the cost of market versus regulatory discipline in banking1 abstract we present evidence that insured deposit financing shields banks from the full costs of market discipline moody s downgrades indicators of increasing risk are associated with negative abnormal equity returns that are increasing in the bank s reliance on insured deposits moreover banks raise their use of insured deposits following increases in risk these findings cast doubt on the ability of capital market participants to effectively discipline bank behavior within the current regulatory environment more generally our findings highlight the potential for regulation to undermine market discipline in regulated industries

the effect of preferred stock rating changes on preferred and common stock prices abstract daily returns are used to investigate the effect of preferred stock rating change announcements on preferred and common stock prices announcements that are free of confounding events clean announcements significantly affect preferred stock prices however the effect occurs after the day of announcement mostly on event day 1 conversely there is no evidence clean announcements affect common stock prices larger preferred stock abnormal returns are associated with announcements that are contaminated by confounding events but the abnormal returns appear to be the result of the confounding events more than the rating change

political influence motives and the choice between tariffs and quotas abstract tariffs and quotas are not symmetric under a variety of circumstances this paper pursues the implications of one such circumstance domestic market power for the political choice of protectionist instrument in the context of a political support maximization model tariffs dominate quotas in the political model in the absence of revenue seeking motives in the presence of revenue seeking ambiguity arises but limits can be placed on the range of tariff or quota levels also some welfare implications emerge

the information content of annual earnings releases a trading volume approach this paper reports the results of an empirical examination of the relations between the volume of securities traded the magnitude of surprises in annual earnings announcements and firm size although early trading volume studies e g beaver 1968 kiger 1972 and foster 1973 replicated basic information content studies with findings similar to those based on security prices we should not expect that security price and trading volume research will continue to yield identical results when more refined hypotheses are tested trading volume reflects investors activity by summing all market trades whereas security prices reflect an aggregation or averaging of investors beliefs as a result we will on occasion observe differences between price and volume reactions to earnings announcements as did morse 1981 this study extends the recent trend toward tests of more refined hypotheses by using a larger sample to examine the associations between unexpected earnings firm size and trading volume and testing whether such associations can be generalized across fiscal year end dates and stock exchange listing my results show a continuous positive relationship between trading

day of the week effects and asset returns the number of empirical studies using daily stock returns is rapidly increasing researchers generally assume that the distribution of stock returns is identical for all days of the week a convenient statistical assumption but not a necessary condition of market equilibrium nevertheless there are reasons to suspect that the distribution of returns may vary according to the day of the week the most obvious is the impact of weekends on monday s return since monday s return is calculated over three instead of one calender day the mean and variance may well be higher on monday compared with any other daily return perhaps three times as large previous research has examined the daily distribution of stock returns for a monday effect while fama 1965 does not compare daily mean returns he does report that monday s variance is about 20o greater than other daily returns with a traditional distributional assumption regarding the returns on a financial asset specifies that the expected returns are identical for all days of the week contrary to this plausible assumption this paper discovers that the expected returns on common stocks and treasury bills are not constant across days of the week the most notable evidence is for monday s returns where the mean is unusually low or even negative several explanations of the results are investigated but none proves satisfactory aside from documenting significant day of the week effects the implications of the results for tests of market efficiency are examined while market adjusted returns continue to exhibit day of the week effects these effects are no longer concentrated on monday during the last year we have had many conversations with our colleagues throughout the professions we are particularly thankful to the participants at sessions of the western and american finance associations where preliminary versions of this paper were presented special thanks are due to gene fama gailen hite jon ingersoll robert jarrow merton miller clifford smith and rex thompson the expert research assistance of frank rabinovitch and youngsup yun is gratefully acknowledged 1 the list of papers using daily stock returns is too long to name recent examples include charest 1978 dodd 1980 banz 1981 and reinganum 1981

changes in the probability of bankruptcy and equity value abstract work in finance suggests that changes in the probability of bankruptcy likely affect firm value by affecting perceptions of the cost of transacting with the firm in this paper accounting information from the balance sheet as well as the income statement is used in conjunction with ohlson s 1980 bankruptcy prediction model to calculate unexpected changes in the probability of bankruptcy for a sample of firms with a large estimated probability of bankruptcy sometime during the ten year study period unexpected changes in the probability of bankruptcy are useful in explaining security returns even after controlling for unexpected earnings

a theory of trading volume a theory of trading volume is developed based on assumptions that market agents frequently revise their demand prices and randomly encounter potential trading partners the model describes two distinct ways informational events affect trading volume one is consistent with conjectures made by empirical researchers that investor disagreement leads to increased trading but the observation of abnormal trading volume does not necessarily imply disagreement and volume can increase even if investors interpret the information identically if they also have had divergent prior expectations simulation tests support the model and are used to contrast the random pairing environment with costless market clearing volume is lower in the costly market and volume increases caused by an informational event persist after the event period this is consistent with existing empirical evidence and suggests that markets do not immediately clear all orders or that investors have demands to recontract

common stock returns and rating changes a methodological comparison this paper examines the adjustments in a firm s common stock price during the eleven months before and during the month of announcement of a bond rating change based on several different measures of abnormal security return the findings are consistent with the proposition that bond downgradings convey information to common stockholders for bond upgradings the price adjustments were statistically insignificant in the month of announcement although in the eleven preceding months upgraded firms exhibited positive abnormal returns while the results do not fully support earlier research we stress that the main contribution of this article lies in the scrutiny it gives to issues of methodology in assessing the possible price effects of bond reclassifications several recent studies have investigated the effects of changes in company debt classifications by the major bond rating agencies 1 these include four studies of the impact of a rating change on bond prices katz 19 hettenhouse and sartoris 14 grier and katz 12 and weinstein 25 and one study of the impact on common stock prices pinches and singleton 22 the findings of the bond price studies differ widely thus while katz and grier and katz suggest that trading rules based on the announced downgradings of industrial bonds may be moderately profitable hettenhouse and sartoris and weinstein analyzing bond yields and returns respectively find that there is no apparent opportunity to profit abnormally subsequent to the announcement of the change weinstein attributes these differences in results largely to issues of methodology and proceeds to investigate the effects of rating changes on bond prices using more refined risk adjustment techniques and portfolio estimation procedures

