Search

The article presents the American Finance Association's 1989 yearly report from the managing editor of "Journal of Finance." The managing editor discusses the submission fee increases of 1989, noting an increase in the number of submissions to the periodical. "Journal of Financial Economics" is noted as the only other major finance journal to publish turnaround statistics. The journal's stylistic guidelines and acceptance policies are mentioned. Smith Breeden Associates donated to the American Finance Association to allow for the establishing of the Smith Breeden prizes for best papers.

This article presents the report of the Representative to the National Bureau of Economic Research (NBER). Founded in 1920, NBER works toward increasing economic understanding. It achieves this through programs, projects, working papers, books, periodicals, and its Summer Institute. Among the many programs sponsored by the Bureau are those focusing on Aging, Corporate Finance, and Industrial Organization. During 2000 NBER issued a total of 13 books. Periodicals include the monthly "NBER Digest," and the "Reporter."

Copyright of Journal of Finance (Wiley-Blackwell) is the property of Wiley-Blackwell and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

This section contains announcements related to the American Finance Association. Included are the results of the 2006 election, information pertaining to the worldwide directory of finance faculty, and information concerning the 2008 annual meeting of the association. The American Finance Association has entered into an agreement with Ohio State University's Department of Finance to maintain a directory of finance faculty that is available on the Web Site of the university. Dates for the 2008 annual meeting, held in New Orleans, Louisiana, are January 4-6.

The article presents a report from the editor of the "Journal of Finance" for the year 1997. During the summer of 1997 Blackwell Publishers began publishing the "Journal" under terms of a five-year agreement. It is hoped that by the year 2000, current and all back issues of the"Journal" will be available online. During 1997 898 papers were submitted, of which 8.85% were accepted for publication. The backlog of accepted but unpublished papers continues to decline, and the turnaround time for papers submitted continues to hold steady.

The article presents information on the fortieth annual meeting of the American Finance Association, to be held at Washington, D.C, on December 28-30, 1981.

The article presents a list of books related to business and finance. Some of the books are "The Politics of Israel: The First Decade of Statehood," by Marver H. Bernstein, "Guidebook to California Taxes With Special Emphasis on Relationship to Federal Taxes," by Russell S. Bock, "The Mechanics of Inflation," "Marxism and Freedom: From 1776 Until Today," by Raya Dunayevskaya, "Prosperity through Competition," by Ludwig Erhard, "Practical Financial Statement Analysis," 4th ed., by Roy A. Foulke, "Supply and Demand," by Hubert Henderson, and "Corporate Bonds: Quality and Investment Performance," by W. Braddock Hickman.

The report of the American Finance Association's representative to the National Bureau of Economic Research (NBER) is presented. NBER has ongoing programs, which also meet during the Summer Institute, on topics such as asset pricing, health economics, and industrial organization. Research projects include international comparisons of welfare programs, which is under the direction of researcher Rebecca Blank.

The article comments on two articles published within the issue; "Some Notes on Financial Incentive-Signalling Models, Activity Choice and Risk Preferences," by S. Ross, and "Welfare Aspects of Options and Supershares," by N. Hakansson. The author notes that both Hakansson and Ross are prominent figures in literature which focuses on the power of options to complete financial markets. The author views the basic premise of Hakansson's paper to be the normative desirability of introducing derivative assets which complete the financial market. He feels that Hakannson's work establishes conditions under which the market portfolio can play the powerful role which is assigned in Ross' paper. The author notes that, if the conditions described by the authors were realized, financial markets could be completed by an institution facilitating trades in options written on the market portfolio.

The article presents a collection of news briefs related to finance in the United States. In 2004 the American Financial Association board authorized a History of Finance project with Stephen Buser named as historian. The 2007 annual meeting of the American Financial Association was held January 5-7 in Chicago, Illinois. Professor Kenneth French was the Program Chair. The American Financial Association and the Department of Finance have entered into a joint venture to maintain and enhance the finance faculty directory on the University's website.

