Common stock portfolios of large, heavily traded firms exhibit daily first-order serial correlation in excess of what would be expected, given the individual security coefficients. Further, this correlation rises as the number of securities in the portfolio increases. The direct implication of this finding is that nonsynchronous trading is not the only cause of correlation in daily market indices. Related implications are also discussed.

We propose a simple model of equilibrium asset pricing in which there are differences in the amounts of information available for developing inferences about the returns parameters of alternative securities. In contrast with earlier work, we show that parameter uncertainty, or estimation risk, can have an effect upon market equilibrium. Under reasonable conditions, securities for which there is relatively little information are shown to have relatively higher systematic risk when that risk is properly measured, ceteris paribus. The initially very limited model is shown to be robust with respect to relaxation of a number of its principal assumptions. We provide theoretical support for the empirical examination of at least three proxies for relative information: period of listing, number of security returns observations available, and divergence of analyst opinion.

We develop a positive theory of the hedging behavior of value-maximizing corporations. We treat hedging by corporations simply as one part of the firm's financing decisions. We examine (1) taxes, (2) contracting costs, and (3) the impact of hedging policy on the firm's investment decisions as explanations of the observed wide diversity of hedging practices among large, widely-held corporations. Our theory provides answers to the questions: (1) why some firms hedge and others do not; (2) why firms hedge some risks but not others; and (3) why some firms hedge their accounting risk exposure while others hedge their economic value.

This paper addresses both how best to incorporate forecasts of future excess market returns into a market-timing strategy and what additional return to expect as a consequence. In contrast to the work of Jensen [8] and Grant ([4], [5], and [6]), the results specifically consider and measure the attractiveness to a risk-averse investor of the positively skewed distribution of portfolio returns expected from a market-timed portfolio. The usual mean and variance characterization of a risky portfolio is not sufficient in the case of a markettimed portfolio, and a simple utility model is employed to measure the incremental value of a market-timing strategy. The results are given as a function of the relative volatility of the market, the quality of available forecasts, and the risk attitude of the investor.

This research develops and tests a model for the prediction of tender offer outcomes. Variables that increase the supply of “obtainable shares” (such as increased bid premiums or the payment of solicitation fees) are shown to increase the probability of success. Increased ownership of target firm shares by the bidder also increases the probability of success. Variables that impede the tendering of shares (such as target management opposition or a competing bid) decrease the probability of success. Tests of the model utilizing both linear and logistic analysis support the theoretical constructs and help resolve the paradoxical findings of previous research.

The parameters of the return process of a firm are determined by two elements—the natural event structure, i.e., the process by which nature affects the value of the firm, and the information structure, i.e., the process by which information about these events is collected and disseminated to investors. Simple measures of three dimensions of the information structure—the frequency and accuracy of, and the bias in information releases, are derived from the moments of the return distribution.

Equilibrium in the market for real assets requires that the price of those assets be bid up to reflect the tax shields they can offer to levered firms. Thus, there must be an equality between the market values of real assets and the values of optimally levered firms. The standard measure of the advantage to leverage compares the values of levered and unlevered assets, and can be misleading and difficult to interpret. We show that a meaningful measure of the advantage to debt is the extra rate of return, net of a market premium for bankruptcy risk, earned by a levered firm relative to an otherwise-identical unlevered firm. We construct an option valuation model to calculate such a measure and present extensive simulation results. We use this model to compute optimal debt maturities, show how this approach can be used for capital budgeting, and discuss its implications for the comparison of bankruptcy costs versus tax shields.

Sensing the opportunity to reap great profits by selling fruit to hungry urban consumers back East, nineteenth-century entrepreneurs flocked to California to establish commercial orchards and citrus groves. Invasions of fruit pests, however, threatened years of investment and patient cultivation, and made the public wary of the uneven quality of California fruit. In this article, Mr. Seftel describes how fruit growers organized and called on government to check the menace. Between 1880 and 1920, orchard owners created an elaborate regulatory network, linking local, state, federal, and academic institutions with their enterprise. These fruit-growing capitalists came to believe that only compulsory compliance with government-enforced pest control regulations could ensure their success. During these four decades, the growing horticultural bureaucracy helped transform California fruit growing from an entrepreneurial venture of uncertain promise into the state's second largest industry.