information technology and time based competition in financial markets this paper studies time based competition in imperfect securities markets linking it investment decisions information processing delays and trading strategies at the it investment stage traders trade off the cost of it against their anticipated trading profits at the trading stage each trader devises a trading strategy based on his new information while taking into account the impact of both his own trades and those of other traders in the market our results illustrate how traders react to market imperfections due to trading costs and information processing delays and how superior traders convert a timeliness advantage into higher trading profits they also shed light on the relationship between the price adjustment process and traders information processing delays timeliness imposes an interesting structure on trader competition traders with longer information processing delays trade less frequently submit smaller orders and enjoy lower profits per trade our analysis of traders it investment decisions demonstrates how factors such as it costs number of traders and the frequency and nature of new information affect the level of it investments we further illustrate how improved it infrastructure translates into competitive advantage

value line rank and firm size this paper studies the relation between value line s successful record in predicting relative stock price movements and the firm size effect the data suggest little direct relation between the two phen omena value line tends not to rank small firm stocks and small firm stocks that are ranked are more likely to receive a low rank than la rge firm stocks within each size sorted quintile of the market the mean payoffs on costless positions constructed according to value lin e s recommendations are positive copyright 1987 by the university of chicago

determinants of individual tourist expenditure as a network empirical findings from uruguay abstract this paper introduces the use of graphical models for assessing the determinants of individual tourist spending these models have the advantage of synthesizing and visualizing the relationships occurring within large sets of random variables through an easy to interpret output to this end individual data from a large official survey of international tourists in uruguay are used symmetric conditional independence structures are first investigated then subgraphs of each expenditure item s neighbourhood are extracted in order to assess the impact of main effects and interactions through proportional ordinal logistic regression results highlight the marginal role of socio demographic variables and direct importance of accommodation type destination and length of stay

stock market returns and inflation evidence from other countries this paper investigates the relation between common stock returns and inflation in twenty six countries for the postwar period our results do not support the fisher hypothesis which states that real rates of return on common stocks and expected inflation rates are independent and that nominal stock returns vary in one to one correspondence with expected inflation there is a consistent lack of positive relation between stock returns and inflation in most of the countries

from hybrids to hierarchies shareholder wealth effects of joint venture partner buyouts this study examines the parent firm performance implications of joint venture jv partner buyouts which involve the conversion of a hybrid governance structure to an internal unit within the firm s hierarchy transaction cost theory as developed and applied in the international literature and market entry research is extended to the post entry investment setting to isolate sources of value creation or dissipation from the governance changes effected by jv partner buyouts the evidence complements recent research on jv longevity and its determinants copyright 2001 john wiley sons ltd

the effect of bond rating changes on common stock prices abstract the evidence in this paper suggests that downgrades by both moody s and standard and poor s are associated with negative abnormal stock returns in the two day window beginning the day of the press release by the rating agency significant negative abnormal performance can still be detected after eliminating observations containing obvious concurrent potentially contaminating news releases there is little evidence of abnormal performance on announcement of an upgrade significant abnormal returns are associated with announcements of additions to the standard and poor s credit watch list if either a potential downgrade or a potential upgrade is indicated

redundant tariffs as rational endogenous protection i introduction in a competitive market tariff protection is redundant whenever the tariff exceeds the difference between the domestic autarky price and the world price with redundant protection domestic price rises by less than the full nominal tariff since a smaller tariff would be sufficient to generate prohibitive protection such excess protection is easily dismissed as economic ignorance on the part of lobby groups and or policy makers yet redundant tariff protection also called water in the tariff is a common feature of 19th and early 20th century u s tariff history more recently the developing nations penchant for redundant nominal tariffs has complicated world bank attempts to calculate effective rates of protection this paper develops political economy models in which the endogenous tariff may be redundant when the world price is uncertain even if agents themselves are risk neutral the possibility of world price declines or domestic cost increases creates positive expected benefits to producers from tariffs that are initially redundant these positive expected benefits provide the rationale or demand for redundant protection embedding this demand within simple political economy models generates endogenous tariffs that appear redundant to casual observation these political economy models also permit us to assess the comparative static effects of changes in the mean preserving spread of the world price an extensive literature explores the links between protection and world price uncertainty most authors address one or more of the following i the optimal choice of protective instrument ii risk aversion by private agents or iii protection as social insurance young and anderson 1980 show that the optimal policy to maximize expected consumer surplus given a constraint on expected imports on expected import expenditure is a specific an ad valorem tariff using the same constraint on expected imports they demonstrate 1982 that quantitative restraints dominate tariffs if consumers exhibit risk aversion toward real income fluctuations in the same vein but in a dynamic setting falvey and lloyd 1986 show that producers prefer non tariff barriers since they concentrate protection on down side risk cassing hillman and long 1986 examine trade policy as social insurance in a ricardo viner model given sufficient risk aversion both mobile and immobile factors exhibit an ex ante preference for reduced domestic price variability under terms of trade uncertainty these papers however do not address the empirically relevant case of above prohibitive protection an existing rationale for tariffs that exceed the prohibitive level is that they facilitate cartel formation fishelson and hillman 1979 show that a domestic monopoly benefits from tariff protection that exceeds the prohibitive level since the tariff that yields full monopoly profit and beyond which additional protection is redundant may exceed the tariff that drives imports to zero an interesting example of this is the formation in 1898 of the american tin plate company this trust was formed to exploit tariff protection that exceeded the prohibitive level the company sold stock whose par value was set at four to five times the cash price of the assets of other tin plate manufacturers that it acquired 1 the existence of potential domestic market power forces a distinction between prohibitive and redundant protection and in this example the above prohibitive tariff is clearly not redundant since domestic price rises by the full amount of the tariff 2 in the u s the 19th century protectionist weapon of choice was the specific tariff usually in the form of a minimum valuation proviso so that all products worth less than a certain amount were taxed as if they were worth the specified minimum specific tariffs generated high and often redundant levels of protection for domestic producers of the coarser grades of manufactures while allowing continued imports of the finer grades that were not produced domestically

