stock price reactions as surrogates for the net cash flow effects of corporate policy decisions abstract this paper adopts a rational market structure to examine the link between the cash flow effects of management policy decisions and the resulting stock price reactions the focus is on testing cross sectional associations between cash flow effects and the underlying characteristics of affected firms we find that it is not possible to infer the sign of association between the stock price reaction and any characteristics of the firm that are observable before management announces its decision our methodological suggestions involve exploiting either a priori assumptions or sample information about the probability distribution of unobservable decision variables underlying the management decision process

market efficiency and insider trading new evidence that corporate insiders earn profits from stock trading does not surprise most financial economists but that outsiders can earn abnormal returns by using pub licly available insider trading data constitutes a serious exception to stock market efficiency the authors show that this anomaly conti nues to exist despite the publication of studies attesting to its exi stence they suggest that the anomalous profits to outsiders are a ma nifestation of the size and earnings price ratio effects controlling for these factors reduces outsider profits by half the additional a ssumption of a 2 percent transactions cost makes outsider profits zer o or negative insider profits after an assumed 2 percent transactio ns cost are a moderate 3 percent per annum for annual holding period s copyright 1988 by the university of chicago

insider trading as a signal of private information there is substantial evidence that insider trading is present around corporate announcements and that this insider trading is motivated by private information using real estate investment trusts that choose to reappraise themselves as our sample we establish that the appraisals contain information but find no market response to the public announcement of this information in these appraisals we consider two possible explanations for this inconsistency the first that the appraisal information is not highlighted in earnings reports and hence remains unobserved and the second that insiders trade on the appraisal information in the time that elapses between the appraisal and its public announcement we find strong support for the second hypothesis with insiders buying selling after they receive favorable unfavorable appraisal news especially for negative appraisals we also find that positive negative appraisals and net insider buying selling elicit significant positive negative abnormal returns during the appraisal period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

cross border bank m as and risk evidence from the bond market the impact of cross border bank m as on bank risk remains an open question though geographically diversifying bank m as have the potential to reduce the risk of bank insolvency they also have the potential to increase that risk due to the increase in risk taking incentives by bank managers and stockholders following these transactions this paper empirically investigates whether cross border bank m as increase or decrease the risk of acquiring banks as captured by changes in acquirers yield spreads this paper also investigates how differences in the institutional environments between bidder and target countries affect changes in yield spreads following m a announcements the study finds that bondholders in general perceive cross border bank m as as risk increasing activities unlike domestic bank mergers specifically on average yield spreads increase by 4 13 basis points following the announcement of cross border m as this study also finds that these yield spreads are significantly affected by the differences in investor protection and deposit insurance environments between the transacting countries however the study does not find that the regulatory and supervisory environment in the home countries of the transacting parties significantly affects the changes in yield spreads the overall evidence suggests that regulators should judge the relative environment in both the home and the host countries in evaluating the associated risks of an active multinational financial institution and in setting the sufficiency of the banks reserve positions

consistent estimation of cross sectional models in event studies event studies often include cross sectional regressions of announcement effects on exogenous variables if the event is voluntary and investors are rational then standard ols and gls estimators are inconsistent consistent ml estimators are constructed for a cross sectional model of horizontal mergers relating announcement effects to exgeneous characteristics of firms and industries the ols and ml estimates differ dramatically for bidders but not for targets the evidence suggests that managers of bidders but not targets have valuable private information about the potential synergies from proposed mergers article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

mimickers of corporate insiders who make large volume trades most prior research shows that corporate insiders can systematically earn abnormal returns by buying or selling their own securities also several studies have investigated whether outsiders can earn abnormal returns by mimicking the trades of insiders after the latter report their trades the findings of these studies suggest that they cannot in contrast this study s results indicate that outsiders can earn significant abnormal returns by mimicking such trades this conclusion is consistent with a growing body of empirical literature that suggests that the market is not efficient in the semistrong form i e is not efficient with respect to all publicly available information

