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...

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...

That solvency testing is difficult is nothing new. Commentators in a 1929 Columbia Law Review article lamented that “courts have not yet developed any clear-cut principles or rules” for solvency testing.Seventy-five years later, Delaware's Court of Chancery complained that “it is not...

Based on recent evidence, we may not be able to reject the hypothesis that the cost of equity for individual common stocks is close to the risk-free rate. One explanation for this outcome would be the combination of excessive optimism with risk aversion, a combination that can generate behavior...

Managerial optimism is behavioral finance's greatest achievement. It explains two prominent features of corporate financial behavior - over-investment and pecking order capital structure preferences - that otherwise require two different theories with mutually incompatible assumptions about...

Risk-averse optimism provides a parsimonious explanation of simultaneous purchase of unfairly-priced insurance and unfairly-priced lottery tickets. The simplicity of this approach contrasts with the complexity of prospect theory

This article proposes a simple balance-sheet solvency test for publicly-traded firms that addresses current limitations of financial-market-based solvency tests. I derive a solvency test from an elementary algebraic relation among the inputs to the balance-sheet solvency calculation for a...

Agency theory - as applied to debates in corporate governance - rests on a myth of separated ownership and control. The true separation, however, is between ownership and ownership: ownership of shares by shareholders and ownership of assets by the corporation. Shareholders are not principals;...

Basic economic analysis of litigation funding shows that risk neutral plaintiffs without budget constraints will not accept funding unless they are pessimistic relative to the funder. Risk aversion makes a plaintiff who shares probabilistic beliefs with the funder act observationally equivalent...

An unacknowledged fact about the Bankruptcy Code's definition of "insolvent" is that it requires unmatured interest to be counted as debt. Ignored in practice, this statutory requirement makes no economic sense, but remains a trap awaiting a litigant in front of a court compelled to apply the...