the effect of value line investment survey rank changes on common stock prices abstract the information content of value line investment survey rank changes is investigated the results suggest rank changes affect common stock prices but the effect varies by the type of rank change changes from rank 2 to rank 1 have the most dramatic impact on prices a cross sectional analysis finds small firms have a greater reaction to a rank change than larger firms which supports theories on the frequency of report arrival and precision of information a speed of adjustment test concludes the prices of individual securities adjust to the information in a rank change over a multiple day period

the behavior of the common stock of bankrupt firms the event of reorganization or liquidation will be determined by a court to the extent such legal decisions are insensitive to general market movements perhaps the market risk of the firm s shares is reduced it could be the case that most corporate bankruptices are so fully anticipated that little or no new information is released when bankruptcies are filed casual observation suggests that major corporate bankruptcies do not come as complete surprises trading in listed stocks usually is halted some time before bankruptcy filings stories that a corporation is about to file a bankruptcy petition sometimes appear in the financial press several days prior to the filing more conclusive evidence that the market anticipates corporate bankruptcies has been presented in previous empirical studies the findings of westerfield 4 and aharony jones and swary 1 demonstrated that shareholders experience abnormal losses over periods of from four to six years prior to bankruptcy one of westerfield s cumulative performance measures indicated that shareholders of bankrupt companies lost on average 76 percent of their wealth relative to returns on securities of equivalent risk during the seventy one months preceding the announcement of bankruptcy of course large shareholder losses prior to bankruptcy do not guarantee that additional large losses will not be suffered when bankruptcy is announced to date only limited evidence supporting the existence of a bankruptcy announcement effect has been reported altman 2 found that shareholders suffered an average capital loss of approximately 26 percent during the period from one month before to one month after bankruptcy announcements unfortunately a two month interval is too long to provide a clear measure of the market s reaction to bankruptcy announcements it is possible that most or all of the shareholder losses detected by altman occurred during the month preceding the announcements

market efficiency and value line s record the value line investment record is frequently interpreted as evidence of market inefficiency this article reconciles the record with market efficiency as one implication of a model that assumes a semistrong form of market efficiency and autoregressive state variables which need not be identified in the model expected returns on assets depend on these state variables and can vary over time value line s rankings are assumed to reflect knowledge of these state variables the value line data are consistent with the model s implications suggesting the value line s rankings predict systematic marketwide factors the purported abnormal returns of positions based on value line s rankings are seen as compensation for the systematic risk associated with these positions copyright 1990 by the university of chicago

the capm and equity return regularities differential returns on dividend and capital gains income systematic abnormal returns surrounding ex dividend dates excess returns on small versus large capitalization stocks excess returns on low versus high price earnings ratio stocks these are among the recent findings that cast doubt on the traditional capital asset pricing model and tease investors with the promise of systematic excess returns some of these effects are undoubtedly related tests indicate for example that the higher a portfolio s price to book ratio the higher the corresponding values of market capitalization pie and stock price furthermore p e dividend yield price and pie effects all experience significant january seasonals what has not been conclusively determined is whether the effects are additive so far it appears that the dividend yield and size effects are not mnutually exclusive investors may want to use a strategy employing several of these characteristics rather than one efforts to explain the size effect have focused on january because the effect is concentrated in that month the most common hypothesis attributes this to year end tax loss selling but the evidence is less than conclusive evidence strongly suggests however that among small firms those with the largest abnormal returns tend to be the firms that have recently become small that either don t pay dividends or have higher dividend yields and that have lower prices and low pie ratios

pricing warrants an empirical study of the black scholes model and its alternatives this paper uses a sample of over 25 000 daily warrant prices to empirically investigate potential problems with the commonly used warrant pricing model proposed by black and scholes as an extension of their call option model one problem seems to be especially important the constant variance assumption of the dilution adjusted blackscholes model appears to cause biases in model prices for almost all warrants and over the entire sample period we show that more accurate price forecasts are obtained with a specific form of the constant elasticity of variance model since the derivation of the black scholes model financial economists have speculated on its usefulness for warrant valuation in their pathbreaking paper black and scholes 1973 claim that in many cases their model can be used as an approximation to give an estimate of the warrant value however black and scholes 1973 warn that

the impact and the spillover effect of a sovereign rating announcement on the euro area cds market abstract this paper analyzes the impact and the spillover effect of a sovereign rating announcement on the euro area cds market through the event study technique we demonstrate that downgrades and upgrades considerably affect financial markets the relevance of the impact is due to the introduction of new information after a rating change announcement information discovery effect and to the role of rating in the current financial regulation certification effect conversely the cds market does not seem to react significantly to rating warning outlook and review announcements furthermore we find evidence of a spillover effect only after a downgrade announcement our results show that the size of the spillover effect is influenced by economic and financial conditions of analyzed countries and that international bank flows between emu members represent an important transmission channel of the spillover effect

the effect of the information environment on the relationship between financial disclosure and security price variability abstract this study provides a test of the relationship between changes in a firm s disclosure environment and its security price behavior the initiation of interim reporting is examined theory suggests that the marginal information content of an annual report is greater when it has not been preceded by interim reports and that greater return variability will be observed at the annual report announcement date the variance of returns upon release of the annual report is compared in the annual report only and annual plus quarterly reports environments as predicted by the theory variability is significantly greater in the annual report only environment

incremental protection and efficient political choice between tariffs and quotas this paper offers a new political economy explanation for the increasing use in recent years of quotas instead of or in combination with tariffs as a form of trade protection we show that under domestic monopoly the comparative efficiency of tariffs and quotas in achieving political objectives will vary depending on the nature of the mark et and the level of protection at high levels of protection quotas can become more politically efficient than tariffs we also show that at low levels of protection a price equivalent quota may not exist

security price reactions to initial reviews of common stock by the value line investment survey this study examines daily price reactions to initial reviews of securities by the value line investment survey the reviews are found to convey information to the market as significant abnormal returns are found over a 3 day period around release of the information furthermore there is no statistically significant subsequent price reation after this 3 day period consistent with market efficiency

