bluuebunny/crossref_metadata_2025 huggingface dataset:
An Examination of Ex‐Dividend Day Stock Price Movements: The Case of Nontaxable Master Limited Partnership Distributions
Authors: SHAW WAYNE H.
Published: April 2012

This study examines the unit (stock) price and volume behavior of master limited partnerships (MLP) around the ex‐dividend day. Since the dividends of MLPs are not taxable to the unitholder, tax based hypotheses predict no abnormal unit movements around the ex‐day. Significant positive excess returns and volume are found before the ex‐dividend day, and significant negative excess returns are found on the ex‐dividend day. The findings which are not significantly impacted by the Tax Reform Act of 1986 suggest ex‐day stock movements are not solely a function of investor marginal tax rates or corporate trading behavior.
Returns and Volatility of Low‐Grade Bonds 1977–1989
Authors: BLUME MARSHALL E. , KEIM DONALD B. , PATEL SANDEEP A.
Published: April 2012

This paper examines the risks and returns of long‐term low‐grade bonds for the period 1977–1989. We find: (1) low‐grade bonds realized higher returns than higher‐grade bonds and lower returns than common stocks, and low‐grade bonds exhibited less volatility than higher‐grade bonds due to their call features and high coupons; (2) there is no relation between the age of low‐grade bonds and their realized returns; cyclical factors explain much of the observed relation between default rates and bond age; and (3) low‐grade bonds behave like both bonds and stocks. Despite this complexity there is no evidence that low‐grade bonds are systematically over‐ or under‐priced.
After‐Hours Stock Prices and Post‐Crash Hangovers
Authors: NEUMARK DAVID , TINSLEY P. A. , TOSINI SUZANNE
Published: April 2012

After‐hours pricing in foreign equity markets of multiple‐listed U.S. securities appeared to be efficient in predicting New York prices in the weeks immediately following the October 1987 crash but relatively uninformative in succeeding months. By contrast, daily changes in New York prices appear to be efficiently incorporated in after‐hours trading on both the Tokyo and London exchanges throughout the sample period. This paper suggests that the asymmetry and temporal variations in cross‐market correlations are consistent with rational investor behavior in equity markets with nonzero transaction costs and time‐varying share price volatility.
The Effect of Taxes on the Relative Valuation of Dividends and Capital Gains: Evidence from Dual‐Class British Investment Trusts
Authors: ANG JAMES S. , BLACKWELL DAVID W. , MEGGINSON WILLIAM L.
Published: April 2012

We provide evidence that taxes affect equity valuation by studying British investment trusts having otherwise identical classes of cash‐ and stock‐dividend‐paying shares outstanding. We study 1969–1982, a period in which there were two dramatic changes in tax policy. We find that stock‐dividend shares, which are convertible into cash‐dividend shares, sell at premiums when the tax system favors capital gains and at discounts when the tax advantage of capital gains is reduced. After the 1975 elimination of the tax advantage to stock‐dividend shares, we observe that investors convert virtually all stock‐dividend shares into cash‐dividend shares.
Volatility increases Subsequent to NYSE and AMEX Stock Splits
Authors: DUBOFSKY DAVID A.
Published: April 2012

The post‐split increase in daily returns volatility is less for AMEX stocks than for NYSE stocks. The exchange trading location is a significant factor in explaining the volatility shift even after stock price and firm size are considered. Furthermore, when measured on a weekly basis, there is no increase in AMEX stocks' returns volatility. These results suggest that measurement errors created by bid‐ask spreads and the 1/8 effect, and also one or more of the elements that make the NYSE different from the AMEX, explain why the estimated volatility of daily stock returns increases after the ex split date.
Stock and Compensation*
Authors: SCHOLES MYRON S.
Published: April 2012

Compensation planning within firms creates important corporate financial problems. Theoretical models and empirical tests of hypotheses in this area should play a much larger role than currently in the modern theory of corporate finance. Employees fund a large proportion of their firm's activities through deferred compensation arrangements tied to the performance of their company. These arrangements are generally put in place for incentive reasons, to align the interests of employees more closely with those of shareholders. Moreover, tax rules encourage or discourage these arrangements at various times. Currently, both tax rules and incentive considerations encourage stock buyback programs to fund deferred compensation arrangements. Prior to the 1980s, however, tax rules favored funding in other than company stock, implying that employees likely held company stock for incentive and not for tax reasons during this time period.
Negotiated Block Trades and Corporate Control
Authors: BARCLAY MICHAEL J. , HOLDERNESS CLIFFORD G.
Published: April 2012

We identify negotiated trades of large‐percentage blocks of stock as corporate control transactions. When a block trades and the firm is not fully acquired, cumulative abnormal returns average 5.6%, and 33% of the chief executives are replaced within a year. Stock‐price increases are larger when control passes to the new blockholder, when management does not resist the blockholder's effort to influence corporate policy, and when the block purchaser eventually fully acquires the firm. These findings suggest that the specific skills and expertise of blockholders, and not just the concentration of ownership, are important determinants of firm value.
The Crash of ʼ87: Was It Expected? The Evidence from Options Markets
Authors: BATES DAVID S.
Published: April 2012

