Investment Policy Implications of the Capital Asset Pricing Model

The results of previous generalized Security Market Line (SML) tests of the Mean Variance (MV) and Linear Risk Tolerance (LRT) Capital Asset Pricing Models indicate that the models are empirically identical. A very widely accepted, but technically incorrect, explanation for the results is that with normal return distributions all expected utility maximizing riskaverse investors will pick MV portfolios. The paper shows that the generalized SML tests cannot distinguish between the MV model and a much wider variety of power utility LRT models than has previously been entertained. On the other hand, with approximately normal, or real world, return distributions the investment policies of the various models are shown to be different from each other, and from the MV policy in particular. To the extent the results of the portfolio selection calculations are robust, the results of, and implications drawn from, the tests of the macro pricing relations are not based on firm micro foundations.     

Asset Pricing Implications of Nonconvex Adjustment Costs and Irreversibility of Investment

This paper derives a real options model that accounts for the value premium. If real investment is largely irreversible, the book value of assets of a distressed firm is high relative to its market value because it has idle physical capital. The firm's excess installed capital capacity enables it to fully benefit from positive aggregate shocks without undertaking costly investment. Thus, returns to equity holders of a high book‐to‐market firm are sensitive to aggregate conditions and its systematic risk is high. Simulations indicate that the model goes a long way toward accounting for the observed value premium.     

Ambiguity, Information Quality, and Asset Pricing

When ambiguity‐averse investors process news of uncertain quality, they act as if they take a worst‐case assessment of quality. As a result, they react more strongly to bad news than to good news. They also dislike assets for which information quality is poor, especially when the underlying fundamentals are volatile. These effects induce ambiguity premia that depend on idiosyncratic risk in fundamentals as well as skewness in returns. Moreover, shocks to information quality can have persistent negative effects on prices even if fundamentals do not change.     

Overconfidence, Arbitrage, and Equilibrium Asset Pricing

This paper offers a model in which asset prices reflect both covariance risk and misperceptions of firms' prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures (e.g., fundamental/price ratios). With many securities, mispricing of idiosyncratic value components diminishes but systematic mispricing does not. The theory offers untested empirical implications about volume, volatility, fundamental/price ratios, and mean returns, and is consistent with several empirical findings. These include the ability of fundamental/price ratios and market value to forecast returns, and the domination of beta by these variables in some studies.     

Incomplete Information, Heterogeneity, and Asset Pricing

We consider a pure exchange economy where the drift of aggregateconsumption is unobservable. Agents with heterogeneous beliefsand preferences act competitively on financial and goods markets.We discuss how equilibrium market prices of risk differ acrossagents, and in particular we discuss the properties of the marketprice of risk under the physical (objective) probability measure.We propose a number of specifications of risk aversions andbeliefs where the market price of risk is much higher, and theriskless rate of return lower, than in the equivalent full informationeconomy (homogeneous and heterogeneous preferences) and thuscan provide an(other) answer to the equity premium and risk-freerate puzzles. We also derive a representation of the equilibriumvolatility and numerically assess the role of heterogeneityin beliefs. We show that a high level of stock volatility canbe obtained with a low level of aggregate consumption volatilitywhen beliefs are heterogeneous. Finally, we discuss how incompleteinformation may explain the apparent predictability in stockreturns and show that in-sample predictability cannot be exploitedby the agents, as it is in fact a result of their learning processes.     

股权控制链、代理冲突与审计师选择

本文利用2002—2003年我国A股市场数据,从上市公司至其最终控制人之间的股权控制链①的视角,考察了上市公司控制性股东与中小股东之间的代理冲突,并在此基础上研究了其与高质量外部审计需求之间的关系。结果表明,控制链越长,控制性股东与中小股东之间的代理冲突就越严重。研究发现,控制性股东的控制权结构所产生的代理冲突越严重,上市公司越有可能聘请审计质量较高的"四大"审计;而聘请"四大",能够降低控制性股东的资金侵占程度,减缓公司的代理冲突。这说明在我国现阶段,高质量外部审计具有一定的治理作用。     

Agency Conflicts and Risk Management

This paper analyzes the relation between agency conflicts andrisk management. In contrast to previous contributions, ouranalysis incorporates not only stockholder-debtholder conflictsbut also manager–stockholder conflicts. We show that thecosts of both underinvestment and overinvestment are essentialin determining the firm's hedging policy. In particular, firmsthat derive more of their value from assets in place (lowermarket-to-book ratios), although having lower costs of underinvestment,generally display larger costs of overinvestment. Thus, theymay be more likely to hedge to control these overinvestmentincentives. Our analysis explains why large profitable firmswith fewer growth opportunities tend to hedge more (Bartramet al., 2004). It also provides a number of new predictionsrelating the benefits associated with risk management to variousdimensions of the firm's economic environment.     

Agency Conflicts and Dividend Persistence

Bank dividends are unusually persistent. In a crisis, they exacerbate systemic risk and raise concerns for regulators. Bank managers, however, may keep dividends elevated to mitigate agency conflicts with shareholders. One theory holds that persistent dividends may substitute for monitoring by dispersed shareholders. A second theory proposes that they attract institutional shareholders who monitor banks, mitigate agency conflicts, and seek to protect their investments’ value. After controlling for regulatory enforcement actions, we test both theories using 7722 bank-quarter observations spanning the 2007–2009 financial crisis. Our results suggest that dividend persistence increases with managerial agency conflicts but decreases in the presence of concentrated institutional shareholders, consistent with the second theory. In addition, contrary to the first theory, dispersed shareholders have no influence on bank dividend policies. Instead, these dispersed shareholders are associated with more frequent stock repurchase programs.

