This paper derives a new and intuitive estimation procedure for the term structure under potential tax arbitrage. No a priori assumptions regarding the equality of the prices and present values of bonds are made. The data are employed to determine whether this equality holds, and an appropriate estimator is thereby endogenously derived. The suggested estimator is based on the optimizing behavior of an investor in a market with frictions, and emerges directly from the solution of the dual of the no-arbitrage optimization problem. In addition, the proposed estimator benefits from being both theoretically sound and straightforward to apply.

This study examines the hypothesis that in the presence of market frictions, relative put and call prices contain information concerning future returns of the underlying asset. A measure of relative prices is derived from the put-call parity relationship for index options and applied to a three-year sample of OEX option transactions. The results show that the measure of relative index option prices leads the stock market by at least 15 minutes.

This paper examines the pricing of S&P 100 calls using 14 months of transactions data. We find that market prices of S&P 100 calls differ systematically from Black-Scholes values. The biases in Black-Scholes model prices are both statistically and economically significant and correspond to biases that arise if market prices incorporate a stochastically changing volatility of the index.

We develop a class of discrete, path-independent models to compute prices of American options within the Black-Scholes (1973) framework, including models in which state variables have time-varying volatility functions and models with multiple state variables. Time-varying volatility functions are illustrated with applications to term structure models developed by Vasicek (1977) and Heath, Jarrow, and Morton (1988), (1990). Distinct from previous work in the literature, the multivariate models suggested in this paper are consistent with arbitrarily large, though constant, covariance functions. Finally, we compare and contrast the numerical accuracy of a large number of models with simulation results.

This study examines initial public offering contract choice decisions. In best-efforts offerings, minimum sales constraints allow issuers to precommit to withdraw the offering if a fixed minimum number of shares is not sold. In firm-commitment offerings, the over-allotment option allows the underwriter to increase sales when demand is strong. Two theories of contract choice–Benveniste and Spindt (1989) and Ritter's (1987) extension of Rock (1986)–offer predictions about the role of these contract features. We find that the 1977–1982 evidence is consistent with Benveniste and Spindt (1989). The evidence is less supportive of the Ritter (1987) hypothesis that minimum sales constraints serve to reduce the winner's curse of the riskier issuers.

Corporate risk hedging with forward contracts increases value by reducing incentives to underinvest. This occurs because the hedge decreases the sensitivity of senior claim value to incremental investment, allowing equity holders to capture a larger portion of the incremental benefit from new investment. Hedging also allows the firm to credibly commit to meet obligations in states where it otherwise could not, which improves contract terms the firm can negotiate with customers, creditors, and managers. These benefits cannot be duplicated by individual hedging, and each result holds independent of agents' risk preferences.

The role of fiduciaries with conflicting interests has received considerable attention recently. The purpose of this paper is to analyze the role of a fiduciary casting votes under conflicting interests in proxy contests that seek to control the corporation and those waged solely for the purpose of deciding an issue. By deriving comparisons across types of contests, we provide implications concerning differences in success probabilities and resolution effects for the two types of contests. The empirical verification (refutation) of such effects would provide insight regarding the (ir)relevance of fiduciary conflict-of-interests in proxy contests.

This paper tests whether there is a difference in the stock price reactions to industrial straight debt offerings of different risk. Using bond ratings at the time of announcement as a measure of risk, we find that there is no monotonic relation between stock price impact and rating and no statistically significant difference across risk classes, even though the sample includes low-rated debt issues from recent years. This confirms earlier evidence on straight debt issues, but differs from the evidence on convertible securities. The paper also finds that the results for straight debt are not affected by shelf registrations or by the issuing firms' involvement in merger and acquisition-related activity.

This paper assesses the ability of financial statement variables to forecast sensitivities to systematic risk factors generated by a multifactor, macroeconomic forces model. Forecasts of beta derived from financial variables are shown to outperform naive, random walk forecasts, although Bayesian-adjusted betas perform as well as the financial variables model.

This paper derives the optimal hedge of an uncertain (unknown quantity) future foreign currency cash flow. This more general optimal hedge includes the traditional hedge for a certain (known quantity) future foreign currency cash flow as a special case. The optimal hedge is found to be unbounded and determined by firm-specific conditions, including the variance of the expected cash flow, and the correlation of that future cash flow with actual exchange rate movements. Simulated optimal hedge values are found for U.S.-based multinational firms possessing S/Dm cash flows, using exchange rate data for the 1981–1987 period. Special cases in which the optimal hedge ratio equals zero and one also are identified, and we show that cash flow uncertainty can strongly affect the effectiveness of hedging.