It is well known that firms are more likely to issue equity when their market values are high, relative to book and past market values, and to repurchase equity when their market values are low. We document that the resulting effects on capital structure are very persistent. As a consequence, current capital structure is strongly related to historical market values. The results suggest the theory that capital structure is the cumulative outcome of past attempts to time the equity market.

We investigate the impact of stock-based compensation on managerial ownership. We find that equity compensation succeeds in increasing incentives of lowerownership managers, but higher-ownership managers negate much of its impact by selling previously owned shares. When executives exercise options to acquire stock, nearly all of the shares are sold. Our results illuminate dynamic aspects of managerial ownership arising from divergent goals of boards of directors, who use equity compensation for incentives, and managers, who respond by selling shares for diversification. The findings cast doubt on the frequent and important theoretical assumption that managers cannot hedge the risks of these awards. WE INVESTIGATE THE IMPACT OF STOCK-BASED COMPENSATION, including options and restricted stock, on the ownership of U.S. executives. Equity-based pay spread at explosive rates in the United States during the 1990s. Morgenson ~1998! reports that in 1997, the 200 largest U.S. companies had reserved more than 13 percent of their common shares for compensation awards to managers, up

We test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998. Contrary to the pecking order theory, net equity issues trackthe financing deficit more closely than do net debt issues. While large firms exhibit some aspects of pecking order behavior, the evidence is not robust to the inclusion of conventional leverage factors, nor to the analysis of evidence from the 1990s. Financing deficit is less important in explaining net debt issues over time for firms of all sizes.

the problems and opportunities facing the financial services industry in its search for competitive excellence. The Center's research focuses on the issues related to managing risk at the firm level as well as ways to improve productivity and performance. The Center fosters the development of a community of faculty, visiting scholars and Ph.D. candidates whose research interests complement and support the mission of the Center. The Center works closely with industry executives and practitioners to ensure that its research is informed by the operating realities and competitive demands facing industry participants as they pursue competitive excellence. Copies of the working papers summarized here are available from the Center. If you would like to learn more about the Center or become a member of our research community, please let us know of your interest.

This paper reviews the theory and evidence regarding the impact of taxation on corporate financial policy. Starting from a basic characterization of the classical corporate income tax and its effects, the analysis focuses on three areas of research: equity policy, debt-equity decisions, and choices regarding ownership structure and organizational form. The discussion stresses the distinction between nominal and more fundamental financial differences for example, in the relationship between borrowing and leasing and that financial policy involves choices not only among different underlying policies but also among characterizations of a given policy. The final section offers some brief reflections on the implications of continuing financial innovation.

This essay surveys the body of research that asks how the efficiency of corporate investment is influenced by problems of asymmetric information and agency. I organize the material around two basic questions. First, does the external capital market channel the right amount of money to each firm? That is, does the market get across-firm allocations right, so that the marginal return to investment in firm i is the same as the marginal return to investment in firm j? Second, do internal capital markets channel the right amount of money to individual projects within firms? That is, does the internal capital budgeting process get withinfirm allocations right, so that the marginal return to investment in firm i’s division A is the same as the marginal return to investment in firm i’s division B? In addition to discussing the theoretical and empirical work that bears most directly on these questions, the essay also briefly sketches some of the implications of this work for broader issues in both macroeconomics and the theory of the firm.

In textbook theory, demand curves for stocks are kept flat by arbitrage between perfect substitutes. Myron Scholes argues in his study of large-block sales that “the market will price assets such that the expected

The literature on conditional event-study methods criticizes standard event-study procedures as being misspecified if events are voluntary and investors are rational. We argue, however, that standard procedures (1) lead to statistically valid inferences, under conditions described in this article; and (2) are often a superior means of inference, even when event-study data are generated exactly as per a class of rational expectations specifications introduced by the conditional methods literature. Our results provide an equilibrium justification for traditional eventstudy methods, and we suggest how these simple procedures may be combined with conditional methods to improve statistical power in event studies. I am grateful to Stephen Brown, my dissertation chairman, for stimulating my interest in the topic, his guidance, and numerous valuable suggestions. Thanks are also due to Franklin Allen (the executive editor), Yakov Amihud,

go to Girts Graudins and Eric Nierenberg for their outstanding contributions to this project. Harvard Business School’s Division of Research provided financial support. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.

We analyze the loan pricing implications of the reform of bank capital regulation known as Basel II. We consider a perfectly competitive market for business loans where, as in the model underlying the internal ratings based (IRB) approach of Basel II, a single risk factor explains the correlation in defaults across firms. Our loan pricing equation implies that low risk firms will achieve reductions in their loan rates by borrowing from banks adopting the IRB approach, while high risk firms will avoid increases in their loan rates by borrowing from banks that adopt the less risk-sensitive standardized approach of Basel II. We also show that only a very high social cost of bank failure might justify the proposed IRB capital charges, partly because the net interest income from performing loans is not counted as a buffer against credit losses. A net interest income correction for IRB capital requirements is proposed.