Idiosyncratic risk, private benefits, and the value of family firms

Many listed companies around the world are controlled by under-diversified family blockholders, who bear idiosyncratic risk in addition to systematic risk. In this paper, we assume that these shareholders require private benefits to compensate for the additional risk. We propose a simple equilibrium model of private benefits that highlights how the idiosyncratic risk borne by a family blockholder impacts the amount of required private benefits and ultimately, the market value of the family firm

Entrepreneur's Overconfidence, Private Benefits and the Market Performance of the Firm

Many firms around the world are managed and partially owned by entrepreneurs. These entrepreneurs hold under diversified portfolios and, therefore, bear idiosyncratic risk in addition to systematic risk. To compensate the additional risk borne, they extract private benefits. In this paper, we analyse how an entrepreneur's overconfidence affects the market performance of the firm, through the channel of private benefits. We show that two dimensions of overconfidence, namely overestimation of future cash-flows and underestimation of idiosyncratic risk (called miscalibration), have opposite effects on the private benefits extracted by the entrepreneur. As a consequence, firms managed and partially owned by overconfident entrepreneurs can deliver overperformance or underperformance, depending on the prevalence of overestimation or miscalibration of the beliefs of the entrepreneur

Idiosyncratic Volatility and Nominal Stock Prices: Evidence from Approximate Factor Structures

Approximate factor structures defined by (Chamberlain and Rotschild 1983) allow to test whether a given quantitative firm characteristic (the nominal stock price in this paper) is a determinant of the idiosyncratic volatility of stock returns. Our study of 8,000 U.S stocks over the period 1980-2014 shows that small price stocks exhibit a higher idiosyncratic volatility than large price stocks. This relationship is persistent over time and robust to variations in the number of common factors of the approximate factor structure. Moreover, this small price effect does not hide a small-firm effect because it is still valid when we analyze the tercile of large firms. Our result confirms that small price stocks have lottery-type characteristics and, therefore, it is not in line with the efficient market hypothesis

Behavioral bias in number processing: Evidence from analysts' expectations

Research in neuropsychology shows that individuals process small and large numbers differently. Small numbers are processed on a linear scale, while large numbers are processed on a logarithmic scale. In this paper, we show that financial analysts process small prices and large prices differently. When they are optimistic (pessimistic), analysts issue more optimistic (pessimistic) target prices for small price stocks than for large price stocks. Our results are robust when controlling for the usual risk factors such as size, book-to-market, momentum, profitability and investments. They are also robust when we control for firm and analyst characteristics, or for other biases such as the 52-week high bias, the preference for lottery-type stocks and positive skewness, and the analyst tendency to round numbers. Finally, we show that analysts become more optimistic after stock splits. Overall, our results suggest that a deeply-rooted behavioral bias in number processing drives analysts’ return expectations

Molecular cloning and sequence analysis of the structural gene of ferredoxin I from the photosynthetic bacterium Rhodobacter capsulatus.

The structural gene (fdxN) encoding ferredoxin I (FdI) in the photosynthetic bacterium Rhodobacter capsulatus was isolated from a cosmid library by using an oligonucleotide probe corresponding to the N-terminal amino acid sequence of FdI. The nucleotide sequences of the gene and of the 3'- and 5'-flanking regions were determined. The gene fdxN codes for a polypeptide of 64 mino acids having a calculated molecular weight of 6,728. Amino acid sequencing of the N- and C-terminal ends of FdI allowed the determination of 86% of the primary structure and confirmed that FdI is the fdxN gene product. Sequence comparisons indicate that FdI shares common structural features with ferredoxins containing two [4Fe-4S] clusters, including eight conserved cysteines. Maximal homology was found with a ferredoxin from Rhodo-pseudomonas palustris. Northern (RNA) hybridization using a 158-base-pair DNA fragment internal to the fdxN coding region revealed the existence of two mRNA transcripts of approximately 330 and 750 nucleotides. Neither of those transcripts was present under nif-repressing growth conditions. The 5' end of the smaller transcript was mapped by S1 nuclease protection and primer extension experiments. On the basis of Southern hybridization experiments, by using probes homologous to fdxN, nifE, and a fragment complementing a nif point mutation, fdxN was localized inside a cluster of nif genes