The current paper is concerned with exploring information contained in a series of undisclosed orders that are submitted by the same broker, using this information to estimate the volume contained in the current undisclosed order, and further investigating the trading patterns followed by stockbrokers in the use of undisclosed orders. In an ARMA framework, the estimation results suggest that the information revealed in past-executed undisclosed orders of a stockbroker is explanatory to the volume of the current undisclosed order submitted by the same broker. As a supplement to the current literature relating to the package-trading patterns detected in large disclosed orders, the current study finds that stockbrokers follow the same pattern in the use of undisclosed orders. A practical application of this method is to use it for the prediction of the volume enclosed in a given undisclosed order.

In August 2000 the Singapore Stock Exchange introduced a pre-trading routine that allowed brokers to place orders into the Exchange’s computerized order matching system for a period of 30 minutes prior to market opening. A post-market trading routine was also introduced allowing for a final order matching and trade execution to occur five minutes after market close. This study investigates the impact of these changes on volatility and the price discovery process. The pre-trading session significantly reduced opening stock market volatility while the post-trading session increased volatility prior to close. A GARCH (1,1) model remains the most appropriate model for capturing the characteristics of the intra-day stock price movements in both before and after periods.

This paper examines the optimal path of dividend policy adjustments for a growth company facing the likely threat of takeover. Departing from the common framework of inefficient managers resisting takeover attempts, the formal analysis here focuses on defensive payout strategy of value-maximizing management under the circumstances of random stock market valuation errors, and the bidders’ perceived synergistic gains. A dynamic model, incorporating acquisition activity stochastically, is formulated for a growth firm drawing funds from both internal and external sources. An optimal “bang-bang” reinvestment strategy is derived with control theory, and it is found to be consistent with the firm’s objective of stock-value-maximization. It is also shown theoretically that an immediate threat of takeover shortens managerial planning horizon. The model provides an explanation of dividend adjustment behavior observed in growth firms, and offers an insight into the impact of anti-takeover costs on the firm’s value over time.

This paper deals with the option-pricing problem. In the first part of the paper we study in more details the discrete setting of the option-pricing problem usually referred to as the binomial scheme. We highlight basic differences between the old and the new approaches. The main qualitative distinction of the new pricing approach from either binomial or Black Scholes’s is that it represents the option price as a stochastic process. This stochastic interpretation can not give straightforward advantage for an investor due to stochastic setting of the pricing problem. The new approach explicitly states that the options price is more risky than represented by binomial scheme or Black Scholes theory. Continuous setting will be considered in the second part of the paper following [1]. One significant conclusion follows from the new model. It states that there is no sense in using either neutral probabilities or ‘neutral world’ applications for options valuation either theoretically or numerically. Recall that after the Black Scholes’ publication [2] the ‘simplified’ approach named later binomial scheme was introduced in [3]. In this paper referring to the historical tradition we first represent discrete scheme. In several examples we discuss two-period plain vanilla option valuation. Then we extend the discrete scheme applications to an exotic option-pricing referred to as a compound option. The compound option in Black Scholes setting was first studied in [4] and then in [5,6]. To highlight the difference between stochastic and deterministic option price definitions note that if a deterministic value is interpreted as a perfect or fair price we can comment that the stochastic interpretation provides this number or any other with the probability that real world option value at maturity will be bellow chosen number. This probability is a pricing risk of the option. Thus with an investor’s motivation of the option pricing the stochastic approach gives information about the risk taking. The investor analyzing option price and corresponding risk makes a decision to purchase the option or not. As far as this paper presents alternative point on option pricing it might be useful to present a short history of this development. Recall that according the US law institutions must provide clients by the risk information regarding client’s prospective on their investments. This circumstance implies importance new approach measuring risk of investments. Different parts of this paper were submitted and sent to journals, conferences, and prominent professors. The third part of the paper was sent to Federal Reserve from the Congressman office and simple examples showing drawbacks of the benchmark option valuation method were submitted to SEC in August 2002.

