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

management ownership and market valuation an empirical analysis we investigate the relationship between management ownership and market valuation of the firm as measured by tobin s q in a 1980 cross section of 371 fortune 500 firms we find evidence of a significant nonmonotonic relationship tobin s q first increases then declines and finally rises slightly as ownership by the board of directors rises for older firms there is evidence that q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder

determinants of privatization prices generating government revenue is a common objective in privatization this paper asks what determines privatization prices using firm level data for all 236 mexican companies privatized between 1983 and 1992 there are three main reasons why net prices auction prices net of the cost of prior restructuring measures are low averaging 54 cents per dollar of assets first privatization prices are very sensitive to the level of competition in the auction and restrictions often limited participation second the privatization process took too long and lengthier privatizations are associated with lower premiums third firm prior restructuring measures absorbed an average of 33 percent of the auction price most restructuring measures do not increase price and delay privatization further net prices would have increased by 71 cents per dollar of assets if the government had emphasized speed succeeding in divesting assets in one year less than the average and firing the ceo were the only restructuring step taken

stock markets corporate finance and economic growth during the past decade the capitalization of emerging markets increased twentyfold in 1994 trading on these markets accounted for about 17 percent of the 9 6 trillion of shares traded on the world s stock markets up from a mere 3 percent of the much smaller 1 6 trillion in 1985 this rapid growth in emerging stock market activity raises critical questions for developing country policymakers what effect do stock markets have on economic growth how does stock market development affect firms financing decision and if stock markets are good for growth what policies can governments adopt to foster their development this note summarizes answers to these questions drawn from a recent research project

option prices as predictors of equilibrium stock prices the black scholes option pricing model modified for dividend payments is used to calculate jointly implied stock prices and implied standard deviations a comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices the implications of this finding are discussed this study investigates the role of call option prices as predictors of the equilibrium prices of their underlying stocks using the black scholes 3 bs model previous tests of the bs model have shown that the formula is highly successful in explaining the observed market prices of options see black and scholes 2 galai 8 chiras and manaster 6 and macbeth and merville 12 according to the model the option price is a function of the current value of the underlying stock the instantaneous variance of the stock s rate of return the time to maturity of the option the risk free rate of interest and the exercise price of the option 1 given an observed option price and known values of all input parameters to the bs model except the stock price one can determine the price of the underlying stock that equates the observed option price to its calculated value it follows from the underlying logic of the model that the implied price is the value of the underlying stock for which a continuously revised option bond portfolio would be a perfect substitute for the stock hence if options are actually priced according to the model implied stock prices will be the option market s assessment of equilibrium stock values previous empirical studies have assumed that observed stock prices are the relevant stock prices for option valuation however just as stock prices may differ in the short run from one exchange to another i e nyse midwest

open interest in stock options around quarterly earnings announcements in this paper i document the behavior of open interest in listed stock options around quarterly earnings announcements using pooled timeseries cross section regressions i find a significant decline in open interest prior to announcements this behavior cannot be explained by the reactions of investors to good and bad news i also find in several separate regressions that open interest behaves differently for options whose values are most sensitive to changes in stock volatility suggesting the behavior of open interest is correlated with recently documented temporary increases in the volatility of stock returns around announcement dates many studies based on the volume and price behavior of equities have confirmed that investors respond to public announcements thought to contain information interpreting those responses is a more difficult task for example while beaver 1968 has argued that consensus among investors is an important factor in investor responses others have shown that it is not possible to make unambiguous inferences about consensus by examining price and volume alone see miller 1977 verrecchia 1981 and karpoff 1986

share issue privatizations as financial means to political and economic ends abstract this study examines how political and economic factors affect the offer price share allocation and other terms governments choose when they privatize state owned enterprises via a public share offering using a 59 country sample of 630 share issue privatizations sips with total proceeds of over 446 billion during the period 1977 1997 we find that governments consistently underprice sip offers tilt their share allocation patterns to favour domestic investors impose control restrictions on privatized firms and typically use fixed price offers rather than book building or competitive tender offers all to further political and economic policy objectives

the financial and operating performance of newly privatized firms an international empirical analysis this study compares the pre and postprivatization financial and operating performance of 61 companies from 18 countries and 32 industries that experience full or partial privatization through public share offerings during the period 1961 to 1990 our results document strong performance improvements achieved surprisingly without sacrificing employment security specifically after being privatized firms increase real sales become more profitable increase their capital investment spending improve their operating efficiency and increase their work forces furthermore these companies significantly lower their debt levels and increase dividend payout finally we document significant changes in the size and composition of corporate boards of directors after privatization the last fifteen years have witnessed a significant global shift away from state socialism towards entrepreneurial capitalism one of the most important and visible aspects of this trend has been the enthusiasm with which governments of all political persuasions have sold their state owned enterprises soes to private investors in hopes that the generally unsatisfactory economic performance of these firms can be improved by the discipline of private ownership this denationalization process given its current title of privatization by the conservative government of margaret thatcher in

