We propose a novel Bayesian framework to incorporate uncertainty about the state of the market. Among others, one advantage of the framework is the ability to model a large collection of time-varying parameters simultaneously. When we apply the framework to estimate the cost of equity we find...

Beginning with Banz (1981), I review 30years of research on the size effect in equity returns. Since Fama and French (1992), there has been a vigorous, ongoing debate on whether the size premium is a compensation for systematic risk. Since the late 1990s, research on the size effect has been...

The structure of a firm-commitment Seasoned Equity Offering (SEO) resembles a put-option underwritten by an investment bank syndicate (Smith, 1977). Employing implied volatilities from issuers’ stock options as a direct forward-looking measure, this paper examines the impact of expected price...

We examine whether mutual funds and hedge funds herd after each other and the associated impacts on stock prices. We find strong evidence that mutual funds herd into or out of stocks following the herd of hedge funds: mutual funds’ herding measure is positively related to last quarter’s...

This paper analyzes the optimal capital budgeting mechanism when divisional managers are privately informed about the arrival of future investment projects. Consistent with field study evidence, an optimal allocation mechanism can include a stipulation that a capital request for discretionary...

This study extends the works of Mauer and Sarkar (2005) and Andrikopoulos (2009) by incorporating a regime-dependent earnings-based bonus into managerial compensation. Examining the individual effects of ownership shares and earnings-based bonus compensation, we find that the former provides...

We study the operating, financial, and ownership structure characteristics of newly listed firms which become acquisition targets shortly after their initial public offerings. We examine whether such firms get acquired because of their successful performance or as an alternative to delisting. We...

The Berger and Ofek (1995) excess value measure, comparing a conglomerate’s actual market value to an imputed value based on standalones, has become the standard method to determine value effects of diversification. In this paper, we address a significant bias in this procedure stemming from...

This paper empirically examines how labor unions affect investment-cash flow sensitivity using samples from the US covering the period of 1984–2009. We find a significant positive union effect using a q model of investment. The capital expenditures of firms are 1.71 times more sensitive to...

We develop a dynamic model in which a firm exercises an option to expand production on either a small or large scale with cash reserves and costly external funds. An intermediate level of cash reserves, which is insufficient for the large-scale investment but sufficient for the small-scale...