investor preference for large firms new evidence on economies of size in the last several decades industrial organization literature has been replete with studies demonstrating a systematic relationship between accounting rates of return and firm size in the direction of greater and more stable accounting profits for larger firms these studies have been subject to criticism for an alarming number of statistical and conceptual problems the most important of which alleges a serious bias in accounting profit measures as proxies for economic profit 2 the criticisms have resulted in a stalemate in the interpretation of empirical evidence on firm size and performance nevertheless there is continued interest in the area ostensibly resulting from policy concerns with large firm advantages in both product and capital markets this paper provides new evidence concerning the industrial organization literature controversy of the connection between firm size and performance stock market data are used to examine the relationship between capital market returns risk and firm size the findings suggest that even if there were no advantages of large size in the product market equal rates of operating profit large firms would still have a substantial capital raising advantage over small firms this advantage is unrelated to the widely recognized floatation cost economies even after controlling for nondiversifiable risk using the capital asset pricing model capm investors still demonstrate a statistically significant and economically important preference for the securities of larger firms investors apparently place a premium on large firms which is not attributable to large firms observed lower risk as captured by the widely used measure of nondiversifiable risk beta risk this finding a fresh contribution to the

empirical evidence on dividends as a signal of firm value the role of dividends in firm valuation continues to be a theoretical puzzle as well as an empirical obsession with economists the pioneering work by modigliani and miller mm 32 29 is the archetype of the theoretical dilemma whereas the authors proved convincingly the irrelevance of dividend policy to firm value within a perfect capital market they tempered their irrelevance proposition with what is usually referred to as the information content of dividends icd hypothesis in a more scientific sense this hypothesis should be labeled as a conjecture since it is essentially an ad hoc observation that dividends may convey information to the capital market concerning a firm s future earnings potential even though the icd hypothesis was not derived from a well specified economic model it has nevertheless been subjected to a plethora of empirical studies in general these studies have focused upon the precise influence of dividend changes upon a firm s common stock price overall the results can be described as being supportive of the notion that stock price movements are positively correlated with cash dividend changes this correlation of course is consistent with the icd hypothesis

new evidence on beta stationarity and forecast for belgian common stocks abstract based on a comprehensive sample of 170 securities traded continuously on the brussels stock exchange from december 1966 to december 1983 this paper presents evidence which indicates that the stationarity of beta coefficients is not as strong as reported in previous studies which were based on smaller samples it is shown however that beta forecast can be generally improved using an adjustment method and that the improvement is highest for portfolios of increasing size

the mispricing of u s treasury bonds a case study this article documents an apparent pricing anomaly involving 94 percent 30 year treasury bonds during the months of may and june 1986 during this period the price of the 94s rose sharply relative to the prices of other long term treasury bonds and created a potential arbitrage opportunity in addition owners of the 94 bonds were able to borrow at a zero interest rate bypledging their bonds detailed examination reveals that this relative pricing anomaly cannot be attributed to changes in the level or term structure of interest rates or to differences between the bonds with respect to liquidity taxation or duration

mathematical vindication of ricardo on machinery ricardo is shown to be right that machinery can hurt wages and reduce output a dramatic robot example reveals wicksell s error in believing that pareto optimality calls for no drop in total output from a viable invention under ricardo s axiom that labor supply adjusts to keep wages at the subsistence level he can correctly deduce on a market clearing basis a rise in his net product rent plus interest while the greater drop in population and total wages result in a reduction in his gross product rent plus interest plus wages

persistent expected and innate poverty estimates for semi arid rural south india 1975 1984 this paper uses nine years of panel data on 170 rural households in southern india to calculate intertemporal measures of poverty these include measures of 1 expected poverty that identify households likely to remain poor on average during any year 2 innate poverty that identify households that are poor owning to deep rooted characteristics that cannot easily be changed in the short run and 3 persistent poverty that identify households whose incomes fall below a fixed poverty line over a number of years the poverty rates estimated for the sample with the three measures are 61 percent 48 percent and 22 percent respectively c 1993 academic press inc copyright 1993 by oxford university press

market based empirical research in accounting a review interpretation and extension a decade and a half of the most concerted and ambitious research effort in accounting history is evaluated here it is the search into the relationship between publicly disclosed accounting information and the consequences of the use of this information by the major group of usersequity investors as such consequences are reflected in characteristics of common stocks traded in major exchanges this research effort known as market based accounting research mbar obtained its impetus from major developments in finance theory during the late 1950s and early 1960s these were the portfolio selection theory and its offspring the capital asset pricing model capm and the concept of informationally efficient capital markets ecm subsequent developments in information economics agency theory and optimal incentive signaling models were quickly incorporated into mbar while the impetus to this line of research came from other disciplines accounting was not only a beneficiary but also to a modest extent a benefactor mbar is relevant to the study of capital market efficiency the capm information economics and regulation this contribution distinguishes mbar from most accounting areas whose contributions to other disciplines are negligible in