intradaily price volume adjustments of nyse stocks to unexpected earnings the speed and path of adjustment in stocks to the degree of earnings surprise in their quarterly announcements are studied using price volume transactions data a differential price adjustment process was observed with stocks having large positive earnings surprises experiencing a faster adjustment compared with those stocks with negative earnings surprises volume transaction frequency and size were found to be directly related to the absolute degree of surprise but very favorable earnings surprise stocks experienced initially a large number of smaller trades while stocks with large unfavorable earnings surprises had relatively fewer transactions but higher volume per trade the stock market s microstructure has received increasing attention from researchers especially from an empirical perspective as transaction data on prices and volume have become more readily available 1 an important subset of this research has been the study of stock price adjustments to significant news events specifically publicly announced information with economic content should be quickly reflected in prices in an unbiased manner this paper contains a study of the intradaily adjustment in stocks to the informational content of earnings reports using price changes trading volume and transaction frequency and size we examine the transaction to transaction and time series stock behavior associated with different degrees of earnings surprise embedded in earnings announcements the degree of surprise is measured by a comparison of actual with forecasted earnings for 325 new york stock exchange nyse firms these firms are subdivided into five earnings surprise categories in order to determine whether the speed and path of their price volume adjustment processes are different one question of interest is whether the adjustment process for favorable versus unfavorable earnings surprises is similar or different another is whether any adjustment is distinguished by a few large trades or a large number of smaller

the value line enigma extended an examination of the performance of option recommendations the authors extend the research on the value line enigma by examining the performance of call recommendations in value line options d galai s hedge decomposition procedure identifies the components of the calls returns abnormal call returns were most pronounced immediately following the purchase which is consistent with studies of value line s stock rankings the largest and most significant abnormal performance was by calls assigned the highest rank written on stocks judged by value line to be correctly priced abnormal call return performance by joint call and stock ranks was consistent with hypothesis that value line identifies underpriced call options copyright 1993 by university of chicago press

the informative role of the value line investment survey evidence from stock highlights i examine abnormal stock returns associated with stock highlights published by the value line investment survey at the time of their publication stock highlights elicit strong positive abnormal returns they also have positive abnormal returns at the time of the earnings announcement preceding stock highlight publications post earnings announcement drift is present but is much too small to explain abnormal returns at the time of the publication of stock highlights thus value line stock highlights provide useful information to investors this information is rapidly reflected in stock prices consistent with market efficiency

earnings surprise research synthesis and perspectives an investigation of the relation between earnings surprise and three empirical anomalies the p e effect the size effect and the value line enigma indicates that the standardized unexpected earnings sue effect appears to be separate and distinct from each of the three the relations between the sue phenomenon and firm risk the appropriateness of the earnings expectations model and the role of transaction costs are also investigated the sue phenomenon is not attributable to inappropriate risk adjustment use of the wrong earnings expectations model or ignoring transaction costs the sue effect may be partly explained by analysts behavior and is both predictable and profitable the sue effect has also been observed in japan

corporate capital expenditure decisions and the market value of the firm abstract this paper is an event time study of the common stock prices of a sample of 658 corporations around the dates on which they publicly announced their future capital expenditure plans for industrial firms announcements of increases decreases in planned capital expenditures are associated with significant positive negative excess stock returns for public utility firm neither increases nor decreases in planned capital expenditures are associated with significant excess stock returns we interpret the evidence as being consistent with the hypothesis that managers seek to maximize the market value of the firm in making their corporate capital expenditure decisions

stock price reactions to the wall street journal s securities recommendations this paper examines the impact of the heard on the street hots column of the wall street journal on common stock prices the results of the study indicate that the hots column appears to have an impact on stock prices on the publication day however we also find a smaller but statistically significant impact on two days preceding the pub lication the significant abnormal returns on these days are associated with higher trading volume the reaction of stock prices is symmetric with respect to the buy and sell recom mendations and the impact of single company recommendations is greater than the im pact of the multi company recommendations i introduction the efficient market hypothesis assumes that security prices fully and instantaneously reflect all available information considerable evidence has been accumulated during the past decades in support of the hypothesis the acceptance of the hypothesis has raised questions about the economic value of professional investment advice if the market is efficient then the management of port folios based on these recommendations should not consistently outperform the market why then are investors still willing to pay for this information examples of the advice include low cost financial publications brokerage house rec ommendations and subscription financial newsletters that sell for hundreds of dollars recent studies argue that investment advisors can provide information to investors at a lower cost than the investors cost of information production millon and thakor 1985 develop a model that explains the existence of investment advisory agencies they argue that if the information of investment advisory agencies permits security analysts to share information about common uncertainties that affect the value of firms as a whole such as the return on the market portfolio then investment advisory agencies can produce information more cheaply than individual investors this model is consistent with the study of

directly unproductive profit seeking dup activities this paper propses directly unproductive profit seeking dup activities as a general concept that embraces a wide range of recently analyzed economic activities including the subset of rent seeking activities considered by krueger it then proceeds to provide a synthesis and generalization of the welfare theoretic analysis of such activities by developing a fourfold categorization of cases depending on the levels of distortions before and after the dup activity thus a unification and overview of the subject are achieved

the relation between sovereign credit rating revisions and economic growth abstract a country s economic growth exhibits a significant response to sovereign rating changes a one notch upgrade downgrade causes an increase decline of about 0 6 0 3 in re rated countries five year average annual growth rates the results hold after accounting for other determinants of economic growth and potential endogeneity problems and are robust to the use of quarterly data changes in country rating affect economic growth via the interest rate and capital flow channels narrower sovereign bond yield spreads and increased capital inflows are associated with upgrades which stimulate re rated countries economic performance and the converse holds for downgrades

the effect of lender identity on a borrowing firm s equity return previous research demonstrates that a firm s common stock price tends to fall when it issues new public securities by contrast commercial bank loans elicit significantly positive borrower returns this article investigates whether the lender s identity influences the market s reaction to a loan announcement although we find no significant difference between the market s response to bank and nonbank loans we do find that lenders with a higher credit rating are associated with larger abnormal borrower returns this evidence complements earlier findings that an auditor s or investment banker s perceived quality signals valuable information about firm value to uninformed market investors previous studies show that certain types of loan announcements generate significantly positive abnormal returns to the average borrower s equity 1 this finding contrasts with the negative equity returns generally associated with a corporation s issuance of public securities smith 1986 this difference in market reactions indicates that private and public securities are not perfect substitutes for the average firm in this sense lender identity defined as public versus private lender significantly impacts the borrower s abnormal equity return the standard theoretical explanation for this difference is that private lenders either obtain private information about the firm s value or they have the incentive and ability to monitor firm behavior more effectively than other outside monitors can although the empirical literature on private lending has evaluated primarily commercial bank loans and lines of credit these theoretical arguments apply equally to any type of private