The assumption that the market portfolio follows a specified diffusion process implies, in a simple equilibrium framework, that the representative individual must have a certain utility function which is identified in the paper. Not every diffusion process is viable, i.e., can be "endogenized" to be the market portfolio's price process in such an equilibrium model. The paper provides necessary and sufficient conditions for viability which imply that viable diffusion processes constitute a rather restricted family. [ABSTRACT FROM AUTHOR]

This paper examines the optimal structure of financial contracts in an economy subject to two forms of moral hazard. Multiple information problems are shown to generate a role for multiple classes of financial claimants. We then show that economic efficiency is enhanced if the financial structure of the economy consists of both direct and intermediated financial contract markets. Consequently, our results demonstrate a motivation for the complementarity between capital markets and depository financial institutions. [ABSTRACT FROM AUTHOR]

In a 1976 paper in this Journal, William Brainard and I reported the results of applying a mixed estimation procedure to the asset demand equations of savings and loan associations and mutual savings banks. In each sector, the least squares estimates were both implausible and receptive to a priori information. Even with the simplifying assumptions of normality and exchangeability, the incorporation of prior information through a mixed estimation technique yielded estimates which predicted reasonable asset responses to a wide variety of experiments. Actual root mean square errors for one to eight quarter ahead predictions were also calculated within and outside the sample period used for estimation. For savings and loans, the least squares estimates, mixed estimates and even our pure priors (using prior means for all parameters other than the intercept) forecast out of sample about equally well. Although their overall records were roughly comparable, there were some differences in forecasting particular variables a specific number of quarters ahead. Surprisingly often, one method would forecast better than another method one quarter ahead but not as well as eight quarters ahead. For mutual savings banks, the pure priors outforecast the pure data for five of the six assets in the one quarter ahead tests and were roughly comparable to least squares in the farther ahead tests. The mixed predictions were more accurate than least squares in every case but one, short term bonds one quarter ahead. For both sectors, naive autoregressive forecasts had an impressive accuracy one quarter ahead that declined dramatically as the forecasting period lengthened. A number of developments may now have made these results obsolete. The Federal Reserve Board's flow of funds data have been revised and, with the passage of time, there are now more data available. In addition, the orthogonalization routine in the computer program that we used has been changed. Computational accura... [ABSTRACT FROM AUTHOR]

The relationship between forward foreign exchange rates and subsequent future spot rates has received extensive theoretical and empirical attention in the literature. Two hypotheses have been advanced on the theoretical side. The first hypothesis is that the forward rate is an unbiased estimate of the future spot rate. The second hypothesis holds that speculators in the foreign exchange markets require a return for assuming a speculative position and, hence, that the forward rate is not an unbiased estimate of the future spot rate. Several studies have attempted to test the empirical validity of the above hypotheses, but so far the results have been inconclusive. The basic proposition advanced and tested empirically in this paper is that a firm's (or an individual's) foreign exchange position must be analyzed within the context of the capital asset pricing model (CAPM). A summary of certain basic propositions in foreign exchange theory is given in Section II. The prior literature in the field is reviewed in Section III. Section IV develops the principal ideas of the paper. The precise nature of the risky asset represented by the foreign exchange commitment is identified and the asset's rate of return is specified in measurable form. In addition, the appropriate form of the empirical test is outlined. The results of the empirical tests are reported and analyzed in Section V. The conclusions of this study are that the forward rate is a biased predictor of the future spot rate and that speculative positions do not receive a return above that expected in the CAPM framework. The relationship between forward foreign exchange rates and subsequent future spot rates has received extensive theoretical and empirical attention in the literature. Two hypotheses have been advanced on the theoretical side. The first hypothesis is that the forward rate is an unbiased estimate of the future spot rate. The second hypothesis holds that speculators in the foreign exchange mar... [ABSTRACT FROM AUTHOR]