estimation risk and stability of optimal portfolio composition abstract the mean variance portfolio models indicate that for optimal investment decisions the true ex ante values of the model parameters should be used instead in practice ex post parameter estimates are used if in the estimation process the probability distribution of estimators is not known there is a problem of estimation risk this paper investigates the impact of estimation risk on the composition of optimal portfolios as the multivariance distribution of the vector of optimal portfolio weights allocated to risky assets is analytically intractable a use of the monte carlo simulation experimental is made this study suggests that the composition of optimal portfolio is relatively more stable when the estimates of model parameters are obtained from longer series of historical observations or the expected portfolio return is low

variance and lower partial moment betas as bases for costing equity capital among regulated utilities an important question in the setting of public utility rates is what constitutes a fair rate of return or cost of equity capital for a regulated utility recent debates over this issue have centred on the capm s ability to produce realistic equity cost figures for use in the rate setting process several researchers recommend modified or expanded versions of the market model as a means of improving its predictive capabilities one such approach is the lower partial moment model the purpose of the present paper is to assess the robustness of the lower partial moment model relative to the conventional capm as a basis for estimating the cost of a utility company s equity capital the hypothesis that empirical estimates of the lpm beta tend to overestimate the true systematic risk of utility companies was corroborated by our test results

primary schooling cognitive skills and wages in south africa using a fairly rich data set from south africa the paper finds that despite the sobriquet gutter education the african schooling systems help to create cognitive skills and these skills are a determinant of wage levels various robust estimators are used but the influential outlier problem does not turn out to be serious computational skills appear to be more important than comprehension skills in influencing wages the african primary schooling system was an extremely poor generator of computational skill the seven year course raising the computational test score by 13 if that a policy implication is that productivity could be raised by certain near costless reallocations of resources in favour of mathematical learning

firms fiscal years size and industry abstract most u s corporations choose their fiscal years to coincide with the calendar year we document that the larger the firm the more likely it is to begin its fiscal year in january this finding holds across industries

market implication of predisc10sure information size and exchange effects differential market reactions to earnings announcements can inter alia be ascribed to the extent to which such announcements entail surprise i e unexpected information the greater the predisclosure information the less the surprise element in earnings announcements since there is no direct measure of predisclosure information the literature has utilized two different proxies i firm size the size effect atiase 1980 1985 and ii exchange listing the exchange effect grant 1980 atiase 1980 argues that private predisclosure information production and dissemination are an increasing function of firm size capitalization if so the amount of unexpected information conveyed to the market by actual earnings reports should be inversely related to firm size other things equal empirical evidence in atiase 1985 supports this hypothesis grant 1980 found that for otc firms the average price revaluation associated with annual earnings announcements is significantly higher in the report week relative to both nonannouncement

on the diversification observability and measurement of estimation risk this paper reexamines how risk return relationships are affected by investor uncertainty about the exact parameters of the joint rate of return distribution we attempt to clarify results relating to three central issues first we address the issue of diversification focusing on an apt factor model framework second we discuss the observability of estimation risk and describe research experimental designs that should encompass the existence of estimation risk and reveal it in the data finally we suggest exploiting contemporaneous return observations on high and low information securities to aid in the measurement of return parameters for low information securities

nonstationary expected returns abstract recent evidence reveals significant negative serial correlation in aggregate market wide stock returns we extend this result to relative market adjusted returns demonstrating negative serial correlation in five year returns we then test two competing explanations 1 market mispricing and 2 changing expected returns in an efficient market the tests are conducted using the capital asset pricing model to estimate relative returns the evidence suggests that negative serial correlation in relative returns is due almost entirely to variation in relative risks and therefore expected relative returns through time we document substantial relative risk shifts particularly for extreme performing stocks

predisclosure information firm capitalization and security price behavior around earnings announcements several studies on the relationship between earnings reports and security price behavior provide evidence suggesting that a significant portion of the information revealed through earnings reports is reflected in security prices prior to the report month e g ball and brown 1968 and brown and kennelly 1972 this has been attributed at least partly to the existence of other more timely sources of information which allow market agents to forecast earnings prior to their release the evidence above reflects an average finding across all firms one question of interest is whether there are significant systematic crosssectional differences in the security price reactions to earnings announcements of firms which are associated with specific firm characteristics that lead to differential amounts of predisclosure information this study focuses on firm size capitalization as one such characteristic a firm