moody s and s p ratings are they equivalent conservative ratings and split rated bond yields we examine the relative impact of moody s and s p ratings on bond yields and find that at issuance yields on split rated bonds with superior moody s ratings are about 8 basis points lower than yields on split rated bonds with superior s p ratings this suggests that investors differentiate between the two ratings and assign more weight to the ratings from moody s the more conservative rating agency moody s becomes more conservative after 1998 and the impact of a superior moody s rating becomes stronger furthermore the differential impact of the two ratings is more pronounced for the more opaque rule 144a issues

a note on testing an aggressive investment strategy using value line ranks one of the better known investment advisory services is the value line investment survey an unresolved debate has been in progress in the literature for a decade as to whether the performance of the value line investment service is inconsistent with the efficient market hypothesis for example black 2 states that the vl system can produce extra returns even when transaction costs are considered but he does not report his exact test procedure or any quantitative results of his study on the other hand kaplan and weil 10 11 do not believe that vl can generate abnormal returns we shall show in the following sections that the vl system represents a borderline case when transaction costs are neglected abnormal returns are obtained when realistic transaction costs are used active trading according to vl recommendations does not yield abnormal returns for a buy and hold policy however vl recommendations do yield abnormal returns even when transaction costs are considered

the impact of bond rating changes on corporate bond prices new evidence from the over the counter market abstract i study the information content of bond ratings changes using daily corporate bond data from trace abnormal bond returns over a two day event window that includes the downgrade upgrade are negative positive and statistically significant although the reaction to upgrades is economically small monthly abnormal bond returns around downgrades and upgrades are statistically significant but overstate the magnitude of the reaction relative to two day abnormal returns unlike the bond market the stock market reaction to upgrades is statistically insignificant evidence suggests that the differing inferences on the effect of upgrades in the two markets can be attributed to wealth transfer effects rather than relative market inefficiencies in the cross section the bond market response is stronger for rating changes that appear more surprising rating changes of lower rated firms and upgrades that move the firm from speculative grade to investment grade

a comparison of single and multifactor portfolio performance methodologies a comparison of single and multifactor portfolio performance methodologies using value line and size ranked portfolios indicates that although both methodologies provide unbi ased estimates of portfolio performance there are systematic differences in the power of the two methodologies the predictive power of the multifactor methodology is superior for well diversified portfolios but inferior for less diversified portfolios

cross sectional association between abnormal returns and firm specific variables abstract abnormal returns market model prediction errors are the subject of many event studies in accounting and finance literature conditional on the event of interest researchers have recently used cross sectional regressions to examine relations between abnormal returns and firm specific variables this paper demostrates that non constant variences and covariances in market model residuals across firms introduced bias in the estimated slope coefficients of the independent variables i e the expected signs of the estimated slope coefficients can be predicted a priori a method is develope to removed the bias in the estimated slope coefficiets and is found to be effective this method explicitly takes the dependence among abnormal returns across firms into account methods that assume abnormal returns across firms to be independent do not control for such bias

market reactions to messages from brokerage ratings systems one dimension of the strategies investment houses use to present investment advice is the number of categories in their rating systems we studied three four and five level systems and found that in all rating systems upgrades outnumber downgrades price reactions are more pronounced to multiple level than to single level recommendation changes and to recommendation upgrades to the highest rating category these price reactions confirm that the market gleans new information from analysts research but suggest that investors at least partially recognize analysts tendency toward optimism and thus react more strongly to downgrades the price effects also show that adding more rating categories is not simply a way to portion out information in smaller bits some of the largest price reactions are to changes between the top two categories in a five level system even though the descriptions of the categories would not signal a portfolio action our results are consistent with the view that firms try to

domestic tourism expenditures the non linear effects of length of stay and travel party size the independent variables length of stay and travel party size are recurrent determinants of expenditures in micro level tourism studies in most of this research it has been tacitly assumed that these variables have linear effects on tourism spending this study situated in a norwegian setting questions this approach by explicitly scrutinizing the possible non linearities in the relationships between tourism expenditures on the one hand and length of stay and travel party size on the other the empirical results suggest a positive but diminishing relationship between length of stay and tourism expenditures and a convex i e u relationship between travel party size and tourism expenditures the study also considers how a number of other key independent variables affect tourism expenditures finally some managerial and scholarly implications are discussed

price and trading volume reaction surrounding earnings announcements a closer examination the process of information dissemination and interpretation in securities markets is very complex and mostly unobservable while changes in prices and the amount of trading that takes place at the market level provide evidence of information processing verrecchia 1981 demonstrated that these are not sufficient to describe completely the dissemination of information and its interpretation by investors a descriptive study of price changes and trading volume however may still provide some insights into how investors react to information this paper is an empirical investigation of price changes and trading volume during the days surrounding the announcement of quarterly and annual earnings in the wall street journal wsj in the original paper investigating trading volume and price changes surrounding earnings announcements beaver 1968 was primarily concerned with whether the annual earnings announcement had information content i e led to changes in investors assessments of the probability distribution of future returns if there were any significant price changes and or trading volume during the week of the announcement then the annual earnings announcement was assumed to have had

costly information transmission in continuous time with implications for credit rating announcements abstract this paper formulates a continuous time information transmission model in which an altruistic sender privately observes a stochastic state variable and incurs a communication cost when she broadcasts a message we characterize the sender s optimal announcement strategy using an ordinary differential equation we prove the optimality of the sender s strategies using a martingale verification argument and show that the sender s optimal strategy involves sending discrete messages furthermore we apply the model to the timing decision of credit rating announcements and provide a framework to study various aspects of rating announcements such as the probability of rating reversals and the expected time before a rating change

