bluuebunny/crossref_metadata_2025 huggingface dataset:
Optimal Bond Trading with Tax Clienteles: A Discrete‐Time Dynamic Trading Model
Authors: Tian Yisong
Published: March 2005

This study develops a discrete‐time dynamic trading model for bond pricing under differential taxation. The model incorporates both the tax‐timing option effect and the tax‐clientele effect. Investors from all tax brackets have a chance to bid for a bond, and the marginal investor is the one who is willing to pay the highest price. Simulation results show that inter‐bracket trading occurs frequently as the interest rate changes, which enhances the value of the tax option. These results are shown to be robust to changes in interest rate process and tax regimes.
The Role of Alternative Methodology on the Relation Between Portfolio Size and Diversification
Authors: Beck Kristine L. , Perfect Sieven B. , Peterson Pamela P.
Published: March 2005

An important concern in portfolio management is the number of securities needed to create a well‐diversified portfolio. The number of securities that constitute a welldiversified portfolio, however, varies widely among studies. It is demonstrated that past conclusions are highly sensitive to the methodology used in quantifying diversification. This finding motivates the development of alternative methods that reduce the effect of repeated replications on test results. The first approach exploits the power curves of statistical tests, whereas the second approach suggests the use of more robust statistics. Both approaches provide researchers with guidance in the design of future diversification studies.
Market Efficiency and Money Market Fund Portfolio Managers: Beliefs Versus Reality
Authors: DeGennaro Ramon P. , Domian Dale L.
Published: March 2005

This paper develops two models of the money market mutual fund maturity decision. The first assumes that markets are efficient but that transactions are costly. The second model relies on a survey of fund managers to select variables that might permit exploiting perceived profit opportunities. Empirical tests provide strong support for the former model, but none for the latter. This can be interpreted as meaning that although managers may believe that financial markets are inefficient, margins are too small and competition too fierce for them to react aggressively on those beliefs. Any actions they do take to exploit alleged inefficiencies are not detectable in the data. In addition, the study finds that managers in the aggregate have no special ability to adjust their funds' maturity to capitalize on interest‐rate changes.
An Examination of Option‐Implied S&P 500 Futures Price Distributions
Authors: Sherrick Bruce J. , Irwin Scott H. , Forster D. Lynn
Published: March 2005

Expected S&P 500 futures price distributions are derived using no‐arbitrage option pricing models. These distributions are parameterized both as the lognormal and as a less restrictive three‐parameter Burr‐XII distribution. The resulting option‐based probability assessments display some evidence of miscalibration very near to expiration and far from expiration, but are accurate over intermediate time ranges. The means of the implied price distributions correspond closely to the contemporaneous futures prices for both distributions, although marginally better with the Burr‐XII. The Burr‐XII distribution also performs better than the lognormal based on calibration statistics, and hence, is used to recalibrate estimated distributions.
The Effects of Variations in Laxity (or Strictness) of Closure Rules on the Valuation of Deposit Insurance
Authors: Lai Van Son
Published: March 2005

The passage of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), which removed some of the freedom or latitude the FDIC had in resolving and closing insolvent institutions, makes it clear that regulatory closure rules are not invariant with regard to time and events. Therefore, this paper analyzes the effects of variations in the laxity or strictness of bank closure rules on the valuation of deposit insurance. Hardly predictable state variables, such as political, economic and bureaucratic constraints, represent potential sources of uncertainty that drive changes in the stringency of closure policy. A variation of Ronn and Verma's [14] model is extended to consider situations where the insurance agency's closure rule is uncertain.
Pricing Effects of the Decision to Sell or Hold Adjustable Rate Mortgage Loans in a Portfolio
Authors: Benjamin John D. , Heuson Andrea J. , Sirmans C.F.
Published: March 2005

Residential mortgage originators can transfer loans to ultimate lenders quickly and efficiently using the secondary mortgage market. Some adjustable rate mortgage (ARM) lenders use this outlet consistently while others hold whole loans in their portfolios on a long‐term basis. Selling and holding lenders should respond to different economic factors when setting yields on ARM loans originated because their long‐term positions in the loans are so diverse.

