the effect of changes in reserve requirements on bank stock prices abstract the present study re examines the tax burden effects of reserve requirements on bank profitability it differs from previous work in two ways 1 changes in stock prices rather than accounting data are used to measure profitability effects and 2 emphasis is placed on changes in reserve requirements as opposed to their level regarding the latter distinction two kinds of changes are considered 1 temporary changes in reserve requirements for the purpose of discretionary monetary policy and 2 more permanent changes in reserve requirement levels based on the event study methodology temporary changes were found to have little effect on security prices whereas more permanent changes had a stronger influence on bank stock prices reflecting a tax burden effect

effects of announcements of reorganization outcome less is known about whether the market perceives the final resolution of post reorganization filing to be idiosyncratic or to carry endemic implications for the corresponding industries this study observes the presence of intra industry information transfers the magnitude and direction of the reactions in response to three separate resolution outcome differs in a systematic way across industry portfolios specifically portfolio rivals that are affected by competitive realignments in the industry experience stock price reactions in the opposite manner to those of the distressed firms thus suggesting dominant competitive effects in addition this study reveals that the discriminatory power and forecast performance of three hybrid neuro fuzzy models are stable and unimpaired across time and are generally superior in classifying rival cumulative prediction error rcpe candidates

predicting how people play games a simple dynamic model of choice we use the simple dynamic model developed in sarin and vahid 1999 games and economic behavior 28 294 309 to explain the experiments reported in erev and roth 1998 american economic review 88 848 881 in an earlier paper sarin and vahid 1998 mimeo texas a m university and monash university we showed that the model predicted behavior in repeated coordination games remarkably well and better than equilibrium theory or reinforcement learning models in this paper we show that the same one parameter model can also explain behavior in games with a unique mixed strategy nash equilibrium better than alternative models hence we obtain further support for the simple dynamic model journal of economic literature classification numbers c7 d8

uk directors trading the impact of dealings in smaller firms this paper reasesses the u k results of significant abnormal returns from directors trading for a new sample of directors trades 1984 86 and finds that abnormal returns tend to be concentrated in smaller firms when an appropriate benchmark portfolio is used it is found that the significance of the abnormal returns is substantially reduced with the implication that directors trading does not yield particularly high profits to either the directors themselves or to an outside investor mimicking those trades coauthors are john matatko ian tonks and richard purkis copyright 1994 by royal economic society

performance changes around bank mergers revenue enhancements versus cost reductions this paper examines operating performance around commercial bank mergers we find that industry adjusted operating performance of merged banks increases significantly after the merger large bank mergers produce greater performance gains than small bank mergers activity focusing mergers produce greater performance gains than activity diversifying mergers geographically focusing mergers produce greater performance gains than geographically diversifying mergers and performance gains are larger after the implementation of nationwide banking in 1997 further we find improved performance is the result of both revenue enhancements and cost reduction activities however revenue enhancements are most significant in those mergers that also experience reduced costs

games with unique mixed strategy equilibria an experimental study abstract the results of an experiment studying the choices of subjects playing mixed extensions of three variants of simple 2 2 non constant sum strictly competitive games of the same form matching pennies are presented subjects exhibited a variety of behavioral adaptive learning strategies this heterogeneity of individual behavior produced aggregate dynamics whose estimated steady states are quite different from those predicted by the nash equilibria of those stage games with asymmetrical payoff functions the observed aggregative dynamics are well accounted for both by a quantal equilibrium model of mckelvey and palfrey and by a learning model of roth and erev journal of economic literature classification number c72

investor protection and the value effects of bank merger announcements in europe and the us investor protection regimes have been shown to partly explain why the same type of corporate event may attract different investor reactions across countries we compare the value effects of large bank merger announcements in europe and the us and find an inverse relationship between the level of investor protection prevalent in the target country and abnormal returns that bidders realize during the announcement period accordingly bidding banks realize higher returns when targeting low protection economies most european economies than bidders targeting institutions which operate under a high investor protection regime the us we argue that bidding bank shareholders need to be compensated for an increased risk of expropriation by insiders which they face in a low protection environment where takeover markets are illiquid and there are high private benefits of control