decomposing the heterogeneous discretionary spending of international visitors to fjord norway abstract this paper provides a comprehensive econometric analysis of the expenditures of international visitors to the western fjord region of norway the data come from an intercept survey conducted on randomly elicited summer visitors at central tourism locations in the region estimations are performed for total group expenditures and personal tourist expenditures to adjust for potential sampling bias both un weighted and weighted regressions techniques are employed the results identify elasticity measures with respect to length of stay travel party size and income and uncover several other statistically significant and economically important determinants of expenditures as a novel exploratory feature the paper also analyzes expenditure shares for different categories of tourism goods and services

tax induced trading around ex dividend days abstract this paper investigates trading volume around ex dividend days for taxable distributions cash dividends it is found that trading volume increases significantly around the ex dividend day this increase is more pronounced for high yield actively traded stocks and after brokerage commissions became negotiable the results are consistent with the hypothesis that short term traders have an impact on ex day price behavior at least for taxable distributions for non taxable distributions stock splits and stock dividends we find negative abnormal volume around ex day

the informational role of bond analysts this study uses a large sample of sell side bond analysts reports to examine the properties of recommendations provided by bond analysts and the impact of these recommendations on bond securities first we document that the distribution of bond analysts buy hold and sell recommendations is skewed positively but less so than the distribution of equity analysts recommendations the positive skewness in bond analysts recommendations is greater for

the effect of a rating downgrade on outstanding commercial paper diamond 1991 argues that a firm s reputation determines whether it borrows directly or through an intermediary we test the diamond model by examining the quantity response of commercial paper issued by bank holding companies to a rating downgrade from 1986 to 1991 cumulative abnormal declines averaged 6 69 percent in the first two weeks after the downgrade and 11 05 percent in the subsequent 12 weeks in contrast to commercial paper issued by bank holding companies large cds issued by affiliated banks did not change significantly in the period around a downgrade suggesting that deposit insurance may have removed market discipline from the cd market the objective of this study is to test diamond s 1991 theory of corporate capital structure in which a firm s reputation determines whether it borrows directly or through an intermediary in diamond s model a firm without an established reputation will borrow through and be monitored by an intermediary by building a good reputation a firm may gain access to the nonintermediated markets such as the commercial paper market and consequently avoid the cost of monitoring in the process of maintaining its reputation a firm may eliminate the conflict of interest between borrowers and lenders about the choice of risk in investment decisions such firms have an incentive to maintain their reputation because the reputation itself has become a valuable asset that reduces borrowing costs in the model a firm that loses its reputation will find the cost of placing debt directly prohibitively expensive using event study methodology we test the diamond model by examining the quantity response of commercial paper cp to a rating downgrade of the issuing company we focus on ratings because firms that borrow in the cp market usually have high ratings in part these ratings reflect the firms reputation for selecting safe investments in the diamond framework if credit ratings proxy for reputation then a rating downgrade may be associated with a decline in the amount of outstanding cp this change in capital structure may occur relatively rapidly because outstanding cp typically has a

municipal bond demand premiums and bond price volatility a note the behavior of different components of municipal bond yields may have a significant impact upon bond price behavior specifically demand premiums created by banks may stabilize bond yields in some maturity ranges but not in others for example short term municipals may be stabilized but not long term this research implies that bank demand behavior may create demand premiums that stabilize prices of short term municipal bonds relative to those of treasury bonds of like maturity while this implication is inconsistent with the residual theory of bank demand it is consistent with the tax shield theory attributed to hendershott and koch 3 4

the declining credit quality of u s corporate debt myth or reality in recent years the number of downgrades in corporate bond ratings has exceeded the number of upgrades leading some to conclude that the credit quality of u s corporate debt has declined however an alternative explanation of this apparent decline in credit quality is that the rating agencies are now using more stringent standards in assigning ratings an ordered probit analysis of a panel of firms from 1978 through 1995 suggests that rating standards have indeed become more stringent implying that at least part of the downward trend in ratings is the result of changing standards bond ratings play a key role in corporate financing and investment decisions a corporation that can issue higher rated bonds usually receives better terms than one that can issue only lower rated bonds by law or policy some investors can purchase only bonds with an investment grade rating a restriction which in some asset pricing models would affect the relative prices of financial assets numerous articles in the popular press have presumed that the credit quality of the debt of u s corporations has been declining over the last couple of decades the comprehensive study by lucas and lonski 1992 of moody s rating changes of corporate debt is consistent with this presumption to cite their statistics in 1970 moody s downgraded 21 issues and upgraded 23 issues but over the following years the number of bonds downgraded began to exceed by substantial margins the number of bonds upgraded and by 1990 moody s downgraded 301 issues and upgraded only 61 their study includes both investment and noninvestment grade bonds but internal data from donaldson lufkin jenrette confirm that this trend also applies to investment grade bonds alone in a somewhat different context grundy 1997 documents similar trends in the ratings of preferred shares over the 1965 to 1990 period as the credit quality of a firm s corporate debt decreases that firm will face a greater probability of financial distress which at the extreme translates into bankruptcy there is some debate as to the effect of financial dis

risk aversion and optimal trade restrictions if the representative consumer of a country is risk averse then the choice of trade controls must take account of their effects on the fluctuations of domestic real income if the world price of the importable is uncertain and risk aversion is high then the optimal policy for achieving a ceiling on expected imports involves a reduction in imports and a rise in the domestic price as the world price falls moreover a quota is superior to a tariff in achieving the ceiling under domestic uncertainty a tariff is superior to a quota but it could be optimal to reduce the domestic price as imports increase economists have long recognized the equivalence of price and quantity controls under certainty the comparison of these control modes and the characterization of the optimal form of control under uncertainty has been undertaken by two groups of authors weitzman 1974 1978 considered a planning authority which faces uncertainty about the costs and benefits of producing a good he showed that the ranking of price and quantity controls depends on the curvature of the cost and benefit functions and that an optimal policy can be considered as a mixture of price and quantity controls his work was developed by laffont 1977 ireland 1977 malcomson 1978 and yohe 1978 in the context of international trade the comparison of tariffs and quotas under uncertainty has been undertaken by fishelson and flatters 1975 pelcovits 1976 dasgupta and stiglitz 1977 young 1979 1980a b and helpman and razin 1980 recently young and anderson 1980 showed that the policy maximizing expected consumer s surplus given a constraint on expected imports expected import expenditure is a specific tariff an ad valorem tariff in contrast to weitzman s planning model the price instrument is superior to the quantity instrument whatever the curvature of the benefits function 2 the conclusion of young and anderson appears to provide a strong argument against using quantity instruments to restrict trade however the expected surplus criterion is a valid welfare measure only if the marginal utility of income is constant in this paper we characterize the optimal form of trade restriction if the representative consumer of the importing country exhibits risk aversion toward income fluctuations the optimal policy can have surprising properties properties which with high risk aversion are better approximated by a quota rather than a tariff hence the second best justification for using quantity controls to restrict trade turns out to depend on

