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In the presence of “real effects” of disclosure in a production economy, this research aims to investigate the link between disclosure and cost of capital relating to different time periods: namely the post-disclosure cost of capital (the cost of capital subsequent to disclosure), the pre-disclosure cost of capital (the cost of capital for the period leading up to disclosure) and the overall cost of capital (the cost of capital across both periods). The author also extends the analysis to whether and how in the presence of a real effect of disclosure, investors' ex ante welfare might be affected.

This research is conducted via stylized models.

The author demonstrates that, first, in contrast to findings in a pure-exchange economy, in a production-based economy where disclosure affects firms' investment decisions, both the overall cost of capital and the investors' ex ante welfare can be affected by disclosure quality. As disclosure quality improves, the post-disclosure cost of capital may either increase or decrease, as may the pre-disclosure cost of capital. The change in the post-disclosure cost of capital is not fully offset by the change in the pre-disclosure cost of capital, and therefore the overall cost of capital can either increase or decrease. Second, a firm's profitability of existing and new production are critical factors in determining whether cost of capital increases or decreases with disclosure quality. The author characterizes conditions under which higher disclosure quality increases or decreases the disclosing firm's cost of capital over different time periods. Third, when disclosure affects interrelated firms' production decisions, the disclosing firm's overall cost of capital changes with disclosure quality, even when the marginal (unconditional) distribution of the disclosing firm's cash flow is not affected by the disclosure.

This research contributes to a largely unexplored but important area: the real effect of disclosure on the cost of capital.

The purpose of this study is to investigate the impact of leverage, regulatory capital and tier-I capital ratios on the ex ante and ex post risk of Japanese banks.

To test the hypotheses, the authors have implemented a panel of 507 commercial and cooperative banks of Japan over the period extending from 2001 to 2020, using a two-step system Generalized Method of Moments (GMM) framework.

The overall sample banks' results show that the impact of leverage, regulatory capital and tier-I capital ratios on ex ante and ex post risk is positive. The findings reveal that the effects of regulatory and tier-I capital ratios on ex post risk are negative (positive) for commercial (cooperative) banks, high-liquid, low-liquid and high-growth banks in Japan. In addition, the regulatory capital ratio is more beneficial for risk due to its power to absorb losses. The lagged coefficient indicates that banks require more time to adjust their ex post and ex ante risk during crisis period than during normal economic conditions.

The heterogeneity in results has practical implications for regulators, policymakers and bank managers in formulating the capital requirement guidelines with respect to ex ante and ex post risk across different categories and characteristics of banks.

To the best of the authors' knowledge, this is the first study investigating the impact of leverage, regulatory capital and tier-I capital ratios on the ex ante and ex-post risk of Japanese commercial and cooperative banks over the period from 2001 to 2020. The insights into the impact of leverage, regulatory capital and tier-I capital ratios on the ex ante and ex post risk of well-capitalized, under-capitalized, high and low-liquid banks are new in the context of Japan.

Risk capital is an important input for management functions. Capital structure decisions, capital budgeting, and ex post performance measurement require different measures of risk capital. While it has become common to estimate risk capital using VaR models, it is not clear that VaR‐based capital estimates are optimal for applications to management functions (e.g. risk management, capital budgeting, performance measurement, or regulation). This article considers three typical problems that require an estimate of credit risk capital: an optimal equity capital allocation; an optimal capital allocation for capital budgeting decisions; and an optimal capital allocation to remove moral hazard incentives from a compensation contract based on ex post performance. The optimal credit risk capital allocation is different for each problem and is never consistent with a credit VaR estimate of unexpected loss. The results demonstrate that the optimal risk capital allocation depends on the objective.

The purpose of this paper is to investigate whether proxies considered under ex ante uncertainty hold true under a fixed price mechanism structure. In particular, the study examines whether pre-initial public offering (IPO) financial performance, measured by Altman Z-score, can serve as a proxy for ex ante uncertainty or signalling in an IPO market where a fixed price mechanism is used to determine the offer price.

This study uses solely ex ante information available to prospective investors prior to the IPO to proxy for ex ante variables. It also applies a more sophisticated and robust approach using quantile regression (QR) technique in addition to ordinary least squares (OLS) regression. Applying the QR technique allows the study to produce estimates for the conditional quantiles of the distribution of IPO initial returns and address the violations of basic assumptions of the standard OLS technique.

The results show that for ex ante variables, such as IPORISK, company size, the Altman Z-score measure of pre-IPO performance, audit quality and the technology industry, are significantly related to IPO initial returns. However, the relationship differs across the conditional quantiles of the distribution of IPO initial returns, which would not have been recognised using standard OLS. However, the sign of the coefficients shown by some of these variables contradicts the ex ante uncertainty hypothesis assumption, but they are found to have predictive power in explaining IPO initial returns. These findings reveal unique characteristics of the IPO process and investors in Malaysia. Most importantly, the Altman Z-score is found to be significant in the lower and upper quantiles, but insignificant around the median quantile, which implies that Altman Z-score is important for IPOs with low and high initial returns.

These findings suggest that theoretical explanations of the ex ante uncertainty hypothesis cannot be generalised across financial markets, particularly in the Malaysian IPO market where fixed price offerings are common, and investors are risk averse, whereby they avoid risky IPOs, and prefer to take a small amount of returns against high risks. In addition, the composition of the companies in the market is not as large as the developed markets. This implies that the share price of the IPO may be sensitive to other disclosures in the prospectus, market sentiments or financial news. This study recommends the need for more empirical evidence for this purpose by including other important proxies of ex ante uncertainty, such as the use of IPO proceeds and risk factors that are disclosed in the prospectus to test whether the ex ante uncertainty hypothesis holds true in Malaysia.

