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Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
, 1976
"... This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of ..."
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Cited by 896 (5 self)
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This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.
Resurrecting the (C)CAPM: A CrossSectional Test When Risk Premia Are TimeVarying
 Journal of Political Economy
, 2001
"... This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditio ..."
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Cited by 137 (4 self)
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This paper explores the ability of conditional versions of the CAPM and the consumption CAPM—jointly the (C)CAPM—to explain the cross section of average stock returns. Central to our approach is the use of the log consumption–wealth ratio as a conditioning variable. We demonstrate that such conditional models perform far better than unconditional specifications and about as well as the FamaFrench threefactor model on portfolios sorted by size and booktomarket characteristics. The conditional consumption CAPM can account for the difference in returns between lowbooktomarket and highbooktomarket portfolios and exhibits little evidence of residual size or booktomarket effects. We are grateful to Eugene Fama and Kenneth French for graciously providing the
The CrossSection of Volatility and Expected Returns
 Journal of Finance
, 2006
"... We especially thank an anonymous referee and Rob Stambaugh, the editor, for helpful suggestions that greatly improved the article. Andrew Ang and Bob Hodrick both acknowledge support from the NSF. ..."
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Cited by 81 (6 self)
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We especially thank an anonymous referee and Rob Stambaugh, the editor, for helpful suggestions that greatly improved the article. Andrew Ang and Bob Hodrick both acknowledge support from the NSF.
Risks and Portfolio Decisions involving Hedge Funds
, 2002
"... Hedge funds are known to exhibit nonlinear optionlike exposures to standard asset classes and therefore the traditional linear factor model provides limited help in capturing their riskreturn tradeoffs. We address this problem by augmenting the traditional model with optionbased risk factors. O ..."
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Cited by 80 (6 self)
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Hedge funds are known to exhibit nonlinear optionlike exposures to standard asset classes and therefore the traditional linear factor model provides limited help in capturing their riskreturn tradeoffs. We address this problem by augmenting the traditional model with optionbased risk factors. Our results show that a large number of equityoriented hedge fund strategies exhibit payoffs resembling a short position in a put option on the market index, and therefore bear significant lefttail risk, risk that is ignored by the commonly used meanvariance framework. Using a meanconditional ValueatRisk framework, we demonstrate the extent to which the meanvariance framework underestimates the tail risk. Working with the underlying systematic
Housing collateral, consumption insurance, and risk premia, Working paper
, 2002
"... In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the condit ..."
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Cited by 56 (2 self)
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In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of asset prices and consumption growth. A decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, and increases the conditional market price of risk. Using aggregate data for the US, we find that a decrease in the ratio of housing wealth to human wealth predicts higher returns on stocks. Conditional on this ratio, the covariance of returns with aggregate risk factors explains eighty percent of the crosssectional variation in annual size and booktomarket portfolio returns. 1
Why is longhorizon equity less risky? A durationbased explanation of the value premium, NBER working paper
, 2005
"... We propose a dynamic riskbased model that captures the value premium. Firms are modeled as longlived 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 im ..."
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Cited by 49 (10 self)
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We propose a dynamic riskbased model that captures the value premium. Firms are modeled as longlived 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. THIS PAPER PROPOSES A DYNAMIC RISKBASED MODEL that captures both the high expected returns on value stocks relative to growth stocks, and the failure of the capital asset pricing model to explain these expected returns. The value premium, first noted by Graham and Dodd (1934), is the finding that assets with a high ratio of price to fundamentals (growth stocks) have low expected returns relative to assets with a low ratio of price to fundamentals (value stocks). This
The empirical riskreturn relation: a factor analysis approach
, 2007
"... Existing empirical literature on the riskreturn relation uses a relatively small amount of conditioning information to model the conditional mean and conditional volatility of excess stock market returns. We use dynamic factor analysis for large datasets to summarize a large amount of economic info ..."