corporate governance through the proxy contest evidence and implications the current literature concerning proxy contests provides little evidence that shareholders suffer materially from sub par performance prior to a contest furthermore no study has thoroughly examined the long term performance of targeted firms subsequent to a proxy contest using a sample of ninety seven election contests during the period 1968 87 the authors find negative abnormal returns and deteriorating operating performance prior to the announcement of a contest following the contest negative abnormal returns are observed these negative returns are driven by cases in which dissident shareholders successfully acquire board seats the results for accounting based operating performance measures confirm these findings copyright 1993 by university of chicago press

competitiveness through management of diversity effects on stock price valuation this study s premise is that firms that can lower their costs and enhance their differentiation through the effective management of their human resources have a competitive advantage using data fr

does information matter in the commons experimental evidence abstract common pool resources cprs typically involve interaction where precise information about payoffs is absent however all experimental studies of cprs we are aware of study environments where the payoff structure is known in this paper we address the behavioral consequences of two degrees of information on the mapping between decisions and payoffs we run two treatments one with complete information on the payoff structure and one with none remarkably aggregate behavior is not significantly different between the two treatments in both cases the aggregate tendencies converge to the nash equilibrium furthermore the best reply dynamics organize individual behavior in both treatments remarkably well

issuing costs to existing shareholders in competitive and negotiated underwritten public utility equity offerings abstract this paper presents the results of an empirical investigation of whether there is any difference in the cost incurred by public utilities if they issue new equity through a negotiated or competitive underwriting we conclude that the expected cost of a competitive offer is less than the expected cost of a negotiated offer but that the variance of the cost is substantially greater with a competitive offer these results are interesting because most public utilities use negotiated underwriting unless forced by regulation to use competitive offers this paper is also an addition to the growing agency theory literature

proxy contests and the governance of publicly held corporations abstract analysis of 60 proxy contests for seats on the boards of exchange listed firms during 1978 1985 shows that three years after the contest less than one fifth of the sample firms remain independent publicly held corporations run by the same management team proxy contests are typically followed by managerial resignations even when dissidents fail to obtain a majority of board seats and are often followed by sale or liquidation of the firm the average stockholder wealth gains associated with proxy contests are largely attributable to gains by companies in which dissident activity leads to sale or liquidation

payoff assessments without probabilities a simple dynamic model of choice abstract we develop a model which reflects the tendency of people to simplify the decision problems they face the decision maker chooses among alternate strategies only on the basis of the payoff she assesses she would obtain from them and these assessments do not explicitly take into account her subjective judgements regarding the likelihood of alternate states of the world at each stage the decision maker chooses the strategy that she assesses to give the highest payoff she updates her assessments adaptively we show that such behavior leads to maxmin choices we also consider the decision maker who experiences shocks journal of economic literature classification numbers c7 d8

the effect of piracy on the market penetration of subscription software software piracy is not necessarily harmful to a software firm seeking to launch a new product when strategically managed through the use of price and protection measures piracy establishes the initial adopters of the software who in turn influence other users to buy the product we examine the role of piracy in affecting the adoption of subscription software products we present an individual level model in an adaptive population setting intended to determine the price protection mix that maximizes the discounted profit stream over the life of the software an extension for nonsubscription software is also discussed

communication costs information acquisition and voting decisions in proxy contests this article synthesizes some recent progress in the theories of corporate control and political lobbying to model the proxy campaign as a political campaign the model yields a number of testable implications only some of which have been examined in the literature for example if the loss from voting for a bad dissident exceeds the gain from voting for a good dissident the model predicts that as communication costs fall the number of proxy fights increases announcement day returns decrease and the fraction of dissident wins first increases and then decreases article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