conditioning the return generating process on firm specific events a discussion of event study methods empirical investigations into the codetermination of security prices and eco nomic events are called event studies there are several ways of estimating the codetermination of interest since fama fisher jensen and roll 8 it has been general practice to first translate variables into rates of return then net out gen eral market movements and finally examine the relationship between residual returns and events the methodology in all of its variants fails under the rubric of 4 residual analysis empirical methods used in residual analysis deviate from the structure and terminology generally found in classical econometrics while this is not a criticism of residual analysis it results in a communication problem that is more than simply pedantic in nature a broad body of econometric literature dealing with parameter estimation statistical inference and hypothesis testing often goes untapped by empiricists in finance who within internally consistent sets of as sumptions have created a separate body of statistical methods in this paper a union of the two disciplines is advocated to provide a forum for comparing and contrasting alternative empirical methods the event study problem is broken down into three phases the parameterization of informa tion arrival applicable to the problem an examination ofthe relationship between parameters in the information arrival process and the estimates resulting from alternative estimation methods and aggregation across firms experiencing simi

bank capital structure regulatory capital and securities innovations since late 1993 nonfinancial corporations have used financial instruments that permit them to treat preferred stock dividends as tax deductible interest bank holding companies bhcs however did not issue these trust preferred securities tps until 1996 when the federal reserve qualified them as tier 1 capital we delineate and test five not mutually exclusive hypotheses by 1 analyzing the stock market s reaction to the fed s ruling and to tps filings and 2 comparing bhcs that issued tps with those that did not we find that regulatory capital requirements tax savings and uninsured sources of funds had significant positive effects on bhcs demand for capital and that the market responded favorably to tps filings our event study findings are contrary to prior empirical results in that we find a positive market reaction to equity offerings

disentangling the dividend information in splits a decomposition using conditional event study methods while folklore in finance holds that split valuation effects are due to dividend increases associated with splits little is known about magnitudes of dividend and nondividend components of split announcement effects we find that splits and dividends are indeed informational substitutes a notion we characterize more precisely but a significant portion of split valuation effects 46 according to our estimates cannot be attributed to dividend information in splits our techniques extend the literature on conditional event study methods and we illustrate their practical value in testing hypotheses and analyzing data not amenable to analysis by standard procedures article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the existence of equilibrium in discontinuous economic games ii applications in part i of this study we established two existence theorems for mixed strategy equilibrium in games with discontinuous payoff functions see theorems 4 4 and 5 5 in dasgupta and maskin 1986 hereafter d m 1986 in this second part we use the second of these two theorems to prove the existence of mixed strategy equilibrium in some wellknown discontinuous economic games that fail to have pure strategy equilibria the models we analyse are the bertrand edgeworth example of price setting duopolists with capacity constraints see section 2 2 price competition among firms producing differentiated products hotelling 1929 and d aspremont gabszewicz and thisse 1979 see section 2 3 spatial competition eaton and lipsey 1975 and shaked 1975 see section 3 and models of market dependent information rothschild and stiglitz 1976 and wilson 1977 section 4 the paper concludes section 5 with a classification of these models

investment and insider trading within a dynamic environment this paper introduces an inside trader to an economy where rational but uninformed traders choose between investment projects with different levels of insider trading when inside information has little value in future investment decisions insider trading distorts investment towards assets with less private information imposing net welfare costs on the economy when an insider s private information is valuable in making future investment decisions the net social benefit of inside trading can be positive the resulting increases in investment efficiency due to more informative prices is enough to compensate for the distortion induced by the inside trader when insiders receive private information more than once insiders may trade to reveal their private information at the beginning of their relationship with the firm this has two effects i more information is revealed in equilibrium and ii there is less chance than an uninformed agent will have to trade with the insider both these effects reduce the investment inefficiencies associated with insider trading as a consequence uninformed liquidity traders prefer to trade in a market with a long term insider this improvement in investment efficiency leads to a pareto improvement both the uninformed traders and the insider are made better off if the insider receives information more than once

