How do managers of a firm choose between alternative finan­ cial policies? Can the choice of a particular financial policy affect the value of the firm? Since the early 1960s, the debate on these questions has been lively and interesting as economists have inves­ tigated the effect on the value of the firm of relaxing the various assumptions in the celebrated Modigliani-Miller theory. Further­ more, even if we stick to the MM-assumptions (that is, we assume perfect and complete capital markets, no taxes and symmetric information), and we therefore know that only optimally chosen investments determine firm's value, another interesting question arises: How does the structure of ownership affect investment de­ cisions (and, in turn, values)? This research monograph attempts to analyze some of the issues involved in this debate. It belongs to the area of mathematical economics and is intended to appeal to mathematical economists as well as economists and mathemati­ cians. It is meant to deal with economically relevant problems in a mathematically adequate way. To decide whether or not it succeeds in this task, it is up to the reader. I am greatly indebted to Dr. Margaret Bray for her supervi­ sion of my PhD thesis in Economics at the London School of Eco­ nomics from which this book resulted. She helped me as friend and adviser through many struggles in the last three years and invested a great amount of work in this thesis.

Inhalt

I - Markets and Information.- 1 The Information Content of Dividends.- 1.1 Introduction.- 1.1.1 Asymmetric Information.- 1.1.2 Public Information.- 1.1.3 Overview of Part I.- 1.2 Dividends and Information.- 2 An Application of the Kalman Filter.- 3 The Effect of Publicly Available Information.- 3.1 Public Information.- 3.2 Conclusion.- II - Managers and Stock Price.- 4 Dividend Policy and Stock Price Volatility.- 4.1 Introduction.- 4.1.1 Dividends and Prices.- 4.1.2 Price Volatility.- 4.1.3 Overview of Part II.- 4.2 The Excess Volatility Debate.- 4.2.1 The Variance Bounds Inequality.- 4.2.2 Small Sample Bias.- 4.2.3 The Issue of Stationarity.- 4.3 Explaining Excess Volatility.- 4.3.1 Rational Bubbles.- 4.3.2 Time Varying Discount Rates.- 4.3.3 Challenges to Rational Expectations.- 5 Volatility of Prices and Volatility of Dividends.- 6 A General Framework for the Variance Bounds Inequality.- 6.1. Expected Sample Variance of Prices.- 6.2 Grossness of a Violation.- 6.3 Conclusion.- III - Ownership Structure and Investments.- 7 Value, Ownership, and Equity Linkages.- 7.1 Introduction.- 7.1.1 The Hierarchical Group.- 7.1.2 Overview of Part III.- 7.2 Value and Ownership.- 8 Corporate Grouping and Resource Allocation.- 8.1 Resource Allocation in a Group.- 8.2 Ownership Structure and Value.- 9 Ownership and Investments: A Numerical Example.- 10 Ownership Concentration and Corporate Control.- 10.1 Concentrate Shareholdings and Monitoring.- 10.2 Patterns of Corporate Ownership.- 11 Large Investor Activism and Corporate Monitoring.- 11.1 Introduction.- 11.2 Activism and Monitoring.- 11.3 Activism and Business Groups.- 11.4 Conclusion.- References.