In imperfect capital markets, an entrepreneur has to invest substantial personal funds to start a private firm and is forced to bear large firm-specific risk. Furthermore, if the entrepreneur is risk averse, one would expect the private equity to earn a premium for idiosyncratic risk. In this...

Testing portfolio alpha against a linear factor model can be interpreted as a mean-variance efficiency test of the optimal portfolio of factors. For ambiguity neutral investor, adding active portfolio with statistically significant alpha always implies efficiency gain relative to the optimal...

We consider a linear factor APT model and assume that agents are ambiguity averse with respect to payoffs of arbitrage portfolios. In contrast to the standard result, pricing errors need not converge to zero in the limit as the number of assets goes to infinity. Even in the case of exact factor...

We investigate how debt financing responds to exposure to long-lived and temporary cash flow shocks. We identify these shocks using filtering methods that we demonstrate are highly effective for corporate finance data using Monte-Carlo simulations. The long-lived and temporary shocks we identify...