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211
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 3043 (12 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.
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 267 (9 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.
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 246 (10 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
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 235 (22 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: an Empirical Perspective,”Journal of Finance,
, 2005
"... ABSTRACT 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 ..."
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Cited by 144 (13 self)
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(Show Context)
ABSTRACT 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. Keywords: Asset Pricing, Risk Sharing. * First version August 2002. The authors thank Thomas Sargent, Robert Hall, Dirk Krueger, Steven Grenadier, Narayana Kocherlakota, Andrew Abel, Fernando Alvarez, Andrew Atkeson, Patrick Bajari, John Cochrane, Timothey Cogley, Harold Cole, Marco Del Negro, Lars Peter Hansen, John Heaton, Christobal Huneuus, Kenneth Judd, Sydney Ludvigson, Sergei Morozov, Lee Ohanian, Monika Piazzesi, Luigi Pistaferri, Esteban RossiHansberg, Kenneth Singleton, Laura Veldkamp, PierreOlivier Weill, Amir Yaron, the editor Robert Stambaugh and an anonymous referee. We also benefited from comments from seminar participants at
Multivariate tests of financial models: A new approach
 Journal of Financial Economics
, 1982
"... A variety of fmancial models are cast as nonlinear parameter restrictions on multivariate regression models, and the framework seems well suited for empirical purposes. Aside from eliminating the errorsinthevariables problem which has plagued a number of past studies, the suggested methodology in ..."
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Cited by 120 (2 self)
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A variety of fmancial models are cast as nonlinear parameter restrictions on multivariate regression models, and the framework seems well suited for empirical purposes. Aside from eliminating the errorsinthevariables problem which has plagued a number of past studies, the suggested methodology increases the precision of estimated risk premiums by as much as 76%. In addition, the approach leads naturally to a likelihood ratio test of the parameter restrictions as a test for a financial model. This testing framework has considerable power over past test statistics. With no additional variable beyond fi, the substantive content of the CAPM is rejected for the period 19261975 with a significance level less than 0.001. 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 105 (21 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
Arbitrage, and Equilibrium Asset Pricing
 Journal of Finance. 2001
"... This paper offers a model in which asset prices ref lect both covariance risk and misperceptions of firms ’ prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures ~e.g., fundamental0price ratios!. Wi ..."
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Cited by 82 (17 self)
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This paper offers a model in which asset prices ref lect both covariance risk and misperceptions of firms ’ prospects, and in which arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to both risk and mispricing measures ~e.g., fundamental0price ratios!. With many securities, mispricing of idiosyncratic value components diminishes but systematic mispricing does not. The theory offers untested empirical implications about volume, volatility, fundamental0price ratios, and mean returns, and is consistent with several empirical findings. These include the ability of fundamental0price ratios and market value to forecast returns, and the domination of beta by these variables in some studies. THE CLASSIC THEORY OF SECURITIES MARKET equilibrium beginning with Sharpe ~1964!, Lintner ~1965!, and Black ~1972! is based on the interaction of fully rational optimizing investors. In recent years, several important studies have explored alternatives to the premise of full rationality. One
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 82 (12 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.
Land of Addicts? An Empirical Investigation of HabitBased Asset Pricing Models
, 2003
"... A leading explanation of aggregate stock market behavior suggests that assets are priced as if there were a representative investor whose utility is a power function of the difference between aggregate consumption and a “habit" level, where the habit is some function of lagged and (possibly) co ..."
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Cited by 68 (5 self)
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A leading explanation of aggregate stock market behavior suggests that assets are priced as if there were a representative investor whose utility is a power function of the difference between aggregate consumption and a “habit" level, where the habit is some function of lagged and (possibly) contemporaneous consumption. But theory does not provide precise guidelines about the parametric functional relationship between the habit and aggregate consumption. This makes formal estimation and testing challenging; at the same time, it raises an empirical question about the functional form of the habit that best explains asset pricing data. This paper studies the ability of a general class of habitbased asset pricing models to match the conditional moment restrictions implied by asset pricing theory. Our approach is to treat the functional form of the habit as unknown, and to estimate it along with the rest