the dartboard column second hand information and price pressure this study analyzes the effect of second hand information on the behavior of security prices and volume using analysts recommendations published in the monthly dartboard column of the wall street journal for the two days following the publication of the recommendations average positive abnormal returns of 4 percent nearly twice the level of abnormal returns documented in previous research on analyst recommendations and average volume double normal volume levels on the two days following publication of the recommendations are documented the positive abnormal return on announcement is partially reversed within 25 trading days the authors conclude that the positive abnormal return on announcement of the recommendations is a result of naive buying pressure as well as the information content of the analysts recommendations

the information content of municipal bond rating changes a note municipal bond rating changes have positive social value if they signal previously unavailable information on changes in municipal financial soundness weinstein 11 has found that rating changes for corporate bonds do not appear to contain relevant new information his finding is consistent with that of pinches and singleton 7 that stock price adjustments occurred several months prior to a corporate bond rating change rating agencies apparently respond to changes in corporate financial and operating conditions several months after the information is impounded in bond and stock prices 1 however as a result of institutional differences between corporate and municipal bond markets it is possible that rating changes for municipal bonds do convey new information this note examines the information content of municipal bond rating changes by evaluating municipal bond price adjustments during the period surrounding a rating change the joint hypothesis tested is that municipal bond rating changes convey information to investors which is relevant for assessing equilibrium values of the securities and that the municipal bond market is efficient so that valuation changes occur simultaneously with rating changes the following section examines the institutional setting of the municipal bond market in order to specify why information content of bond rating changes might be anticipated remaining sections of the paper describe sample selection derivation of test data findings and discussion

corporate bond ratings changes and economic instability evidence from the korean financial crisis abstract this study presents the first empirical analysis of the impact of bond ratings changes during periods of significant economic instability using the korean financial crisis as the experimental stimulus the study documents that changes in korean bond ratings during the financial crisis resulted in dramatically stronger changes in stock prices than ratings changes of identical magnitude announced either before or after the crisis

output spillovers from changes in sovereign credit ratings this research examines how a sovereign rating revision of one country influences the economic growth rates of other countries rating revisions have significant output spillover effects a one notch upgrade downgrade prompts on average a significant downward revision of about 0 03 0 07 in the consensus forecast of annual economic growth rates of other countries in the two month period after the event the spillovers are transmitted through direct and indirect trade and financial linkages between event and non event countries the evidence indicates that a predominance of differential common spillovers leads upgrades downgrades to produce adverse output effects for other countries

micro economic determinants of tourist expenditure a quantile regression approach abstract we assess the effect of the main determinants of tourist expenditure by applying both linear and quantile regression models to individual micro data collected by a survey addressed to non resident tourists who spent their holidays in sardinia during the period april october 2012 we find that in addition to income and foreign nationality tourist expenditure is crucially driven by trip related party size stay length accommodation sea and sun typology and transport modality and psychographic characteristics repeated visits and holiday motivations moreover our results indicate that the effects vary with respect to the expenditure component and the level of spending thus confirming the high complexity of the tourism product higher positive effects were found for heavy spenders in the case of foreign nationality previous visits and notoriety motivated holidays while party size and the number of visited sites contribute to reducing the level of expenditure for light spending tourists

the resolution of claims in financial distress the case of massey ferguson when a firm s business deteriorates to the point where it cannot meet its financial obligations the firm is said to have entered the state of financial distress the first signals of distress are usually violations of debt covenants coupled with the omission or reduction of dividends some financially distressed firms eventually go bankrupt others recover or manage to settle the claims against them out of court 1 the behavior of firms in financial distress is interesting for two reasons first the costs of financial distress are an important element in capital structure theory in many models 2 these costs are hypothesized to counteract the tax benefits of leverage and lead to an internal optimum for the capital structure of the firm second financial distress has come to be recognized as a state in which contractual claims are incompletely specified standard terms of the debt equity contract are violated when the firm enters financial distress and claimants may then decide not to act according to previously agreed upon rules or legal formulas recent history has provided a number of examples of firms in financial distress including massey ferguson international harvester chrysler and braniff the resolution of claims in these situations often differs from what is predicted by legal rules or standard theoretical models this paper examines the actual resolution of claims in the reorganization of massey ferguson ltd in part i we use time series data on daily stock returns to test different specifications of priority rules for debt and equity claims in part ii we consider whether massey ferguson avoided deadweight costs of financial distress through the restructuring of claims negotiated among creditors during the winter of 1980 81

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

bond rating agencies and stock analysts who knows what when both bond rating agencies and stock analysts evaluate publicly traded companies and com municate their opinions to investors comparing the timeliness of each we find that granger causality flows both ways while most bond downgrades are preceded by declines in actual and forecast earnings both actual earnings and forecasts of future earnings tend to fall following downgrades although part of this post downgrade forecast revision can be attributed to negative news regarding actual earnings most appears to be reaction to the downgrade itself we find little change in actual earnings following upgrades analysts however tend to increase their forecasts of future earnings

an empirical analysis of strategic competition and firm values the case of r d competition abstract we operationalize a firm s competitive strategy through a new empirical measure and develop a framework for empirical analysis of the market value of strategic behavior using this framework we study announcement effects of r d spending the announcing firm s stock prices are positively influenced by a change in spending and negatively by our competitive strategy measure csm competitors stock prices are positively influenced by the interaction between the market s reaction to the announcing firm and the csm our results are consistent with positive effects of accommodating competition with strategic substitutes and nonpositive effects of tough competition with strategic complements