making a market mass privatization in the czech and slovak republics the author assesses the czechoslovak mass privatization program for speed equity and corporate governance the program transferred claims on assets in 1 491 enterprises assets worth about 10 7 billion to the 8 5 million citizens who participated in the scheme the entire cycle of project preparation public information and nationwide simultaneous bidding took 14 months this was equivalent to privatizing more than three medium scale and large scale enterprises on average per day equity objectives were achieved by transferring equal claims equivalent to about 1 250 per person to all participants and by putting in place a transparent and decentralized process the government s role was simple to provide a framework and a set of rules for potential firms managers and shareholders to find each other the scheme s design based on simultaneous sequential bidding rounds worked to put information about enterprise values into the public domain by allowing increasingly informed bidders to interact the structure of ownership that emerged will have very different implications for corporate governance enterprises in the czech republic and those that sold for high prices in the bidding rounds are characterized by a greater concentration of shareholdings those in the slovak republic and those that sold for lower prices have more diffuse ownership structures the mass privatization scheme served to quickly differentiate the enterprises with favorable prospects from those with unfavorable prospects under current conditions but enterprises that could have survived in some form if they had been restructured before privatization or enterprises that could have been viable but lacked effective governance were sacrificed for the sake of speed and decentralization

speculative carryover an empirical examination of the u s refined copper market this article develops and estimates an empirically tractable model of equilibrium storage the method bridges the gap between theoretical rational expectations models and applied commodity market work the application to the u s refined copper market provides estimates of structural supply and demand rational price forecasts and the risk of copper storage that is consistent with modern portfolio theory

capital market information and industrial performance the role of west german banks in orthodox theory external capital markets play a dual role supplying various forms of investment finance and disciplining firms which are inefficient or fail to pursue profit goals an extensive literature speaks of the efficiency of external capital markets meaning that firms can make production investment decisions and investors can choose among the securities that represent ownership of firms activities under the assumption that security prices at any time fully reflect all available information fama i970 1 however this concept of efficiency is purely technical it depends critically on what information is available and we know there are problems of appropriability and failure in information markets deriving ultimately from certain peculiarities of information as a commodity arrow i962 thus another growing literature focusses on problems of achieving equilibrium in markets where agents are imperfectly or asymmetrically informed amongst other things this literature shows that informational failures of the kind in question can lead to capital rationing in loan and credit markets and the use of strict collateral requirements as screening devices jaffee and russell i976 stiglitz and weiss i98i cable and turner i983 these may then be expected to affect the efficiency of individual firms and the system as a whole capital shortage implies that some profitable investment opportunities are foregone and production choices may also be distorted by the need to satisfy additional financial constraints contrived to elicit signals of creditworthiness of the firms undertaking them similarly the disciplining role of external capital markets can be impaired by information impactedness williamson i975 and the costs of mobilising and giving effect to shareholders preferences thus in the principal agent framework developed by jensen and meckling i976 and fama i980 the degree of constraint on managerial pursuit of non profit goals as posited by managerial theorists depends on the transactions costs of stock owner intervention the result is an optimal degree of departure from cost minimising profit maximising behaviour determined by the level of transactions costs institutional factors which affect the way information is distributed amongst agents can therefore have an important bearing on allocative and technical efficiency and the west german system of industrial finance provides an in

economic evaluation of voting power of common stock this paper presents an economic evaluation of common stock voting rights an index of relative voting rights inequality for different classes of stock of the same corporation is constructed and the empirical relationship between the market premium on a superiorvoting stock and the voting inequality index is examined in only three out of the 25 cases could investors have arbitraged between the two classes of stock although in one case the arbitrage opportunity persisted for several months ownership and control of large corporations are two separate functions each shareholder typically holds a relatively small number of shares and hence lacks significant voting power as a result shareholders interest in the management of the firm is typically limited and a majority of them do not participate in the corporation s general meetings 1 thus the investment and financial decisions of the firm are made by a small group the management which effectively controls the firm the possible conflict of interest between these two groups and other various aspects of the separation of control and ownership are the subject of several studies 2 grossman and hart 5 show that even if the directors of the firm do not act in the best interest of the shareholders 3 it may be impossible for them to be disciplined and replaced by a takeover bid this raises the issue of whether theright to control the firm s activities has any economic value to focus the issue suppose a firm issues two classes of stock one with voting rights and the other with no voting rights and assume further that the two classes are entitled to the same pecuniary payoff in every state of the world according to traditional financial theory that asserts that two assets promising the same payoff in every state of nature must sell for the same price the voting rights would be worthless and we should expect the same market price for the two classes of stock however

