| This dissertation deals with several important issues on stocks. The first essay studies the optimality of debt and equity for a small firm. The second essay shows that correlated nonsynchronous trading of stocks can explain a very large part of three well-known empirical regularities on short-term stock return correlations. The third essay investigates how the predictability of stock returns and foreign exchange rates affects an investor's international portfolio choice.; The first essay (co-written with Philip Dybvig) compares debt and equity for a small firm. We find that the two have very different potential incentive problems. With equity financing, the manager (an employee) may expend too little effort, while with debt financing, the manager (the owner) may keep the entire cash flow and default on the debt. Depending on the relative severity of these two incentive problems, either debt or equity may dominate the other. These problems are exacerbated by the possibility of a management buyout (MBO) and are reduced by sinking funds, stock or option compensation, and non-vested pensions.; In the second essay, I investigate whether nonsynchronous trading can explain three well-known empirical regularities on short-term stock return correlations, and I find that correlated nonsynchronous trading of stocks can explain a very large part of the regularities. The existence of proportional transaction costs and investors' trading behavior in the presence of this market friction create the unique features of the model in the paper: there is a no-trade-region for the stock, and the trading (or non-trading) of the stock is correlated over time. I derive in closed form the transition densities of variables determining stock returns at the incidence of trading and non-trading. I then generate random samples for the observed stock prices, and compute correlations on the observed stock returns. The simulations show that the model can generate results that are consistent with the empirical findings.; In the third essay, I study the impact of the predictability of stock returns and foreign exchange rates on an investor's international portfolio choice. I find that the predictability can affect the investor's international portfolio choice significantly, but that the investor's optimal portfolios do not exhibit home bias. Further if we assume a large forward premium, consistent with the forward premium puzzle found in the data, the investor tends to invest more in countries with significantly higher interest rates. |