     

Corporate Governance and Agency Conflicts

I investigate whether corporate governance is associated with the level of agency conflicts in firms. I employ exploratory principal components analysis on 22 individual governance variables to obtain seven factors that represent the different dimensions of governance for a firm. I measure the level of agency conflicts in firms based on seven proxies for agency conflicts used in the literature. I find that firms with greater agency conflicts have better governance mechanisms in place, particularly those related to the board, audit committee, and auditor. I also find that the composition and functioning of the board, the independence of the auditor, and the equity‐based compensation of directors are significantly associated with firm performance, but primarily for firms with high agency conflicts. Overall, the results support the theory that the existence and role of various governance mechanisms in a firm are a function of the level of agency conflicts in the firm.     

Default Risk, Asset Pricing, and Debt Control

The pricing and control of firms’ debt has become a majorissue since Merton’s (1974) seminal article. Yet Mertonas well as other recent theories presume that the asset valueof the firm is independent of the debt of the firm. However,when using debt finance, firms may have to pay a premium foran idiosyncratic default risk and may face debt constraints.We demonstrate that firm-specific debt constraints and endogenousrisk premia, based on collateralized borrowing, affect the assetvalue of the firm and, in turn, the collateral value of thefirm. In order to explore the interdependence of debt financeand asset pricing of firms, we endogenize default premia andborrowing constraints in a production-based asset pricing model.In this context then the dynamic decision problem of maximizingthe present value of the firm faces an additional constraintgiving rise to the debt-dependent firm value. We solve for theasset value of the firm with debt finance by the use of numericaldynamic programming. This allows us to solve the debt controlproblem and to compute sustainable debt as well as the firm’sdebt value.     

Valuation Risk and Asset Pricing

Standard representative‐agent models fail to account for the weak correlation between stock returns and measurable fundamentals, such as consumption and output growth. This failing, which underlies virtually all modern asset pricing puzzles, arises because these models load all uncertainty onto the supply side of the economy. We propose a simple theory of asset pricing in which demand shocks play a central role. These shocks give rise to valuation risk that allows the model to account for key asset pricing moments, such as the equity premium, the bond term premium, and the weak correlation between stock returns and fundamentals.     

Tax Clienteles and Asset Pricing

Taxation of asset returns can create various clientele effects. If every agent is marginal on all assets, no clientele effects arise. If some (but not every) agent is marginal on all assets, there arises a clientele effect in quantities but none in prices. If no agent is marginal on all assets, there arise clientele effects in both quantities and prices. In the first two cases, standard asset pricing and martingale results extend to analogous aftertax results. In the third case, linear asset pricing works only on subsets of assets, and the standard martingale results become after-tax supermartingale results.     

Information Consumption and Asset Pricing

We study whether firm and macroeconomic announcements that convey systematic information generate a return premium for firms that experience information spillovers. We use information consumption to proxy for investor learning during these announcements and construct ex ante measures of expected information consumption (EIC) to calibrate whether learning is priced. On days when there are information spillovers, affected stocks earn a significant return premium (5% annualized) and the capital asset pricing model performs better. The positive effect of the Federal Reserve Open Market Committee announcements on the risk premia of individual stocks appears to be modulated by EIC. Our findings are most consistent with a risk‐based explanation.     

Asset Pricing and Expected Inflation

This paper provides an equilibrium model in which expected real returns on common stocks are negatively related to expected inflation and money growth. It is shown that the fall in real wealth associated with an increase in expected inflation decreases the real rate of interest and the expected real rate of return of the market portfolio. The expected real rate of return of the market portfolio falls less, for a given increase in expected inflation, when the increase in expected inflation is caused by an increase in money growth rather than by a worsening of the investment opportunity set. The model has empirical implications for the effect of a change in expected inflation on the cross-sectional distribution of asset returns and can help to understand why assets whose return covaries positively with expected inflation may have lower expected returns. The model also agrees with explanations advanced by Fama [5] and Geske and Roll [10] for the negative relation between stock returns and inflation.     

Technological Growth and Asset Pricing

We study the asset‐pricing implications of technological growth in a model with “small,” disembodied productivity shocks and “large,” infrequent technological innovations, which are embodied into new capital vintages. The technological‐adoption process leads to endogenous cycles in output and asset valuations. This process can help explain stylized asset‐valuation patterns around major technological innovations. More importantly, it can help provide a unified, investment‐based theory for numerous well‐documented facts related to excess‐return predictability. To illustrate the distinguishing features of our theory, we highlight novel implications pertaining to the joint time‐series properties of consumption and excess returns.     

Co-Kurtosis and Capital Asset Pricing

This paper examines the impact of co-kurtosis on asset pricing using a four-moment capital asset pricing model. It is shown that, in the presence of skewness and kurtosis in asset return distribution, the expected excess rate of return is related not only to the systematic variance but also to the systematic skewness and systematic kurtosis. Investors are compensated in higher expected return for bearing the systematic variance and the systematic kurtosis risks. Investors also forego the expected excess return for taking the benefit of increasing the systematic skewness.     

Seasonality and Consumption-Based Asset Pricing

Most of the evidence on consumption-based asset pricing is based on seasonally adjusted consumption data. The consumption-based models have not worked well for explaining asset returns, but with seasonally adjusted data there are reasons to expect spurious rejections of the models. This paper examines asset pricing models using not seasonally adjusted aggregate consumption data. We find evidence against models with time-separable preferences, even when the models incorporate seasonality and allow seasonal heteroskedasticity. A model that uses not seasonally adjusted consumption data and nonseparable preferences with seasonal effects works better according to several criteria. The parameter estimates imply a form of seasonal habit persistence in aggregate consumption expenditures.