Starting from the change in decision-makers’ risk attitude, which suggests “an increase in risk leads to a heightened tendency for risk aversion”, this study explores the nonlinear relationship between idiosyncratic risk and corporate cash holdings. Empirical analysis results indicate that, with the enhancement of decision-makers’ risk-averse degree, the marginal increase in corporate cash holdings presents an upward trend as idiosyncratic risk rises. Associated with the changes in managers’ risk attitude, the nonlinear relationship between idiosyncratic risk and corporate cash holdings becomes insignificant when the firm purchases directors’ liability insurance or is located in regions with better business environments. However, if the executives are older or hold academic titles, the increase in corporate cash holdings with the rise of idiosyncratic risk is more rapid.

This paper studies idiosyncratic risk of new ventures. An option-based model of a new venture with multistage investments and jumps is developed. Our model ex- plains (1) why new ventures?idiosyncratic volatility eventually decreases as they clear R&D investment stages and become mature ?rms ?the stage-clearing e¤ect; (2) the negative relation between jumps in value and subsequent idiosyncratic volatility ?the jump e¤ect; (3) the dynamics of idiosyncratic volatility under di¤erent schedules of staged venture capital investments; and (4) the e¤ect of di¤erent schedules of staged investments on ?rm valuation with the presence of jumps. Empirically, we develop a generalized Markov-Switching EARCH model to simultaneously capture structural changes in ?rms?idiosyncratic volatility and the relation between jumps and idiosyn- cratic volatility. Using a hand-collected dataset of early-stage biotech ?rms, we ?nd empirical evidence supporting the jump e¤ect and the stage-clearing e¤ect described by our model.

本文考虑一个面临经营性风险（非系统风险）的企业家，在给定的债务及企业所得税率下，如何通过消费平滑、企业资本投资、破产保护以及金融风险投资，实现消费效用最大化的公司金融问题。本文得到了非风险中性下企业资本价值的半闭式解及相应的最优经营策略和最优破产阀值。对应经典的资本资产定价（CAPM）理论，得到了企业家的期望收益率、贝塔系数、系统风险溢价和非系统风险溢价（idiosyncratic risk premium）。不同于传统观点，非系统风险溢价严格大于零。这些结论和数值计算表明，企业家的风险态度对企业资本价值、最优资本结构，资本投资策略、破产水平、贝塔系数、非系统风险溢价、期望收益率等具有显著的影响。

This paper examines the impact of idiosyncratic risk on the cross-section of weekly stock returns from 1963 to 2006. I use an exponential GARCH model to forecast expected idiosyncratic volatility and employ a combination of the size e§ect, value premium, return momentum and short-term reversal to measure relative mispricing. I ?nd that stock returns monotonically increase in idiosyncratic risk for relatively undervalued stocks and monotonically decrease in idiosyncratic risk for relatively overvalued stocks. This phenomenon is robust to various subsamples and industries, and cannot be explained by risk factors or ?rm characteristics. Further, transaction costs, short-sale constraints and information uncertainty cannot account for the role of idiosyncratic risk. Overall, these ?ndings are consistent with the limits of arbitrage arguments and demonstrate the importance of idiosyncratic risk as an arbitrage cost.

The evidence on the relation between idiosyncratic risk and future market return is at odds with the theory in Merton (1987). We argue that this is because conventional idiosyncratic risk measures are too noisy that consequently camou?age the true pricing relation suggested by the theory in empirical tests. To reduce the noise, we employ a random portfolio approach to construct an alternative aggregate idiosyncratic risk measure. Due to a high correlation between the noise components of the conventional idiosyncratic risk measure and our portfolio idiosyncratic risk measure, we include both measures simultaneously in a predictive regression, in which the conventional idiosyncratic risk measure helps to further reduce the noise in our portfolio idiosyncratic risk measure. We ?nd that both variables are signi?cant and jointly predict returns on the market with an adjusted R2 of 2%. Our results are very robust to all conventional control variables, sample periods, the size deciles.

The evidence on the relation between idiosyncratic risk and future market return is at odds with the theory in Merton (1987). We argue that this is because conventional idiosyncratic risk measures are too noisy that consequently camou?age the true pricing relation suggested by the theory in empirical tests. To reduce the noise, we employ a random portfolio approach to construct an alternative aggregate idiosyncratic risk measure. Due to a high correlation between the noise components of the conventional idiosyncratic risk measure and our portfolio idiosyncratic risk measure, we include both measures simultaneously in a predictive regression, in which the conventional idiosyncratic risk measure helps to further reduce the noise in our portfolio idiosyncratic risk measure. We ?nd that both variables are signi?cant and jointly predict returns on the market with an adjusted R2 of 2%. Our results are very robust to all conventional control variables, sample periods, the size deciles