In the early sixties a number of papers developed stock value models in which the cost of equity capital is a function of the firm's equity investment rate. The conclusions reached, however, have for the most part been rejected in the subsequent literature. Instead, it has become widely accepted both in the theoretical work and in the textbooks on finance that the cost of equity capital is equal to the yield at which a firm's stock is selling, and the latter is independent of the firm's investment rate. In fact, one frequently finds the two terms, share yield and cost of equity capital used interchangeably in the literature. However, contributions to the literature during the last few years provide additional support for and clarification of the alternative theory, and a broad reconsideration of the subject is in order. Part I below critically reviews the literature of the early sixties on both sides of the subject and certain subsequent papers which contributed to the conclusion that share yield and cost of equity capital are equal and independent of investment policy. Parts II and III examine the recent contributions which have materially strengthened the theoretical basis for the contrary conclusion, that the cost of equity in a firm is an increasing function of its investment rate. Part IV reviews the empirical evidence on the subject, and Part V both summarizes the conclusions reached and discusses the areas in which the model requires further development. [ABSTRACT FROM AUTHOR]

A conference paper is presented that focuses on the pricing of new automobile financing. In his research the author uses the cost of the vehicle's credit as the finance rate and argues against the criticism that this is not a measure of pure interest and opts to use the U.S. Federal Reserve System's method for estimating the finance rate. During 1952-1962 sales finance companies competed more heavily with other financial institutions and the car manufacturers' own lenders.

The article presents a list of books the publications received for review.

This article presents a discussion on several papers that examined postwar economics in the U.S. The author discusses the government bond holdings of life insurance companies and the common stock shares purchased by colleges and universities with money from endowments. The author also discusses a paper that examined some of the philosophical forces that have shaped investment activity in the U.S. The author explores how the purchasing power theory had been applied by investors in their financial decision making. The author also discusses trends in securities prices following the end of World War II.

This article presents news and events regarding the American Finance Association (AFA). The AFA and Morgan Stanley are pleased to announce that Eugene F. Fama, the Robert R. McConnick Distinguished Service Professor at the University of Chicago, has been chosen as the first recipient of the Morgan Stanley-American Finance Association Award for Excellence in Finance. The AFA annual meeting will take place in New Orleans, Louisiana, in January 2008. There are also forms and information regarding membership and submission procedures.

Several announcements are presented, including an obituary for Shmuel Kandel, professor and dean at Tel Aviv University, a notice of the establishment of the Morgan Stanley-American Finance Association Award for Excellence in Finance and a notice that the 2008 annual meeting of the American Finance Association is to be held in New Orleans, Louisiana from January 4 through 6.

This paper explores the empirical relevance of banking market structure on growth. There is substantial evidence of a positive relationship between the level of development of the banking sector of an economy and its long-run output growth. Little is known, however, about the role played by the market structure of the banking sector on the dynamics of capital accumulation. This paper provides evidence that bank concentration promotes the growth of those industrial sectors that are more in need of external finance by facilitating credit access to younger firms. However, we also find evidence of a general depressing effect on growth associated with a concentrated banking industry, which impacts all sectors and all firms indiscriminately. [ABSTRACT FROM AUTHOR]

This paper evaluates various explanations for the profitability of momentum strategies documented in Jegadeesh and Titman (1993). The evidence indicates that momentum profits have continued in the 1990s, suggesting that the original results were not a product of data snooping bias. The paper also examines the predictions of recent behavioral models that propose that momentum profits are due to delayed overreactions that are eventually reversed. Our evidence provides support for the behavioral models, but this support should be tempered with caution. [ABSTRACT FROM AUTHOR]

The article presents commentary from Richard S. Bower about two papers contained in the current issue, "A Programming Approach to Corporate Financial Management" by Myers and Pogue, and "Debt Management and the Form of Business Financing" by White. He is disappointed that neither paper addresses such questions as whether financial managers should incorporate speculation about interest rates into their decisions about debt financing, what the optimal level of debt is, and whether dividends make sense when external equity is available as a source of funds. He doesn't believe White's paper backs up his hypothesis about rate speculation.

