This paper analyzes the relation between the capital structure of a firm and the tax benefits realized from the exercise of stock options. Theory suggests that firms with tax benefits from the exercise of stock options should carry less debt since tax benefits are a non-debt tax shield. We find that both long- and short-term debt ratios are negatively related to the size of tax benefits from option exercise. Moreover, one-year changes in long-term leverage are negatively related to changes in the number of options exercised. Such a relation does not exist for changes in short-term leverage. Finally, firms with option-related tax benefits tend to issue equity, with the net amount of equity issued an increasing function of these tax benefits.

Given the exogenous price process of some assets, we constrain the price process of other assets that are characterized by their final payoffs. We deal with an incomplete market framework in a discrete-time model and assume the existence of the equilibrium. In this setup, we derive restrictions on the state-price deflators. These restrictions do not depend on a particular choice of utility function. We investigate numerically a stochastic volatility model as an example. Our approach leads to an interval of admissible prices that is more robust than the arbitrage pricing interval.

A growing literature documents that various strategies of rotating across equity styles generate significant returns. However, the conventional risk adjustment regression is problematic in evaluating the gains from style rotation. I propose a weight-based multifactor risk adjustment approach as a solution. When interpreted as a performance attribution procedure, this approach extends Sharpe's (1992) classic method by emphasizing factor loading rotation. I use a logit-based timing strategy to show that the conventional procedure produces misleading results and the new method leads to the opposite conclusion.

This paper studies how the precision of noisy public information that investors receive about the expected aggregate dividend growth rate affects stock market returns. I show that less precise information can increase the risk premium and stock return volatility. The numerical results from my calibrated model also show that noisy information can significantly increase the risk premium and stock return volatility. My finding implies that the presence of noisy information may help explain the large average risk premium and return volatility in the U.S. financial market. In addition, my finding suggests it is optimal for firms to disclose to investors more precise information to reduce the cost of equity capital.

We construct a unique data set that includes all reported institutional block trades on the London Stock Exchange and analyze the market reaction to buy and sell trades. We find that the type of investors behind the trade and the combination of the trade's size and the trader's resulting level of ownership are the major determinants of the information effects and the asymmetry between price impacts of buy and sell trades. In particular, large trades undertaken by fund managers, the most active investors in our sample, have strong information content, while, for the remaining trades, we report limited support for the information and the price impact asymmetry hypotheses. These results hold even after accounting for trade complexity and volatility effects in the regressions.

We examine whether time variation in the comovements of daily stock and Treasury bond returns can be linked to measures of stock market uncertainty, specifically the implied volatility from equity index options and detrended stock turnover. From a forward-looking perspective, we find a negative relation between the uncertainty measures and the future correlation of stock and bond returns. Contemporaneously, we find that bond returns tend to be high (low) relative to stock returns during days when implied volatility increases (decreases) substantially and during days when stock turnover is unexpectedly high (low). Our findings suggest that stock market uncertainty has important cross-market pricing in-fluences and that stock-bond diversification benefits increase with stock market uncertainty.

This paper examines the potential benefits of security fungibility by conducting the first comprehensive analysis of global bonds. Unlike other debt securities, global bonds' fungibility allows them to be placed simultaneously in bond markets around the world; they trade, clear, and settle efficiently within as well as across markets. We test the impact of issuing these securities on firms' cost of capital, issuing costs, liquidity, and shareholder wealth. Using a sample of 230 global bond issues by 94 companies from the U.S. and abroad over the period 1996–2003, we find that firms lower their cost of (debt) capital by issuing these fungible securities. We also document that the stock price reaction to the announcement of global bond issuance is positive and significant, while comparable domestic and eurobond issues over the same time period are associated with insignificant changes in shareholder wealth.

This paper investigates to what extent globalization and regional integration lead to increasing equity market interdependence. I focus on Western Europe, as this region has gone through a unique period of economic, financial, and monetary integration. More specifically, I quantify the magnitude and time-varying nature of volatility spillovers from the aggregate European (EU) and U.S. market to 13 local European equity markets. To account for time-varying integration, I use a regime-switching model to allow the shock sensitivities to change over time. I find regime switches to be both statistically and economically important. Both the EU and U.S. shock spillover intensity increased substantially over the 1980s and 1990s, though the rise is more pronounced for EU spillovers. Shock spillover intensities increased most strongly in the second half of the 1980s and the first half of the 1990s. I show that increased trade integration, equity market development, and low inflation contribute to the increase in EU shock spillover intensity. I also find evidence for contagion from the U.S. market to a number of local European equity markets during periods of high world market volatility.