capacity and entry issues in online exchanges abstract with the advent of open standards and internet technologies the number of sellers who can participate in online exchanges is greatly increased we model the competition between identical sellers vying for the same business and find that there exists a mixed strategy equilibrium in prices the results help us understand the dynamics between a seller s capacity and his motivation to participate in an auction

an empirical analysis of the role of the medium of exchange in mergers in empirical studies of differences between firms which are acquired and those which are not researchers typically divide firms into two groups acquired and nonacquired in this paper we argue that cash takeovers may be sufficiently different from noncash acquisitions that failure to distinguish between them may lead to inappropriate generalizations we provide evidence from the mid 1970s that three categories of firms can be distinguished nonacquired acquired in a cash takeover and acquired in an exchange of securities there is a substantial empirical literature exploring the differences between firms which are acquired and those which are not typically these studies divide firms into two groups acquired and nonacquired and analyze the differences in the characteristics of the two groups using binary dependent variable techniques such as discriminant analysis or probit analysis a fundamental shortcoming of these studies is that no distinctions are made concerning the nature of the merger or the acquiring firm that is it is assumed that acquired firms fall into a single category that is distinguishable from nonacquired firms in fact individual acquisitions may be motivated by quite different features suggesting that more than a single category of acquired firms should be analyzed in this paper we argue that cash takeovers may be sufficiently different from noncash acquisitions that modeling the events as being the same i e just mergers may be inappropriate we then provide evidence using data for the mid 1970s that three types of firms can be distinguished nonacquired acquired in a cash takeover and acquired in an exchange of securities the paper is organized as follows in the next section we suggest why firms acquired for cash may be quite different from firms acquired by an exchange of securities section ii describes the empirical techniques which are used and

valuation effects of greenmail prohibitions greenmail payments are widely viewed as actions designed by managers to perpetuate their tenure in offiee this view which suggests that greenmail prohibitions would enhance shareholder wealth receives mixed empirical support in this paper the average market reaction to charter amendments prohibiting greenmail payments is weakly nega tive suggesting there is a value to maintaining managerial flexibility nonlinear maxi mum likelihood estimation however reveals a strong positive correlation between the market reaction and the firm s abnormal stock price runup over the three months just prior to the proxy mailing date for the subsample of firms with a relatively large prior runup the precommitment not to pay greenmail is value enhancing if the prior runup reflects takeover rumors then this evidence is consistent with the proposition that greenmail pay ments amidst takeover speculations are value decreasing

information expected utility and portfolio choice we study the consumption investment problem of an agent with a constant relative risk aversion preference function who possesses noisy information about the future prospects of a stock we also solve for the value of information to the agent in closed form we find that information can significantly alter consumption and asset allocation decisions for reasonable parameter ranges information increases consumption in the vicinity of 25 information can shift the portfolio weight on a stock from 0 to around 70 thus de pending on the stock beta the weight on the market portfolio can be considerably reduced with information causing the appearance of underdiversification the model indicates that stock holdings of informed agents are positively related to wealth unrelated to systematic risk and negatively related to idiosyncratic uncertainty we also show that the dollar value of information to the agent depends linearly on his wealth and decreases with both the propensity to intermediate consumption and risk aversion

investigating security price performance in the presence of event date uncertainty abstract this paper introduces an event study method that incorporates the possibility of a random event date consistent with empirical evidence we assume an event may affect not only the conditional mean of a security s return but also its conditional variance we compare the statistical power and efficiency of our maximum likelihood method with the standard application of traditional event study methods to multiday security returns assuming a two day event period our empirical results provide evidence that the multiday approach is robust we use our maximum likelihood method to investigate the valuation effects of stock splits and stock dividends

what insiders know about future earnings and how they use it evidence from insider trades abstract this paper provides evidence that insiders possess and trade upon knowledge of specific and economically significant forthcoming accounting disclosures as long as 2 years prior to the disclosure stock sales by insiders increase three to nine quarters prior to a break in a string of consecutive increases in quarterly earnings insider stock sales are greater for growth firms before a longer period of declining earnings and when the earnings decline at the break is greater consistent with avoiding an established legal jeopardy there is little abnormal selling in the two quarters immediately prior to the break