Academic finance has explored the effect of taxes on corporate capital structure in great detail. By contrast, the effect of taxes on the capital structure of partnerships, REIT's, and related entities has received little attention. The present paper shows that, under general conditions, the values of partnerships and REIT's are invariant to leverage, contradicting the sparse literature in the area. A proof similar to that of Modigliani-Miller is employed. The effect of real world imperfections is also examined. [ABSTRACT FROM AUTHOR]

Empirical evidence of time varying term premia in bond returns is frequently interpreted as evidence against the Expectations Hypothesis. This paper shows that the Expectations Hypothesis can actually imply time varying term premia if the time frame for which the Expectations Hypothesis holds differs from the return measurement period. Furthermore, many of the properties of these term premia are consistent with those of observed term premia. These results are important because they imply that the case against the Expectations Hypothesis is weaker than claimed in the empirical literature. [ABSTRACT FROM AUTHOR]

This paper examines differences in announcement day effects among firms engaged in voluntary sell-offs. While, on average, an initial sell-off announcement results in a significant positive excess return, not all divestiture announcements are accompanied by positive price movements. Dividing the sample into two subsamples based on whether the transaction price is announced shows that the announcement day effect is significantly positive for the price group but not statistically different from zero for the no-price group. In addition, a positive relation is found between the relative size of the sell-off and the announcement day return. [ABSTRACT FROM AUTHOR]

This paper provides some new insights about approximate factor structures, as defined by Chamberlain and Rothschild [2], and their implications for empirical tests. First, we show that any economy that satisfies an approximate factor structure can be transformed, in a manner that does not alter the characteristics of investor portfolios, into an economy that satisfies an exact factor structure, as defined by Ross [9]. Second, we show that principal components analysis represents just one of many methods of forming groups of well-diversified portfolios with no idiosyncratic risk in large samples. Correct factor loadings will be obtained by regressing security returns on any group of these portfolios. Our interpretations of the Chamberlain and Rothschild results also provide additional insights into the testability of the Arbitrage Pricing Theory. We show that securities cannot be repackaged to hide factors in the manner suggested by Shanken [10] without the variance of some of the repackaged securities approaching infinity in large economies. [ABSTRACT FROM AUTHOR]

This paper analyzes the impact, on both welfare and equilibrium prices, of changes in the financial market in a general equilibrium, two-period context. Previous papers have focused on the "securities effect," tending to essentially ignore the equally important "endowment effect" that arises when market structure changes are implemented. Two forms of endowment neutrality and market structure changes which either preserve, expand, or shift allocational feasibility differentiate the main theorems, which are based on arbitrary preferences and beliefs and substantially extend and modify extant results; in particular, earlier statements identified with value conservation are sharply moderated. Very roughly, the paper yields the following implications for some of the more common changes in the market: non synergistic corporate spinoffs and the opening of option markets have, on balance, strongly positive welfare effects; non synergistic mergers tend to have strong negative welfare effects, while the welfare effects of alternative risky debt structures tend to be ambiguous. All of the preceding, however, may under plausible conditions be redistributive. [ABSTRACT FROM AUTHOR]

The agency costs of debt are introduced in this paper to explain the existence of complex financial instruments. Two areas of complexities are discussed in detail: the call provision and the maturity structure of debt. Their existence is rationalized as a means of resolving agency problems associated with informational asymmetry, managerial (stockholder) risk incentives, and foregone growth opportunities. It is also demonstrated that both features of corporate debt serve identical purposes in solving agency problems. Complex financial instruments are required because markets fail to provide complete and costless solutions to the agency problems discussed in the paper. [ABSTRACT FROM AUTHOR]