risk return and equilibrium a revisit this paper reports the results of tests of the major implications of the two parameter capital asset pricing model the findings indicate that the relationship between stock returns and systematic risk contains important nonlinearities during 1935 82 these nonlinearities cannot be ascribed to previously documented anomalies related to firm size or january seasonality moreover the test results appear to be sensitive to the choice of the proxy for the market portfolio

the turn of the year in canada a number of investigators have reported that january stock returns in the u s exceed returns for other months of the year this paper documents a similar finding for canadian stocks over the period 1951 1980 however canada did not introduce a capital gains tax until 1973 and the paper reports that january returns in canada exceed returns for other months of the year before and after this date thus these data do not support the tax loss selling pressure hypothesis as the entire explanation for the turnof the year effect in stock returns nor by implication do they support the tax lossselling pressure hypothesis as the complete explanation for the small firm effect in u s stocks returns recently keim 9 has reported that returns on nyse and ase firms with small market values exceed by significant margins returns on firms with large market values this result was previously reported by banz 1 and reinganum 11 but keim s analysis shows that most of the excess return for small firms is concentrated in january indeed it is concentrated in the first two weeks in january roll 13 also documents this phenomenon and investigates a number of possible explanations for it 2 after rejecting several possible nonexploitable explanations roll is left with year end tax loss selling pressure of the sort discussed by branch 2 dyl 5 and givoly and ovadia 6 as the most likely explanation of this result according to the tax loss selling pressure hypothesis toward the end of the year stockholders sell stocks that have declined in price during the year investors do this to take advantage of the opportunity to write off capital losses against ordinary income in computing their federal income taxes the year end sell off exerts downward pressure on stock prices as soon as the tax and calendar year ends the selling pressure is relieved and stock prices quickly rebound to their equilibrium levels roll 13 presents some evidence consistent with this hypothesis specifically he finds a negative correlation between stock returns in january and returns over the previous 12 months that is stocks that decrease in value during the year tend to be big gainers in january roll also finds that

friction in the trading process and the estimation of systematic risk abstract this paper considers how estimates of the market model beta parameter can be biased by friction in the trading process information decision and transaction costs that a leads to a distinction between observed and true returns b causes observed returns to be generated asynchronously for a set of interdependent securities and c thereby introduces serial cross correlation into security returns several propositions are derived from which consistent estimators of beta are obtained and the effect of differencing interval length on beta estimates is specified the formulation is contrasted with the related analyses of scholes williams 1977 and dimson 1979

an empirical investigation of the possibility of stochastic systematic risk in the market model in most empirical work on the market model the parameters of that model are estimated by ordinary least squares effectively assuming that the systematic risk of an asset or portfolio is constant through time however a plausible alternative hypothesis would allow the systematic risk of the stock of a company to vary through time such variation may arise through the influence of either microeconomic factors such as operational changes in the company or changes in the business environment peculiar to the company or macroeconomic factors such as the rate of inflation general business conditions and expectations about relevant future events a detailed discussion of these points is provided by rosenberg and guy 1976a 1976b support for the hypothesis that systematic risk varies through time is provided in the studies by jacob 1971 blume 1975 and fabozzi and francis 1978 in this paper we allow the possibility that systematic risk of an asset is stochastic in principle an attempt to model this stochastic behavior could be made through allowing systematic risk to follow a member of the general arima class of models of box and jenkins 1970 ideally the available data would be employed to suggest a specific model from this general class however this approach has to face very serious we discuss the market model in which the possibility is allowed that beta is stochastic and obeys a first order autoregressive process following a brief discussion of methodological issues in the estimation and testing of such models results are reported on an empirical study of a large sample of monthly returns of common stock we find strong evidence indicating stochastic systematic risk but relatively little evidence against the random coefficient model

public inputs and child schooling in brazil household data from a one percent sample of the 1970 brazilian census are used to analyze the effect of public inputs i e the supply of schooling on children s school attainment in brazil the household data are combined with measures of school availability and quality derived directly from the same census data the measures are based on the number and education of schoolteachers in each of 169 different areas of the country elasticities of demand with respect to these public inputs are estimated these elasticities are high in both rural and urban areas in urban areas the positive effect of public inputs is greater for children from households with poorer and less educated parents in rural areas the positive effect of public inputs is greater if anything for children from households that are relatively better off at least compared to other rural households

