The purpose of this paper is to examine various measures of the structure of banking markets and to relate these measures to selected indices of bank prices. To this point most studies in the field (and court rulings as well) have relied almost exclusively on concentration ratios and the number of banks as measures of market structure. However, these simple measures have important deficiencies which may lead to erroneous conclusions.

The classic article about liquidity premiums is Kessel [3]. Kessel regresses the liquidity premium, measured as the difference between the forward rate and the actual future spot rate, against the current spot rate and observes a positive relation between the level of the current spot rate and the size of the liquidity premium. Olsen alters Kessel's model in two respects. First, he introduces a proxy for risk or uncertainty about interest rates as an additional determinant of the liquidity premium. Second, instead of using the actual future spot rate as a measure of the expected future spot rate, he specifies the expected future spot rate as a linear combination of the current and past spot rates.

Professor Mendelson's interesting paper reaches one conclusion with which I have no quarrel. Under his “most likely” future scenario, he argues for the need for the individual investor in the stock market to enhance the external equity capital-raising abilities of corporations. However, on the way to that conclusion, he dispenses a number of inconsistencies and confusing points.

Regulatory reform relating to commercial banks and other deposit financial institutions has been frequently observed to be “crisis-bred.” The National Banking Act, along with fundamental but complementary legislation of 1863 and 1864, was in large measure stimulated by problems of the Civil War. The Federal Reserve Act was an outgrowth of the Panic of 1907 which vividly demonstrated the need for a central bank. The McFadden Act of 1927, the Glass-Steagall Act of 1932, the Reconstruction Finance Act of 1932, the Federal Home Loan Bank Act of 1932, the Home Owners' Loan Act of 1933, the Emergency Banking Act and the Banking Act of 1933, the Securities Exchange Act of 1934 and the Banking Act of 1935 all reflected reactions to crises of various dimensions.

The research report abstracted here addresses the question: do firms of low risk before financial leverage introduce relatively more financial leverage than firms of relatively high risk before leverage? Most of the received theory of corporation finance suggests an affirmative response. Our empirical work encourages us to be far more cautious.

This paper presents a descriptive theory of risk that may be applied to capital budgeting decisions. The proposed theory is actually much more general than a theory of financial risk and is consistent with reported laboratory experiments. The essential feature of this theory is the role that risk descriptively plays as a constraint in the decision-making process. Specifically, risk is modeled as a chance constraint such that projects are rejected if the probability of “failure” is larger than some prescribed level. This has the effect of making all investment decisions chance-constrained programming problems, although some classes of problems have trivial solution procedures. In this context, risk serves to “strike out” or eliminate alternatives from consideration.

The purpose of this paper is to survey monetary policy as it unfolded from the beginning of 1973 to the spring of 1974. This is, on the whole, a relatively uncomplicated period to discuss since there was, I would judge, rather less controversy about the aims and appropriateness of monetary policy over most of this period than is often the case. In brief, monetary policy focused primarily on producing a moderate degree of restraint, one that would relieve the excess demand pressures clearly evident during at least the first part of the period. The aim in doing so was to create a climate in which inflation could gradually be brought under control. This objective suffered serious competition only briefly, when, during the early stages of the oil boycott, the potential of that situation for creating economic weakness was still very unclear.

My remarks are divided into two sections. The first section briefly summarizes the major points of the two papers. I should acknowledge that I agree with almost all of the conclusions by Farrar and Mendelson regarding the reforms which have taken place and the beneficial effects of these reforms. The second section briefly discusses one adverse effect of the institutional market not remedied by the reforms. This adverse consequence is only briefly mentioned by Farrar, while it is discussed by Mendelson, but the full implications are not considered.

Structural reforms of a fundamental nature now under way in Wall Street have been proclaimed so often of late as to become commonplace. The fact that many of these changes are not welcomed by established and influential persons who make their living in or around Wall Street is not news. What may be news, however, is that neither of these facts is particularly new.

While a substantial body of evidence exists indicating that the distribution of price changes in speculative markets is not normally distributed, there is some question about which theoretical distribution best describes price changes. This paper derives and tests an alternative distribution based on the incorporation of vectors of information bits into prices. The resultant distribution uses two parameters, u and β, to measure the response of price lags to given information vectors and can be interpreted as measures of risk.