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Cited by 35 (6 self)
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Existing empirical literature on the riskreturn relation uses a relatively small amount of conditioning information to model the conditional mean and conditional volatility of excess stock market returns. We use dynamic factor analysis for large datasets to summarize a large amount of economic information by few estimated factors, and find that three new factors termed “volatility,” “risk premium,” and “real” factors contain important information about onequarterahead excess returns and volatility not contained in commonly used predictor variables. Our specifications predict 1620 % of the onequarterahead variation in excess stock market returns, and exhibit stable and statistically significant outofsample forecasting power. We also find a positive conditional riskreturn correlation.
Offering versus choice in 401(k) plans: Equity exposure and number of funds
 Journal of Finance
, 2006
"... Records of over half a million participants in more than 600 401(k) plans indicate that participants tend to allocate their contributions evenly across the funds they use, with the tendency weakening with the number of funds used. The number of funds used, typically between three and four, is not se ..."
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Cited by 25 (0 self)
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Records of over half a million participants in more than 600 401(k) plans indicate that participants tend to allocate their contributions evenly across the funds they use, with the tendency weakening with the number of funds used. The number of funds used, typically between three and four, is not sensitive to the number of funds offered by the plans, which ranges from 4 to 59. A participant’s propensity to allocate contributions to equity funds is not very sensitive to the fraction of equity funds among offered funds. The paper also comments on limitations on inferences from experiments and aggregatelevel data analysis. HOW MUCH AND HOW TO SAVE FOR RETIREMENT is one of the most important financial decisions made by most people. Defined contribution (DC) pension plans, such as the popular 401(k) plans, are important instruments of such savings. By 2001 yearend, about 45 million American employees held 401(k) plan accounts with a total of $1.75 trillion in assets (Holden and VanDerhei (2001)). An important characteristic of these plans is that the participant has responsibility over his savings among a plan’s various funds. How responsibly do the participants behave? In particular, how sensitive are participants ’ choices to possible framing effects associated with the menu of choices they are offered? To explore these questions, this paper analyzes a data set recently provided by the Vanguard Group consisting of records of more than half a million participants in about 640 DC plans. These plans offer between 4 and 59 funds in which participants can invest. All plans offer at least one stock fund, 635 plans
A ConsumptionBased Explanation of Expected Stock Returns
 Journal of Finance
, 2006
"... When utility is nonseparable in nondurable and durable consumption and the elasticity of substitution between the goods is high, marginal utility rises when durable consumption falls. The model explains both the crosssectional variation in expected stock returns and the time variation in the equit ..."
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Cited by 24 (2 self)
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When utility is nonseparable in nondurable and durable consumption and the elasticity of substitution between the goods is high, marginal utility rises when durable consumption falls. The model explains both the crosssectional variation in expected stock returns and the time variation in the equity premium. Small stocks and value stocks deliver relatively low returns during recessions when durable consumption falls, which explains their high average returns relative to big stocks and growth stocks. Stock returns are unexpectedly low at businesscycle troughs when durable consumption falls sharply, which explains the countercyclical variation in the equity premium.
A general methodology to price and hedge derivatives in incomplete markets, I.J.T.A.F. [to be submitted
"... We introduce and discuss a general criterion for the derivative pricing in the general situation of incomplete markets, we refer to it as the No Almost Sure Arbitrage Principle. This approach is based on the theory of optimal strategy in repeated multiplicative games originally introduced by Kelly. ..."
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Cited by 8 (3 self)
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We introduce and discuss a general criterion for the derivative pricing in the general situation of incomplete markets, we refer to it as the No Almost Sure Arbitrage Principle. This approach is based on the theory of optimal strategy in repeated multiplicative games originally introduced by Kelly. As particular cases we obtain the CoxRossRubinstein and BlackScholes in the complete markets case and the Schweizer and BouchaudSornette as a quadratic approximation of our prescription. Technical and numerical aspects for the practical option pricing, as large deviation theory approximation and Monte Carlo computation are discussed in detail. 1.