short sale restrictions and market reaction to short interest announcements according to the diamond verrecchia hypothesis if increases in short interest are correlated with information that is not yet public they should precipitate a price adjustment stocks with unexpected increases in short interest are found to generate statistically significant but small negative abnormal returns for a short period around the announcement date when the sample is divided into stocks with and without tradable options nonoptioned stocks closely mimic these results but the optioned stocks do not in a cross sectional analysis of individual firms the short term negative abnormal returns are found to be 1 more negative the higher the degree of unexpected short interest and 2 less negative if the firm has tradable options

the timing of option repricing we investigate whether executive stock option repricings are systematically timed to coincide with favorable movements in the company s stock price for a sample of 236 repricing events we observe sharp increases in stock price in the 20 day period following the repricing date in addition repricing dates tend to either precede the release of good news or follow the release of bad news in the quarterly earnings announcements since information about stock option repricing is not generally released to the public around the repricing date these findings suggest that ceos opportunistically manage the timing of the option repricing date

equilibrium play and adaptive learning in a three person centipede game the two person centipede game is one of the most celebrated paradoxes of backward induction in complete information extensive form games an experimental investigation of a three person centipede game shows that the paradoxical results are strongly affected by the size of the stakes when the number of players in the game is increased from two to three and the game is played for unusually high stakes with group composition being randomly changed from trial to trial the paradox is considerably weakened as players approach equilibrium play with multiple iterations of the stage game when the game is played with low stakes there is no evidence for equilibrium play or learning across iterations of the stage game an adaptive learning model that assumes updating of the individual probabilities of choice outperforms alternative static and dynamic models in accounting for the major results observed in the high stake experiment

strategy similarity and coordination in the payoff assessment model of choice sarin and vahid 1999 only the assessment of the chosen strategy is updated we extend that model to allow the agent to also update the assessments of strategies that the agent thinks are similar to the chosen strategy we use this model to explain observed behaviour in a recent experiment statistical tests cannot distinguish between the payoff distributions generated by the model and the observed payoff distributions in almost every period

on corporate governance a study of proxy contests abstract this paper examines a sample of firms experiencing proxy contests for seats on their board of directors dissident shareholders usually fail to obtain a majority of board seats nevertheless they capture some seats via mechanisms such as cumulative voting in over half of the sample contests regardless of proxy contest outcome positive and statistically significant share price performance is associated with the contest that finding is predicted by the standard economic analysis of proxy contests in which the challenges benefit shareholders by improving corporate performance the finding runs counter to the claim of berle 1962 that the economists view of proxy contests is a wholly imaginary picture a portion of the positive share price changes taking place in the early stages of some proxy contests is not permanent however and as suggested by manne 1962 is at least partially attributable to temporary increases in the market value of the vote attached to corporate shares

naive reinforcement learning with endogenous aspirations this article considers a simple model of reinforcement learning all behavior change derives from the reinforcing or deterring effect of instantaneous payoff experiences payoff experiences are reinforcing or deterring depending on whether the payoff exceeds an aspiration level or falls short of it over time the aspiration level is adjusted toward the actually experienced payoffs this article shows that aspiration level adjustments may improve the decision maker s long run performance by preventing him or her from feeling dissatisfied with even the best available strategies however such movements also lead to persistent deviations from expected payoff maximization by creating probability matching effects

trading frequency and event study test specification abstract we examine the effects of thin trading on the specification of event study tests simulations of upper and lower tail tests are reported with and without variance increases on the event date across levels of trading volume the traditional standardized test is misspecified for thinly traded samples if return variance is unlikely to increase then corrado s rank test provides the best specification and power with variance increases the rank test is misspecified the boehmer et al standardized cross sectional test event study methodology under conditions of event induced variance journal of financial economics 30 pp 253 272 is properly specified but not powerful for upper tailed tests lower tailed alternative hypotheses can best be evaluated using the generalized sign test