Transactions prices of S&P 500 futures options over 1985‐1987 are examined for evidence of expectations prior to October 1987 of an impending stock market crash. First, it is shown that out‐of‐the‐money puts became unusually expensive during the year preceding the crash. Second, a model is derived for pricing American options on jump‐diffusion processes with systematic jump risk. The jump‐diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during October 1986 to August 1987. Both approaches indicate no strong crash fears during the 2 months immediately preceding the crash.
Fifty Years of the American Finance Association
Authors: KEENAN MICHAEL
Published: April 2012

The American Finance Association was organized 50 years ago. This paper reflects on recent trends in Officers and Directors, Membership, Association Meetings, the Journal of Finance, and other activities. Appendix Tables provide historical data for the Association for the past 25 years.
The Relative Signalling Power of Dutch‐Auction and Fixed‐Price Self‐Tender Offers and Open‐Market Share Repurchases
Authors: COMMENT ROBERT , JARRELL GREGG A.
Published: April 2012

We compare three forms of common stock repurchases. Dutch‐auction self‐tender offers and open‐market share repurchase programs are weaker signals of stock undervaluation than fixed‐price self‐tender offers. The price increase from buyback announcements is greater when insider wealth is at risk, greater following negative net‐of‐market stock returns, and unrelated to prior market returns. Buyback announcement returns are also increasing in the fraction of shares sought, which is consistent with both signalling and an upward‐sloping supply curve for stock.
Capital Structure and the Market for Corporate Control: The Defensive Role of Debt Financing
Authors: ISRAEL RONEN
Published: April 2012

A capital structure theory based on corporate control considerations is presented. The optimal debt level balances a decrease in the probability of acquisition against a higher share of the synergy for the target's shareholders. This leads to the following implications: (i) the probability of firms becoming acquisition targets decreases with their leverage, (ii) acquirers' share of the total equity gain increases with targets' leverage, (iii) when acquisitions are initiated, targets' stock price, targets' debt value, and acquirers' firm value increase, and (iv) during the acquisition, target firms' stock price changes further; the expected change is zero and the variance decreases with targets' debt level.
Structural and Return Characteristics of Small and Large Firms
Authors: CHAN K. C. , CHEN NAI‐FU
Published: April 2012

We examine differences in structural characteristics that lead firms of different sizes to react differently to the same economic news. We find that a small firm portfolio contains a large proportion of marginal firms‐firms with low production efficiency and high financial leverage. We construct two size‐matched return indices designed to mimic the return behavior of marginal firms and find that these return indices are important in explaining the time‐series return difference between small and large firms. Furthermore, risk exposures to these indices are as powerful as log(size) in explaining average returns of size‐ranked portfolios.
Tests of the CAPM with Time‐Varying Covariances: A Multivariate GARCH Approach
Authors: NG LILIAN
Published: April 2012

This paper examines an asset pricing model in which the Sharpe‐Lintner CAPM and the zero‐beta CAPM are special cases. The model allows the ratio of expected market risk premium to market variance, the conditional expected excess returns, and the risks to change over time. The results are found to be sensitive to the choice of the portfolio formation techniques. Significant time variability is shown in the conditional expected excess asset returns and risks and also in the reward‐to‐risk ratio.
Debt, Agency Costs, and Industry Equilibrium
Authors: MAKSIMOVIC VOJISLAV , ZECHNER JOSEF
Published: April 2012

We show that risk characteristics of projects' cash flows are endogenously determined by the investment decisions of all firms in an industry. As a result, in reasonable settings, financial structures which create incentives to expropriate debtholders by increasing risk are shown not to reduce value in an industry equilibrium. Without taxes, capital structure is irrelevant for individual firms despite its effect on the equityholders' incentives, but the maximum total amount of debt in the industry is determinate. Allowing for a corporate tax advantage of debt, capital structure becomes relevant but firms are indifferent between distinct alternative debt levels.
Optimal Financial Instruments
Authors: ZENDER JAIME F.
Published: April 2012

Debt and equity are developed as optimal financial instruments in a model where cash flows and control rights are allocated to investors endogenously. When investment decisions must be made by a single party, the debtholder's cash flows are fixed in order to provide the equityholder with efficient incentives for investment. Ownership of control may be transferred to the debtholder to attenuate the impact of asymmetric information, concerning the investment opportunity, on the efficiency of the decision making.
The Effect of Business Risk on Corporate Capital Structure: Theory and Evidence
Authors: KALE JAYANT R. , NOE THOMAS H. , RAMÌREZ GABRIEL G.
Published: April 2012

Under corporate and personal taxation, we demonstrate that the relation between optimal debt level and business risk is roughly U‐shaped. This result follows from the fact that the tax liability is an option portfolio that is long in the corporate tax option and short in the personal tax option. Therefore, the net effect of a change in business risk on the optimal debt level depends upon the relative magnitudes of the resultant marginal changes in the values of these two options. Results of empirical tests offer support for the predicted U‐shaped relationship.
Fundamentals and Stock Returns in Japan
Authors: CHAN LOUIS K. C. , HAMAO YASUSHI , LAKONISHOK JOSEF
Published: April 2012

