Corporate Finance

This article considers the problem of testing curvature (e.g., linearity, concavity, convexity) in a multivariate nonparametric regression model. A measure of curvature, called the simplex statistic, that does not require bandwidth choice and is easy to compute, is introduced. A global test of curvature based on the simplex statistic is also introduced. Localized versions of the test, which require smoothing parameters, are shown to be consistent against more general alternatives than the global test.

In this paper, we analyze the optimal policy for a risk averse agent who wants to sell a large block of shares of a risky security in the presence of price impact and transactions costs. Our framework reduces to the standard Merton portfolio problem in the absence of any market frictions. Optimal liquidation results in revenue distributions which are substantially different from those generated by a naive strategy. The main tradeoff involves choosing between revenue distributions which have high means versus those which have low variances.

In the Public Company Accounting Oversight Board's Sep 2004 Standing Advisory Group Meeting, one of the sessions was devoted to verifiability concerns regarding fair values. At that meeting, some participants expressed the opinion that accounting estimates pose broader problems beyond computing fair values, and investors need to be educated about the role of estimates in financial statements. This paper suggests an extension to the existing accounting model to allow users to better understand the role of estimates/forecasts in financial statements.

The Millennium Date Change (often referred to as Y2K) was anticipated to be a major liquidity event by many financial and corporate institutions as well as the central banks around the world. The timing of the event was foreseeable and thus satisfies the assumptions in the economic theory on public provision of private liquidity. We apply the theory to understand the liquidity premium in financial markets and the actions of the U.S. central bank in the period surrounding Y2K.

Participants in 401(k) retirement plans violate the basic principle of diversification by investing significant fractions of their savings in their employers' equity. This paper characterizes investors' active changes to their company stock investment over time by analyzing new inflows and transfers. The average investor seems to base active changes on salient information, paying attention to past returns, volatility, and business performance.

In asset pricing models, the uncertainty surrounding firm fundamentals plays a central role, driving expected returns, volatility, and valuation ratios. In this paper, we extract estimates of the uncertainty embedded in earnings announcements using option prices. To do this, we take seriously the fact that the timing of earnings announcements, although not the response of equity prices, is known in advance. We develop a no-arbitrage option pricing model incorporating jumps on earnings announcement dates.

This paper explores the motivations and desirability of off-balance sheet financing of credit card receivables by banks. We explore three related issues: the degree to which securitizations result in the transfer of risk out of the originating bank, the extent to which securitization permits banks to economize on capital by avoiding regulatory minimum capital requirements, and whether banks'' avoidance of minimum capital regulation through securitization with implicit recourse has been undesirable from a regulatory standpoint.

In a contingent claims framework, with a single issue of debt and full information, we show that the presence of a bankruptcy code with automatic stay, absolute priority rules, and potential debt forgiveness, can lead to significant conflicts of interest between the borrowers and lenders. In the first-best outcome, the code can add significant value to both parties by way of higher debt capacity, lower spreads, and improvement in the overall value of the firm.