We survey 401 financial executives, and conduct in-depth interviews with an additional 20, to determine the key factors that drive decisions related to reported earnings and voluntary disclosure. The majority of firms view earnings, especially EPS, as the key metric for outsiders, even more so than cash flows. Because of the severe market reaction to missing an earnings target, we find that firms are willing to sacrifice economic value in order to meet a short-run earnings target. The preference for smooth earnings is so strong that 78 % of the surveyed executives would give up economic value in exchange for smooth earnings. We find that 55 % of managers would avoid initiating a very positive NPV project if it meant falling short of the current quarter’s consensus earnings. Missing an earnings target or reporting volatile earnings is thought to reduce the predictability of earnings, which in turn reduces stock price because investors and analysts hate uncertainty. We also find that managers make voluntary disclosures to reduce information risk associated with their stock but try to avoid setting a disclosure precedent that will be difficult to maintain. In general, management’s views provide support for stock price motivations for earnings management and voluntary disclosure, but provide only modest evidence in support of other

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.

This paper explores the e¡ect of equity volatility on corporate bond yields. Panel data for the late 1990s show that idiosyncratic ¢rm-level volatility can explain as much cross-sectional variation in yields as can credit ratings. This ¢nding, together with the upward trend in idiosyncratic equity volatility documented by Campbell, Lettau, Malkiel, and Xu (2001), helps to explain recent increases in corporate bond yields. DURING THE LATE 1990s, THE U.S. EQUITY and corporate bond markets behaved very di¡erently. As displayed in Figure 1, stock prices rose strongly, while at the same time, corporate bonds performed poorly. The proximate cause of the low returns on corporate bonds was a tendency for the yields on both seasoned and newly issued corporate bonds to increase relative to the yields of U.S.Treasury securities. These increases in corporate^Treasury yield spreads are striking because they occurred at a time when stock prices were rising; the optimism of stock market investors did not seem to be shared by investors in the corporate bond market.

Abstract This paper studies the ICAPM intertemporal relation between conditional mean and conditional variance of the aggregate stock market return. We introduce a new estimator that forecasts monthly variance with past daily squared returns -the Mixed Data Sampling (or MIDAS) approach. Using MIDAS, we find that there is a significantly positive relation between risk and return in the stock market. This finding is robust in subsamples, to asymmetric specifications of the variance process, and to controlling for variables associated with the business cycle. We compare the MIDAS results with other tests of the ICAPM based on alternative conditional variance specifications and explain the conflicting results in the literature. Finally, we offer new insights about the dynamics of conditional variance. * We thank

The value anomaly arises naturally in the neoclassical framework with rational expectations. Costly reversibility and countercyclical price of risk cause assets in place to be harder to reduce, and hence are riskier than growth options especially in bad times when the price of risk is high. By linking risk and expected returns to economic primitives, such as tastes and technology, my model generates many empirical regularities in the cross-section of returns; it also yields an array of new refutable hypotheses providing fresh directions for future empirical research. WHY DO VALUE STOCKS EARN HIGHER EXPECTED RETURNS than growth stocks? This appears to be a troublesome anomaly for rational expectations, because according to conventional wisdom, growth options hinge upon future economic conditions and must be riskier than assets in place. In a widely used corporate finance textbook, Grinblatt and Titman (2001, p. 392) contend that “Growth opportunities are usually the source of high betas,..., because growth options tend to be most valuable in good times and have implicit leverage, which tends to increase

international predictability, factor model We thank Kewei Hou and Soeren Hvidjkaer for kindly providing data. Andrew Ang acknowledges support from the NSF.

Abstract not found

We present new evidence on the distribution of the ex ante risk premium based on a multi-year survey of Chief Financial Officers (CFOs) of U.S. corporations. We have responses from surveys conducted from the second quarter of 2000 through the second quarter of 2003. We find evidence that the one-year risk premium is highly variable through time, while the ten-year expected risk premium is stable and equal to approximately 3.8%. For one-year premia, after periods of negative returns, CFOs significantly reduce their market forecasts, and return distributions are more skewed to the left. We also examine an important prediction of asset pricing theory: a positive trade-off between ex ante returns and ex ante volatility. In a unique test, we examine this trade-off in a cross-section of individual respondents. We find that time horizon plays and important role. While there is little evidence of a significant relation between expected returns and variance at the one-year horizon, there is a strong

We study whether exposure to marketwide correlation shocks affects expected option returns, using data on S&P100 index options, options on all components, and stock returns. We find evidence of priced correlation risk based on prices of index and indi-vidual variance risk. A trading strategy exploiting priced correlation risk generates a high alpha and is attractive for CRRA investors without frictions. Correlation risk exposure explains the cross-section of index and individual option returns well. The correlation risk premium cannot be exploited with realistic trading frictions, provid-ing a limits-to-arbitrage interpretation of our finding of a high price of correlation risk. CORRELATIONS PLAY A CENTRAL ROLE in financial markets. There is considerable ev-idence that correlations between asset returns change over time1 and that stock return correlations increase when returns are low.2 A marketwide increase in correlations negatively affects investor welfare by lowering diversification ben-efits and by increasing market volatility, so that states of nature with unusually high correlations may be expensive. It is therefore natural to ask whether mar-ketwide correlation risk is priced in the sense that assets that pay off well when marketwide correlations are higher than expected (thereby providing a ∗Driessen is at the University of Amsterdam. Maenhout and Vilkov are at INSEAD. We would

We study the relationship of corporate governance policy and idiosyncratic risk. Firms with fewer antitakeover provisions display higher levels of idiosyncratic risk, trading activity, private information flow, and information about future earnings in stock prices. Trading interest by institutions, especially those active in merger arbitrage, strengthens the relationship of governance to idiosyncratic risk. Our results indicate that openness to the market for corporate control leads to more informative stock prices by encouraging collection of and trading on private information. Consistent with an information-flow interpretation, the component of volatility unrelated to gov-ernance is associated with the efficiency of corporate investment. THE EFFECT OF CORPORATE GOVERNANCE on equity prices and the distribution of returns is an important issue in corporate finance. Gompers, Ishii, and Metrick (2003) and Cremers and Nair (2005) find that governance can directly influ-ence equity prices. These and other authors generally posit that management constraints and incentives are the mechanisms through which governance in-