We use a stochastic frontier model to obtain a stock-level estimate of the difference between a firm's installed production capacity and its optimal capacity. We show that this “capacity overhang” estimate relates significantly negatively to the cross-section of stock returns, even when...

In an equilibrium Black and Scholes (1973) economy, a firm's default risk and its expected equity return are non-monotonically related. This may explain the surprising relation found between these two variables in recent empirical research. Although changes in default risk induced by expected...

Recent empirical studies show that statistical forecasts of a stock's return skewness negatively price stocks, apparently consistent with recent theoretical studies. While the theoretical studies, however, focus on skewness over long return horizons, the empirical studies focus on skewness over...