... Financial economics: With applications to investments, insurance, and pensions. Post a Commen... more ... Financial economics: With applications to investments, insurance, and pensions. Post a Comment. CONTRIBUTORS: Author: Panjer, Harry H. Author: Boyle, Phelim P. PUBLISHER: Society of Actuaries Foundation (Schaumburg, Ill.). SERIES TITLE: YEAR: 1997. ...
This paper presents a simple discrete-time model for valuing options. The fundamental economic pr... more This paper presents a simple discrete-time model for valuing options. The fundamental economic principles of option pricing by arbitrage methods are particularly clear in this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated Black-Scholes model, which has previously been derived only by much more difficult methods. The basic model readily lends itself to generalization in many ways. Moreover, by its very construction, it gives rise to a simple and efficient numerical procedure for valuing options for which premature exercise may be optimal.
This paper briefly describes recent papers on the economics of rational herding in financial mark... more This paper briefly describes recent papers on the economics of rational herding in financial markets. Some models can predict perfect herding, in which rational agents all act alike without any countervailing force. Such herding typically arises either from direct payoff externalities (negative externalities in bank runs; positive externalities in the generation of trading liquidity or in information acquisition), principal-agent problems (based on managerial desire to protect or signal reputation), or informational learning (cascades). The paper also provides a few pointers to related literature and suggests issues to be addressed in future research.
... Financial deepening in economic development. Post a Comment. CONTRIBUTORS: Author: Shaw, Edwa... more ... Financial deepening in economic development. Post a Comment. CONTRIBUTORS: Author: Shaw, Edward S. PUBLISHER: Oxford University Press (New York). SERIES TITLE: YEAR: 1973. PUB TYPE: Book. VOLUME/EDITION: PAGES (INTRO/BODY): xii, 260 p. ...
Many corporate assets, particularly growth opportunities, can be viewed as call options. The valu... more Many corporate assets, particularly growth opportunities, can be viewed as call options. The value of such 'real options' depends on discretionary future investment by the firm. Issuing risky debt reduces the present market value of a firm holding real options by inducing a suboptimal investment strategy or by forcing the thm and its creditors to bear the costs of avoiding the suboptimal strategy. The paper predicts that corporate borrowing is inversely related to the proportion of market value accounted for by real options. It also rationalizes other aspects of corporate borrowing behavior, for example the practice of matching maturities of assets and debt liabilities.
This paper identifies five common risk factors in the returns on stocks and bonds. There are thre... more This paper identifies five common risk factors in the returns on stocks and bonds. There are three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity. There are two bond-market factors, related to maturity and default risks. Stock returns have shared variation due to the stock-market factors, and they are linked to bond returns through shared variation in the bond-market factors. Except for low-grade corporates, the bond-market factors capture the common variation in bond returns. Most important, the five factors seem to explain average returns on stocks and bonds.
Corporate Investment EMPIRICAL models of business investment rely generally on the assumption of ... more Corporate Investment EMPIRICAL models of business investment rely generally on the assumption of a "representative firm" that responds to prices set in centralized securities markets. Indeed, if all firms have equal access to capital markets, firms' responses to changes in the cost of capital or tax-based investment incentives differ only because of differences in investment demand. A firm's financial structure is irrelevant to investment because external funds provide a perfect substitute for internal capital. In general, with perfect capital markets, a firm's investment decisions are independent of its financial condition. An alternative research agenda, however, has been based on the view that internal and external capital are not perfect substitutes. According to this view, investment may depend on financial factors, such as the availability of internal finance, access to new debt or equity finance, or the functioning of particular credit markets. For example, a firm's internal cash flow may affect investment spending because of a "financ-We are grateful to members of the Brookings Panel for helpful comments and suggestions and to Charles Himmelberg and Jaewoon Koo for excellent research assistance. Financial support from the Federal Reserve Bank of Chicago is acknowledged. Hubbard acknowledges support from a John M. Economic Review, vol. 45 (September 1955), pp. 515-38. for real investment under certain conditions.3 Their key insight was that a firm's financial structure will not affect its market value in perfect capital markets. Thus, if the Modigliani-Miller assumptions are satisfied, real firm decisions, motivated by the maximization of shareholders' claimns, are independent of financial factors such as internal liquidity, debt leverage, or dividend payments.
... The theory of public finance: A study in public economy. Post a Comment. CONTRIBUTORS: Author... more ... The theory of public finance: A study in public economy. Post a Comment. CONTRIBUTORS: Author: Musgrave, Richard Abel (b. 1910, d. ----. PUBLISHER: McGraw-Hill (New York). SERIES TITLE: YEAR: 1959. PUB TYPE: Book. VOLUME/EDITION: PAGES (INTRO/BODY): 628 p ...
This paper considers a firm that must issue common stock to raise cash to undertake a valuable in... more This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions. The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities. The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.
Corporate managers are the agents of shareholders, a relationship fraught with conflicting intere... more Corporate managers are the agents of shareholders, a relationship fraught with conflicting interests. Agency theory, the analysis of such conflicts, is now a major part of the economics literature. The payout of cash to shareholders creates major conflicts that have received ...
... Financial economics: With applications to investments, insurance, and pensions. Post a Commen... more ... Financial economics: With applications to investments, insurance, and pensions. Post a Comment. CONTRIBUTORS: Author: Panjer, Harry H. Author: Boyle, Phelim P. PUBLISHER: Society of Actuaries Foundation (Schaumburg, Ill.). SERIES TITLE: YEAR: 1997. ...