This paper develops and tests a model of differential pricing behavior for selling and holding strategies. Empirical results support the notion that lenders use different factors to price loans and that these factors are related to the risks faced by the originating lender given its origination strategy. Additional findings suggest that institutional and firm‐specific pricing tendencies exist in the primary mortgage market for adjustable rate debt.
The Impact of Option Introduction on Stock Return Variances: The Role of Bid‐Ask Spreads, Return Autocorrelations, and Intrinsic Variances
Authors: Niendorf Bruce D. , Peterson David R.
Published: March 2005

The purpose of this paper is to examine changes in stock return variances following option introduction. The sample consists of National Market System stocks and employs both transaction returns and returns based on bid and ask quotes. Variances are decomposed into portions attributable to bid‐ask spreads, return autocorrelations, and intrinsic variances. Spreads play a negligible role in explaining variance changes. A generally positive component to short‐term autocorrelations falls following option introduction, increasing variances over short holding periods. Intrinsic variances fall prior to the October 1987 crash, but do not change after the crash with option introduction.
Did the 1986 Tax Reform Act Affect Market Reactions to Stock Splits?: A Test of the Tax‐Option Hypothesis
Authors: Dhatt Manjeet S. , Kim Yong H. , Mukherji Sandip
Published: March 2005

This paper tests the prediction of the tax‐option hypothesis that the market impact of stock splits would be reduced by the 1986 Tax Reform Act which eliminated the difference between long‐ and short‐term capital gains tax rates. The results show significant excess returns on stock split announcement and ex‐days even after 1986. The announcement and ex‐day excess returns are similar in different periods before and after the Act. Further, there is no significant relationship between announcement excess returns and increase in returns volatility following splits. These findings are inconsistent with the tax‐option hypothesis.
Long‐Term Financing Decisions: Views and Practices of Financial Managers of NYSE Firms
Authors: Kamath Ravindra R.
Published: March 2005

This paper reports the findings of a 1990 survey of a sample of NYSE firms conducted to learn about the managerial opinions and practices with respect to longterm financing decisions. Relying on a hierarchy of financing sources is discovered to be a far more common practice among the sample firms than maintaining a target capital structure. The risk‐return dimensions of the investment being financed are found to be the most important inputs in determining financing decisions. In spite of the perceived lack of fairness in the market pricing of their securities, the sample firms do not report making financing decisions to signal a need for reevaluation of their securities. Financial managers display a much greater flexibility with capital structure decisions than with either dividend policy decisions or investment decisions. The firms which attempt to maintain target capital structures are found to perceive the average debt ratios in their respective industries to be important determinants of their own debt ratios. The firms which follow financing hierarchies on the other hand, are found to view their firms' past profits and past growth to be important determinants of their debt ratios.
Is the Market Portfolio a Dynamic Factor? Evidence from Individual Stock Returns
Authors: Koutmos Gregory
Published: March 2005

This paper uses a factor model to test whether the market portfolio is a dynamic factor in the sense that individual stock returns contain a premium linked to the conditional risk of the market portfolio. The market conditional risk is based on a decomposition of the market variance into a time‐varying trend component and a transitory component. The evidence shows that the conditional market premium is rising when the permanent trend rises relative to the conditional variance. The evidence for individual stock returns supports the notion that the market portfolio is a dynamic factor. Individual stock return autocorrelations are fully explained by the time variation in the market premium. The risk premia attributed to static factors are statistically insignificant.
Accuracy of International Interest Rate Forecasts
Authors: Gosnell Thomas F. , Kolb Robert W.
Published: March 2005

This study exploits a unique data source with contemporaneous forecasts of three‐month Euromarket interest rates for five different countries. Professional forecasts are explored in a way that avoids two limitations of previous research. First, rather than being restricted to just U.S. interest rates, data are used for five different countries: the United States, Germany, the United Kingdom, Japan, and Switzerland. Second, the study relies upon data gathered on a single date, rather than over a period of weeks. Consensus forecasts are evaluated against two naive models: a no‐change model and a forward rate forecast.

In general, the consensus forecasts prove superior to the no‐change forecast. The consensus measures, though, are found to be inferior to the forward rate forecast. This is true even considering the dramatic success of the banks in forecasting U.S. rates in this period. However, if the spectacular, and perhaps uniquely successful U.S. results are excluded from consideration, the banks proved dramatically inferior to the forward rate of interest in forecasting interest rates. Thus, the ability of these banks to forecast three‐month interest rates for these five countries exceeds that of a no‐change forecast, but falls below the forecasting ability of the forward rate.
Mergers, Method of Payment and Returns to Manager‐ and Owner‐Controlled Firms
Authors: Blackburn Virginia L. , Dark Frederick H. , Hanson Robert C.
Published: March 2005

