This paper develops an equilibrium model of a competitive futures market in which investors trade to hedge positions and to speculate on their private information. Equilibrium return and trading patterns are examined. ~1! In markets where the information asymmetry among investors is small, the return volatility of a futures contract decreases with time-to-maturity ~i.e., the Samuelson effect ho...

We examine whether the previously documented pricing premium for firms’ equity when they meet or beat earnings expectations (MBE) is attributable to a reduction in the cost of equity capital via a reduction in information asymmetry. We measure the latter using the probability of informed trading (PIN) from Easley et al. (1997). We find that PIN decreases (increases) when firms meet or beat (mis...

Financial intermediaries, such as credit rating agencies, have an incentive to maintain a public reputation for credibility amongst investors. However, in a market where credit rating agencies are interacting repeatedly with only a few issuers (sellers), they also have an incentive to develop a second, private reputation for leniency. We develop a dynamic model that analyzes how credit rating a...

Buyers in commercial real estate markets often pay different prices for comparable properties. We document that distant commercial real estate buyers pay, on average, a premium relative to local buyers, controlling for individual property characteristics as well as time fixed-effects. We test the extent to which the sources of these observed premiums are a product of higher search costs/informa...

In this paper, we study how short-sale constraints affect asset price and market efficiency. We consider a fully rational expectations equilibrium model, in which investors trade for two reasons, to share risk and to speculate on private information, but they face short-sale constraints. Short-sale constraints limit both types of trades, and thus reduce the allocational and informational effici...

Field Editor: G. Cassar This paper develops a theory of the participating convertible preferred (PCP) stock commonly used in venture capital settings. I show that the participation and convertibility features of PCP stock can be used to reduce information asymmetry between the venture and potential investors at the time of exit. Further, the convertibility feature of PCP helps in alleviating th...

We show how a high degree of commonality in investor liquidity shocks can diminish incentives for intermediaries to keep markets open and lead to market collapse, even without information asymmetry or news affecting fundamentals. We motivate our model using the perpetual floating-rate note market where two years of explosive growth – in which issues by high quality borrowers were placed with in...

Economists have long been puzzled by the tendency of investors to sell winning investments too soon and hold losing investments too long. Several behavioral explanations for this phenomenon, known as the disposition effect, have been advanced. This paper demonstrates that disposition effects are not intrinsically at odds with rational behavior. Specifically, we show (i) that disposition effects...