organization loses touch with reality. The result is organizational decay—a condition of systemic ineffectiveness. Organizational decay is illustrated through the case of General Motors. Specific dimensions considered are: commitment to bad decisions; advancement of participants who detach themselves from reality and discouragement of reality-oriented participants who are committed to their work; creation of the organizational jungle; isolation of management; development of a hostile orientation to the environment; transposition of work and ritual; loss of creativity; dominance of the financial staff; development of cynicism or the loss of reality; and overcentralization. Organizational decay may be compared with the consequences of hubris.

It has been claimed that the diversified mercantile capitalist of eighteenth-century Britain was replaced by the specialist industrialist of the nineteenth. This study of Manchester cotton merchants who moved into fire insurance in the 1820s examines the neglected strategy of collective diversification. It argues that the merchants' decision to diversify cannot be explained by short-term financial or economic considerations arising out of the insurance or cotton markets and only partly by long-run issues such as profit maximization and constraints on growth. Collective diversification is best understood as part of a broader attempt to create a system of interlocking services by an urban oligarchy seeking both to improve the economic infrastructure of their region and to consolidate the economic and political power of their group.