We present a simple rational model to highlight the effect of investors' participation costs on the response of mutual fund flows to past fund performance. By incorporating participation costs into a model in which investors learn about managers' ability from past returns, we show that mutual funds with lower participation costs have a higher flow sensitivity to medium performance and a lower flow sensitivity to high performance than their higher-cost peers. Using various fund characteristics as proxies for the reduction in participation costs, we provide empirical evidence supporting the model's implications for the asymmetric flow-performance relationship. Copyright 2007 by The American Finance Association.

The power of information technology can be harnessed to help supply chain members establish partnerships for better supply chain system performance. Supply chain partnerships can mitigate deficiencies associated with decentralized control and reduce the “bullwhip effect”. This study illustrates the benefits of supply chain partnerships based on information sharing. For a decentralized supply chain comprising a manufacturer and a retailer, we derive the members’ optimal inventory policies under different information sharing scenarios. We show that increasing information sharing among the members in a decentralized supply chain will lead to Pareto improvement in the performance of the entire chain. Specifically, the supply chain members can reap benefits in terms of reductions in inventory levels and cost savings from forming partnerships with one another. A case study is provided for illustration.

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We explicitly consider financial leverage in a simple equity valuation model and study the cross-sectional implications of potential shareholder recovery upon resolution of financial distress. Our model is capable of simultaneously explaining lower returns for financially distressed stocks, stronger book-to-market effects for firms with high default likelihood, and the concentration of momentum profits among low credit quality firms. The model further predicts (i) a hump-shaped relationship between value premium and default probability, and (ii) stronger momentum profits for nearly distressed firms with significant prospects for shareholder recovery. Our empirical analysis strongly confirms these novel predictions.

This study empirically examines the impact of the interaction between market and default risk on corporate credit spreads. Using credit default swap (CDS) spreads, we find that average credit spreads decrease in GDP growth rate, but increase in GDP growth volatility and jump risk in the equity market. At the market level, investor sentiment is the most important determinant of credit spreads. At the firm level, credit spreads generally rise with cash flow volatility and beta, with the effect of cash flow beta varying with market conditions. We identify implied volatility as the most significant determinant of default risk among firmlevel characteristics. Overall, a major portion of individual credit spreads is accounted for by firm-level determinants of default risk, while macroeconomic variables are directly responsible for a lesser portion.