Since the publication of the seminal papers by Black and Scholes and Merton on the pricing of options and corporate liabilities, their basic framework has been extended and applied to a variety of problems in finance. More recently, the same framework has been used for the valuation of interest dependent claims, and in particular for the pricing of default free bonds. These securities (generally government bonds of various types) are valued by treating them as "contingent" upon the course of one or more interest rates, along with suitable assumptions about the term structure of interest rates. Brennan and Schwartz assume that the value of a default free bond is a function solely of the instantaneous interest rate and time to maturity, and show that various types of bonds—savings bonds, retractable and extendible bonds, and callable bonds—all follow the same partial differential equation as discount bonds, the distinguishing feature being the associated boundary conditions. Taking into account the considerable theoretical work that has been done, there is relatively little published empirical research testing these models. Most of the empirical work in the area of contingent claims analysis has been on the stock options market, with the exception of Ingersoll on the pricing of dual fund shares and Brennan and Schwartz on the valuation of Canadian Federal Government coupon bonds. In this paper contingent claims analysis is applied to the valuation of retractable and extendible bonds and the resultant model is then applied to price Government of Canada bonds. [ABSTRACT FROM AUTHOR]

The article comments on three papers within the issue: "Long-Term Effects of Government Deficits on the U.S. Output Potential," by George von Furstenburg, "Capital Formation and the Recent Productivity Slowdown," by Peter Clark, and "U.S. Productivity Growth Recession: History and Prospects for the Future," by Michael McCarthy. The author discusses each article and criticizes their shortcomings. He looks at von Furstenburg's use of the Phelps-Shell model of dynamic economic growth and notes the usefulness of neoclassical growth theory. The author feels that his discussion on the effects of government deficits on output growth or productivity represent a fruitful economic analysis innovation.

It has long been suggested that the financial structure of a firm communicates information about its returns, and in Ross [1977] some models were developed in which, at an equilibrium, managers would use finance to transmit and validate information about their firms. While these models have the virtue of describing a positive role for finance they are missing some important elements. Perhaps their principal limitation is that they assign no significant function to the manager beyond that of choosing the financial structure. This is in contrast to the neoclassical view of the manager as being concerned solely with activity choice, rather than with irrelevant financial matters. One of the purposes of this paper is to explore the relationship between these two functions. It is not unlikely that in some situations no incentive schedule can be found that simultaneously motivates that manager to make correct activity choices—efficient ones—and to signal the firm's type through the financial structure. Such a structure must reward the manager on the basis of competence while signalling, through finance, the framework of choice faced by the manager. The problem of assessing performance is further complicated by the inability to identify states. In the absence of a complete contingent description of the economy it will always be difficult to separate out the extent to which a particular firm's returns were the consequence of the manager's choices or nature's, i.e., skill or luck. The problems of moral hazard in such a situation are evident; if the manager's productive performance is positively rewarded it is in his interest to bias downward the market's perception of the activity set open to him. This evaluation problem is the second theme of this paper. The first section of the paper introduces the general incentive-signalling-financial (ISF) equilibrium model, and the following section specializes the model to a traditional state-space framework. Here... [ABSTRACT FROM AUTHOR]

In this paper we present an outline of LONGER, a financial planning model based on mixed integer linear programming. The model is based on recent advances in capital market theory, but at the same time it recognizes certain additional considerations that are manifestly important to the financial manager. Thus, we believe that the model has good potential for practical application, although in this paper we emphasize LONGER's relationship to finance theory. We will skim over a number of issues that are critical in a practical application; a later paper will discuss these issues and present LONGER at a practical level of detail. Still another paper has worked out implications for decentralized capital budgeting rules. [ABSTRACT FROM AUTHOR]

