Modeling Structural and Temporal Variation in the Market's Valuation of Banking Firms

Hidden capital exists whenever the accounting measure of a firm's net worth diverges from its economic value. Such unbooked capital has on-balance-sheet and off-balance-sheet sources. This paper develops a model to estimate both forms of hidden capital and to test hypotheses about their determinants. In effect, the analysis expands the two-index model by endogenizing the market and interest-rate sensitivities of any stock and decomposing each sensitivity into on-balance-sheet and off-balance-sheet elements. For a sample of banks during 1975–1985, the model finds considerable variation in both forms of hidden capital.     

Publishing in the Majors: A Comparison of Accounting,Finance, Management,and Marketing*

Business schools evaluate publication records, especially for the promotion and tenure decision, by comparing the quality and quantity of a candidate's research with those of peers within the same discipline (intradisciplinary) and with those of academics from other business disciplines (interdisciplinary). A recently developed analytical model of the research review process provides theory about the norms used by editors and referees in deciding whether to publish research papers. The model predicts that interdisciplinary differences exist in quality norms, which could result in disparity among business disciplines in the number of top‐tier articles published. I examine the period from 1980 to 1999 and, consistent with the theory, find that significant differences exist in the number of articles and proportion of doctoral faculty who published in the “major” journals in accounting, finance, management, and marketing. Most notably, the proportion of doctoral faculty publishing a major article is 1.4 to 2.4 times greater in the other business disciplines than in accounting (depending on the set of journals). The theory also predicts an upward drift over time in the quality norms used by referees. Consistent with a drift, the number of articles published has declined substantially in marketing and, to a lesser extent, in the other business disciplines.     

Predictable Stock Returns: The Role of Small Sample Bias

Predictive regressions are subject to two small sample biases: the coefficient estimate is biased if the predictor is endogenous, and asymptotic standard errors in the case of overlapping periods are biased downward. Both biases work in the direction of making t-ratios too large so that standard inference may indicate predictability even if none is present. Using annual returns since 1872 and monthly returns since 1927 we estimate empirical distributions by randomizing residuals in the VAR representation of the variables. The estimated biases are large enough to affect inference in practice, and should be accounted for when studying predictability.     

Is Common Stock Obsolete?

Agency theory rests on a well-defined relationship between shareholders and managers. That relationship is examined and found to be a poorly denned state-contingent contract. The implications of that finding, and the existence of only a weak market for managers, lead to the conclusion that the traditional assumptions about the rights of shareholders no longer apply and that common stock (ordinary share capital) is obsolete.     

Federal Deposit Insurance,Regulatory Policy,and Optimal Bank Capital*

This paper seeks to explain the combination of explicit and implicit pricing for deposit insurance employed by the FDIC. Essentially, the FDIC sells two products—insurance and regulation. To span the product space, it must and does set two prices. We argue that the need to establish regulatory disincentives to bank risk-taking is the heart of the controversy over the adequacy of bank capital and that the ability to close risky banks before exhausting their charter value (i.e., the value of their right to continue in business) stands at the center of these disincentives and in front of the FDIC's insurance reserves.