This paper relates cross‐sectional differences in returns on Japanese stocks to the underlying behavior of four variables: earnings yield, size, book to market ratio, and cash flow yield. Alternative statistical specifications and various estimation methods are applied to a comprehensive, high‐quality data set that extends from 1971 to 1988. The sample includes both manufacturing and nonmanufacturing firms, companies from both sections of the Tokyo Stock Exchange, and also delisted securities. Our findings reveal a significant relationship between these variables and expected returns in the Japanese market. Of the four variables considered, the book to market ratio and cash flow yield have the most significant positive impact on expected returns.
Chaos and Nonlinear Dynamics: Application to Financial Markets
Authors: HSIEH DAVID A.
Published: April 2012

After the stock market crash of October 19, 1987, interest in nonlinear dynamics, especially deterministic chaotic dynamics, has increased in both the financial press and the academic literature. This has come about because the frequency of large moves in stock markets is greater than would be expected under a normal distribution. There are a number of possible explanations. A popular one is that the stock market is governed by chaotic dynamics. What exactly is chaos and how is it related to nonlinear dynamics? How does one detect chaos? Is there chaos in financial markets? Are there other explanations of the movements of financial prices other than chaos? The purpose of this paper is to explore these issues.
The Pricing of Default‐free Interest Rate Cap, Floor, and Collar Agreements
Authors: BRIYS ERIC , CROUHY MICHEL , SCHÖBEL RAINER
Published: April 2012

The paper focuses on the valuation of caps, floors, and collars in a contingent claim framework under continuous time. These instruments are interpreted as options on traded zero coupon bonds. The bond prices themselves are used as the underlying stochastic variables. This has the advantage that we end up with closed form solutions which are easy to compute. Special attention is devoted to the choice of the stochastic process appropriate for the price dynamics of the underlying zero coupon bonds.
A Tax‐Tax Clientele for Inde‐linked Bonds: A Comment
Authors: KNOLL MICHAEL S.
Published: April 2012

This comment describes the U.S. federal income tax treatment of corporate bonds that are indexed for inflation and argues that these bonds do not have a tax‐tax clientele in the United States.
Is Fairly Priced Deposit Insurance Possible?
Authors: CHAN YUK‐SHEE , GREENBAUM STUART I. , THAKOR ANJAN V.
Published: April 2012

We analyze risk‐sensitive, incentive‐compatible deposit insurance in the presence of private information and moral hazard. Without deposit‐linked subsidies it is impossible to implement risk‐sensitive, incentive‐compatible deposit insurance pricing in a competitive, deregulated environment, except when the deposit insurer is the least risk averse agent in the economy. We establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This suggests a contradiction between deregulation and fairly priced, risk‐sensitive deposit insurance.
One Market? Stocks, Futures, and Options During October 1987
Authors: KLEIDON ALLAN W. , WHALEY ROBERT E.
Published: April 2012

We provide new evidence regarding the degree of integration among markets for stocks, futures and options prior to and during the October 1987 market crash. Where previous analyses have resulted in recommendations for the implementation of circuit breakers, the coordination of margin requirements across markets, and changes in regulatory jurisdiction, our analysis indicates that delinkage between markets during the crash was primarily caused by an antiquated mechanism for processing stock market orders. The results suggest that market integration may be better served by efficient order execution than by further restricting markets.

To a large extent, the problems of mid‐October can be traced to the failure of these market segments [stocks, stock index futures, and stock options] to act as one. (Report of the Presidential Task Force [Brady Report] (1988, Executive Summary, p. vi)).
The 1985 Ohio Thrift Crisis, the FSLIC's Solvency, and Rate Contagion for Retail CDs
Authors: COOPERMAN ELIZABETH S. , LEE WINSON B. , WOLFE GLENN A.
Published: April 2012

This paper uses both an ARIMA transfer‐function intervention model and a panel data analysis to examine the effect of the Ohio deposit insurance crisis in 1985 on the pricing of six‐month retail certificates of deposit (CDs) for federally‐insured Ohio banks and savings and loans. Adjusting for pricing reactions due to changes in market rates, we find a significant, unanticipated rise in CD‐rate premiums on the initial event week of the crisis that continued for approximately seven weeks. Consistent with a contingent insurance guarantee hypothesis, rate premiums are found to be risk based.
Sovereign Debt: Optimal Contract, Underinvestment, and Forgiveness
Authors: SCHWARTZ EDUARDO S. , ZURITA SALVADOR
Published: April 2012