crossovers dividends and the size effect the size effect may have been the result of high stock volatility and low dividend payments suppose an equity market is partitioned into a large stock index and a small stock index and suppose that over a given period of time each of the indexes retains its share of the total market capitalization price volatility will cause some stocks to cross over from one index to the other which will result in higher returns for the small stock index and lower returns for the large stock index dividend payments by large companies could offset the effect of the crossovers but they have historically been insufficient to do so hence the size effect

forecasting systematic risk estimates of raw beta that take account of the tendency of beta to change and the heteroskedasticity of residual returns in the application of modern portfolio theory the systematic risk of a security is of central importance beta the future regression coefficient of the return of the security on the return of the market is an index of that risk since the future is yet to be revealed nonclairvoyant practitioners and researchers must rely on estimated rather than actual values of beta and the estimates must be based on data that are currently available

relation between market model prediction errors and omitted variables a methodological note a number of accounting studies have examined market model prediction errors to evaluate the share price effects of various events such as voluntary or mandatory accounting changes a common approach is to examine the prediction errors around the event date of a portfolio of potentially affected firms this approach has been extended recently through the use of cross sectional regressions e g leftwich 1981 holthausen 1981 collins rozeff and dhaliwal 1981 sepe 1982 and chow 1983 in which prediction errors or raw returns are regressed on firm specific variables such as size the purpose of this paper is to examine the implications of some recent findings in finance for the various finance based empirical accounting studies in general two types of omitted variables from the standard capital assets pricing model have been identified first several studies have reported that certain firm specific variables such as size banz 1981 and reinganum 1981 earnings yield basu 1975 1983 and dividend payout ratio litzenberger and ramaswamy 1979 may be omitted variables from the standard capm in addition other studies have found some special time series characteristics of stock returns such

why did wicksell change his mind about the machinery question abstract the article investigates wicksell s change of mind about the machinery question between 1890 and 1900 1901 wicksell at first sided with the so called compensation theory that workers are not harmed by the introduction of machinery in his lecture notes of april 1900 made available here for the first time wicksell deployed marginal productivity theory to discuss the effects of labour saving technical progress with inconclusive results finally in his published 1901 lectures and in his 1900 article about marginal productivity wicksell claimed that the introduction of machinery increases output and reduces wages his analysis was based on the demonstration that free competition maximizes output but not total utility it is argued that wicksell s change of mind and his mature formulation of the machinery question result from his critical assessment of the then new concept of pareto optimality together with his reinterpretation and rejection of ricardo s 1821 contention that the introduction of machinery may diminish output and employment

taxes and stock return seasonality evidence from the london stock exchange prior to the introduction of capital gains taxes seasonality is not detected in the returns of firms that traded on the london stock exchange however after the imposition of a capital gains tax the british stock return data exhibit apparent monthly effects in both jan uary and april additional analysis reveals that while the april effect is consistent with the tax loss selling hypothesis the january effect cannot be attributed solely to the introduction of capital gains taxation furthermore the authors efforts indicate that much caution should be exercised when interpreting studies that compare results from non u s data sources with those from u s data copyright 1987 by the university of chicago

estimating betas on daily data for a small stock market abstract this paper examines the properties of different market risk beta measures computed on daily data for a thin security market i e the helsinki stock exchange in finland in accordance with the results by dimson and marsh 1983 the paper shows that differences in trading frequency between different stocks produce a serious bias towards what appears to be stability in estimated betas furthermore the paper shows that when betas are computed the exclusive use of stock prices based on actual trades will not solve the problem of a thin trading bias in measured stability of these beta estimates in fact other methods proposed to cope with the thin trading problem seem to be at least as efficient as use of trade to trade returns finally betas corrected for differences in trading frequency are still shown to be statistically related for firm size

misspecification of capital asset pricing this study documents empirical anomalies which suggest that either the simple one period capital asset pricing model capm is misspecified or that capital markets are inefficient in particular portfolios based on firm size or earnings price e p ratios experience average returns systematically different from those predicted by the capm furthermore the abnormal returns persist for at least two years this persistence reduces the likelihood that these results are being generated by a market inefficiency rather the evidence seems to indicate that the equilibrium pricing model is misspecified however the data also reveals that an e p effect does not emerge after returns are controlled for the firm size effect the firm size effect largely subsumes the e p effect thus while the e p anomaly and value anomaly exist when each variable is considered separately the two anomalies seem to be related to the same set of missing factors and these factors appear to be more closely associated with firm size than e p ratios