information asymmetry valuation and the corporate spin off decision we empirically analyze the information hypothesis that the separation of a rm s divisions into independently traded units through a spin o enhances value because it mitigates information asymmetry about the rm consistent with this hypothesis we nd that rms that engage in spin o s have higher levels of information asymmetry compared to their industry and size matched counterparts and the information problems decrease signi cantly after the spin o the gains around spin o s are positively related to the degree of information asymmetry and this relation is more pronounced for rms with fewer negative synergies between divisions finally rms with higher growth opportunities and rms in need of external capital show a higher propensity to engage in spin o s they also raise more capital following a spin o which is consistent with the view that

does section 16b deter insider trading by target managers abstract this paper examines empirically whether the short swing rule section 16b of the securities exchange act deters managers from trading before mergers since a merger forces the sale of the target s outstanding equity insider purchases within six months before the merger cannot escape this rule we examine the 1941 1961 period when no other insider trading laws were enforced consistent with 16b s deterrent effect managers purchases drop significantly before the announcement before completion the decrease occurs only in the 1941 1955 period surprisingly pre announcement sales do not decline even though 16b cannot punish deferral of planned sales

on the positive correlation between income inequality and unemployment abstract two papers published in this journal jantti 1994 and mocan 1999 among others find empirical evidence that increases in structural unemployment have a substantial aggravating impact on income inequality the main point of this work is to show that standard job search models can help us understand this empirical regularity as a byproduct of the analysis the paper also provides a closed form general expression that enables direct calculation of the gini coefficient of wage income inequality as a function of any arbitrary initial distribution of wage offers three numerical examples illustrate the results

opening a can of worms the pitfalls of time series regression analyses of income inequality this paper argues that time series regression analysis is of only very limited use for understanding the determinants of income inequality the argument is based on a combination of results from the time series econometrics literature and several characteristics of inequality itself principally nonstationarity of the data in most inequality regression models and the weak theoretical foundations underlying the models a sample of postwar us data is used to illustrate the problems involved

pseudo market timing a reappraisal the average firm going public or issuing new equity underperforms the market in the long run this underperformance could be related to the endogeneity of the number of new issues if new issues cluster after periods of high abnormal returns on new issues in such a case ex post measures of new issue abnormal returns may be negative on average despite the absence of ex ante abnormal returns we evaluate this endogeneity problem in event studies of long run performance we argue that it is unlikely that the endogeneity of the number of new issues explains the long run underperformance of equity issues

corporate takeover bids methods of payment and bidding firms stock returns this study explores the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids the results reveal significant differences in the abnormal returns between common stock exchanges and cash offers the results are independent of the type of takeover bid i e merger or tender offer and of bid outcomes these findings supported by analysis of nonconvertible bonds are attributed mainly to signalling effects and imply that the inconclusive evidence of earlier studies on takeovers may be due to their failure to control for the method of payment recent studies on corporate takeovers provide inconclusive results on the valuation effects of acquisitions on the common stock of bidding firms 1 substantial differences are reported between the studies that analyze acquisitions initiated as tender offers and those that confine their samples to merger proposals the existence of mixed empirical findings for the bidding firms makes it difficult to interpret existing evidence and to draw conclusions about the managers acquisition motivations nevertheless the reason for the substantial difference between empirical findings on mergers and tender offers still remains an unresolved issue it is observed however that mergers are usually common stock exchange offers whereas tender offers are usually cash offers given that different methods of financing a project have different signalling implications myers and majluf 39 the differential stock returns of bidders in mergers and tender offers may be due to the method of acquisition financing

