In their article Stock Issues and Investment Policy When Firms Have Information That Investors Do not Have, Myers and Majluf(1981) show that there exist situations where positive net present value projects may be passed up if they have to be financed externally. It is shown here that if projects...

We re-examine the Mehra and Prescott (1985) model. Allowing the time preference factor to be greater than one resolves the "equity premium puzzle." We show that this solution is consistent with finite expected utility and a positive risk-free rate of interest. For somewhat higher values of...

Since lenders cannot observe the riskiness of the projects borrowers could choose, interest rates alone cannot be used as an instrument to discipline the borrowers. A credible threat to exclude borrowers who default more than a certain number of times from participating in the capital markets...

If yields are assumed to have an exact unit-root, it has previously been shown that the rational expectations hypothesis of the term structure (REHTS) has been rejected by single-equation tests. However, small deviations from exact unit-root produce substantial changes in the small sample...

Because much of the value of equity depends on the option characteristics of investment projects, it is not feasible to calculate equity duration directly. As a result, recent literature has focused on estimating equity duration empirically. By using 25 size and book-to-market portfolios, this...

We offer a new model for pricing bonds subject to default risk. The event of default is remodeled as the first time that a state variable that captures the solvency of the issue goes below a certain level. The payoff to the bond in case of default is a constant fraction of the value of a...

This paper investigates the determinants of leveraged buyout (LBO)activity by comparing firms that have implemented LBOs to those that have not. The analysis considers sources of gains from LBOs as well as the costs that can arise from the large amount of debt included in their financial...

We find that between 20 and 25 percent of the negative covariance between excess returns and inflation is explained by shocks to monetary policy variables. The finding is robust to changes in the monetary policy rule that have occured during the 1966-1998 period. The result contradicts the...

ABSTRACT It is thought that American options always gain value as the time to the option's expiration date increases. Merton (1973) proved this result using simple arbitrage arguments for options on non-dividend paying stocks. However, market prices reveal that (i) an American put can increase...