the association between accounting earnings and security returns for large and small firms abstract the differential information hypothesis advanced by atiase 1980 states that information production and dissemination by private parties for the purpose of identifying mispriced securities is an increasing function of firm size this study examines two corollaries of that hypothesis first security prices of large firms anticipate accounting earnings earlier than security prices of small firms second for a given level of unexpected earnings the cumulative abnormal returns of small firms exceed those of large firms the results are generally consistent with atiase s hypothesis

predicting risk some new generalizations existing adjustment techniques for forecasting systematic risk of individual firms have been based on relatively uniformative prior knowledge about the cross sectional distribution of risk estimates this study introduces prior information in the form of size and industry based cross sectional distributions of risk estimates such information is incorporated into forecasts using familiar and generalized adjustment techniques the latter being based on recently developed multiple shrinkage methods improved forecast performance results

the stability of uk risk measures and the problem of thin trading this paper examines the problems of estimating risk measures and their stability in thin markets it shows analytically that conventional approaches used in previous studies can lead to serious overestimates of the stability of risk measures when shares are subject to thin trading it then demonstrates using uk data that this is in fact a serious practical problem and that the resultant biases are of precisely the form predicted finally the paper presents reliable evidence on the stability of uk risk measures by using an estimation method designed to avoid thin trading bias using this approach risk measures are found to be as stable in the uk as they are in the usa this paper examines the stability of risk measures in the uk the focus is on providing reliable evidence in a market where many of the shares suffer from thin trading this is important because thin trading can seriously distort stability measures leading to incorrect conclusions indeed this is a problem which has almost certainly afflicted many previous studies of stability the paper makes four main contributions first it shows analytically that thin trading can lead to serious overstatements about stability second it uses uk data to illustrate that this is in fact a serious practical problem and that the biases are of precisely the form predicted this is important for anyone who wishes to interpret previous claims on beta stability in thin markets third the paper presents reliable evidence on the stability of uk betas by using an estimation method designed to avoid thin trading bias besides avoiding bias our

the aftermarket performance of small firm initial public offerings abstract the dream of many entrepreneurs is to some day take his or her growing small firm public and to thereby become the ceo of a publicly traded corporation currently entrepreneurs are continuing to utilize initial public offerings ipos as a viable source of venture financing ipos also represent a viable mechanism for harvesting venture capital and entrepreneurial investments the touted entrepreneurial benefits of taking a company public include the abilities to borrow additional funds return to the public equity market negotiate mergers without depleting cash the potential for enhanced personal wealth and so forth investors in small firm public equity issues are often motivated by the potential for discovering another apple computer or perhaps an ibm at the ground floor this study empirically examines the aftermarket returns of small publicly held firms that have issued initial public offerings aftermarket returns refers to stock returns immediately after a stock begins trading the study specifically examines two questions first is there a positive risk return relationship for small firm aftermarket returns where higher firm risk will generate higher aftermarket return second will aftermarket returns show on industry effect where certain industries will automatically generate higher returns answers to these questions will affect the strategic financial alternatives available to entrepreneurs both before and after going public and will also affect the decisions of investors interested in financing small public corporations the research findings indicate that entrepreneurs planning to take younger firms public will probably not have available to them numerous subsequent financial alternatives utilizing corporate stock if the true aftermarket performance of their stock is taken into consideration likewise investors in small firm public issues may also be disappointed in the aftermarket performance of younger firms a positive risk return relationship where age was a proxy measure of risk did not exist this was true even though the initially quoted returns of these same younger firms may have been substantial on the other hand the aftermarket performance of older firms is typically favorable finally the study suggests that neither entrepreneurs nor investors should bet solely on a particular industry categorization to carry their aftermarket stock performance while certain industries indicated significant positive initial returns aftermarket returns based on industry classification were generally not statistically significant investors should therefore always exercise firmspecific due diligence and research before investing in small firm public equity issues since the variance of their aftermarket market returns tends to be large

ricardo s volte face on machinery a formal restatement of the numerical example ricardo invoked to explain his change of mind on the feasibility of the depressing effect of technology on labor underlines the analytical difficulty that he could not overcome and thus explains his inconclusive results this difficulty is basically due to the absence of a clearly perceived demand theory demands for goods factor services and money characteristic of him and of classical economics in general since the focus of the technology labor issue is on the expected change of demand for labor in response to technical change the failure of classical economists and of ricardo to propose a relevant theory was inevitable