managerial ownership of voting rights abstract managers of firms with dual classes of common stock can choose different quantities of votes for a given cash flow interest by choosing different quantities of the two securities we study managerial stock holdings in 45 dual class firms and find that vote ownership per se is an important motivation for these holdings in that corporate officers and their families hold a median 56 9 of the votes and 24 0 of the common stock cash flows we also find significant family involvement in many sample firms and document four case studies in which explicit acquisition premiums were paid for superior voting shares

why east european banks don t want equity abstract a number of observers have argued that banks should fill the corporate governance vacuum in eastern europe only in few cases this has happened in general banks have not shown great interest in control rights based on ownership this paper explains why based on interviews with bank managers in the czech republic hungary and poland

the value of the voting right a study of the milan stock exchange experience i study the large premium 82 percent attributed to voting shares on the milan stock exchange the premium varies according to the ownership structare and the concentration of the voting rights and it can be rationalized in the presence of enormous private benefits of control a case study seems to indicate that in italy private benefits of control can easily be worth more than 60 percent of the value of nonvoting equity a tentative explanation for these findings is provided traditional finance theory disregards the value of voting rights in pricing common stock in most cases this omission does not seem harmful many studies of differential voting stocks in different countries have indicated that voting rights are generally worth between 10 percent and 20 percent of the value of common stock the italian evidence i present differs sharply from this view in italy voting shares that have inferior dividend rights trade at an average premium

ownership structure governance and innovation abstract this paper tests the impact of firms ownership structure on innovation in a context featuring pronounced ownership concentration and conflicts between large and minority shareholders using data for 20 000 italian manufacturers and accounting for the possible endogeneity of ownership levels we find that ownership concentration negatively affects innovation especially by reducing r d effort conflicts between large and minority shareholders appear to be a determinant of this effect moreover risk aversion induced by lack of diversification exacerbates large shareholders reluctance to innovate family owners support innovation more than financial institutions but the benefits of financial institutions increase with their equity stakes

the performance of privatized firms in the czech republic abstract with the growing importance of privatizations as a part of government policy most empirical studies of these privatizations conclude that firm performance immediately improves following privatization privatization has been the most important part of the transition from the centrally planned economies of central and eastern europe and has a larger impact on those economies than privatizations in other countries however few studies have looked at the performance of firms following mass privatization this study uses 453 separate firms 101 firms privatized in both waves for a total of 554 observations in the first and second waves of czech voucher privatization using methodology from previous studies we find that while the overall effects from privatization are positive the effects vary by privatization wave size and industry firms privatized in the first wave performed worse decline in performance following privatization than firms privatized in the second wave we also fail to find ownership concentration or debt as an important factor in restructuring the firm i believe that the results are consistent with two hypotheses first economic and political structure surrounding the privatization waves plays an important part in the success of privatization stable environments both political and economic help privatized firms restructure and improve operating performance as well as attract foreign investors and capital even in less developed countries but in transitional economies undergoing mass privatization in rapidly changing and developing economic and political environments hinder firms from restructuring and improving performance following privatization results are also consistent with the hypothesis that firms with a longer preparation period prior to privatization an implicit seasoning improve performance following privatization

stock markets corporate finance and economic growth an overview the research presented here focuses on four issues first it constructs more measures or criteria of stock market development than any previous study it compares liquidity concentration volatility institutional development and international integration across forty four industrial and developing countries from 1976 to 1993 besides identifying general characteristics of these measures and defining stock market development empirically these data facilitate further research into the relationship between stock market development and financial intermediaries corporate finance decisions and economic growth these measures ranked for each country can be used for inter country comparisons of the level of stock market development in addition the data provide a basis for gauging the success of capital market development projects using objective criteria second with these new data the research investigates the relationships between stock markets and financial intermediaries third the research analyzes the relationship between stock market development and long run economic growth fourth the research studies the ties between stock market development and financing choices of firms this overview puts this research in context and reviews the main results of the study section i provides a brief review of the role of stock markets in economic development and documents the evolution of debt and equity markets during the growth process section ii defines stock market development and presents summary data on the development of financial intermediaries and stock markets section iii presents evidence on the effect of stock market development on economic growth section iv summarizes the empirical results on how stock market development affects firm financing decisions section v concludes by discussing policy implications

