Hayne Leland

• University of California, Berkeley

In the absence of significant news, hedging strategies were blamed for the stock market crash of October 1987; but traditional models cannot explain how a relatively small amount of selling could cause so large a price drop. The authors develop a rational expectations model in which prices play an important role in shaping expectations; markets are...

This essay details a model of capital structure and financial equilibrium, developed in order to provide more theoretical information about informational asymmetries, financial structure, and financial intermediation. Although direct information transfer about the abilities of the entrepreneur and/or the quality of the firm is uncertain, one public...

Transactions costs invalidate the Black‐Scholes arbitrage argument for option pricing, since continuous revision implies infinite trading. Discrete revision using Black‐Scholes deltas generates errors which are correlated with the market, and do not approach zero with more frequent revision when transactions costs are included. This paper develops...

I consider markets with asymmetric information. As suggested by Akerlof, quality deterioration in such markets may take place. I show that this is a general phenomenon. Minimum quality constraints (or "licensing requirements") are examined as a possible solution to the problem. Although not generally a first-best solution, such constraints will inc...

Admati, Demarzo, Hellwig, et Pfleiderer (ADHP, 2018) font remarquer que les modèles statiques d’endettement optimal supposent que les entreprises n’ont aucune dette à l’origine. Dans ce cas, le levier qui maximise la valeur de l’entreprise maximise aussi la richesse des actionnaires initiaux. Toutefois, à l’aide d’un simple modèle à deux périodes a...

Most practitioners measure investment performance based on the CAPM, determining portfolio "alphas" or Sharpe Ratios. But the validity of this analysis rests on the validity of the CAPM, which assumes either normally distributed (and therefore symmetric) returns, or mean-variance preferences.

Although all standard equity indexes have a zero weight in cash, managers running index-tracking portfolios often find that maintaining a positive cash holding is cost-efficient. This practice saves significantly on transaction costs because temporary cash inflows and outflows can be absorbed into the cash inventory. In this paper, a mean–variance...

This paper examines the value of debt subject to default risk in a continuous time framework. By considering debt with regular principal repayments (e.g. through a sinking fund), we are able to examine bonds with arbitrary maturity while retaining a time-homogeneous environment. This extends Leland's [1994] earlier closed-form results to a much ric...

This paper studi equlibriam asset price processes in a pure exchange economy with a single representative agent. A general approach is presented to characterize equilibrium asset price processes within the class of diffusion processes. By exploiting the equilibrium condition that the representative agent opfimally holds the total supply of risky as...

Insider trading moves forward the resolution of uncertainty. Using a rational expectations model with endogenous investment level, the author shows that, when insider trading is permitted, (1) stock prices better reflect information and will be higher on average, (2) expected real investment will rise, (3) markets are less liquid, (4) owners of inv...

This paper studi equlibriam asset price processes in a pure exchange economy with asingle representative agent. A general approach is presented to characterize equilibrium assetprice processes within the class of diffusion processes. By exploiting the equilibriumcondition that the representative agent opfimally holds the total supply of risky asset...

Corporate tax savings explain more the 80% of the “value” created by the typical LBO. Our tax system, which allows firms to deduct payments to bondholders but not to stockholders, provides a primary impetus to the LBO movement. The 1986 Tax Reform Act further increased the benefits to extreme leverage. While privately profitable, LBOs have created...

Six months after the market crash of October 1987, we are still sifting through the debris searching for its cause. Two theories of the crash sound plausible -- one based on a market panic and the other based on large trader transactions -- though there is other evidence that is difficult to reconcile. If we are to believe the market panic theory o...

We consider optimal nonuniform pricing schedules, where the price depends upon the amount purchased. Such schedules are regularly used by public utilities and other services. Welfare-optimal nonuniform prices are related to the theory of optimal uniform prices developed by Ramsey. We characterize situations in which upward or downward discontinuiti...