the relation between the return interval and betas abstract the size effect is sensitive to the length of the return interval used in estimating betas beta changes with the return interval because an asset s covariance with the market and the market s variance do not change proportionately as the return interval is changed we document beta sensitivity to the return interval evidence from cross sectional regressions of returns on monthly and annual betas is inconsistent with beta changes stemming only from the higher standard errors of the longer interval betas we provide evidence that the size effect becomes statistically insignificant when risk is measured by betas estimated using annual returns

mandated accounting changes and debt covenants the case of oil and gas accounting abstract the relationships among mandated accounting changes bond covenants and security prices has been the focus of several studies these studies have provided mixed evidence on the existence of a bond covenant effect on security prices this paper suggests that inconclusive prior results are a consequence of inappropriately measuring the default risk of debt using an option pricing framework it is shown that the debt to equity alone is not an adequate measure of default risk in particular both the debt to equity ratio and the total risk of the firm are necessary to adequately model the bond covenant effects of an accounting change these theoretical propositions are supported by the empirical analysis of the security market reaction to changes in oil and gas accounting

ricardo was right ricardo added a chapter on machinery to the third and last edition of his principles in it he contended that invention of machinery could reduce i the demand for labor ii wages and iii national income this paper is devoted to the analytical questions of whether ricardo was right that viable invention can reduce the total of real output after all competitive prices adjust to clear all markets and why so many mainstream economists doubt ricardo after a defense of ricardo s analysis the political and ideological aspects of the historical discussions are evaluated mathematical proofs are provided in an appendix

union firm bargaining and the influence of product market power and production technology on systematic risk the relationship between the capm firm beta and the firm s microeconomic decisions is studied by a model under uncertainty which combines the feature of an ex ante inputs substituable production technology and the existence of a union which bargains over various economic dimensions of the firm it is shown that the earlier findings of a relationship between the firm beta the firm product market power and the labor capital ratio may be reinforced through the indirect channel of labor market bargaining but the relationship becomes more complex and heavily depends on the scope of the union firm bargaining process this yields the empirical prediction confirmed for a panel of belgian firms that any proper estimation of the determinants of firm beta must control for firms in the sample being unionized

decomposing the gender gap in cognitive skills in a poor rural economy girls lag markedly behind boys in education in many developing countries which may slow economic growth and increase inequity this paper uses indicators of the output of the education production process cognitive skills to characterize and to investigate the determinants of the large educational gender gap in rural pakistan local school availability accounts for about a third of the total cognitive achievement gender gap and over two fifths of that in numeracy which implies that policies that increased local school availability for girls could reduce substantially the gender gaps in cognitive skills to further reduce these gender gaps will require policies that focus on the demand side of the market where our results suggest the response to modest changes in incentives may be high

adjusting to technological change the subject of my address is adjusting to technological change something that a lot of people are doing nowadays the revolution in information and communication technologies and the transition to a knowledge based economy are inducing people in every sector to change how they work and do business what i want to emphasize is that these changes constitute a social process that involves more than the sum of our individual struggles with inanimate nature people are adjusting not only to changes in technology but to changes that others are making to technology adjustments in one sector induce unexpected adjustments and innovations in other sectors in a complex process that none of the participants can possibly comprehend the process is governed by social institutions particularly by the business enterprises that organize almost all economic transactions in a modem economy and at the same time it is transforming those institutions a graphic account of how peoples lives are being tossed about by the winds of change might be too depressing for this occasion so to keep it light i am simply going to talk about macroeconomic theory if there is one profession that has not yet seen much of the darker side of technological change it is macroeconomic theory in fact the recent resurgence of interest in growth and technological change seems to have had a calming effect on the profession by diverting attention from the issues of unemployment inflation and aggregate demand management that have been the subjects of the furious controversies since the keynesian revolution peaceful coexistence has emerged between previously opposing schools now united by the

risk and return abstract this paper examines the seasonality in the basic relationship between expected return and risk during 1935 82 the results reveal that the positive relationship between return and risk is unique to january the risk premiums during the remaining eleven months are not significantly different from zero

