Finance Journal's top research prize a Kellogg tradition

by Kari Richardson

One measure of the Kellogg School's top-tier finance faculty is the large number of honors they have earned, including prestigious editorships and awards for their work.

Among the most coveted distinctions is the Smith Breeden Prize, given each year to the authors of the top three papers published in the Journal of Finance. Since the award's inception 15 years ago, Kellogg School authors have earned eight of them.

Michael Fishman, the Norman Strunk Distinguished Professor of Financial Institutions and chair of the Finance Department, an award winner himself says: "I'm proud that the research of my colleagues is among the best in the profession. Numerous awards have gone to my colleagues over the years --- one indication of the leadership role of Kellogg in finance research."

Kellogg's prize-winning authors have taken a novel approach in their research: creating a model for dynamic analysis of a problem instead of focusing on static examinations, for example, or bringing a new perspective to a field many have studied.

Here are the Kellogg School professors who have won the Smith Breeden Prize, along with brief abstracts of their award- winning papers.

Distinguished paper, 1989

"Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions," by Prof. Michael Fishman
In acquisitions, bidding firms sometimes offer cash to the shareholders of the target firm. Other times they offer securities in the combined firm. For both bidding and target firms, the stock market responds more favorably to cash offers. Fishman's paper examines the factors that influence this choice.

Distinguished paper, 1990

"Equity Issues and Stock Price Dynamics," by Deborah Lucas, the Donald C. Clark/Household International Distinguished Professor of Finance, and Robert L. McDonald, the Erwin Plein Nemmers Distinguished Professor of Finance
Firms may avoid issuing stock to raise capital because issuing causes a well-documented drop in share price. A leading explanation is the so-called lemons problem --- managers have an incentive to issue stock when their firm is most overvalued. Lucas' and McDonald's paper expands on the importance of the lemons problem in explaining issuance patterns and the dynamics of stock price behavior around the time of equity issues.

Distinguished paper, 1990

"Capital Structure and the Informational Role of Debt," by Artur Raviv, the Alan E. Peterson Distinguished Professor of Finance, and Milton Harris
Raviv and Harris provide a theory of capital structure based on the effect of debt on investors' information about the firm and their ability to oversee management. They write that debt serves as a disciplining device because default allows creditors the option to force the firm into liquidation. Raviv and Harris conclude that stockholders will design capital structure over time to exploit the ability of debt to generate useful information.

First prize, 1994

"The Benefits of Lender Relationships: Evidence from Small Business Data," by Mitchell Petersen, the Glen Vasel Associate Professor of Finance, and Raghuram Rajan
Petersen and Rajan examine how small firms secure enough capital to finance their expansions. He finds that firms who build a relationship with a bank have greater access to capital, but they do not borrow at lower rates.

First prize, 1997

"Evidence on the Characteristics of the Cross Sectional Variation in Stock Returns," by Kent Daniel, the John L. and Helen Kellogg Distinguished Professor of Finance, and Sheridan Titman
Small stocks and low market-to-book stocks earn high returns, given their apparent riskiness. Daniel and Titman critique an important paper by Fama and French that argues these stocks' average returns can't be explained by standard models of risk because those models measure risk incorrectly. In their paper, Daniel and Titman propose a new test with ability to discriminate between the characteristics model and the Fama and French model.

Distinguished paper, 1998

"Do Asset Fire-Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions," by Todd Pulvino, associate professor of finance
The "Trade-off Theory" of capital structure says that firms choose the optimal debt-equity mix by trading off tax and other benefits of debt with expected costs of financial distress. One problem with testing the theory, however, is that costs of financial distress are extremely difficult to measure. Pulvino finds a clean and relatively homogenous way to measure: having to sell assets very quickly.

First prize, 1999

"Investor Psychology and Security Under- and Overreaction," by Profs. Kent Daniel, David Hirshleifer and Avanidhar Subrahmanyam
Daniel and his co-authors show that a common human trait, overconfidence in one's ability to interpret information, could be responsible for security return predictability, including both the overreaction at long horizons and apparent under-reaction to information at short horizons.

First prize, 2002

"Limited Arbitrage in Equity Markets," by Todd Pulvino, associate professor of finance, Mark Mitchell and Erik Stafford
One of the central tenets in finance is the "Law of One Price," which states that assets that produce identical cashflows in all states of the world must have the same prices. Pulvino and co-authors examine one situation in which the law is clearly violated --- negative stub value trades.

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