This paper studies the binomial approximation to the continuous trading term structure model of Heath, Jarrow, and Morton (1987). The discrete time approximation makes the original methodology accessible to a wider audience, and provides a computational procedure necessary for calculating the contingent claim values derived in the continuous time paper. This paper also extends and generalizes Ho and Lee's (1986) model to include multiple random shocks to the forward rate process and to include an analysis of continuous time limits. The generalization provides insights into the limitations of the existing empirical implementation of Ho and Lee's model.

Greenmail payments are widely viewed as actions designed by managers to perpetuate their tenure in office. This view, which suggests that greenmail prohibitions would enhance shareholder wealth, receives mixed empirical support in this paper. The average market reaction to charter amendments prohibiting greenmail payments is weakly negative, suggesting there is a value to maintaining managerial flexibility. Nonlinear maximum likelihood estimation, however, reveals a strong positive correlation between the market reaction and the firm's abnormal stock price runup over the three months just prior to the proxy mailing date. For the subsample of firms with a relatively large prior runup, the precommitment not to pay greenmail is value enhancing. If the prior runup reflects takeover rumors, then this evidence is consistent with the proposition that greenmail payments amidst takeover speculations are value decreasing.

In rational, efficiently functioning markets, the returns on stock index and stock index futures contracts should be perfectly, contemporaneously correlated. This study investigates the time series properties of 5-minute, intraday returns of stock index and stock index futures contracts, and finds that S&P 500 and MM index futures returns tend to lead stock market returns by about five minutes, on average, but occasionally as long as 10 minutes or more, even after stock index returns have been purged of infrequent trading effects; however, the effect is not completely unidirectional, with lagged stock index returns having a mild positive predictive impact on futures returns.

This paper demonstrates that Black-Scholes option pricing model hedge positions that are risk free when rebalanced continuously will frequently exhibit substantial systematic risk when rebalanced at finite intervals. This systematic risk may have biased important empirical tests of the option pricing model. Moreover, this systematic risk means that the Black-Scholes option pricing model is inherently inconsistent with the discrete time version of the Capital Asset Pricing Model (CAPM).

In a credit market characterized by a priori asymmetric information, collateral not only can identify credit applicants but also can result in moral hazard involving the borrower's use of pledged assets. The borrower's other alternatives are to apply for unsecured bank credit and be priced as “average,” or to acquire financing by selling an asset and subsequently renting it for continued use. The optimal secured loan contract for higher quality firms is shown to involve overcollateralization. There is underinvestment relative to first best in maintenance of the pledged assets but overinvestment relative to the level that would be chosen without bank monitoring. Self-financing and unsecured credit are chosen by the intermediate and lowest quality groups, respectively.

We examine the behavior of common stock prices after a large change in price occurs during a single trading day and find evidence that the stock market appears to have overreacted, especially in the case of price declines; however, the magnitude of the overreaction is small compared to the bid-ask spreads observed for the individual stocks in the sample. We interpret this finding as being consistent with a market that is efficient after transactions costs are considered.

Low second-class postage made it easy for national magazines and regional newspapers to reach their readers in the late nineteenth century. But the Post Office and some members of Congress questioned the wisdom of a policy that enabled advertising-filled publications to circulate at subsidized rates. This article traces the efforts to reform the postal policy governing periodicals, which became enmeshed in Progressive Era debates about the value of mass culture and government's role in promoting it.