the relation between common stock returns trading activity and market value this study examines the relation between common stock returns trading activity and market value our results indicate that although firm size and trading activity are highly correlated differences in trading activity are not the underlying reason for the firm size anomaly the finding of systematic differences in risk adjusted returns across stocks of firms of different size recent empirical research has revealed systematic differences in risk adjusted returns for common stocks of firms of different sizes as measured by the market value of outstanding common stock see banz 1 and reinganum 5 roll 7 in a recent paper has suggested that the firm size anomaly may result from errors in risk measurement in particular roll suggested that because small firms trade less frequently than large firms risk measures obtained from daily or weekly returns data may seriously underestimate the risk associated with holding a portfolio of small firms in response to roll s conjecture reinganum 6 examined the risk adjusted returns of portfolios formed on the basis of firm size using both the scholes williams 8 and the dimson 2 aggregated coefficient method of estimating portfolio betas and found that regardless of the beta estimation technique employed differences in estimated betas were insufficient to account for differences observed in the returns of size ranked portfolios if reinganum s 6 finding is correct that the firm size effect is not attributable to a misassessment of risk and if smaller firms trade less frequently than do larger firms then firm size may merely proxy for trading activity 1 thus the observed firm size effect may be explained in terms of a liquidity premium associated with inactively traded shares the purpose of this paper is to determine whether or not the firm size anomaly is explicable in terms of differences in the trading activity of common stocks a liquidity premium would provide a logically appealing explanation for the firm size effect tinic 11 demsetz 3 and others have argued that transactions costs vary inversely with trading activity as measured by average number of

using shrinkage estimators to improve upon time series model proxies for the security market s expectation of earnings time series models box and jenkins 1976 and nelson 1973 of earnings expectations have frequently been used in capital market research to produce proxies for the security market s assessment of earnings surprise surrounding corporate earnings announcements see e g ball and brown 1968 beaver clarke and wright 1979 and foster olsen and shevlin 1984 these time series models are used to proxy for the market s assessment of unexpected earnings in situations wherever current analysts forecasts are not available e g small firms and quarterly earnings in a recent survey paper bathke and lorek 1984 suggest that three parsimonious time series models have been shown to be useful forecasting models of quarterly earnings per share viz those of 1 foster 1977 2 griffin 1977 and watts 1975 and 3 brown and rozeff 1979 using different samples of firms drawn from different time periods three classes of seasonal autoregressive integrated moving average sarima models have been identified as being the best univariate time series

cost of capital to the hospital sector this paper provides estimates of the cost of equity and debt capital to for profit and non profit hospitals in the u s for the years 1972 83 the cost of equity is estimated using alternatively the capital asset pricing model and arbitrage pricing theory we find that the cost of equity capital using either model substantially exceeded anticipated inflation the cost of debt capital was much lower accounting for the corporate tax shield on debt and capital paybacks by cost based insurers lowered the net cost of capital to hospitals

an empirical study of selected factors influencing the decision to list on foreign stock exchanges the growing internationalization of capital markets suggests that an increasing number of firms perceive the benefits of listing their stocks on foreign exchanges as outweighing the related costs many other firms however still limit listing their securities to their domestic exchanges this study investigates the motives for listing abroad the empirical analyses based on data on 481 multinationals indicate significant association between the likelihood of listing abroad and 1 the relative size of a firm in its domestic capital market 2 the ratio of foreign to total sales

are seasonal anomalies real a ninety year perspective in recent years there has been a proliferation of empirical studies documenting unexpected or anomalous regularities in security rates of return in addition to the widely studied relation between firm size and rate of return 1 these include seasonal regularities related to the time of the day harris 1986 the day of the week see ball and bowers 1986 cross 1973 french 1980 gibbons and hess 1981 jaffe and westerfield 1985 keim and stambaugh 1984 and lakonishok and levi 1982 the time of the month ariel 1987 and the turn of the year see haugen and lakonishok 1988 jones pearce and wilson 1987 lakonishok

event study methodologies and the size effect abstract this study of 862 press recommendations demonstrates that the size effect can distort longer term performance measures and hence event studies relative to similar sized companies post publication performance is neutral however market adjustments the capm and market model with equally or capitalization weighted indexes all produce biased results event studies are most exposed to such bias when the measurement interval is long event securities differ systematically in size or weighting from the index constituents the size effect is large and or volatile and when capm type methodologies are used these distortions are avoided by explicitly controlling for size

overreaction underreaction and the low p e effect although earnings surprises have been studied extensively they have not been examined in the context of contrarian strategies positive and negative earnings surprises affect best high p e and worst low p e stocks in an asymmetric manner that favors worst stocks long term reversion to the mean in which worst stocks display above market returns while best stocks show below market results regardless of the sign of the surprise continues for at least 19 quarters following the news these results are consistent with mispricing overreaction to events prior to the surprise and a corrective price movement after the surprise is consistent with extant research on underreaction the mispricing correction hypothesis explains the superior returns of contrarian strategies noted here and elsewhere in the literature