changes in organizational structure and shareholder wealth the case of limited partnerships this paper analyzes the consequence for shareholders of a change in organizational form the conversion of a corporation or the spin off of a unit into a limited partnership theory suggests that prior to the tax reform act of 1986 the tax benefits of conversion to a limited partnership and the creation of a new entity separate from the parent corporation should have a positive effect on shareholder wealth on the other hand the increase in agency costs of such an organizational change should decrease the wealth of shareholders empirical results lend support to hypotheses that predict an increase in stock price at the announcement of the conversion but cannot identify the source of the gain

shareholder wealth effects of directors liability limitation provisions the adoption of liability limitation provisions llps is associated with insignificant stock price reactions for all firms but with positive stock price reactions for poorly performing firms this result is consistent with the hypothesis that the net benefit of llps is larger for financially troubled firms than for other firms because outside directors are valuable to the distressed firm and llps substantially affect experts expected costs of serving as directors

investor protection and corporate governance recent research has documented large differences among countries in ownership concentration in publicly traded firms in the breadth and depth of capital markets in dividend policies and in the access of firms to external finance a common element to the explanations of these differences is how well investors both shareholders and creditors are protected by law from expropriation by the managers and controlling shareholders of firms we describe the differences in laws and the effectiveness of their enforcement across countries discuss the possible origins of these differences summarize their consequences and assess potential strategies of corporate governance reform we argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank centered and market centered financial systems

the social construction of market value institutionalization and learning perspectives on stock market reactions this study advances a social constructionist view of financial market behavior the paper suggests that the market s reaction to particular corporate practices such as stock repurchase plans are not as financial economists contend simply a function of the inherent efficiency of such practices rather stock market reactions are also influenced by the prevailing institutional logic and the degree of institutionalization of the practice the theory first predicts that the emergence of the agency perspective on corporate governance in the mid 1980s represented a powerful new institutional logic that would lead the market to reverse its prior aggregate reaction to stock repurchase plans in the united states the paper then considers the potential for institutional decoupling of repurchase plans and develops competing hypotheses about how the market value of these policies might have changed as more firms formally adopted but did not implement the plans over time in contrast to a financial economic pers

the outsourcing of r d through acquisitions in the pharmaceutical industry abstract we examine the performance of 160 pharmaceutical acquisitions from 1994 to 2001 and find evidence that on average acquirers realize significant positive returns these returns are positively correlated with prior acquirer access to information about the research and development activities at target firms and a superior negotiating position a unique desperation index is employed to determine the current status of a firm s internal productivity we find that firms experiencing declines in internal productivity or which are more desperate are more likely to engage in an outsourcing type acquisition in an effort to replenish their research pipelines

callable bonds a risk reducing signalling mechanism a comment the existence of callable bonds has been somewhat of a puzzle the call feature provides firms with a valuable interest rate option but the value of this option should be exactly offset by the creditor s demand for a higher interest rate as compensation one explanation for the call provision from myers 4 bodie and taggart 3 and barnea haugen and senbet 2 is that callable bonds may be used to reduce some agency costs another explanation from robbins and schatzberg 5 is that callable bonds can signal a firm s better prospects in the presence of asymmetric information one possible problem with the agency cost and signalling explanations of callable bonds is that short term debt may serve the same functions in all four studies indeed short term debt is equivalent to long term debt in the theoretical sections of the agency cost studies however robbins and schatzberg hereafter rs suggest that short term debt fails to provide the risk sharing opportunities inherent in callable bonds thus they suggest that a signalling explanation provides a unique role for callable bonds one limitation of rs s results is that they are based on an example that makes a series of strong assumptions about a two stage lottery faced by good news and bad news firms in order for their model to have general applicability it would be desirable to demonstrate that their results hold under more general assumptions the results of this study suggest that their findings cannot be generalized without further assumptions callable bonds do not yield a separating equilibrium result when only a minor change is made in two of the lottery probabilities suggesting that their results are far from robust to minor changes in assumptions moreover callable bonds may fail to generate a separating equilibrium even for some good news firms that conform to rs s original model because bad news firms that do not meet their assumptions may attempt to mimic good news firms that do the risk sharing result is also very sensitive to the specific assumptions made by robbins and schatzberg specifically callable bonds increase the risk borne by management if one change is made in the numeric values of one of the lottery payouts the paper begins with a review of the relevant portions of robbins and schatzberg s model section ii provides a counterexample in which callable bonds fail to provide a separating equilibrium section iii provides a counterexample in which callable bonds fail to provide risk sharing debt and the paper concludes with a summary

