Why Is Long‐Horizon Equity Less Risky? A Duration‐Based Explanation of the Value Premium

We propose a dynamic risk‐based model that captures the value premium. Firms are modeled as long‐lived assets distinguished by the timing of cash flows. The stochastic discount factor is specified so that shocks to aggregate dividends are priced, but shocks to the discount rate are not. The model implies that growth firms covary more with the discount rate than do value firms, which covary more with cash flows. When calibrated to explain aggregate stock market behavior, the model accounts for the observed value premium, the high Sharpe ratios on value firms, and the poor performance of the CAPM.     

Should Derivatives Be Privileged in Bankruptcy?

Derivatives enjoy special status in bankruptcy: they are exempt from the automatic stay and effectively senior to virtually all other claims. We propose a corporate finance model to assess the effect of these exemptions on a firm's cost of borrowing and incentives to engage in derivative transactions. While derivatives are value‐enhancing risk management tools, seniority for derivatives can lead to inefficiencies: it transfers credit risk to debtholders, even though this risk is borne more efficiently in the derivative market. Seniority for derivatives is efficient only if it provides sufficient cross‐netting benefits to derivative counterparties that provide hedging services.     

Commentary: Research Productivity Measurement and the Field of Academic Accounting*

The previous issue of Canadian Accounting Perspectives contained three studies that examined various aspects of performance measurement in universities. In this issue, we step back from the acts of performance measurement and disclosure to consider the context within which the demand for increased performance measurement has arisen. The current commentary considers the use of research productivity measures in the field of academic accounting and why the use of these measures is drawing such an equivocal response from academics in the field. Starting from three theoretical perspectives, we consider the use, response, and consequences associated with research productivity measurement.     

Reconciling Bagehot and the Fed's Response to September 11

Bagehot (1873) states that to prevent bank panics a central bank should provide liquidity at a "very high rate of interest." In contrast, most of the theoretical literature on liquidity provision suggests that central banks should lend at an interest rate of zero. This is broadly consistent with the Federal Reserve's behavior in the days following September 11, 2001. This paper shows that both policies can be reconciled. With commodity money, as in Bagehot's time, liquidity is scarce and a high price allows banks to self-select. In contrast, the Fed has a virtually unlimited ability to temporarily expand the money supply so self-selection is unnecessary.