This study fulfils the need for finding an appropriate theory that better explains IPO initial returns in the Asian IPO market by focussing exclusively on the pre-IPO information available in the prospectus. It also sheds light on important selected pre-listing information.

The purpose of this paper is to describe a study which examined the effects of underwriter reputation market segments on the value relevance of firm specific risk measures in the pricing of initial public offerings (IPOs).

The study abandons the notion of a homogenous market for IPOs and focuses instead on the differential demand for information across identifiable segments of the IPO market in the pre‐market offering period leading to the first day trading closing prices. Ordinary least square (OLS) regressions were used to test the two hypotheses developed in the paper.

It was found that firm‐specific risk measures are associated with the initial trading day returns of IPOs managed by low reputation underwriters, but not those by high reputation underwriters. However, as expected, these risk measures are impounded in initial trading day returns only for a sub‐sample of high‐risk junk IPOs that were marked down in price by the underwriter prior to the offering in order to make them more attractive to investors.

As with all empirical studies the tests are joint tests of the hypotheses stipulated and econometric assumptions underlying OLS. The findings of the study may not be generalized to an unrelated domain.

The findings suggest that ex ante risk measures are useful in picking among junk IPOs those with the best chances of survival, and thus earning an initial trading return on those IPOs.

This is the first study to look at junk IPOs in a systematic manner using a quasi‐experimental design.

We examine the incremental cross-sectional role of several common risk factors related to size, book-to-market, and momentum in size-and-momentum-sorted portfolios. Unlike the existing literature, which focuses on the conditional mean specification only, we evaluate the common risk factors’ incremental explanatory power in the cross-sectional characterization of both average return and conditional volatility. We also investigate the role of ex-ante market risk in the cross-section. The empirical results demonstrate that the size-and-momentum-based risk factors explain a significant portion of the cross-sectional average returns and cross-sectional conditional volatility of the benchmark equity portfolios. We find that the Fama–French (1993) factors and the ex-ante market risk are priced in the cross-sectional conditional volatility. We conclude that the size-and-momentum-based factors provide a source of risk that is independent of the Fama–French factors as well as ex-post and ex-ante market risk. Our results bolster the risk-based explanation of the size and momentum effects.

This study aims to provide new explanation of the new issue puzzle.

This study uses market implied cost of capital (ICC), rather than ex post realized returns, as proxy for ex ante expected returns, and sheds new light on the question why initial public offering (IPO) firms underperform the market within a 3–5 years period after the offerings.

Using ICC, the author finds that the market expects to earn higher risk premium for new listing firms than similar firms, which is contradictory to the documented new issue puzzle. The higher expected returns come from higher idiosyncratic volatility for newly listed firms, which are young and have more growth opportunities. The author also reports that investors are negatively surprised by lower-than-expected performances of newly listed firms.

The author’s results provide new empirical evidence that the new issue puzzle does not exist. Previous results observed IPO firms' under-performance is attributable to that ex post realized returns are a noisy proxy for ex ante expected returns, especially for newly listed firms with limited information.

This chapter reports estimates of consumers’ preferences for plans to improve food safety.

The plans are distinguished based on whether they address the ex ante risk of food borne illness or the ex post effects of the illness. They are also distinguished based on whether they focus on a public good – reducing risk of illness for all consumers or allowing individual households to reduce their private risks of contracting a food borne pathogen.

Based on a National Survey conducted in 2007 using the Knowledge Network internet panel, our findings indicate consumers favor ex ante risk reductions and are willing to pay approximately $250 annually to reduce the risk of food borne illness. Moreover, they prefer private to public approaches and would not support efforts to reduce the severity of cases of illness over risk reductions.

This study is the first research that allows a comparison of survey respondents’ choices between public and private mechanisms for ex ante risk reductions.

Sometimes resources are badly employed because of coordination failures. Actions by decision makers that affect the likelihood of such failures are sometimes said to cause “systemic risk.” This paper seeks to consider the externality in the choice of ex ante risk management policies by individuals and firms, concerned with private risk, not with their contribution to systemic risk.

The implications for debates over fair value accounting are considered.

One consequence is that individuals and firms become overleveraged from a social viewpoint. The recent credit crisis exemplifies the importance of this problem. The US tax system taxes equity more heavily than debt, and therefore exacerbates the bias toward overleveraging. A possible solution is to reduce or eliminate taxation of corporate income and capital gains. Preparedness externalities can also cause firms to become too transparent, and thereby subject to financial runs.

The paper offers insights into systemic risk, coordination failures, and preparedness externalities, focusing on tax and accounting policy.

We argue that uninformed subscribers to an initial public offering (IPO) of common stocks are exposed to greater ex ante risk of trading against informed traders in the secondary market because the advent of public trading conveys hitherto private information and thereby mitigates adverse selection. The going‐public firm underprices the new issue to compensate uninformed subscribers for this added secondary market adverse selection risk. We test this market liquidity‐based explanation by investigating the ex‐post consequences of ownership structure choice on the initial pricing and the secondary market liquidity of a sample of initial public offerings on the New York Stock Exchange (NYSE). Consistent with our argument, we find that initial underpricing varies directly with the ex post trading costs in the secondary market. Further, initial underpricing is related positively to the concentration of institutional shareholdings and negatively to the proportional equity ownership retained by the founding shareholders. Finally, the secondary market illiquidity of new issues is positively related to institutional ownership concentration and negatively to ownership retention and underwriter reputation. Thus, the evidence based on our NYSE sample supports the view that the entrepreneurs' choice of ownership structure affects both the initial pricing and the subsequent market liquidity of new issues.