Jules H. van Binsbergen

Optimal Capital Structure

We study optimal capital structure by first estimating firm-specific cost and benefit functions for debt. The benefit functions are downward sloping reflecting that the incremental value of debt declines as more debt is used. The cost functions are upward sloping, reflecting the rising costs that occur as a firm increases its use of debt. The cost functions vary by firm to reflect the firm’s characteristics such as asset collateral and redeployability, asset size, the book-to-market ratio, profitability, and whether the firm pays dividends. We use these cost and benefit functions to produce a firm-specific recommendation of the optimal amount of debt that a given company should use. In textbook economics, equilibrium occurs where supply equals demand. Analogously, optimal capital structure occurs where the marginal benefit equals the marginal cost of debt. We illustrate optimal debt choices for specific firms such as Barnes & Noble, Coca-Cola, Six Flags, and Performance Food Group, among others. We also calculate the cost of being underlevered for companies that use too little debt, the cost of being overlevered for companies that use too much debt, and the net benefit of debt usage for those that are correctly levered. Finally, we provide formulas that can be easily used to approximate the cost of debt function, and in turn to determine the optimal amount of debt, for any given firm.

Assessing Asset Pricing Models Using Revealed Preference

We propose a new method of testing asset pricing models that relies on using quantities rather than simply prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the model that is closest to the model that investors use in making their capital allocation decisions. Using our method, we assess the performance of the most commonly used asset pricing models in the literature.

Matching Capital and Labor

We establish an important role for the firm by studying capital reallocation decisions of mutual fund firms. At least 30% of the value mutual fund managers add can be attributed to the firms role in efficiently allocating capital amongst its mutual fund managers. We find no evidence of a similar effect when a firm hires managers from another firm. We conclude that an important reason why firms exist is the private information that derives from the firms ability to better assess the skill of its own employees.

Good-Specific Habit Formation and the Cross-Section of Expected Returns

I study the cross-section of expected stock returns in a general equilibrium framework where agents form habits over individual varieties of goods. Goods are produced by monopolistically competitive firms whose income and price elasticities of demand depend on the habit formation of the consumers. Firms that produce goods with a high habit level relative to consumption have low income and price elasticities, set high prices for their product, and have low expected returns on their stock. Taking this prediction to the data, I find a return spread that is hard to explain by commonly used empirical asset pricing models.

Asset Allocation and Managerial Assumptions in Corporate Pension Plans

We empirically examine the effect of regulations on pension decision-making. We find that in the face of mandatory contributions, pension plans alter their asset allocations and increase their risk taking to avoid mandatory contributions. This behavior resembles gambling for resurrection. The economic effects we document are large, representing annual active reallocations of over

Collective pension schemes and individual choice

103M for the average plan. We also examine the effect of regulations on pension accounting assumptions affecting net income. We find that plan sponsors increase their assumed rates of return on plan assets when subject to pension-related costs. The evidence suggests an earnings-management interpretation. Finally, we examine whether pension fund managers are tactical in their asset allocations. We find that pension fund managers are active as an investor class, but do not seem to time the market in a manner consistent with return predictability.

Likelihood-Based Estimation of Exactly-Solved Present-Value Models

Collective pension schemes are the dominant form of saving for retirement in the Netherlands. We investigate the introduction of individual choices into a collective pension system without affecting the generally accepted advantages of a collective agreement. Increasing individual choices can be beneficial, as it prevents pension plans from making decisions for the average plan participant that may not be optimal for individual participants. We argue for a system in which individuals choose from a set of low-cost balanced index funds, together with a level of intergenerational guarantees that are exchange-traded. This system maintains the two primary advantages of collective agreements: risk sharing and low implementation costs, while facilitating different risk taking behavior at the individual level. To facilitate individual choices within collective pension schemes, it is important to enhance the transparency associated with intergenerational guarantees to all participants in the scheme, both in terms of their price and quantity. We argue that the current system, in which long-term guarantees are given by the young to the old within a specific fund but not across pension funds, is not transparent and we argue that it can be suboptimal. We propose a system of Pension Guarantee Exchanges (PGEs) that increase transparency and allow pension funds with different age distributions to trade with each other. Knowing the price of such guarantees facilitates the introduction of individual portfolio choices within collective pension schemes.

Active Managers are Skilled: On Average, They Add More Than

We develop a tractable exactly solved present-value model to study the dynamics of stock returns, dividend growth rates, and the price-dividend ratio. We show that standard predictive regressions of returns and dividend growth rates on the lagged price-dividend ratio suffer from a problem that is akin to an errors-in-variables problem. By using non-linear filtering techniques to estimate the structural parameters of our present-value model, we can mitigate this errors-in-variables problem. We then use this framework to decompose the price-dividend ratio and excess stock returns, and study the influence of approximation errors that would arise if we were to log-linearize the model. Our model induces heteroscedasticity in returns, even though the latent processes for expected returns and expected dividend growth rates are homoscedastic.

3 Million Per Year

Active fund managers are skilled and, on average, have used their skill to generate about

Financial Valuation of PBGC Insurance with Market‐Implied Default Probabilities

3.2 million per year. Large cross-sectional differences in skill persist for as long as 10 years. Investors recognize this skill and reward it by investing more capital in funds managed by better managers. These funds earn higher aggregate fees, and a strong positive correlation exists between current compensation and future performance.