This paper studies the pricing of IPOs in the Indian context. The paper also examines whether the introduction of Bookbuilding has an impact on IPO pricing. The results suggest that IPO are underpriced. The results also suggest that bookbuilt IPOs show lower amount of underpricing than fixed price issues,. A more detailed study suggests that it has to do more with the size of the issue than the issue process. The paper also suggests a model, which demonstrates that IPO underpricing is unavoidable in a market with information asymmetry. The model predicts that the underpricing is more severe in case of smaller size issues. This is consistent with the empirical findings.

This paper reviews the two most important papers of contemporary banking theories: Contemporary Banking Theory (Bhattacharya et al 1993) and Theories of the Banking Firm: A Review of the Literature (Swank 1996), which focus on dealing with the question of why banks exist, and how the banks behavior. These two papers have valuable practical implications for the management of the retail banks, especially the theories of the risk management, the portfolio models, liquidity and maturity transformations, etc. This essay discussed the implications of the theories of retail banking and the developments of the retail banking.

How corporate growth affects the choice between relationship-based debt and public debt remains an unsettled issue in the literature. For high-growth firms, the banking relationship mitigates asset-substitution and underinvestment problems due to debt financing. Close relationships, however, work against funding competition and facilitate holdup behavior by banks. This paper suggests an effective mechanism for high-growth firms, namely competition from equity, to curb banks’ rent extraction when public debt becomes more costly. According to the generalized Myers-Majluf view in the recent literature, new equity issues by high-growth firms actually reduce or even reverse the adverse-selection discount because asymmetric information about these firms’ valuations arise largely from growth rather than from assets-in-place. Our evidence from Japanese data for 1983 to 1997 shows that the relation between loan-to-debt ratio and growth, initially significantly negative, is indeed reversed toward the high end of growth spectrum and turns significantly positive. Consistent with our explanation, fast-growing high-flyers raise more new equity than do other firms. These results not only confirm the existence of both costs and benefits of monitored debt, but also explain why high-growth firms enjoy the benefits without fearing holdup behavior by banks.

We investigate how the market for corporate control (external governance) and shareholder activism (internal governance) interact. Looking at equity prices from 1990 to 2001, we find that these mechanisms are strong complements. A portfolio that buys firms with the highest level of takeover vulnerability and shorts firms with the lowest level of takeover vulnerability generates an annualized abnormal return of 10 - 15% only when public pension fund (blockholder) ownership is high as well. A similar portfolio created to mimic the importance of internal governance generates annualized abnormal returns of 8%, though only in the presence of ‘high’ vulnerability to takeovers. Further, we show that the complementary relation exists for firms with lower industry-adjusted leverage and is stronger for smaller firms. The complementary relation is confirmed using accounting measures of profitability. Using data on acquisitions, firm level Q’s and accounting performance, we explore possible interpretations, providing preliminary evidence for a risk effect as well.

We propose a model of project selection and design of managerial compensation contract that features adverse selection and moral hazard. Our model generates the rather intuitive result that the ex ante probability of a specific project being selected (or, equivalently, its manager being hired) is increasing in the type of the project/manager. Ex post, however, the most capable manager (i.e., the one with the highest type) is not necessarily the one who will be hired to run a project. Basically, when the managers’ types are not identically distributed, picking the most capable manager or selecting the most promising project may actually be inconsistent with the provision of optimal incentives to alleviate the inherent agency problems. Therefore, our model offers a rational explanation to the phenomenon that apparently more capable candidates are occasionally passed over in recruitment and job promotion situations. Our analysis also holds obvious implications for firms’ capital budgeting decisions. If the severity of the principal-agent conflict is sufficiently great (say, between the headquater and the divisional manager) and if the verification of the true project type (the NPV value) by the headquarter is sufficiently costly, we may well see instances where corporate headquarters rationally allocate scarce resources to a lower-NPV project ahead of a higher-NPV project.

Using a new statistical procedure suitable to test efficient market hypothesis in presence of volatility clustering, we find significant evidence against the weak form of efficient market hypothesis for both Shanghai and Shenzhen stock markets, although they have become more efficient at the later stage. We also find that Share A markets are more efficient than Share B markets, but there is no clear evidence on which stock market, Shanghai or Shenzhen, is more efficient. These findings are robust to volatility clustering, a key feature of high-frequency financial time series. They have important implications on predictability of stock returns and on efficacy of capital asset pricing and allocation in Chinese economy.