In this paper we develop a time consistent rational expectations model which analyzes the equilibrium loan contract between a borrowing country and a foreign bank. The loan contract specifies both the amount of the loan and the promised interest payments, and rationally reflects the investment decisions of the country and the possibilities of renegotiation and repudiation of the debt. An important feature of the model is that at the initial negotiation of the loan there is uncertainty about whether the country will renegotiate for partial forgiveness in the future, and whether it will eventually repudiate the debt, even having successfully renegotiated. Moreover, the probabilities of renegotiation and repudiation, and the amount of possible forgiveness are endogenously determined. In the model the repudiation decision is directly related to the underinvestment problem; the objective of the renegotiation is precisely to alleviate this problem. The model is used to analyze the effects of four variables on both the optimal contract and the country's welfare: the degree of penalties that a bank can impose on a defaulting country, the uncertainty of production, the productivity of investments and the riskless interest rate. The analysis has policy implications as well as testable predictions.
The Cross‐Section of Expected Stock Returns
Authors: FAMA EUGENE F. , FRENCH KENNETH R.
Published: April 2012

Two easily measured variables, size and book‐to‐market equity, combine to capture the cross‐sectional variation in average stock returns associated with market β, size, leverage, book‐to‐market equity, and earnings‐price ratios. Moreover, when the tests allow for variation in β that is unrelated to size, the relation between market β and average return is flat, even when β is the only explanatory variable.
Seasonality and Consumption‐Based Asset Pricing
Authors: FERSON WAYNE E. , HARVEY CAMPBELL R.
Published: April 2012

Most of the evidence on consumption‐based asset pricing is based on seasonally adjusted consumption data. The consumption‐based models have not worked well for explaining asset returns, but with seasonally adjusted data there are reasons to expect spurious rejections of the models. This paper examines asset pricing models using not seasonally adjusted aggregate consumption data. We find evidence against models with time‐separable preferences, even when the models incorporate seasonality and allow seasonal heteroskedasticity. A model that uses not seasonally adjusted consumption data and nonseparable preferences with seasonal effects works better according to several criteria. The parameter estimates imply a form of seasonal habit persistence in aggregate consumption expenditures.
Positive Prices in CAPM
Authors: NIELSEN LARS TYGE
Published: April 2012

Some equilibrium prices in CAPM may be negative because of nonmonotonicity of preferences. We identify several sets of sufficient conditions for prices to be positive. The central conditions impose bounds on the investors' risk aversion. These bounds do not need to hold globally but only in a relevant range of portfolios or combinations of mean and standard deviation. The relevant range is specified on the basis of exogenous parameters and variables, and it must contain any endogenously determined equilibrium. The bounds on risk aversion ensure that the preferences for assets are sufficiently well‐behaved within the relevant range.
A Simple and Numerically Efficient Valuation Method for American Puts Using a Modified Geske‐Johnson Approach
Authors: BUNCH DAVID S. , JOHNSON HERB
Published: April 2012

Geske and Johnson (1984) develop an equation for the American put price and obtain accurate prices using a method requiring quadrivariate normal integrals evaluated over an interval containing four equally spaced exercise points. We show that a modification of their method which uses optimal placement of exercise points yields in most cases accurate values using nothing more than bivariate normals. In the more difficult (deep‐in‐the‐money) cases, trivariate normals suffice.
Debt, Liquidity Constraints, and Corporate Investment: Evidence from Panel Data
Authors: WHITED TONI M.
Published: April 2012

This paper presents evidence supporting the theory that problems of asymmetric information in debt markets affect financially unhealthy firms' ability to obtain outside finance and, consequently, their allocation of real investment expenditure over time. I test this hypothesis by estimating the Euler equation of an optimizing model of investment. Including the effect of a debt constraint greatly improves the Euler equation's performance in comparison to the standard specification. When the sample is split on the basis of two measures of financial distress, the standard Euler equation fits well for the a priori unconstrained groups, but is rejected for the others.
Causal Relations Among Stock Returns, Interest Rates, Real Activity, and Inflation
Authors: LEE BONG‐SOO
Published: April 2012

Using a multivariate vector‐autoregression (VAR) approach, this paper investigates causal relations and dynamic interactions among asset returns, real activity, and inflation in the postwar United States. Major findings are (1) stock returns appear Granger‐causally prior and help explain real activity, (2) with interest rates in the VAR, stock returns explain little variation in inflation, although interest rates explain a substantial fraction of the variation in inflation, and (3) inflation explains little variation in real activity. These findings seem more compatible with Fama (1981) than with Geske and Roll (1983) or with Ram and Spencer (1983).
Reputation and Performance Among Security Analysts
Authors: STICKEL SCOTT E.
Published: April 2012

Members of the Institutional Investor All‐American Research Team supply more accurate earnings forecasts than other analysts when forecasts are matched by the corporation followed and by the date of brokerage house issuance. This contemporaneous advantage is complemented by a timing advantage; All‐Americans supply forecasts more often than other analysts. Stocks returns immediately following large upward forecast revisions suggest that All‐Americans impact prices more than other analysts. However, there is virtually no difference in returns following large downward revisions. Nevertheless, the collective results suggest a positive relation between reputation and performance, and, assuming that All‐Americans are better paid, pay and performance.
Dividends and Losses
Authors: DeANGELO HARRY , DeANGELO LINDA , SKINNER DOUGLAS J.
Published: April 2012