It has been suggested that information has the three following uses:

1. Information can be employed to earn trading profits.

2. Information can improve the operating decisions of a firm or group of firms and thereby increase the stock price.

3. Information can reduce the risk of a firm or group of firms and thereby increase the stock price.

In the linear market-index model of the return-generating process, return on security j is given by

where αj and βj are constants characteristic of company j, is return on a market index, and is the company-specific component of return such that and . The coefficient βj is given by . It is known as market responsiveness, volatility, systematic risk, and, more commonly, simply as “beta.” It has been widely accepted as a measure of nondiversifiable risk and incorporated in popular performance measures. Many stock information services now provide estimates of beta.

Capital adequacy is an important and controversial issue in banking. Bank regulators consider the evaluation of capital adequacy one of their major responsibilities and place special attention on the role of capital in preventing bank failures.

The purpose of this paper is to test the hypothesis that three financial performance variables, namely, growth, profitability, and risk, are determinants of corporate debt ratios in the manufacturing sector in industrialized countries. In particular, a linear model is hypothesized and Ordinary Least Squares is used to estimate the coefficients for the relationship. The sample used contains 816 firms in four selected industries in five industrialized countries during the period 1966–72.

In this paper a model is presented to explain the structure of systematic risk. The starting point is the expression for the total dollar return to investors who hold the securities from period t - 1 to t assuming no new securities have been issued in the interim:

where Xt is earnings before interest, preferred dividends, and taxes; T is the corporate tax rate; Dd,t is the interest paid on debt in year t; Dp,t is the dividend paid to preferred shareholders in year t; Dc,t is the dividend (total) paid to equity shares-holders in year t; ΔPt · Nt-1 is the aggregate capital gains for the Nt-1 shares of common stock outstanding as of t-1 and ΔGt is the change in the capitalized value of future growth opportunities. The hypothesis is that the risk associated with the left-hand side variables, the market determined systematic risk, is derived from the corporate variables on the right-hand side of the equation. The market determined level of systematic risk is a linear function of the sensitivity of percent changes in revenues of the firm to percent changes in GNF (asset betas), financial leverage, and changes in growth potential.

The current operating procedure of the Federal Reserve, as described by Richard Davis and interpreted by me, entails picking long-term growth rates (meaning six months and longer) for monetary aggregates, while simultaneously specifying short-run conditions for the federal funds rates and monetary aggregates which are felt to be consistent with long-term goals. But, he also states, because of “shorter term developments,” that the specified shorter term growth rates for monetary aggregates might not be equivalent to the desired long-term growth rate. This operating procedure disturbs me for two reasons. First, there is evidence demonstrating that different growth rates in the money stock which last as long as six months result in different levels of economic activity; thus six months should be the maximum control period not the minimum. Secondly, I don't see what meaning a long-term growth path for monetary aggregates can have if the Federal Reserve lets “shorter term” development define the short-term growth paths for money in a way which is inconsistent with the longer term goals.

This paper examines the problem of including intertemporally dependent cash flows in capital budgeting models under uncertainty, including review of previous efforts to resolve this problem. The difficulty involved in estimating autocorrelation coefficients and the magnitude of the error introduced by assuming independence are discussed.

This study examines the historic security market performance of REIT shares during the six-year period 1968–1973. Performance measures suggested by Sharpe, Treynor, and Jensen were calculated for a sample of 30 larger and older REITs on both a pre- and post-tax basis. Principal conclusions are: 1) The average mortgage trust sampled had “outperformed” the S&P 500 while equity and hybrid trusts have fared poorer than the S&P 500. 2) The differences in performance levels are due principally to return levels and not risk differentials. 3) A substantial portion of the risk inherent in an REIT is diversifiable risk. This together with other evidence suggests that most REITs have not diversified risk exposure to the extent they indicated they would and were able to. 4) Performance rankings using before- and after-tax returns were identical, suggesting that certain espoused tax advantages unique to REITs have been virtually meaningless on a practical level.