Financial models are used extensively by the staff of the Federal Reserve Board to aid in the analysis of alternative monetary policies. The purpose of this paper is not to describe these models in detail, but rather to outline the structure of the short-term models and to discuss both how they are used and some problems that we have encountered with them. Two different financial models are used at the Federal Reserve Board: a monthly model of the money market and the money market sector of our quarterly model. A third, a weekly model, has been estimated but used only to analyze special policy questions. The models are structural in the sense that they attempt to isolate demands and supplies of a set of financial assets. While the two models differ somewhat in the assets considered, they both are used to analyze the relationships between the monetary aggregates on the one hand and interest rates and reserves on the other. Any one of these three variables can be assumed exogenous for purposes of simulation. The models are also used to analyze the effects of special policy actions such as the imposition of marginal reserve requirements on CD's. The quarterly model is well known and need not be described here. For purposes of this paper, the money market sector of the model is defined to include equations for the public's demand for currency, demand deposits, savings and time deposits, and for CD's along with commercial bank demand for free reserves and their offering rates on savings and time deposits and on CD's. Rates offered on savings deposits by thrift institutions are also included. Given the volume of bank reserves, the sector determines M[sub 1], M[sub 2], the Treasury bill rate, the CD rate and the average rate offered on savings and thrift accounts. [ABSTRACT FROM AUTHOR]

The existing empirical literature fails to agree on the nature of the intertemporal relation between risk and return. This paper attempts to resolve the issue by estimating a conditional two-factor model motivated by Merton's intertemporal capital asset pricing model. When long-term government bond returns are included as a second factor, the partial relation between the market risk premium and conditional market variance is found to be positive and significant. The paper also helps explain the convoluted empirical relation between the market risk premium, conditional market variance, and the nominal risk-free rate previously reported in the literature. [ABSTRACT FROM AUTHOR]

The purpose of this paper is to derive the three MM Propositions using the standard deviation-mean portfolio model in a market equilibrium context. This approach to some of the major issues of corporation finance enables us to derive these propositions in a somewhat more direct way than with the use of the risk-class assumption and the arbitrage proof of the MM paper. Instead, a model is substituted relating the maximization of stockholder expected utility to the selection of portfolios of assets to, finally, the financing and investment decisions within the corporation, A link will be provided between two branches of the field of finance that have so far been evolving more or less separately. [ABSTRACT FROM AUTHOR]

Financial decision-making involves two separate and distinct considerations: (1) forming probability beliefs about potential returns from various assets and (2) allocating financial resources among assets on the basis of these beliefs. This paper deals exclusively with the second consideration. No effort is made to determine how management forms probability beliefs about returns on investment opportunities; the emphasis of this paper is on the proper financial decisions to be made given such beliefs. [ABSTRACT FROM AUTHOR]

A list of books received by the journal as of December 1954 is presented, including "Publicity in Action," by Herbert M. Baus, "Ethics in a Business Society," by Marquis W. Childs and Douglas Carter, and "A Graphic Approach to Economics," by K. William Kapp and Lore L. Kapp.

This section lists the 2002 winners of the Smith Breeden Prizes, awarded for the top three papers in the "Journal of Finance," for the year, and the Brattle Group Prizes, awarded for outstanding papers on corporate finance.

The article presents a report from the American Finance Association's editor of the "Journal of Finance" for the year 2006. The journal's success for that year is credited to the previous editor. Information about the numbers of articles submitted to the magazine and the number of times articles published in it were cited by other authors is provided. A discussion of the review process and turnaround time is presented and the contributions of key members of the journal's staff are acknowledged. Prizes awarded for distinguished articles are also discussed.

This article presents information pertaining to the periodical, its parent body, the American Finance Association, and the publisher, Blackwell Publishing. Most importantly, contact information is provided along with computer network resources, information regarding potential advertisements, and a listing of articles that appear in the current issue. The article also discusses prizes awarded by the American Finance Association for research papers, including the Smith-Breeden Prizes for 2006 and the Brattle Awards for 2007.

