This is the first study that uses Merton’s (1974) option pricing model to compute default measures for individual firms and assess the effect of default risk on equity returns. The size effect is a default effect, and this is also largely true for the book-to-market (BM) effect. Both exist only in segments of the market with high default risk. Default risk is systematic risk. The Fama-French (FF) factors SMB and HML contain some default-related information, but this is not the main reason that the FF model can explain the cross-section of equity returns.

This paper makes indirect inference about the time-variation in expected stock returns by comparing unconditional sample variances to estimates of expected conditional variances. The evidence reveals more predictability as more information is used, and no evidence that predictability has diminished in recent years. Semi-strong form evidence suggests that timevariation in expected returns remains economically important.

We try to explain the severe under-pricing of 523 A-share IPOs in the Chinese markets from 1997 to 2001 using institutional characteristics, absolute value, and relative value of IPO. We find that relative values of IPO are critical determinants of the severe under-pricing of A-share IPOs in China. We also find that relaxing government regulation of offering price increases under-pricing, and thus conclude that the severe under-pricing of A-share IPOs in China is not caused by the government regulation of offering price. We propose a relative value theory to explain why relaxing government regulation of offering price results in higher under-pricing and find some support for the theory.

This article does not focus on any special methods or techniques for pricing a share, but concentrates on the relationship between equilibrium price(s) of a share and competitive interactions of rational investors. In this article, it attempts to establish a model combining “Bayesian Game” theory concerned on “non-cooperative games of incomplete information” and “Random Walk” theory together to illustrate process of how new equilibrium price(s) will be achieved in incomplete information when new information is released into market. Moreover, due to incomplete information structure and bargaining behaviors from rational investors for maximizing their expected utility respectively in this model, it leads to a deviation between new equilibrium price(s) and value of a share (Pareto-optimality). From this conclusion, it can be stated that rational investors’ strategies or behaviors make sense for change of share price. Furthermore, since the real market is not perfect market, so 1.when rational investors price a share, they not only need to estimate value of the share, but also should consider about beliefs and strategies from opponents; 2.if behavioral patterns among rational investors can be described by the model from process of new equilibrium price(s) achieved, change of a share price will be predicted more precisely.

Abstract：Some scholars have discussed extensively the interaction of capital structure, investment and product market behaviors. They suggest that debt leads to lower investment expenditures and weaker or stronger product market competition. They, however, look only at two of the above behaviors. This paper develops a model which examines all three behaviors and shows that debt and investment can be substitutes in a model where firms rationally take on debt. Furthermore, it is demonstrated that when firms compete with prices in the product market, an increase in debt leads to lower investment and higher prices. Key Words：Debt Investment Product Market Behavior Limited Liability Effect Credible Commitment

China’s Stock Market is the most important emerging market awaiting for investigation by both academics and industrials. We study the pro…tability of long position in winner-based threshold momentum strategies after accounting for the trans-action cost. We …nd substantial pro…ts (double to octuple the money every year) in daily threshold trading strategies when trading cost is not accounted. However, at very low level of trading cost, say 0.2%, all pro…ts disappear. We employ a model that rebalance the portfolio carefully to save the transaction cost, but the trading rules still fail to profit at a reasonable level of trading cost. Thus, the momentum pro…ts may not compete with the trading cost.

A government policy aimed at the reduction of state shares in state-owned enterprises (SOE) triggered a crash in Chinas stock market. The sustained depression and spillover even after the policy adjustments were over constitute a puzzle the so-called state-share paradox. The empirical study finds evidence in two dimensions. First, a regime switching model with an absorbing state suggests that government policy switches the regime to liquidity black holes. Second, there is no evidence of light-to-liquidity during the crash, suggesting to model the crash as an aggregate phenomenon of the whole market. To carefully match the evidence, a theoretical model is set up within the framework of market microstructure. The state-share paradox is not a simply instance of news-driven crash. The model shows that Chinas stock market has distinctive features of liquidity production and price discovery. The irregularities of a representative liquidity supporter generate an inverted-S demand curve and give rise to potential liquidity black holes. Multiple equilibria and the resulting large drop in prices arise from supply dynamics of short-run investors, who buy the stock from the primary market liquidate their long positions in the secondary market. This study contributes a rational panics hypothesis to the literature. The rational panics hypothesis is neither an rational model with noise traders, nor a standard rational expectation model under the asymmetric information framework. It is based on homogeneous agents with incomplete information, and is consistent with the evidence of absorbing regime switching and the recent literature on state-dependent preference. Our findings have larger implications for ine¢ ciency of Chinas stock market.

Using daily data from May 2000 to January 2004, this study examines the risk, return, security selection and market timing performance of China’s security investment funds, in comparison with the performance of SIFs in the U.S. Our results indicate that China investment funds show superior marketing timing performance while U.S. fund managers display stronger security selection ability. These results imply that the potential synergy for Sino-U.S. joint venture investment funds could be tremendous. Additional analysis of the trading volume of closed-end funds in China illustrates that investors’ interests in SIFs are strongly and positively related to fund performance. Results also indicate that Chinese investors favor professionally managed funds more than direct investment in stocks during negative market conditions.

This study examines the role of information uncertainty (IU) in predicting cross-sectional stock returns. We define IU in terms of "value ambiguity", or the precision with which firm value can be estimated by knowledgeable investors at reasonable cost. Using several different proxies for IU, we show that: (1) On average, High IU firms earn lower future resturns (the "mean" effect), and (2) Price and earnings momentum effects are much stronger among high IU firms (the "interaction" effect). These findings are consistent with theoretical models that feature investor overconfidence (Daniel et al. (1998)) and information cascades (Bikhchandani et al. (1992)). Specifically, our evidence indicates that high IU exacerbates investor overconfidence and limits rational arbitrage.

This paper generalizes the Myers and Majluf (1984) model by introducing an agency cost structure based on private benefits of control. This new model predicts that many corporate finance variables each have opposing effects on under- and overinvestment. Private benefits exacerbate overinvestment but, interestingly, a small amount of private benefits can enhance firm value by alleviating underinvestment. Likewise, an increase in insider ownership alleviates overinvestment but aggravates underinvestment. When private benefits are small, the adverse effect of insider ownership on underinvestment tends to dominate. When there are considerable private benefits, the incentive-alignment effect of insider ownership is pronounced. Additionally, this model reconciles existing equity financing theories on announcement effects. It helps resolve the puzzle that small-growth firms do not seem to have an asymmetric information disadvantage when they issue new equity.