This paper examines the interaction between a firm's volatility and dividend policies and capital structure and maturity policies. The firm is permitted to costlessly and continuously select any asset volatility and dividend yield, within bounds. Simple and intuitive rules are derived for the...

Nearly any standard financial model concludes that two assets with identical cash flows must sell for the same price. Alas, closed-end mutual fund company share prices seem to violate this fundamental tenant. Even when one considers several standard frictions, such as taxes and agency costs,...

Dealers need to search for quotes in many of the world's largest markets (such as spot foreign exchange, US government bonds, and the London Stock Exchange). This search affects trading cost. We estimate the share of total trading cost attributable to search. Our experiments show that the share...

The joint determination of capital structure and investment risk is examined. Optimal capital structure reflects both the tax advantages of debt less default costs (Modigliani-Miller), and the agency costs resulting from asset substitution (Jensen-Meckling). Agency costs restrict leverage and...

We develop and analyze a model of a multi-stage investment project that captures many features of R&D; ventures and start-up companies. An important feature these problems share is that the firm learns about the potential profitability of the project throughout its life, but that "technical...

This paper explores the rationale for corporate risk management. Following Smith and Stulz (1985) and Mayers and Smith (1987), the assumption is made that firms can contractually commit to bondholders to maintain a particular risk management policy, or asset volatility. With that as a starting...

We hypothesize that mutual thrifts often converted to stock ownership when the returns to conversion were predicted to be high. We show that excess returns on the initial public offerings (IPOs) of thrift conversions during the 1990s were predictable with publicly available data. The same...

In recent years results from the theory of martingales has been successfully applied to problems in financial economics. In the present paper we show how efficient and elegant this "martingale technology" can be when solving for complex options. In particular we provide closed form solutions for...

This paper shows how to decompose the dollar profit earned from an option into two basic components: 1) mispricing of the option relative to the asset at the time of purchase, and 2) profit from subsequent fortuitous changes or mispricing of the underlying asset. This separation hinges on...

This paper develops a simple technique for valuing European and American derivatives with underlying asset risk-neutral returns which depart from lognormal in terms of prespecified non-zero skewness and greater-than-three kurtosis. Instead of specifying the entire risk-neutral distribution by...