callable bonds a risk reducing signalling mechanism a reply robbins and schatzberg 3 hereafter rs argued that callable bonds constitute a risk reducing signalling mechanism wall 6 hereafter wall responds that there exist examples quite similar to the one presented in rs for which short term debt proves to be a superior instrument in wall s first example short term debt can signal good prospects although callable bonds cannot a second example purports to show strictly superior risk reduction capabilities when either short term debt or callable bonds can signal wall contends therefore that the class of problems for which callable bonds serve as a risk reducing signalling mechanism lacks generality in this reply we restrict our notion of what it means for securities offering to be risk reducing at the same time that it signals in doing so we find that wall s first example is one from a broad class of problems for which it is impossible both to reduce risk and to signal the fact that callable bonds are not optimal for this problem is thus quite consistent with the idea that callable bonds constitute a risk reducing signalling mechanism furthermore we demonstrate that no power should be ascribed to wall s second example for it rests upon failure to note a subtle point in rs short term debt is strictly superior in the second example only if we do not allow the firm to overcapitalize its investment project if as in rs we do allow securities offerings that raise excess capital the excess to be placed in a riskless investment opportunity we can obtain a callable bonds contract that equals the performance of short term debt if we introduce new corporate strategic behavior that seeks additional enhancement of the corporate manager s decision making namely selling off risky projects once information about prospects becomes symmetric callable bonds prove strictly superior before providing these results we begin by demonstrating that wall s assertions are automatically questionable because short term debt is equivalent to a degenerate subclass of callable bonds

simple play in the prisoner s dilemma abstract players do not have knowledge of the objective game they know the available strategies and have scalar valued non probabilistic payoff assessments they act myopically always choosing the strategy they consider best they update these assessments in the direction of the received payoff it is shown that such players converge to choose their maxmin strategies when facing a game against nature in the prisoner s dilemma however the players need not converge to their maxmin strategy and often end up cooperating

liberal egalitarianism and the harm principle this paper analyses the implications of classical liberal and libertarian approaches for distributive justice in the context of social welfare orderings an axiom capturing a liberal non interfering view of society named the weak harm principle is studied whose roots can be traced back to john stuart mill s essay on liberty it is shown that liberal views of individual autonomy and freedom can provide consistent foundations for social welfare judgements in both the finite and the infinite context in particular a liberal non interfering approach can help to adjudicate some fundamental distributive issues relative to intergenerational justice however a surprisingly strong and general relation is established between liberal views of individual autonomy and non interference and egalitarian principles in the rawlsian tradition

case based decision theory this paper suggests that decision making under uncertainty is at least partly case based we propose a model in which cases are primitive and provide a simple axiomatization of a decision rule that chooses a best act based on its past performance in similar cases each act is evaluated by the sum of the utility levels that resulted from using this act in past cases each weighted by the similarity of that past case to the problem at hand the formal model of case based decision theory naturally gives rise to the notions of satisficing decisions and aspiration levels

the effect of private antitrust litigation on the stock market valuation of the firm the authors study the implications for shareholder wealth of interfirm antitrust litigation and how the costs of the dispute affect the propensity to settle upon filing defendants experience significant wealth losses that are ten million dollars larger than the wealth gains of plaintiffs financial distress behavioral constraints and follow on suits are sources of wealth leakage and influence settlement behavior since the threat of a monetary transfer has little power to explain either wealth effects or the likelihood of settlement the central concern of defendants may be the potential prohibition of profitable business practices copyright 1995 by american economic association