overreaction and insider trading evidence from growth and value portfolios insider transactions are not random across growth and value stocks we find that insider buying climbs as stocks change from growth to value categories insider buying also is greater after low stock returns and lower after high stock returns these findings are consistent with a version of overreaction which says that prices of value stocks tend to lie below fundamental values and prices of growth stocks tend to lie above fundamental values do market prices reflect investor overreaction 1 the purpose of this paper is to provide evidence on this question however new evidence is unlikely to change many minds if the findings depend on the newly controversial capital asset pricing model capm or multifactor models or if they involve datasnooping 2 we bypass these problems by not using capm or a benchmark model and by examining a new set of data we measure insider buying and selling in stocks that are ranked by measures such as the ratio of cash flow per share to price per share cf p 3 current practice refers to stocks with low cf p as growth stocks and to stocks with high cf p as value stocks we examine the direction of insider trades along the growth value spectrum to see if they are consistent with attempts to profit from market overreaction by overreaction we mean price movements that predictably reverse this experiment does not require an asset pricing model because we do not examine the returns accruing to insider trades 4

mergers and the market concentration doctrine evidence from the capital market the last 3 decades of vigorous enforcement of u s antimerger laws is based on the market concentration doctrine one of the oldest and most controversial propositions in industrial economics this doctrine which is an implication of oligopoly models in the tradition of cournot 1838 1927 and nash 1950 holds that the level of industry concentration is a reliable index of the industry s market power the empirical implication is that a relatively high level of industry concentration which in the presence of entry barriers is believed to facilitate intraindustry collusion or dominant firm pricing should be associated with relatively large industrywide monopoly rents following bain 1951 numerous the market concentration doctrine predicts that a horizontal merger is more likely to have collusive anticompetitive effects the greater the merger induced change in industry concentration since a collusive anticompetitive merger generates an increase in the industry s quality adjusted product price or a decrease in factor prices it also follows from the doctrine that the mergerinduced expected benefits to the product market rivals of the merging firms should be an increasing function of the concentration change the empirical results of this paper which are based on the industry wealth effect of a large sample of horizontal mergers including cases found in violation of antimonopoly laws fail to support this prediction this conclusion is robust with respect to assumptions concerning the probability that a proposed merger will be prevented by the law enforcement agencies and it continues to hold after transforming the industry wealth effect into a hypothetical constant expected change in the industry s product price the results imply that the levels of concentration and market shares found in the department of justice s merger guidelines are unlikely to identify truly anticompetitive mergers i wish to thank paul asquith gregg jarrell rex thompson walter vandaele the participants of the economics workshop at the antitrust division of the u s department of justice and a referee of this journal for helpful comments earlier drafts were presented at the 1983 meetings of the european association for research in industrial economics and at the 1984 meetings of the western finance association financial support from the social sciences and humanities research council of canada grant no 494 83 0091 and the u s federal trade commission is also gratefully acknowledged 1 a closely related but somewhat less general prediction is that high levels of concentration should be associated with relatively high supracompetitive product prices although

insider trading earnings changes and stock prices this study empirically examines the relation between reportable insider trading and the information captured by annual unexpected earnings for a large sample of firms spanning a ten year period 1978 87 each observation is assigned to one of four groups based on the direction of net insider trading buy sell and the sign of unexpected earnings for each of these groups 15 month cumulative abnormal returns are regressed on annual unexpected earnings the slope coefficient is the largest for the group where insiders are net purchasers and the sign of unexpected earnings is positive this is consistent with an inference that insider buying interactively confirms the favorable information captured by positive unexpected earnings and this interaction reduces the noise in unexpected earnings the result with regard to the unfavorable information captured by the group with insider selling and negative unexpected earnings is similar but less pronounced the analysis also suggests that insider trading conveys information not fully captured by the year s earnings

comment on cyclical and secular influences on the size distribution of personal income in the uk some econometric tests by g weil 1986 comment on cyclical and secular influences on the size distribution of personal income in the uk some econometric tests by g weil applied economics vol 18 no 10 pp 1103 1107