predictable events and excess returns the case of dividend announcements abstract this paper hypothesizes that the risk per unit of time and the required rate of return are higher than normal during an event period whose timing can be predicted consistent with this hypothesis this paper presents empirical evidence indicating that the unconditional mean rate of return the variance of stock returns and their systematic risk are higher than usual during dividend announcement periods however the documented increases in the systematic risk are not large enough to fully explain the excess returns this finding is puzzling and hard to reconcile with existing theory

what determines the value of corporate votes this paper studies the determinants of the value of voting rights in u s corporations results support the hypothesis that the price of a vote is determined by the expected additional payment vote holders will receive for their votes in case of a control contest the size of this differential payment is a function of the probability that a vote is pivotal in a control contest and the magnitude of the private benefits obtainable by controlling the company simple proxies for these two factors explain up to 30 percent of the variation of the voting premium across companies and through time my findings also suggest that the value of managerial perquisites are at least partially reflected in the price of votes

anticipation of quarterly earnings announcements a test of option market efficiency abstract this study tests chicago board options exchange efficiency by examining option price behavior in the weeks surrounding a firm s quarterly earnings announcement the evidence presented here suggests that a first order autoregressive seasonal process describes quarterly earnings behavior and demonstrates that the information content of an earnings announcement is fully incorporated in option prices by the end of the announcement week

corporate governance and equity prices evidence from the czech and slovak republics the 1992 czechoslavakia mass privatization program involving about 1 500 eneterprises and implemented through a voucher scheme with competitive bidding was a bold step in changing the ownership and governance of a large part of the economy it represents a clear test case of one approach and other countries may benefit from its lessons at the time much skepticisism was voiced about mass privatization it would lead to diffuse ownership and no effective corporate governance would result but innovative forces led to the emergence of investment funds that collected much of the individuals voucher points leading to a much more concentrated ownership structure it has been expected that this concentrated ownership would lead to improved corporate governance but the jury is still out so far only limited and largely anecdotal evidence is available on the impact investment funds have on the way firms are being managed too little time has passed and too many shocks have occurred for example the split of the czech and slovak republics to expect to find discernible changes in corporate governance on measures of actual firm performance an alternative approach is to investigate whether firms that ended up with more concentrated ownership and possibly improved governance sell for higher prices either in the last voucher round or in the secondary market since then in a forward looking financial market one can expect prices to incorporate the effects of better ownership on future firm performance and associated dividends to shareholders put differently one would expect that two firms with different shareholding structures but otherwise identical would trade at different prices with the firm with a more concentrated ownership and presumably better corporate governance trading at a higher price on a cross sectional basis ownership structure may thus be significant in explaining relative share prices the author explores this line of reasoning controlling for a number of firm and sector specific variables he finds 1 majority ownership by a domestic or foreign investor has a positive influence on firm prices 2 firms with many small owners have lower prices 3 ownership by many small scale investors makes it easier for any single investor to establish effective control but such control does not necessarily translate into higher prices the author also provides two possible explanations of why higher prices appear to be associated only with majority ownership by a single investor he finds 1 the corporate legal framework and the difficulty in collecting proxy votes in the czech and slovak republics may prevent a small investor from making the necessary changes in the way firms are managed thus keeping prices low and 2 commercial banks are both managers of invesment funds and creditors of individual firms funds managers may face conflicts of interest and not be interested in increasing the value of equity alone but also the value of credits this could explain why prices are relatively lower for those firms in which investment funds have effective control

coase versus the coasians who should enforce laws or contracts judges or regulators many coasians though not coase himself advocate judicial enforcement we show that the incentives facing judges and regulators crucially shape this choice we then compare the regulation of e nancial markets in poland and the czech republic in the 1990s in poland strict enforcement of the securities law by a highly motivated regulator was associated with a rapidly developing stock market in the czech republic hands off regulation was associated with a moribund stock market i introduction at the heart of economists traditional skepticism about government regulation is the coase theorem coase 1960 the theorem states that when property rights are well dee ned and transaction costs are zero market participants will organize their transactions in ways that achieve efe cient outcomes when they can do so it is not necessary for the government to engage in corrective actions through taxes regulations or even legal rules financial markets are often used to demonstrate the coase theorem s case against regulation advocates of the regulation of these markets point to a variety of potential failures such as the ability of security issuers to expropriate both potential and existing investors through misrepresentation or proe t diversion investors fear of such expropriation prevents e rms from raising external funds and keeps efe cient projects from being undertaken not so reply the coasians they point out that most securities transactions take place between sophisticated adults and that both the buyers and the issuers of securities have available to them a vast range of private arrangements to achieve efe ciency including contracts such as corporate charters certie cation by intermediaries and various forms of bonding such contracts render most laws and regulations unnecessary stigler 1964 easterbrook and fischel 1991