the nature of discipline by corporate takeovers this paper provides a comprehensive examination of the disciplinary role of the corporate takeover market using a sample of u s target firms over the period 1979 to 1998 the time period spanned allows a broader study not only of the disciplinary role of the takeover market in general but also of the interaction between the takeover market and alternative governance mechanisms during the 1980s and 1990s overall our evidence is consistent with the view of the corporate takeover market as a court of last resort that is it is an external source of discipline that intercedes when internal control mechanisms are relatively weak or ineffective copyright 2004 by the american finance association

measuring beliefs and rewards a neuroeconomic approach the neurotransmitter dopamine is central to the emerging discipline of neuroeconomics it is hypothesized to encode the difference between expected and realized rewards and thereby to mediate belief formation and choice we develop the first formal test of this theory of dopaminergic function based on a recent axiomatization by caplin and dean 2008a these tests are satisfied by neural activity in the nucleus accumbens an area rich in dopamine receptors we find evidence for separate positive and negative reward prediction error signals suggesting that behavioral asymmetries in response to losses and gains may parallel asymmetries in nucleus accumbens activity

why regulate insider trading evidence from the first great merger wave 1897 1903 we use event time methodology to study legal insider trading associated with mergers circa 1900 for mergers with prospective disclosures similar to today s we find substantial value gains at announcement implying participation by outside shareholders despite the absence of insider constraints furthermore preannouncement stock price runups relative to total value gain are no more than those observed for modern mergers insider regulation apparently has produced little benefit for outsiders with the inside information pricing function and related gains shifting to external information specialists other results suggest market penalties for nondisclosure i e insider trading is less successful in a restricted information environment

empirical evidence on on vertical foreclosure i introduction prior to the 1980s the united states department of justice and the federal trade commission actively challenged vertical mergers on the theory that such mergers foreclosed unintegrated rivals in the downstream market from access to inputs supplied by the merged firm this policy changed when critics of the foreclosure theory claimed that vertically integrated firms have no incentive to transfer products between the upstream and downstream markets at a price other than the market price and therefore vertical mergers have no effect on the price charged to consumers 1 the arguments against attacking vertical mergers were also supported by research that demonstrated that vertical integration can enhance efficiency 2 as a result vertical mergers currently receive very little if any attention from the enforcement agencies recent contributions by ordover saloner and salop 1990 krattenmaker and salop 1986 and salinger 1988 1989 have reopened the debate about the competitive effects of vertical mergers they each use theoretical models to show that vertical foreclosures can raise costs to unintegrated rivals and lead to higher prices for consumers although these models demonstrate that foreclosure can be a profitable strategy that injures competition to date these theories have not been tested empirically if vertical foreclosure rarely occurs or if it occurs only in a narrow set of circumstances changes in current policy on vertical mergers may not be justified a necessary but not sufficient condition for anticompetitive foreclosure is that the vertical merger cause the unintegrated rivals to be less profitable this result from previous theoretical work is tested here on a sample selected from all vertical merger cases challenged by the justice department and the federal trade commission during the period 1963 to 1982 we find no evidence of anticompetitive market foreclosure for the sample of cases challenged by the antitrust agencies one possible explanation for our results is that the tests over the entire sample are significantly affected by a few weak cases brought by the government during a period of aggressive antitrust enforcement we test this by examining variables that have been identified by krattenmaker and salop 1986 and the department of justice merger guidelines as being conducive to foreclosure such as barriers to entry and industry concentration even the cases with high industry concentration and barriers to entry which potentially should exhibit substantial market power provide no evidence of foreclosure while this does not preclude anticompetitive foreclosure as a possibility it does call into question the cases brought by the antitrust agencies during the 1960s and the 1970s until the proponents of the more rigorous economic version of the foreclosure theory provide clearer guidelines about the conditions under which vertical mergers are likely to injure competition continuation of the current policy of not contesting these mergers seems justified ii theory of anticompetitive foreclosure the foreclosure arguments used to challenge vertical mergers during the 1950s and 1960s were easily discredited because no formal theory was used to support them more recent attempts to reconstruct the foreclosure theory have used economic models to demonstrate that vertical foreclosure can reduce competition the key to each of these models is that foreclosure raises the costs to the unintegrated rivals of the merged firm and this under certain conditions raises the price of the final product to the consumer the legal definition of foreclosure focuses on the ability of unintegrated firms to buy from or sell to integrated rivals while the economic definition of anticompetitive foreclosure focuses on whether prices to consumers increase salinger 1988 has provided a model that demonstrates the conditions under which anticompetitive foreclosure will occur