This paper extends the seminal work of Akerlof, and Salop and Stiglitz in two directions: (i) the sellers can select both the selling prices and quality levels of their good, and (ii) the buyers can acquire price/quality information about individual sellers at a cost. We observe multiple price/quality combinations in equilibrium, which depend upon...

The study estimates an empirical model of return intentions using a dataset compiled from an internet survey of Turkish professionals residing abroad. In the migration literature, wage differentials are often cited as an important factor explaining skilled migration. The findings of our study suggest, however, that non-pecuniary factors, such as th...

In most situations of practical relevance, the price behavior of a call option is very similar to a combined position involving the underlying stock and borrowing. The call price and the stock price will change in the same direction. The effect on the call price of a one dollar change in the stock price, however, will depend on the current price of...

That it is easier to measure the costs of price regulation than the benefits is evident in the conflicting results of studies made to determine welfare gains. An econometric study based on a simple theory of demand by customer class concludes that: (1) the effectiveness of regulation across states is irregular, which suggests that state regulatory...

Institute of Business & Economic Research, University of California, Berkeley. The author thanks Mark Rubinstein for comments and suggestions and Octavio Tourinho.

For several decades, economists have subjected the assumption that firms maximize profits to a barrage of criticism. Firms maximize sales (Ref. 1). Firms maximize utility of profits and sales (Ref. 2). Firms maximize just about anything but profits.† And firms that have alternative goals, we are led to believe, do not exhibit profit-maximizing beha...

Future natural resource discoveries will most likely take place on public lands. Rights to potential oil and gas resources are transferred from the public to private firms through a lease; the lease specifies the nature of the rights granted. Federal offshore leases have specified that firms pay a royalty equivalent to one-sixth of the value of pro...

This paper develops a comprehensive approach to project selection and financing decisions, when firms' securities are traded in competitive markets and investors prefer “more to less.” The technique is based on direct inferences from observed security prices.

This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent-policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection a...

For optimal nonuniform pricing schedules, the authors have focused attention on two: profit maximization and welfare maximization, and consider two common forms of nonuniform pricing: two-part and two-blocked policies. It is shown that, regardless of the firm's objective, it can always do at least as well with a two-block as with a two-part policy...

So portfolio insurance seemed a product that would have considerable appeal. The only problem was how to provide it. Clearly, the parallels with regular insurance were limited. While the form of an insurance contract might look familiar⎯an assured value in return for a premium⎯the manner in which it would be provided would have to be quite differen...

Traditional economic models separate firms' production decisions from equilibrium in stock markets. In this paper, we develop an integrated model of production in the presence of capital asset market equilibrium. Our theory indicates that, in a stochastic environment, production and financial variables are inextricably interrelated. Following the f...

Defining "fair return" when profits are random has been a central problem in the theory of regulation. In this paper, we develop a simple but general concept of fair return based on an equilibrium model of production under uncertainty. We propose regulatory behavior which will induce firms to make efficient input choices, while at the same time gua...

Many economic theories presume that a feasible policy set contains an optimal policy. Theorists who have taken care to ensure the existence of solutions commonly have resorted to introducing explicit bounds on a closed policy or action set, thereby rendering it compact. Given a continuous objective function, Weierstrass' Theorem can then be used to...

Properties of optimal forward exchange positions are examined in an expected utility framework. Models considered include multiple forward exchange markets and other alternatives for investment. The responses of optimal forward positions to changes in distributions of returns to speculation are examined, including changes in dispersion about a cons...

Thesis (Ph. D.)--Harvard University, 1968. Includes bibliographical references (leaves 132-137). Microfilm of typescript. Cambridge, Mass. : Harvard University Library Microreproduction Service, 1968. -- 1 reel ; 35 mm.

I. Introduction, 465. — II. A two period model of consumption, 466. — III. The effect of uncertainty on saving, 467. — IV. Decreasing risk aversion and precautionary saving, 468. — V. Speculations on the consumption function, 470. — VI. Conclusion, 472.