This paper presents a simple discrete-time model for valuing options. The fundamental economic pr... more This paper presents a simple discrete-time model for valuing options. The fundamental economic principles of option pricing by arbitrage methods are particularly clear in this setting. Its development requires only elementary mathematics, yet it contains as a special limiting case the celebrated Black-Scholes model, which has previously been derived only by much more difficult methods. The basic model readily lends itself to generalization in many ways. Moreover, by its very construction, it gives rise to a simple and efficient numerical procedure for valuing options for which premature exercise may be optimal.
This paper briefly describes recent papers on the economics of rational herding in financial mark... more This paper briefly describes recent papers on the economics of rational herding in financial markets. Some models can predict perfect herding, in which rational agents all act alike without any countervailing force. Such herding typically arises either from direct payoff externalities (negative externalities in bank runs; positive externalities in the generation of trading liquidity or in information acquisition), principal-agent problems (based on managerial desire to protect or signal reputation), or informational learning (cascades). The paper also provides a few pointers to related literature and suggests issues to be addressed in future research.
... Financial deepening in economic development. Post a Comment. CONTRIBUTORS: Author: Shaw, Edwa... more ... Financial deepening in economic development. Post a Comment. CONTRIBUTORS: Author: Shaw, Edward S. PUBLISHER: Oxford University Press (New York). SERIES TITLE: YEAR: 1973. PUB TYPE: Book. VOLUME/EDITION: PAGES (INTRO/BODY): xii, 260 p. ...
Many corporate assets, particularly growth opportunities, can be viewed as call options. The valu... more Many corporate assets, particularly growth opportunities, can be viewed as call options. The value of such 'real options' depends on discretionary future investment by the firm. Issuing risky debt reduces the present market value of a firm holding real options by inducing a suboptimal investment strategy or by forcing the thm and its creditors to bear the costs of avoiding the suboptimal strategy. The paper predicts that corporate borrowing is inversely related to the proportion of market value accounted for by real options. It also rationalizes other aspects of corporate borrowing behavior, for example the practice of matching maturities of assets and debt liabilities.
This paper identifies five common risk factors in the returns on stocks and bonds. There are thre... more This paper identifies five common risk factors in the returns on stocks and bonds. There are three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity. There are two bond-market factors, related to maturity and default risks. Stock returns have shared variation due to the stock-market factors, and they are linked to bond returns through shared variation in the bond-market factors. Except for low-grade corporates, the bond-market factors capture the common variation in bond returns. Most important, the five factors seem to explain average returns on stocks and bonds.
Corporate Investment EMPIRICAL models of business investment rely generally on the assumption of ... more Corporate Investment EMPIRICAL models of business investment rely generally on the assumption of a "representative firm" that responds to prices set in centralized securities markets. Indeed, if all firms have equal access to capital markets, firms' responses to changes in the cost of capital or tax-based investment incentives differ only because of differences in investment demand. A firm's financial structure is irrelevant to investment because external funds provide a perfect substitute for internal capital. In general, with perfect capital markets, a firm's investment decisions are independent of its financial condition. An alternative research agenda, however, has been based on the view that internal and external capital are not perfect substitutes. According to this view, investment may depend on financial factors, such as the availability of internal finance, access to new debt or equity finance, or the functioning of particular credit markets. For example, a firm's internal cash flow may affect investment spending because of a "financ-We are grateful to members of the Brookings Panel for helpful comments and suggestions and to Charles Himmelberg and Jaewoon Koo for excellent research assistance. Financial support from the Federal Reserve Bank of Chicago is acknowledged. Hubbard acknowledges support from a John M. Economic Review, vol. 45 (September 1955), pp. 515-38. for real investment under certain conditions.3 Their key insight was that a firm's financial structure will not affect its market value in perfect capital markets. Thus, if the Modigliani-Miller assumptions are satisfied, real firm decisions, motivated by the maximization of shareholders' claimns, are independent of financial factors such as internal liquidity, debt leverage, or dividend payments.
... The theory of public finance: A study in public economy. Post a Comment. CONTRIBUTORS: Author... more ... The theory of public finance: A study in public economy. Post a Comment. CONTRIBUTORS: Author: Musgrave, Richard Abel (b. 1910, d. ----. PUBLISHER: McGraw-Hill (New York). SERIES TITLE: YEAR: 1959. PUB TYPE: Book. VOLUME/EDITION: PAGES (INTRO/BODY): 628 p ...
This paper considers a firm that must issue common stock to raise cash to undertake a valuable in... more This paper considers a firm that must issue common stock to raise cash to undertake a valuable investment opportunity. Management is assumed to know more about the firm's value than potential investors. Investors interpret the firm's actions rationally. An equilibrium model of the issue-invest decision is developed under these assumptions. The model shows that firms may refuse to issue stock, and therefore may pass up valuable investment opportunities. The model suggests explanations for several aspects of corporate financing behavior, including the tendency to rely on internal sources of funds, and to prefer debt to equity if external financing is required. Extensions and applications of the model are discussed.
Corporate managers are the agents of shareholders, a relationship fraught with conflicting intere... more Corporate managers are the agents of shareholders, a relationship fraught with conflicting interests. Agency theory, the analysis of such conflicts, is now a major part of the economics literature. The payout of cash to shareholders creates major conflicts that have received ...
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