modelling cognitively bounded rationality an evaluative taxonomy abstract since its origins in the 1950s the notion of bounded rationality has been incorporated into economic theory using an array of methodological approaches this paper presents a taxonomy by which these approaches can be categorized and understood evaluating each approach against a range of important criteria at a time when the foundations of economic theory are being re examined this paper should be viewed as a first step towards an assessment of the appropriate role that this more realistic view of cognition should take in different areas of economic theory and also of the desirable characteristics of models that incorporate it

the effect of pre emptive right amendments on shareholder wealth abstract pre emptive rights allow existing shareholders to purchase a new offering of shares before the general public this paper investigates the effect on shareholder wealth of removing pre emptive rights from corporate charters two hypotheses are constrasted 1 shareholder wealth maximization suggests that management uses this extra degree of freedom to pick the least cost method for raising new equity hence the amendment increases shareholder wealth 2 management welfare maximization holds that management will use the passage of the amendment to maximize their own welfare sometimes to the detriment of shareholders hence the amendment decreases shareholder wealth the evidence indicates that the amendment decreases shareholder wealth

callable bonds a risk reducing signalling mechanism the theory of financial economics has failed to distinguish advantages of callable bonds from those of short term debt this paper shows that either type of borrowing can signal a firm s better prospects but that short term debt does so at the cost of weakened risk sharing with capital markets by issuing either equity or long term non callable debt a firm with poor investment opportunities will not pool its prospects with those of a better firm but equity produces superior risk sharing perhaps this explains the almr ost complete absence of long term non callable bonds from observed corporate capital structures financial theory has found only moderate success in explaining the routine inclusion of call provisions among the covenants of corporate bonds in the absence of market imperfections or incompleteness the incremental compensation promised to bondholders should exactly offset the value of the call provision retained by equityholders indifference should obtain 1 nevertheless it is hard to accept indifference as an explanation given the near universality of call provisions in corporate bond contracts in this paper we argue that in the presence of asymmetric information about investment quality corporate managers can signal their firm s better prospects by issuing bonds that include call provisions our major result shows that this signalling mechanism can be more attractive to risk averse managers than would be the choice of short term debt which could also serve to signal furthermore we demonstrate that non callable corporate debt is a dominated security that is both it and equity signal bad news but equity provides risk sharing this finding helps to explain the relative absence of long term non callable debt from corporate financial markets previous attempts to explain the prevalence of call provisions in corporate bond contracts fall into four categories two categories involve pure wealth transfers from bondholders to stockholders in these constant sum environments a gain to one group constitutes a loss to the other in the first category managers possess private information with regard to future interest rate movements issuing callable bonds will capture gains for stockholders when anticipated drops

a reexamination of the conglomerate merger wave in the 1960s an internal capital markets view one possible explanation for bidding firms earning positive abnormal returns in diversifying acquisitions in the 1960s is that internal capital markets were expected to overcome the information deficiencies of the less developed capital markets examining 392 bidder firms during the 1960s we find the highest bidder returns when financially unconstrained buyers acquire constrained targets this result holds while controlling for merger terms and for different proxies used to classify firms facing costly external financing we also find that bidders generally retain target management suggesting that management may have provided companyspecific operational information while the bidder provided capital budgeting expertise