An annual loss is essentially a necessary condition for dividend reductions in firms with established earnings and dividend records: 50.9% of 167 NYSE firms with losses during 1980–1985 reduced dividends, versus 1.0% of 440 firms without losses. As hypothesized by Miller and Modigliani, dividend reductions depend on whether earnings include unusual items that are likely to temporarily depress income. Dividend reductions are more likely given greater current losses, less negative unusual items, and more persistent earnings difficulties. Dividend policy has information content in that knowledge that a firm has reduced dividends improves the ability of current earnings to predict future earnings.
Insider Trading in Financial Signaling Models
Authors: BAGNOLI MARK , KHANNA NAVEEN
Published: April 2012

We study the impact of voluntary trade by the manager. We find that, in contrast to standard signaling models, an action is good news for some firms and bad news for others, depending on observable characteristics of the firm, its managers, and their compensation plans. Further, voluntary trade eliminates separating equilibria and thus the possibility of exactly inferring the manager's private information. This may cause the manager to take inefficient actions so as to earn trading profits. Such undesirable behavior can be more effectively constrained by compensation contracts based on phantom shares or nontradeable options instead of large stockholdings.
One‐Time Cash Flow Announcements and Free Cash‐Flow Theory: Share Repurchases and Special Dividends
Authors: HOWE KEITH M. , HE JIA , KAO G. WENCHI
Published: April 2012

The leading explanation for the positive price response surrounding tender offer share repurchase and specially designated dividend (SDD) announcements is the information signaling hypothesis. This paper reexamines these announcements to determine if Jensen's free cash‐flow theory also has explanatory power. Lang and Litzenberger's (1989) findings suggest an important role for the free cash‐flow theory in explaining the market's reaction to dividend changes. In contrast, we find the market's reaction to share repurchases and SDDs is approximately the same for both high‐Q and low‐Q firms. We thus have an empirical puzzle: If Jensen's free cash‐flow theory applies to dividend changes, it is difficult to see why it does not also apply to the analogous events examined here.
Stock Price Dynamics and Firm Size: An Empirical investigation
Authors: CHEUNG YIN‐WONG , NG LILIAN K.
Published: April 2012

We show that after controlling for the effects of bid‐ask spreads and trading volume the conditional future volatility of equity returns is negatively related to the level of stock price. This “leverage effect” is stronger for small, as compared to large, firms. We also document that while the essential characteristics of the relations between stock price dynamics and firm size are stable, the strengths of the relationships appear to change over time.
Futures‐Trading Activity and Stock Price Volatility
Authors: BESSEMBINDER HENDRIK , SEGUIN PAUL J.
Published: April 2012

We examine whether greater futures‐trading activity (volume and open interest) is associated with greater equity volatility. We partition each trading activity series into expected and unexpected components, and document that while equity volatility covaries positively with unexpected futures‐trading volume, it is negatively related to forecastable futures‐trading activity. Further, though futures‐trading activity is systematically related to the futures contract life cycle, we find no evidence of a relation between the futures life cycle and spot equity volatility. These findings are consistent with theories predicting that active futures markets enhance the liquidity and depth of the equity markets.
Invisible Parameters in Option Prices
Authors: HESTON STEVEN L.
Published: April 2012

This paper characterizes contingent claim formulas that are independent of parameters governing the probability distribution of asset returns. While these parameters may affect stock, bond, and option values, they are “invisible” because they do not appear in the option formulas. For example, the Black‐Scholes (1973) formula is independent of the mean of the stock return. This paper presents a new formula based on the log‐negative‐binomial distribution. In analogy with Cox, Ross, and Rubinstein's (1979) log‐binomial formula, the log‐negative‐binomial option price does not depend on the jump probability. This paper also presents a new formula based on the log‐gamma distribution. In this formula, the option price does not depend on the scale of the stock return, but does depend on the mean of the stock return. This paper extends the log‐gamma formula to continuous time by defining a gamma process. The gamma process is a jump process with independent increments that generalizes the Wiener process. Unlike the Poisson process, the gamma process can instantaneously jump to a continuum of values. Hence, it is fundamentally “unhedgeable.” If the gamma process jumps upward, then stock returns are positively skewed, and if the gamma process jumps downward, then stock returns are negatively skewed. The gamma process has one more parameter than a Wiener process; this parameter controls the jump intensity and skewness of the process. The skewness of the log‐gamma process generates strike biases in options. In contrast to the results of diffusion models, these biases increase for short maturity options. Thus, the log‐gamma model produces a parsimonious option‐pricing formula that is consistent with empirical biases in the Black‐Scholes formula.
Value of Latent Information: Alternative Event Study Methods
Authors: ACHARYA SANKARSHAN
Published: April 2012

