Review of Finance - current issue

Editorial Statistics

Pagano, M., Zechner, J. — Sun, 11 Oct 2009 22:58:50 PDT

Winners of the Best Paper Competition in Corporate Governance

Sun, 11 Oct 2009 22:58:50 PDT

When No Law is Better Than a Good Law

Bhattacharya, U., Daouk, H. — Sun, 11 Oct 2009 22:58:50 PDT

This paper argues, both theoretically and empirically, that sometimes no securities law may be better than a good securities law that is not enforced. The first part of the paper formalizes the sufficient conditions under which this happens for any law. The second part of the paper shows that a specific securities law – the law prohibiting insider trading – may satisfy these conditions. The third part of the paper takes this prediction to the data. We find that the cost of equity actually rises when some countries enact an insider trading law, but do not enforce it.

Proximity Always Matters: Local Bias When the Set of Local Companies Changes

Bodnaruk, A. — Sun, 11 Oct 2009 22:58:50 PDT

I analyze the portfolios of individual investors who have changed their place of residence. As distance from a company they invest in changes, investors adjust their portfolio composition. The farther investors move away from the closest establishment of a company in their portfolio, the more of its shares they sell compared to investors who do not move. Among the companies that investors held before the move, after moving, investors abnormally increase their ownership in companies closer to their new location; these companies provide them with higher risk-adjusted returns than companies in which they kept holdings unchanged or abnormally reduced holdings.

Credit Card Debt Puzzles and Debt Revolvers for Self Control

Bertaut, C. C., Haliassos, M., Reiter, M. — Sun, 11 Oct 2009 22:58:50 PDT

Most US credit card holders revolve high-interest debt, often with substantial liquid and retirement assets. We model separation of accounting from shopping allowed by credit cards, in a rational, dynamic game. When the shopper is more impatient than the accountant, selling assets to repay debt is not necessarily optimal, as the shopper can restore debt. Modest relative impatience generates asset-debt co-existence and target utilization rates, matching incidence and median assets of debt revolvers with substantial assets. Empirical evidence is consistent with a role for spending control considerations, after allowing for standard determinants of credit card debt.

Bounded Rationality and Asset Pricing with Intermediate Consumption

Berrada, T. — Sun, 11 Oct 2009 22:58:50 PDT

We consider a pure exchange economy with incomplete information. Some agents display learning bias and over- or under-react to the arrival of new information. We show under which conditions biased agents survive over a finite horizon. We also study the distribution of irrational agents consumption shares. Irrational agents have a signiÞcant consumption share in the economy when (i) shocks are less persistent (ii) risk aversion is high (iii) volatility of aggregate consumption is high. We also show that agents impact on prices is increasing in their consumption share and conclude that biased agents can signiÞcantly influence equilibrium quantities.

Convertibles in Sequential Financing

Wang, S. — Sun, 11 Oct 2009 22:58:50 PDT

Sequential financing is a popular strategy in corporate finance. However, depending on the type of financial instrument used to carry out the strategy, sequential financing can have many potential problems. This paper shows that certain types of convertibles can be deployed to resolve the problems completely. This may explain why convertibles are widely adopted to implement sequential financing in reality, especially among companies with many real options. We find that the call feature and some popular call restrictions are necessary for an efficient convertible. Indeed, almost all real-world convertibles have a call feature and call restrictions.