To learn about investors' information processing, we examine the issuances of trust preferred stock, a leverage-neutral hybrid security. Specific benefits of trust preferred stock issuance have become focal points for issuers. These focal benefits include tax and financial distress avoidance, for example. We find these benefits are associated with short-run stock price misreactions. For those issuers that do not have a focal issuance benefit, mean short-run abnormal returns tend to be negative but long-run abnormal returns tend to be positive. Unanticipated changes in long-run profit opportunities, not short-run operating profits, appear to be the key to the misreaction.

Stock split ex-dates are associated with both an increased intensity of small investor buying and a positive abnormal return. The broker promotion hypothesis suggests that the increase in relative spread after a split induces brokers to promote splitting stocks to small investors. The trading inconvenience hypothesis ascribes the ex-split effects to inconveniences such as investors' aversion to dealing with due bills, which is unrelated to relative spreads. The reduction in the bid-ask spread due to decimalization allows us to disentangle these two hypotheses. During the 1/8th pricing period, we show that after the ex-date, the relative spread increases significantly. The average buy order size decreases and the frequency of small transactions increases after the split. After decimalization, these changes are smaller in magnitude. We observe significant positive abnormal returns around the ex-date during the 1/8th pricing period, but not in the decimal pricing period. These results support the broker promotion hypothesis.

This paper uses a volatility decomposition method to study the time-series behavior of equity volatility at the world, country, and local industry levels. Between 1974 and 2001, there is no noticeable long-term trend in any of the volatility measures. Then in the 1990s there is a sharp increase in local industry volatility compared to market and country volatility. Thus, correlations among local industries have declined. More assets are needed to achieve a given level of diversification, and there is more of a penalty for not being well diversified by industry. Local industry volatility leads the other volatility measures.

Using a Monte Carlo simulation, this study addresses the question of how traditional risk measures and immunization strategies perform when the term structure evolves in a Heath-Jarrow-Morton (1992) manner. The results suggest that, for immunization purposes, immunization strategies and portfolio formation strategies are more important than interest rate risk measures. The performance of immunization strategies depends more on the transaction costs and the holding period than on the risk measures. Moreover, the immunization performance of bullet and barbell portfolios is not very sensitive to interest rate risk measures.

Using disaggregated panel data, we examine how firms change trade credit in response to a monetary tightening. We find that both accounts payable and accounts receivable increase with tighter monetary policy, implying that trade credit helps firms absorb the effect of a credit contraction. Further, both S&P 500 firms and a comparison group of smaller firms increase net trade credit (accounts receivable minus payable), making up for the reduced liquidity associated with tighter policy. However, we find no evidence that large firms play this role more actively than smaller firms.

We develop a straightforward procedure to price derivatives by a bivariate tree when the underlying process is a jump-diffusion. Probabilities and jump sizes are derived are derived by matching higher order moments or cumulants. We give comparisons with other published results along with convergence proofs and estimates of the order of convergence. The bivariate tree approach is particularly useful for pricing long-term American options and long-term real options because of its robustness and flexibility. We illustrate the pedagogy in an application involving a long-term investment project.

Journal rankings are frequently used as a measure of both journal and author research quality. Nonetheless, debates frequently arise because journal rankings do not take into account the underlying diversity of the finance research community. This study examines how factors such as a researcher's geographic origin, research interests, seniority, and journal affiliation influence journal quality perceptions and readership patterns. Based on a worldwide sample of 862 finance academics, we find remarkable consistency in the rankings of top journals. For the remaining journals, perception of journal quality differs depending on the researcher's geographic origin, research interests, seniority, and journal affiliation.

This study examines the relations between earnings management by firms offering seasoned equity issues and the pricing of their offers. We hypothesize that seasoned equity offering (SEO) firms that employ aggressive accounting decisions also more aggressively push up their offer prices, thereby leading to a decrease in the degree of underpricing. Consistent with our prediction (the issuer's greed hypothesis), evidence indicates that SEO firms that make opportunistic accounting decisions issue new shares at inflated prices. Our findings remain robust after controlling for other determinants of SEO underpricing and the possible endogeneity of pricing and earnings management.