This paper presents an econometric model to value latent information underlying corporate events. This model computes the market's inference of the value of latent information from the probability of an event, conditional on firm‐specific, preevent information. It provides a convenient framework for testing significance of preevent information variables, such as accounting attributes and lagged stock return. Simulations show that this model, when applied to both event and preevent period data, can decrease the incidence of bias in event studies. If restricted to only event period data, this model reduces to a truncated regression and does not perform as well as standard procedures.
Limitation of Liability and the Ownership Structure of the Firm
Authors: WINTON ANDREW
Published: April 2012

This paper models the optimal choice of shareholder liability. If investors want managers to be monitored, the monitors should be residual claimants (shareholders), and monitoring and firm value will increase as shareholders commit more of their wealth to the firm. When liquidating wealth is costly, contingent liability dominates direct investment as a wealth commitment device; however, if wealth is unobservable, under this regime only relatively poor investors will hold shares in equilibrium. This may be prevented at a cost by verifying shareholder wealth and restricting stock transfers. Comparative statics on various liability regimes are used to motivate actual contractual arrangements.
Options, Short Sales, and Market Completeness
Authors: FIGLEWSKI STEPHEN , WEBB GWENDOLYN P.
Published: April 2012

This paper presents empirical evidence that trading in options contributes to both transactional and informational efficiency of the stock market by reducing the effect of constraints on short sales. The significantly higher average level of short interest exhibited by optionable stocks supports the argument that options facilitate short selling. We also find significant effects on option prices, related to the short interest in the underlying stock. We then present evidence that options also increase information efficiency. Earlier work, that is replicated and extended here, has suggested that short sale constraints cause stock prices to underweight negative information. Options appear to reduce that effect.
Treasury Auction Bids and the Salomon Squeeze
Authors: JEGADEESH NARASIMHAN
Published: April 2012

Recent press accounts claim that collusion is common practice in Treasury auctions and that as a result the auction profits are excessive. But, this paper finds that the auction prices are on average marginally higher than the secondary market bid prices. The auction profits, however, are systematically related to the total fraction of winning bids tendered by banks and dealers. The postauction prices of the two‐year notes in which Salomon Brothers had a 94 percent holding are also examined. The secondary market prices of these notes were significantly higher than the estimated competitive prices in the four‐week postissue period.
Trading Patterns and Prices in the Interbank Foreign Exchange Market
Authors: BOLLERSLEV TIM , DOMOWITZ IAN
Published: April 2012

The behavior of quote arrivals and bid‐ask spreads is examined for continuously recorded deutsche mark‐dollar exchange rate data over time, across locations, and by market participants. A pattern in the intraday spread and intensity of market activity over time is uncovered and related to theories of trading patterns. Models for the conditional mean and variance of returns and bid‐ask spreads indicate volatility clustering at high frequencies. The proposition that trading intensity has an independent effect on returns volatility is rejected, but holds for spread volatility. Conditional returns volatility is increasing in the size of the spread.
The Effect of Money Shocks on Interest Rates in the Presence of Conditional Heteroskedasticity
Authors: GRIER KEVIN B. , PERRY MARK J.
Published: April 2012

Most current empirical work finds no evidence that money shocks lower interest rates. We show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates. Autoregressive conditional heteroskedasticity (ARCH) models find a significant liquidity effect where ordinary least squares (OLS) models do not. The existence of a liquidity effect is found using different models and sample periods when ARCH models are used in estimation, but never when OLS is employed.
Short Selling and Efficient Sets
Authors: ALEXANDER GORDON J.
Published: April 2012

The effect of short selling on the composition and location of the efficient set has been analyzed in a variety of ways. However, the situation typically facing investors where the initial margin requirement is less than 100 percent and the riskfree interest rate that is paid on the short proceeds is less than the rate paid on initial margin has not previously been considered. The Elton‐Gruber‐Padberg algorithm (1976, 1978), subject to certain modifications, is shown here to be capable of identifying the efficient set under such conditions.
Information Sharing in Credit Markets
Authors: PAGANO MARCO , JAPPELLI TULLIO
Published: April 2012

We present a model with adverse selection where information sharing between lenders arises endogenously. Lenders' incentives to share information about borrowers are positively related to the mobility and heterogeneity of borrowers, to the size of the credit market, and to advances in information technology; such incentives are instead reduced by the fear of competition from potential entrants. In addition, information sharing increases the volume of lending when adverse selection is so severe that safe borrowers drop out of the market. These predictions are supported by international and historical evidence in the context of the consumer credit market.
A Nonparametric Approach to Pricing and Hedging Derivative Securities Via Learning Networks
Authors: HUTCHINSON JAMES M. , LO ANDREW W. , POGGIO TOMASO
Published: April 2012