Previous work provides evidence of disparate consequences for acquiring firms initiating stock and cash merger exchanges. These studies show that the choice of payment method and the subsequent consequences may be a result of dissimilar motivations. This paper addresses the role of corporate control by examining the consequences of stock, cash and mixed exchanges to manager‐ and owner‐controlled firms. Particular attention is paid to mixed exchanges as a test of the total consequences of acquisition activity. The results indicate that the market valuation of the acquiring firm's stock is related to both the method of payment and the acquiring firm control structure.
Securityholder Taxes, Corporate Capital Structures and the Priority Structure of Debt
Authors: Kim Chang‐Soo , Mauer David C.
Published: March 2005

This paper shows that the firm has an incentive to issue multiple classes of debt that are differentiated by seniority to enhance securityholder tax‐timing option values. The analysis establishes that there is at least one mix of senior and junior debt that maximizes the tax option gain from having multiple priority classes of debt. An analytic example provides specifications for the optimal amount of leverage and the optimal mix of senior and junior debt. Relative to the case of only one class of debt, a multiple debt priority structure increases the optimal amount of corporate leverage.
The Impact of Antitakeover Amendments on Corporate Financial Performance
Authors: Johnson Mark S. , Rao Ramesh P.
Published: March 2005

Previous event studies that examine the impact of antitakeover amendments on firm value provide mixed results. Some studies support the management entrenchment hypothesis, while others support the shareholder interest hypothesis. In this study, a longitudinal approach is used to examine the impact of antitakeover amendments on several financial attributes of the firm including: operating and net income to total assets, operating and overhead expenses to sales, research and development to total sales, capital expenditures to sales, and debt relative to total assets. It is concluded that antitakeover amendments are not deleterious in terms of their impact on various fundamental firm performance measures.
Stock Returns and Open‐Market Stock Repurchase Announcements
Authors: Liu Chao‐Shin , Ziebart David A.
Published: March 2005

Recent studies document stock price underreactions and overreactions. This evidence is extended by studying open‐market stock repurchase announcements. Repurchase announcements were chosen for the study because of the uncertainty regarding the appropriate interpretation of the repurchase announcement. Cross‐section regression models are used to test the relation between the reaction to the repurchase announcement and returns in subsequent periods. The results indicate that the market overreacts to repurchase announcements that are deemed to be “good news” by the market. Neither reversal nor drift is observed following repurchase announcements considered to be “bad news” by the market. The results are robust and are not driven by a few influential observations, beta shifts, or bid‐ask bounce.
The Impact of Health Care Reform on Capital Acquisition for Hospitals
Authors: Topping Sharon , Carroll Carolyn , Lindley James T.
Published: March 2005

In this paper, the response of the market for hospital stocks to the episode of the Medicare Prospective Payment System (PPS) legislation and its resulting impact on the ability of hospitals to generate capital for expansion and growth are addressed. The response to PPS legislation is evaluated by examining stock returns of publicly traded hospital companies using both traditional event study analysis and intervention analysis. The paper focuses on the effect of PPS over time and uses qualitative data to support the empirical evidence. Before and after its passage, the market reacted negatively to PPS legislation. This result supports qualitative evidence showing that hospitals' capital positions were impaired. When profit margins fell, bond ratings went down, while borrowing costs increased; the rate of hospital bond defaults went up and capital improvements were delayed.
Capital Gains Taxes and Stockholders' Response to Dutch Auction Tender Offers
Authors: Kadapakkam Palani‐Rajan , Seth Sarabjeet
Published: March 2005

Capital gains taxes are conjectured to explain upward sloping supply curves in tender offers. This paper analyzes expiration day returns in Dutch auction tender offers to examine this conjecture. A proxy measure for the capital gains of the marginal tendering stockholder is constructed, based on tender offer size and daily price‐volume history for one year. Cross‐sectional regressions suggest that the tender price increases with the capital gains of the marginal tenderer, but only for firms with low institutional holdings. This is consistent with capital gains tax effects being relevant only when tax‐exempt holdings are low.
An empirical comparison of bankruptcy models
Authors: Mossman Charles E. , Bell Geoffrey G. , Swartz L. Mick , Turtle Harry
Published: March 2005

Four types of bankruptcy prediction models based on financial statement ratios, cash flows, stock returns, and return standard deviations are compared. Based on a sample of bankruptcies from 1980 to 1991, results indicate that no existing model of bankruptcy adequately captures the data. During the last fiscal year preceding bankruptcy, none of the individual models may be excluded without a loss in explanatory power. If considered in isolation, the cash flow model discriminates most consistently two to three years before bankruptcy. By comparison, the ratio model is the best single model during the year immediately preceding bankruptcy. Quasi‐jack‐knifing procedures suggest that none of the models can reliably predict bankruptcy more than two years in advance.
The evidence of bidders' overpayment in takeovers: the valuation ratios approach
Authors: Han Ki C. , Suk David Y. , Sung Hyun Mo
Published: March 2005

