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Presidential Address
| 2012 Presidential Address |
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Abstract The nature of the firm and its financing are closely interlinked. To produce significant net present value, an entrepreneur has to transform her enterprise into one that is differentiated from the ordinary. To achieve the control that will allow her to execute this strategy, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets. So an entrepreneur has to commit to undertake a second transformation, standardization, that will make the human capital in the firm, including her own, replaceable, so that outside financiers obtain rights over going-concern surplus. I argue that the availability of a vibrant stock market helps the entrepreneur commit to these two transformations in a way that a debt market would not. This helps explain why the nature of firms and the extent of innovation differ so much in different financing environments. |
| 2011 Presidential Address |
| Discount Rates
John H. Cochrane Abstract Discount rate variation is the central organizing question of current asset pricing research. I survey facts, theories and applications. We thought returns were uncorrelated over time, so variation in price-dividend ratios was due to variation in expected cash flows. Now it seems all price-dividend variation corresponds to discount-rate variation. We thought that the cross-section of expected returns came from the CAPM. Now we have a zoo of new factors. I categorize discount-rate theories based on central ingredients and data sources. Discount-rate variation continues to change finance applications, including portfolio theory, accounting, cost of capital, capital structure, compensation, and macroeconomics. |
2010 Presidential Address
Asset Price Dynamics with Slow-Moving Capital
Darrell Duffie
Abstract
I address the apparent slow movement of investment capital to trading opportunities, and the implications for asset price dynamics.
The arrival of new capital can be delayed by fractions of a second in some markets, for example an electronic limit-order-book market, or months in other markets, such as that for catastrophe risk insurance. The pattern of price responses to supply or demand shocks, however, typically involves a sharp reaction to the shock and a subsequent and more extended reversal. The amplitude of the immediate price impact and the pattern of the subsequent recovery can reflect many sorts of institutional impediments to immediate trade, such as search costs for trading counterparties or time to raise capital by intermediaries. I discuss special impediments to capital formation during the recent financial crisis that caused asset price distortions, which subsided afterward. After presenting examples of price reactions to supply shocks in more “normal” market settings, I offer a simple illustrative model of price dynamics associated with slow moving capital that is based on the notion that many investors do not monitor markets and adjust their positions continually.
2009 Presidential Address
Sophisticated Investors and Market Efficiency
Jeremy C. Stein
Abstract
Stock-market trading is increasingly dominated by sophisticated professionals, as opposed to individual investors. Will this trend ultimately lead to greater market efficiency? I consider two complicating factors. The first is crowding-the fact that, for a wide range of "unanchored" strategies, an arbitrageur cannot know how many of his peers are simultaneously entering the same trade. The second is leverage-when an arbitrageur chooses a privately-optimal leverage ratio, he may create a fire-sale externality that raises the likelihood of a severe crash. In some cases, capital regulation may be helpful in dealing with the latter problem.
2008 Presidential Address
The Cost of Active Investing
Kenneth R. French
Abstract
I compare the fees, expenses, and trading costs society pays to invest in the U.S. stock market with an estimate of what would be paid if everyone invested passively. Averaging over 1980 to 2006, I find investors spend 0.67% of the aggregate value of the market each year searching for superior returns. This implies that society’s capitalized cost of price discovery is at least 10% of the current market cap. Moreover, under reasonable assumptions, the typical investor would increase his average annual return by 67 basis points over the 1980 to 2006 period if he switched to a passive market portfolio.
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