We propose a nonparametric method for estimating the pricing formula of a derivative asset using learning networks. Although not a substitute for the more traditional arbitrage‐based pricing formulas, network‐pricing formulas may be more accurate and computationally more efficient alternatives when the underlying asset's price dynamics are unknown, or when the pricing equation associated with the no‐arbitrage condition cannot be solved analytically. To assess the potential value of network pricing formulas, we simulate Black‐Scholes option prices and show that learning networks can recover the Black‐Scholes formula from a two‐year training set of daily options prices, and that the resulting network formula can be used successfully to both price and delta‐hedge options out‐of‐sample. For comparison, we estimate models using four popular methods: ordinary least squares, radial basis function networks, multilayer perceptron networks, and projection pursuit. To illustrate the practical relevance of our network pricing approach, we apply it to the pricing and delta‐hedging of S&P 500 futures options from 1987 to 1991.
Trading and Liquidity on the Tokyo Stock Exchange: A Bird's Eye View
Authors: LEHMANN BRUCE N. , MODEST DAVID M.
Published: April 2012

The trading mechanism for equities on the Tokyo Stock Exchange (TSE) stands in sharp contrast to the primary mechanisms used to trade stocks in the United States. In the United States, exchange‐designated specialists have affirmative obligations to provide continuous liquidity to the market. Specialists offer simultaneous and tight quotes to both buy and sell and supply sufficient liquidity to limit the magnitude of price changes between consecutive transactions. In contradistinction, the TSE has no exchange‐designated liquidity suppliers. Instead, liquidity is provided through a public limit order book, and liquidity is organized through restrictions on maximum price changes between trades that serve to slow down trading. In this article, we examine the efficacy of the TSE's trading mechanisms at providing liquidity. Our analysis is based on a complete record of transactions and best‐bid and best‐offer quotes for most stocks in the First Section of the TSE over a period of 26 months. We study the size of the bid‐ask spread and its cross‐sectional and intertemporal stability; intertemporal patterns in returns, volatility, volume, trade size, and the frequency of trades; and market depth based on the response of quotes to trades and the frequency of trading halts and warning quotes.
A Theory of the Dynamics of Security Returns around Market Closures
Authors: SLEZAK STEVE L.
Published: April 2012

Numerous empirical studies document patterns in the means and variances of security returns measured over periods that are punctuated by market closures. This article develops a multiperiod model in which closures delay the resolution of uncertainty, thereby redistributing risk across time and agents. Since agents are risk averse in the model, this redistribution affects the equilibrium price, altering risk premia, liquidity costs, and the degree of informational asymmetry. As a consequence, closures alter both the means and variances of returns. The article demonstrates that closures can generate a variety of mean and variance effects, including those that mirror the empirical phenomena.
Tax‐Induced Intertemporal Restrictions on Security Returns
Authors: BOSSAERTS PETER , DAMMON ROBERT M.
Published: April 2012

This article derives testable restrictions on equilibrium asset prices when investors have the option to time the realization of their capital gains and losses for tax purposes. The tax‐timing option alters both the magnitude and timing of equity returns relative to those in a tax‐free model. The tax‐induced restrictions are empirically examined, and the tax rates and preference parameters are estimated. While the tax‐free model can be rejected in favor of the tax‐based model as the specified alternative, the tax‐based model is still unable to adequately explain cross‐sectional differences in asset returns.
Ratings, Commercial Paper, and Equity Returns
Authors: NAYAR NANDKUMAR , ROZEFF MICHAEL S.
Published: April 2012

We present the first evidence that initial ratings of commercial paper influence common stock returns. Highly‐rated industrial issues of commercial paper, unaccompanied by bank letters of credit, are associated with significantly positive abnormal returns; lower‐rated issues are not. The stock price effects of changes in commercial paper ratings also demonstrate the relevance of ratings to the financing of firms. Rating downgrades, especially those that imply an exit from the commercial paper market, produce significantly negative abnormal returns; upgrades have no effects. Initial commercial paper ratings and subsequent reratings appear to help investors sort firms by their future prospects.
Trading Mechanisms and the Components of the Bid‐Ask Spread
Authors: AFFLECK‐GRAVES JOHN , HEGDE SHANTARAM P. , MILLER ROBERT E.
Published: April 2012

We compare the relative magnitudes of the components of the bid‐ask spread for New York Stock Exchange (NYSE)/American Stock Exchange (AMEX) stocks to those of National Association of Securities Dealers Automated Quotations (NASDAQ)/National Market System (NMS) stocks. We find that the order‐processing cost component is smaller, and the adverse selection component is greater on the NYSE/AMEX trading systems than on the NASDAQ/NMS system. The inventory holding component is also greater for exchange‐traded stocks than for NASDAQ/NMS stocks, but this may be attributable to differences in the characteristics of the firms whose stocks trade on the respective systems.
On the Cross‐sectional Relation between Expected Returns and Betas
Authors: ROLL RICHARD , ROSS STEPHEN A.
Published: April 2012

There is an exact linear relation between expected returns and true “betas” when the market portfolio is on the ex ante mean‐variance efficient frontier, but empirical research has found little relation between sample mean returns and estimated betas. A possible explanation is that market portfolio proxies are mean‐variance inefficient. We categorize proxies that produce particular relations between expected returns and true betas. For the special case of a zero relation, a market portfolio proxy must lie inside the efficient frontier, but it may be close to the frontier.
Testing Volatility Restrictions on Intertemporal Marginal Rates of Substitution Implied by Euler Equations and Asset Returns
Authors: CECCHETTI STEPHEN G. , LAM POK‐SANG , MARK NELSON C.
Published: April 2012

