Legal solvency tests play a crucial role in high‐stakes financial transactions. This article presents a brief introduction to legal solvency tests that play important roles in bankruptcy and corporate law. The author then proceeds to analyze these tests from the perspective of financial...

Most high‐stakes litigation settles prior to the trial verdict being achieved. This apparent class action settlement pressure raises an interesting risk finance question addressed by the authors in this article. The article describes the basic law and economics of settlement risk within the...

Until recently, financial intermediaries have behaved as though immune from the bite of intellectual property law. However, recent decisions of the federal courts and acquiescence by Congress have created a new legal landscape. This article explores the basic principles and implications of...

We explore the use of deep learning hierarchical models for problems in financial prediction and classification. Financial prediction problems – such as those presented in designing and pricing securities, constructing portfolios, and risk management – often involve large data sets with...

We develop a simple stock selection model to explain why active equity managers tend to underperform a benchmark index. We motivate our model with the empirical observation that the best performing stocks in a broad market index often perform much better than the other stocks in the index....

The single-firm event studies that securities litigants use to detect the impact of a corrective disclosure on a firm's stock price have low statistical power. As a result, observed price impacts are biased against defendants and systematically overestimate the effect on firm value. We use the...

There is much evidence that passive equity strategies dominate active equity management, but many investors remain committed to active investing despite its poor relative performance. We explore the behavioral-economic hypothesis that investors fall prey to the conjunction fallacy, believing...

We test the limits of arbitrage argument for the survival of irrationality-induced financial anomalies by sorting securities on their individual residual variability as a proxy for idiosyncratic risk - a commonly asserted limit to arbitrage - and comparing the strength of anomalous returns in...

Equity short sellers face a risk that an acquirer - called here the "game-ending greater fool" - will acquire the short target at a premium to the short price even if the short seller is correct about overvaluation. If short sellers account for this risk, even partially, then prices may be too...

The standard dividend discount model assumes an infinite stream of dividends, but many stocks disappear through merger at a premium at some point in their corporate life, with a current takeover probability of about 0.5% to 2% per year for publicly-traded firms in the U.S. Ignoring takeover...