Empirically, bidder returns at the time of takeover announcements are negative. This paper investigates the relation between bidder returns and overpayment in mergers and tender offers while controlling for other potentially important factors. Unlike other studies, the paper measures overpayment using two valuation ratios: earnings‐price ratio and book‐to‐market ratio. Results show these ratios are important in explaining negative bidder returns. The paper also finds that the payment method in mergers and tender offers produces an information effect.
Price reversal and drift following earnings announcements
Authors: Ho Li‐Chin Jennifer , Liu Chao‐Shin , Ziebart David A.
Published: March 2005

Systematic patterns in returns following earnings announcements are difficult to interpret. This study provides additional insights into the observation of price reversal and drift by examining the effects of both the method used to identify winners and losers and also the length of the subsequent period analyzed. The results show that both drift and reversal can be observed for the same sample and event. This evidence indicates that security price behavior following earnings announcements, especially in the short‐term, depends not only on the earnings information, as in the drift studies, but also on the price reaction to the earnings information.
A test of the Investor's Daily stock ranking system
Authors: Olson Dennis O. , Nelson John , Witt Craig , Mossman Charles
Published: March 2005

This paper examines the profitability of trading strategies derived from stock rankings published in Investor's Business Daily. The best system provides market‐adjusted abnormal monthly returns of 1.81% from buying S&P 500 stocks, and a 3.18% abnormal return on an arbitrage portfolio. Stocks selected for trading have above average volatility, but a portion of abnormal return may be a reward for identifying stocks with short‐run sustainable price momentum. Results seem indicative of market inefficiency, but the phenomena may be temporary since abnormal returns are lower during the second half of the data set.
Insider Trading and the Bid‐Ask Spread
Authors: Chung Kee H. , Charoenwong Charlie
Published: March 2005

This study examines the intertemporal and cross‐sectional association between the bid‐ask spread and insider trading. Empirical results from the cross‐sectional regression analysis reveal that market makers establish larger spreads for stocks with a greater extent of insider trading. The time‐series regression analysis, however, finds no evidence of spread changes on insider trading days. These results suggest that although market makers may not be able to detect insider trading when it occurs, they protect themselves by maintaining larger spreads for stocks with a greater tendency of insider trading. The results also reveal that market makers establish larger spreads when there are unusually large transactions. In addition, this study finds that spreads are positively associated with risk and negatively with trading volume, the number of exchange listings, share price, and firm size.
The Impact of Ownership Structure On Corporate Debt Policy: a Time‐Series Cross‐Sectional Analysis
Authors: Moh'd Mahmoud A. , Perry Larry G. , Rimbey James N.
Published: March 2005

This study examines the influence of agency costs and ownership concentration on the capital structure of the firm. Of particular interest is the composition of equity ownership as a determinant of overall capital structure and the dynamic adjustment of capital structure to changes in the equity ownership. Results indicate that the distribution of equity ownership is important in explaining overall capital structure and that managers do reduce the level of debt as their own wealth is increasingly tied to the firm. It is also noted that the time‐series component is important in resolving the conflicting results reported in prior research.
Stock Splits: An Institutional Investor Preference
Authors: Mason Helen B. , Shelor Roger M.
Published: March 2005

This study examines the relationship between the level of institutional ownership and the likelihood that firms will enact a stock split. There is evidence of a positive relationship between institutional ownership and subsequent split behavior. A firm size effect emerges from the finding that larger firms have higher percentages of institutional owners. This implies that institutional investors either encourage stock split behavior or invest in firms that exhibit indicators of eminent stock splits. Institutions purchasing shares before the split are likely to obtain short‐term and long‐term earmings increases.
Option Pricing with Heterogeneous Expectations
Authors: Guo Chen
Published: March 2005

This paper re‐derives the finite mixture option pricing model of Ritchey (1990), based on the assumption that the option investors hold heterogeneous expectations about the parameters of the lognormal process of the underlying asset price. By proving that the model admits no riskless arbitrage, this paper justifies that the entire family of finite mixture of lognormal distributions is a desirable candidate set for recovering the risk‐neutral probability distributions from contemporaneous options quotes. The parametric method derived from the model is significantly simpler than the nonparametric method of Rubinstein (1994) for recovering the risk‐neutral probability distributions from contemporaneous option prices.
Deterministic nonlinearity in the stock returns of major European equity markets and the United States
Authors: Pandey Vivek , Kohers Theodor , Kohers Gerald
Published: March 2005