household income and child schooling in vietnam the stronger are the associations between household income and child schooling the lower is intergenerational social mobility and the less equal is opportunity this study estimates the associations between household income and children s school success in vietnam the estimates indicate that these associations are considerable this article also investigates some ways in which policies relate to household incomes school fees are progressive but school fees are only about one third of what households pay directly to schools and are a much smaller proportion of a household s total school related expenditures total household expenditures paid directly to schools increase with household income less proportionately than do school fees alone so the overall structure of such payments is less progressive than is the structure of school fees because school enrollment is positively related to household income moreover the structure of school fees is less progressive for the entire population than for the selected subset that has children enrolled in school further the two school quality measures that have the strongest positive association with children s school success are much more available to higher income households meaning that higher income households have greater school expenditures in part because they are obtaining higher quality schooling and not because charges for the same quality schooling are progressive across income classes

transaction costs and asset prices a dynamic equilibrium model in this article we study the effects of transaction costs on asset prices we assume an overlapping generations economy with a riskless liquid bond and many risky stocks carrying proportional transaction costs we obtain stock prices and turnover in closed form surprisingly a stock s price may increase in transaction costs and a more frequently traded stock may be less adversely affected by an increase in transaction costs calculations based on the marginal investor overestimate the effects of transaction costs for realistic parameter values transaction costs have very small effects on stock prices but large effects on turnover

survey evidence on diffusion of interest and information among investors abstract questionnaire surveys of institutional and individual investors were undertaken to learn about patterns of communications it was found that direct interpersonal communications are very important in investor decisions questions elicited what fraction of investors were unsystematic and allowed themselves to be influenced by word of mouth communications or other salient stimuli randomly sampled investors were studied as well as investors in stocks whose price had recently increased dramatically contagion or epidemic models of financial markets are proposed in which interest in individual stocks is spread by word of mouth the survey evidence is interpreted as supporting such models

the seasonal stability of the factor structure of stock returns this paper investigates the month by month stability of a daily returns and correlation coefficients of stock returns b correlation and covariance matrices c number of return generating factors and d the apt pricing relationship the results show that there is a january effect and a small firm effect in stock returns correlation matrices are more stable than covariance matrices but both types of matrices are not stable across months and across the sample groups the number of return generating factors is rather stable most of the time and for most of the sample groups but there is some significant instability that is related to the average correlation coefficients among stocks the apt pricing relationship does not seem to be supported by the two stage process using the maximum likelihood factor analysis the seasonality of common stock returns has received considerable attention in financial economics research studies by officer 23 rozeff and kinney 29 gultekin and gultekin 11 and others have investigated the stock returns of the u s and other countries on a monthly basis they generally have found that on average january returns are significantly higher than the returns for other months banz 1 and reinganum 25 26 have found abnormally high returns in small market value firms and keim 17 has related this to the first few trading days of january schwert 30 points out the current difficulty of explaining these empirical regularities and the need for further investigations several studies have examined seasonality in risk premiums rozeff and kinney 29 found that seasonality appeared in the risk premiums obtained from a twoparameter capm and that january displayed a relatively large risk premium compared with the other months keim 16 also found seasonality in the risk premiums more recently tinic and west 32 examined the risk premiums of the two parameter capm and observed the previously reported seasonality and high january premium they also found that january is the only month in which there is a consistently positive statistically significant relationship between expected return and risk very recently using the two stage procedure with the

options short sales and market completeness this paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales the significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling we also find significant effects on option prices related to the short interest in the underlying stock we then present evidence that options also increase information efficiency earlier work that is replicated and extended here has suggested that short sale constraints cause stock prices to underweight negative information options appear to reduce that effect

a bayesian approach to modeling stock return volatility for option valuation new measures of stock return volatility are developed to increase the precision of stock option price estimates with bayesian statistical methods volatility estimates for a given stock are developed using prior information on the cross sectional patterns in return volatil ities for groups of stocks sorted on size financial leverage and trading volume call option values computed with the bayesian procedure generally improve prediction accuracy for market prices of call options relative to those computed using implied volatility standard historical volatility or even the actual ex post volatility that occurred during each option s life although the bayesian methods produce biased call price estimators they do reduce the systematic tendency of standard pricing approaches to overprice underprice options on high low volatility stocks little bias improvement is observed with respect to the time to maturity and moneyness of the call options

testing for nonstationarity of market risk an exact test and power considerations this paper reexamines the issue of common stock market risk stationarity by applying a newly available exact test for random walk regression coefficients for each eight year subperiod tested in the 1951 1974 interval betas for individual new york stock exchange listed stocks appeared to be nonstationary the statistical powers of the exact test and of locally most powerful tests are compared to the power of the test employed previ ously by sunder these power considerations are cited to explain the differences between test results obtained here and those reported by sunder