This paper examines the impact of idiosyncratic risk on the cross-section of weekly stock returns from 1963 to 2006. I use an exponential GARCH model to forecast expected idiosyncratic volatility and employ a combination of the size effect, value premium, return momentum and short-term reversal to measure relative mispricing. I ?find that stock returns monotonically increase in idiosyncratic risk for relatively undervalued stocks and monotonically decrease in idiosyncratic risk for relatively overvalued stocks. This phenomenon is robust to various subsamples and industries, and cannot be explained by risk factors or ?rm characteristics. Further, transaction costs, short-sale constraints and information uncertainty cannot account for the role of idiosyncratic risk. Overall, these ?findings are consistent with the limits of arbitrage arguments and demonstrate the importance of idiosyncratic risk as an arbitrage cost.

The B-share markets in China, originally for foreign investors only, were opened to local investors in 2001. This reform was expected to improve the information efficiency in B-share markets, since local investors were supposed to be better informed than foreign investors. Meanwhile, we find that, after opening to local investors, B-share price synchronicity increases, and firm-specific return variation (idiosyncratic risk) decreases. Opening B-share markets to local investors fails to improve or even deteriorates the information capitalization of B-share prices. The findings may help us understand Chinese government’s policy making. For instance, in August 2007, Chinese government announced that Chinese citizens would be allowed in public to buy and sell Hong Kong stocks through special accounts with domestic commercial banks. But after hearing opinions from different entities, Chinese government decides to infinitely postpone this policy.

Early-stage ?rms usually have a single large Research and Development (R&D) project that requires multi-stage investment. Firms? volatility can dramatically change due to the evolvement of R&D e¤orts and stage clearing. First, the success (failure) of R&D e¤orts within each stage (jump risk) decreases (increases) the un- certainty (i.e. volatility) level of the ?rms?future returns ?"jump e¤ect". Second, at the end of each stage, ?rms decide whether to continue next stage investment upon re-evaluating the project prospect conditional on the resolution of technical uncertainty and other information; as ?rms survive each investment stage and are becoming mature, the uncertainty level of their future returns should eventually decrease in later investment stages that lead to maturity ?"stage-clearing e¤ect". Ignoring these e¤ects results in incorrect estimation of ?rms?future volatility, an important element for early-stage ?rm valuation. In this paper, I develop a gener- alized Markov-Switching EARCH methodology for early-stage ?rms with discrete stage-clearing and jumps. My methodology can identify structural changes in the idiosyncratic volatility and also explore the relation between price changes and future volatility. Using a hand-collected dataset of early-stage biotech ?rms, I con?rmed the existence of the "stage-clearing e¤ect" and the "jump e¤ect". In the second part of my paper, I model early-stage ?rms as sequences of nested call options with jumps that lead to mature ?rms. "Jump e¤ect" arises because the early-stage ?rms are modeled as compound call options with jumps on the underly- ing cash ?ows, the volatility of the early-stage ?rms at each stage is determined by the compound call option elasticity to the underlying cash ?ows. If the downside (upside) jump happens, the value of the underlying cash ?ows decreases (increases), which makes the compound call option elasticity go up (down). As a result, the compound call option becomes riskier (less risky). "Stage-clearing e¤ect" arises because as ?rms exercise their option to continue investment, the new options that ?rms enter into will eventually become a less risky option.

This paper develops an integrated model of asset pricing and moral hazard. In particular, we combine a version of the Capital Asset Pricing Model (CAPM) with a multi-agent moral hazard model. The excess dollar returns for risky stocks, optimal contracts for managers (agents) that involve relative performance, and equilibrium stock prices are explicitly characterized. We show that the CAPM linear relation in terms of the expected dollar returns still holds in the presence of moral hazard and that our  is given by the ratio of the covariance between a firm’s stock return and the market return over the variance of the market return, with both returns adjusted for the compensation to the managers. The equilibrium price of a stock decreases with its idiosyncratic risk, but the expected excess dollar return of the stock is independent of it. Consequently, the risk premium, which is defined as the ratio of the excess return to the stock price, increases with idiosyncratic risk. We also show that the risk aversion of the principal in our model leads to less emphasis on relative performance evaluation than in a model with a risk-neutral principal. This result may shed light on why the empirical evidence for relative performance evaluation is mixed, even though the theoretical prediction based on a risk-neutral principal strongly supports it. In addition, we show that if the manager of a firm is compensated based solely on his own performance, then the expected dollar return of the firm increases with its idiosyncratic risk. This exercise illustrates that, in the presence of moral hazard, contracting plays a key role in the determination of the expected return of a stock. Furthermore, we show that under certain conditions, the equilibrium contract is a linear combination of the stock price and the level of the market portfolio.