tourism and discretionary income allocation heterogeneity among households tourism expenditures have been much researched in the past at the aggregate level to evaluate national benefit of the tourism industry and at the disaggregate level to evaluate the attractiveness of tourist market segments past studies however fail to take into account that tourism expenditures are affected by the plethora of other expenditures households make and that households are heterogeneous in allocating discretionary funds to alternative spending options the present study fills this gap by investigating heterogeneity in household discretionary expenditures derived from a realistic choice task in doing so it challenges the implicit paradigm of prior research into tourism expenditures in which the context of the household tradeoff in allocating income is ignored the results highlight the importance of studying tourism expenditure in the context of other household expenditure decisions demonstrate the high level of heterogeneity between individuals with respect to their spending preferences and illustrate the value of this knowledge for tourism destination management as well as government policy in being able to assess the competition between expenditure categories and identify market segments most suitable for the product category offered

information effects in financial distress the case of seabrook station abstract in 1972 a group of electric utilities announced plans to construct seabrook station a nuclear generating facility in 1988 the lead partner in the venture public service company of new hampshire psnh filed for bankruptcy examination of the stock price effects of a variety of financial events preceding the bankruptcy filing shows that information about cash flows paid to psnh security holders affected the common stock prices of psnh and its seabrook partners whereas information about investment and operating cash flows had little or no effect

an analysis of value destruction in at t s acquisition of ncr abstract at t s 7 5 billion acquisition of ncr decreased the wealth of at t shareholders by between 3 9 billion and 6 5 billion and resulted in negative synergies of 1 3 to 3 0 billion we find that at t paid a documented 50 million and possibly as much as 500 million to satisfy pooling accounting thus boosting eps by roughly 17 but leaving cash flows unchanged we conclude that at t s decision to acquire ncr in what the market perceived as a value destroying transaction was related at least in part to the 1984 consent decree with the department of justice that led to the break up of at t

transaction cost two part tariffs and collusion i introduction this paper studies a situation in which cartelization serves to reduce prices and improve social welfare the unusual outcome can be attributed to demand complementarity that exists between the goods under consideration because market demand functions exhibit such complementarity a reduction in either seller s price raises the demand for the other seller s product a cartel internalizes this cross effect and sets prices at relatively low levels whereas the same firms acting as rivals ignore the interdependence and set prices somewhat higher the complementarity originates from transaction costs that customers pay in order to participate in exchange hence complementarity exhibits a specific mathematical form in market demand functions one could even adopt the view that these transaction costs are the underlying circumstance that makes collusion socially more attractive than rivalry another feature that must be mentioned is firms use of two part tariffs under this pricing scheme the customer pays a seller an entrance fee to obtain the privilege of purchasing merchandise then also pays a per unit price on merchandise actually obtained in the context of two part tariffs the paper s main finding can be stated as follows the sum of entrance fees facing customers is smaller when sellers form a cartel than when they set prices independently however per unit prices are the same whether sellers collude or not this model with transaction costs appropriately describes a geographical marketplace such as a shopping mall or central business district in which potential customers face expenses for transportation within the centralized shopping area a department store assesses customers an annual fee for the privilege of shopping this is the store s entrance fee in addition to per unit prices on merchandise a health spa next door imposes membership dues and pay as you go fees on its services a theater sells passes another type of entrance fee that entitle holders to special rates on movies attended later a similar situation is tourism in which case the tourist encounters expenses when traveling to a vacation or convention site at this location hotels charge a daily entrance fee for lodging plus something additional for each meal and telephone call rental cars are available for a fixed charge plus an added price per mile driven entertainment e g disneyland might be marketed through a two part tariff as well a different sort of transaction cost is the expense of educating oneself before being able to effectively utilize certain goods and services speculating in the stock market say requires prior study of finance and irs rules after paying this initial transaction cost the ready investor encounters two part tariffs through which related services are sold entrance fees might take several forms a stock broker levies an annual maintenance charge on accounts an advisory service s newsletter is available at a fixed subscription rate a mutual fund charges new shareholders a roughly constant load it is argued below that these entrance fees would all be lower if the vendors formed a cartel two part tariffs have been studied in this journal before murphy 1977 computes a monopolistic seller s profit maximizing multi part tariff although the seller cannot discriminate between rich and poor customers ex ante self sorting occurs if the seller designs the correct price schedule scott and morrell 1985 investigate a two good monopoly that employs two part tariffs if one good s entrance fee must be set equal to zero for exogenous reasons then optimal values of the remaining price parameters hinge on the exact nature of demand interdependence strong results are obtained when customers are identical levin 1988 compares the stackelberg nash and collusive behavior of firms that employ ordinary pricing in another journal stahl 1982 analyzes rivalry and collusion when buyers pay transportation costs and vendors use ordinary linear pricing

tourism s climate mitigation dilemma flying between rich and poor countries stronger demand for medium to long haul air transport is the main driver of the tourism industry s increasing greenhouse gas ghg emissions causing the current development of global tourism to be environmentally unsustainable efficiency improvements and biofuel usage are unlikely to maintain pace with the projected growth in transport volume therefore curbing the growing demand for air transport has been suggested as another option for the sustainable development of tourism however the political and industry discourse concerning the restriction of air transport tends to label such a restriction as unethical as such limits would impair the development that tourism brings to poor countries this paper investigates the possible impacts of air travel restrictions on the least developed countries ldcs and non ldcs by examining global tourism the impacts on ldcs are found to be neutral on average with both losses and gains in tourist arrivals the extent of any losses does not appear to be beyond the scope of possible economic compensation

ratings hardwiring and asset prices this paper discusses the asset pricing implications of ratings hardwiring the latter is defined as the mechanical response of trading decisions to changes in ratings this issue is studied within a noisy rational expectations framework of asset pricing under asymmetric information in which traders specialize in different driving factors of asset payoffs and interact with others who mechanically link their asset supply to ratings we show that ratings hardwiring leads to predictable supply shocks and induces informed traders to overreact to new information thus creating a channel through which shocks are amplified and prices become less informative and more volatile

credit rating and debt crises we develop an equilibrium theory of credit rating in the presence of rollover risk by influencing rational creditors ratings affect sovereigns probability of default which in turn affects ratings our analysis reveals a pro cyclical impact of credit rating in equilibrium the presence of a rating agency increases default risk when it is high and decreases default risk when it is low