The Euler equations derived from intertemporal asset pricing models, together with the unconditional moments of asset returns, imply a lower bound on the volatility of the intertemporal marginal rate of substitution. This paper develops and implements statistical tests of these lower bound restrictions. While the availability of short time series of consumption data often undermines the ability of these tests to discriminate among different utility functions, we find that the restrictions implied by a number of widely studied financial data sets continue to pose quite a challenge to the current generation of intertemporal asset pricing theories.
Circuit Breakers and Market Volatility: A Theoretical Perspective
Authors: SUBRAHMANYAM AVANIDHAR
Published: April 2012

This paper examines ex ante effects of circuit breakers (mandated trading halts). We show that circuit breakers, by causing agents to suboptimally advance trades in time, may have the perverse effect of increasing price variability and exacerbating price movements. We next consider a situation in which a circuit breaker causes trading to be halted in both a dominant (more liquid) and a satellite market. As agents switch from the dominant market to the satellite market, price variability and market liquidity decline on the dominant market and increase on the satellite market.
Stock Returns following Large One‐Day Declines: Evidence on Short‐Term Reversals and Longer‐Term Performance
Authors: COX DON R. , PETERSON DAVID R.
Published: April 2012

We examine stock returns following large one‐day price declines and find that the bid‐ask bounce and the degree of market liquidity explain short‐term price reversals. Further, we do not find evidence consistent with the overreaction hypothesis. We observe that securities with large one‐day price declines perform poorly over an extended time horizon.
Free Cash Flow, Shareholder Value, and the Undistributed Profits Tax of 1936 and 1937
Authors: CHRISTIE WILLIAM G. , NANDA VIKRAM
Published: April 2012

In 1936, the Federal Government unexpectedly imposed a tax on undistributed corporate profits. Despite the direct costs of the tax, its announcement produced a positive revaluation of corporate equity, particularly among lower‐payout firms. We interpret this as evidence of a divergence between managerial and shareholder preferences regarding dividend payout policies, consistent with the presence of agency costs. We also find that despite the incentives created by the tax, the actual growth in dividends during 1936 was lower among firms judged more likely to be subject to higher agency costs after controlling for liquidity, debt, and the growth in earnings.
Firm Valuation, Earnings Expectations, and the Exchange‐Rate Exposure Effect
Authors: BARTOV ELI , BODNAR GORDON M.
Published: April 2012

Consistent with previous research, we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar. We investigate the possibility that this failure is due to mispricing. Lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms, suggesting that mispricing does occur. A simple trading strategy based upon these results generates significant abnormal returns. Corroborating evidence from returns around earnings announcements as well as errors in analysts' forecasts of earnings is also provided.
Corporate Events, Trading Activity, and the Estimation of Systematic Risk: Evidence From Equity Offerings and Share Repurchases
Authors: DENIS DAVID J. , KADLEC GREGORY B.
Published: April 2012

We investigate the relation between trading activity, the measurement of security returns, and the evolution of security prices by examining estimates of systematic risk surrounding equity offerings and share repurchases. In contrast to prior studies, we find no evidence of changes in systematic risk following either equity offerings or share repurchases after correcting for biases caused by infrequent trading and price adjustment delays. Moreover, changes in ordinary least squares beta estimates are significantly related to contemporaneous changes in trading activity. Our results have implications for studies interested in the properties of security returns, particularly those examining periods in which trading activity changes.
Why do NASDAQ Market Makers Avoid Odd‐Eighth Quotes?
Authors: CHRISTIE WILLIAM G. , SCHULTZ PAUL H.
Published: April 2012

The NASDAQ multiple dealer market is designed to produce narrow bid‐ask spreads through the competition for order flow among individual dealers. However, we find that odd‐eighth quotes are virtually nonexistent for 70 of 100 actively traded NASDAQ securities, including Apple Computer and Lotus Development. The lack of odd‐eighth quotes cannot be explained by the negotiation hypothesis of Harris (1991), trading activity, or other variables thought to impact spreads. This result implies that the inside spread for a large number of NASDAQ stocks is at least $0.25 and raises the question of whether NASDAQ dealers implicitly collude to maintain wide spreads.
An Empirical Study of the Consequences of U.S. Tax Rules for International Acquisitions by U.S. Firms
Authors: MANZON GIL B. , SHARP DAVID J. , TRAVLOS NICKOLAOS G.
Published: April 2012

This article examines the effect of tax factors on the equity values of U.S. multinational corporations making foreign acquisitions. Abnormal stock returns are found to be related to a tax variable that captures differences in the international tax status of acquiring firms but not related to a naive tax variable that captures differences between tax rates in target countries and the United States. Our evidence suggests that aggregate intercountry differentials in after‐tax returns are competed away, while firm‐specific, tax‐related advantages (or disadvantages) are reflected in abnormal returns around the announcement date of the acquisition.