an approach to statistical inference in cross sectional models with security abnormal returns as dependent variable several recent event studies test hypotheses about the association between event related abnormal security returns and firm characteristics using a three step procedure first forecast model parameters are estimated usually parameters of a market model second prediction errors or residuals are computed over an event period third prediction errors are regressed cross sectionally on firm characteristics hypothesized to influence the impact of the event on share values results of these regressions are used to draw inferences about the relation between abnormal returns and firm characteristics researchers who employ three step procedures acknowledge that crosssectional ols regressions lead to valid inferences if the disturbances are iid normal in cross section see for example leftwich 1981 p 23 and lustgarten 1982 p 138 while sufficient assumptions to draw valid inferences from ols regressions are clear these assumptions are violated if there is cross correlation and cross sectional heteroscedasticity in the firm return processes from which the prediction errors are estimated assumptions about the processes generating these prediction

anomalies in security returns and the specification of the market model we examine the hypothesis originally advanced by roll 12 that observed anomalies in excess returns can be explained by misspecification of the market model used to estimate systematic risk we find substantial misspecifications in the model systematically related to size and period of listing of the securities in question there is some evidence that these misspecifications are associated with systemic biases in measured betas used to construct excess returns

the gains to bidding firms from merger abstract this study examines the effect of mergers on the wealth of bidding firms shareholders bidding firms gain significantly during the twenty one days leading to the announcement of each of their first four merger bids these results fail to support the capitalization hypothesis that bidders gains are captured at the beginning of merger programs bidders abnormal returns are positively related to the relative size of the merger partners and the gains during the announcement period are larger for mergers which are successful though the gains are larger prior to 1969 merger bids after 1969 also significantly increase the wealth of bidding firms shareholders the results suggest that the inconclusive findings of the earlier studies may be due to methodological deficiencies the findings of this study are consistent with value maximizing behavior by the management of bidding firms

analyzing online b2b exchange markets asymmetric cost and incomplete information this research applies the discriminating auction to analyze the online b2b exchange market in which a single buyer requests multiple items and several suppliers having equal capacity and asymmetric cost submit bids to compete for buyer demand in the present model we examine the impact of asymmetric cost and incomplete information on the participants in the market given the complete cost information each supplier randomizes its price and the lower bound of the price range is determined by the highest marginal cost in addition the supplier with a lower marginal cost has a larger considered pricing space but ultimately has a smaller equilibrium one than others with higher marginal costs when each supplier s marginal cost is private information the lowest possible price is determined by the number of suppliers and the buyer s reservation price comparing these two market settings we find whether it is beneficial to buyers or suppliers depends on the scale of the bid process and the highest marginal cost when the number of suppliers and the difference between the highest marginal cost and the buyer s reservation price are sufficiently large each supplier can gain a higher profit if the marginal costs are private information on the contrary when the highest marginal cost approaches the buyer s reservation price complete cost information benefits the suppliers

measuring the effects of socio economic variables on the income distribution an application to the east german transition process this paper develops a discrete variant of the semiparametric methodology of dinardo fortin and lemieux 1996 dfl to measure the effects of socio economic variables on the income distribution although the proposed method is also based on the calculation of hypothetical income distributions by reweighting the original population it is much easier to implement the framework is applied to examine the distributional effects of rising unemployment decreasing female labor market participation and widening income structure in east germany following the reunification with west germany in 1990 the empirical results suggest that both these tendencies contributed considerably to the recent increase in income inequality in east germany

studying firm specific effects of regulation with stock market data an application to oil price regulation regulations are often introduced and reformed in response to unanticipated changes in market forces in late 1973 for example opec quadrupled the world price of oil and u s policy makers responded by imposing oil price regulation such events pose a fundamental problem of interpretation for studies that use stock prices to identify the economic effects of regulation what portion of the capital gains or losses experienced by investors in regulated firms is due to regulation and what portion is due to unanticipated economic events to answer these questions we use microeconomic theory to derive hypotheses about how the capital gains and losses created by opec pricing and u s regulatory policies are related to the underlying characteristics of petroleum firms we test the hypotheses by including a model of firm specific abnormal returns in the standard market models of common stock returns earned by investors in petroleum firms the results indicate the u s oil production and refiner access to price controlled crude oil were sources of capital gains and that u s and foreign refining were sources of capital losses