This paper examines the trade-generation and reputation-building incentives facing sell-side analysts. Using a unique data set I demonstrate that optimistic analysts generate more trade for their brokerage firms, as do high reputation analysts. I also find that accurate analysts generate higher reputations. The analyst therefore faces a conflict between telling the truth to build her reputation versus misleading investors via optimistic forecasts to generate short-term increases in trading commissions. In equilibrium I show forecast optimism can exist, even when investment-banking affiliations are removed. The conclusions may have important policy implications given recent changes in the institutional structure of the brokerage industry. [ABSTRACT FROM AUTHOR]

Using transaction data from Indonesia, this paper shows that domestic investors have higher profits than foreign investors. In addition, clients of global brokerages have higher long-term and smaller medium (intramonth) and short (intraday) term profits than clients of local brokerages. This suggests that clients of local brokerages have a short-lived information advantage, but that clients of global brokerages are better at picking long-term winners. Finally, domestic clients of global brokerages have higher profits than foreign clients of global brokerages, suggesting that the combination of local information and global expertise leads to higher profits. [ABSTRACT FROM AUTHOR]

This paper uses evidence from a data set of 27 European IPOs to analyze how investors bid and the factors that influence their allocations. We also make use of a unique ranking of investor quality, associated with the likelihood of flipping the IPO. We find that investors perceived to be long-term holders of the stock are consistently favored in allocation and in out-turn profits. In contrast to Cornelli and Goldreich (2001), we find little evidence that more informative bids receive larger allocations or higher profits. Our results cast doubt upon the extent of information production during the bookbuilding period. [ABSTRACT FROM AUTHOR]

The Federal Reserve sets targets for interest rates which it enforces through direct market intervention. These targets are changed periodically. In this paper, we develop a term structure model in which the short rate is subject to a control which keeps it close to a target which changes from time to time. The probability of target changes is not constant in the model, but changes as a function of observables. The model performs well at explaining the shifts in the yield curve that accompany target changes. [ABSTRACT FROM AUTHOR]

The article presents announcements related to finance, including meeting announcements for the Northern Finance Association on September 19-20, 1992 and the Academy of Financial Services on October 21, 1992, as well as a call for suggestions to the Nominating Committee of the American Finance Association for the new slate of directors.

This comment addresses an important issue in capital market theory in general and in its application to the international capital market in particular. However, we feel that many of the questions raised by Adler regarding our earlier paper result from trying to make more of our results than we intended. In our paper we explicitly stated that two conditions must exist in order to provide a financial motivation for direct foreign investment (DFI) over portfolio investment: (1) there must exist greater barriers or costs to portfolio capital flows than to capital flows forming part of the direct investment package; and (2) investors must recognize that MNCs provide a diversification opportunity which otherwise is not available. We provided examples of potential barriers, but did not attempt to specify them or test for their existence. What we did was to show that the risk characteristics of firms engaged in DFI was not inconsistent with a rational capital market response to these foreign activities. We feel that this was an important result given a widespread view that foreign activities were perceived as increasing the risk of U.S. firms engaged in DFI. [ABSTRACT FROM AUTHOR]

We attempt to translate Neo-Austrian ideas about the workings of financial markets, as originally advanced by F. A. Hayek, into the standard probabilistic language of modern finance. We focus on an apparent paradox, namely the insistence of Neo-Austrians on order (i.e., stationarity) together with ever-reemerging inefficiencies. The paper's findings have implications beyond Neo-Austrian theory: They demonstrate how easy it is to reject market efficiency, but how much more difficult it is to discern the nature of the inefficiency. We illustrate our findings with price data from the U.S. Treasury bill market over the period 1962 to 1999. There is ample evidence that the price of a three-month Treasury bill is not a random walk, yet the sign of the average price change is erratic, so that inference about the nature of the inefficiency is unreliable. [ABSTRACT FROM AUTHOR]