unemployment and the size distribution of income the impact of changes in the level of unemployment on the u k size distribution of annual income is examined using cross section data increased unemployment is shown to have a discernible regressive effect however reductions in shares were not highly concentrated at the very bottom of the distribution many individuals affected by unemployment during the year are in households families not at the bottom of the distribution particularly because of the presence of other working members copyright 1986 by the review of economic studies limited

strategic wholesale pricing in a supply chain with a potential entrant this paper develops an adverse selection model for a two stage supply chain with one supplier one retailer and a potential outside entrant supplier who makes a partially substitutable product the work is different from most research on entry deterrence that only considers a single stage model our main interest is to investigate how the incumbent supplier can strategically maximize her profit by a wholesale pricing policy when facing the potential entrant we focus on a model where the entrant supplier will sell her product through the same incumbent retailer we derive the optimal decisions for each player and study the comparative statics of the equilibrium to investigate how the supply chain structure may affect the deterrence strategy of the incumbent supplier we also consider three alternative models with different channel structures when both suppliers sell their products directly when the entrant has another independent retailer and when the entrant sells her product directly through the comparison we find that the existence of the common downstream retailer often enhances the deterring motivation of the incumbent supplier

the risk preferences of u s executives in this paper i elicit risk attitudes of u s executives by calibrating a subjective option valuation model for option exercising data 1996 to 2008 yielding approximately 65 000 values of relative risk aversion rra for almost 7 000 executives the observed behavior is generally consistent with moderate risk aversion and a median mean rra close to one three values are validated for chief executive officers ceos by testing theory based predictions on the influence of individual characteristics on risk preferences such as gender marital status religiosity and intelligence senior managers such as ceos presidents and chairpersons of the boards of directors are significantly less risk averse than non senior executives rra heterogeneity is strongly correlated with sector membership and firm level variables such as size performance and capital structure alternative factors influencing option exercises are tested for their influence on rra values this paper was accepted by brad barber finance

event studies in economics and finance the event study is an important research tool in economics and finance the goal of an event study is to measure the effects of an economic event on the value of firms event study methods exploit the fact that given rationality in the marketplace the effects of an event will be reflected immediately in security prices thus the impact can be measured by examining security prices surrounding the event in this paper event study methods are described including some of the potential complications an example is included to illustrate the approach

equity carve outs and managerial discretion this study proposes a managerial discretion hypothesis of equity carve outs in which managers value control over assets and are reluctant to carve out subsidiaries thus managers undertake carve outs only when the firm is capital constrained consistent with this hypothesis firms that carve out subsidiaries exhibit poor operating performance and high leverage prior to carve outs also consistent with this hypothesis in carve outs wherein funds raised are used to pay down debt the average excess stock return of 6 63 percent is significantly greater than the average excess stock return of 0 01 percent for carve outs wherein funds are retained for investment purposes in this study we investigate the financial and operating performance of firms that undertake equity carve outs and analyze the cross section of excess stock returns around the announcement of these transactions in an equity carve out a firm offers to sell shares in a wholly owned subsidiary to the public as such a carve out can be viewed as the sale of an asset or as an equity offering schipper and smith 1986 focus on carve outs as equity offerings and compare the announcement period stock returns of carve outs with those of seasoned equity offerings in this study we view the carve out as the sale of an asset which is intended to raise funds to finance other activities of the parent or the subsidiary in viewing equity carve outs as asset sales we borrow from the work of lang poulsen and stulz 1995 who propose and test a financing hypothesis to explain the cross section of excess stock returns around announcements of asset sales the characterization of an equity carve out as a sale of assets must be tempered by the fact that certain features distinguish carveouts from outright asset sales equity carve outs are asset sales to public shareholders as opposed to a single buyer carve outs are undertaken explicitly for the purpose of raising funds in the capital market and the parent firm typically continues to hold a substantial fraction of the equity of the carved out subsidiary following the offering equity carve outs are similar to asset sales in that funds raised in the offering can be either retained within