By using recently developed statistical tools designed to overcome some of the limitations often associated with financial data, this study attempts to detect low‐dimensional deterministic chaos in five major European stock markets and the United States. Country indexes exhibiting low‐dimensional deterministic chaos may contain some informational inefficiency; thus, it may be possible to use nonlinear dynamics to predict future stock returns. The results do not provide evidence of the existence of low‐dimensional chaotic systems in any of the examined indexes. As such, the notion of market efficiency in the examined indexes is not threatened by the findings of this study.
Determining the implied volatility for American options using the QAM
Authors: Kutner George W.
Published: March 2005

This paper describes an efficient numerical procedure which may be used to determine implied volatilities for American options using the quadratic approximation method. Simulation results are presented. The procedure usually converges in five or six iterations with extreme accuracy under a wide variety of option market conditions. A comparison of American implied volatilities with European model implied volatilities indicates that significant differences may arise. This suggests that reliance on European model volatilities estimates may lead to significant pricing errors.
The Influence of Information Arrival on Market Microstructure: Evidence from Three Related Markets
Authors: Lee Chun I , Mathur Ike
Published: March 2005

This study examines the influence of information arrival on market microstructure for the MMI, NYSE, and S&P 500 stock index futures markets, with special emphasis on the effects of opening and closing of trading and expiration of contracts on price movements and trading activities. The results of the examination show that although the opening of the (MMI) futures market is associated with higher volatility, it is when the spot market opens that volatility reaches its highest level. Similarly, the closing of the futures markets, though more volatile, is not as volatile as the closing of the spot markets. Trading patterns, on the other hand, are distinct from volatility. For MMI, trading declines consistently after the close of the spot market. In contrast, the NYSE and S&P 500 continue to trade and reach a peak at the close of the futures markets. Expiration effects are evidenced by the increase in volatility and trading near the closing of the MMI and the spillover to the NYSE and S&P 500. In sharp contrast, the expirations of the NYSE and S&P 500 are only assooiated with decrease in trading, suggesting that efforts to dampen volatility by changing expiration days from Friday to Thursday and shifting settlement price from Friday close to Friday open, have been successful.
Market Making and Trading in Nasdaq Stocks
Authors: Goldstein Michael A. , Nelling Edward F.
Published: March 2005

This paper examines the relations between the number of market makers, trading activity, and price improvement in Nasdaq stocks, using a model motivated by Grossman and Miller (1988). Results indicate a positive relation between the number of market makers and trading frequency, and that competition among market makers reduces effective bid‐ask spreads. Results estimated using a simultaneous equations framework support the model predictions of Grossman and Miller. Results also indicate that trading frequency may be more important than trade size in determining the number of market makers.
Explicit versus Implicit Contracts: The Case of DIFF and CROSS Futures
Authors: Karagozoglu Ahmet K.
Published: March 2005

This paper investigates the potential success of an explicit futures contract when an implicit one, which can duplicate it, exists. It is hypothesized that the success of the explicit futures contract depends on its value added being greater than that of its implicit counterpart given that sufficient hedging demand exists for it. Following a discussion of value added analysis, hedging effectiveness of the Euro‐rate Differential (DIFF), the Currency Cross‐rate (CROSS) futures contracts, and their implicit counterparts are calculated and tests of relative hedging effectiveness of these contracts are performed. Test results support the hypothesis of the paper and their implications for new futures contract development are discussed.
Managerial Ownership and Agency Conflicts: A Nonlinear Simultaneous Equation Analysis of Managerial Ownership, Risk Taking, Debt Policy, and Dividend Policy
Authors: Chen Carl R. , Steiner Thomas L.
Published: March 2005

This paper uses a nonlinear simultaneous equation methodology to examine how managerial ownership relates to risk taking, debt policy, and dividend policy. The results have implications for our understanding of agency costs. We find risk to be a significant and positive determinant of the level of managerial ownership while managerial ownership is also a significant and positive determinant of the level of risk. The result supports the argument that managerial ownership helps to resolve the agency conflicts between external stockholders and managers but at the expense of exacerbating the agency conflict between stockholders and bondholders. We further observe evidence of substitution‐monitoring effects between managerial ownership and debt policy, between managerial ownership and dividend policy, and between managerial ownership and institutional ownership.
Who Moves the Asia‐Pacific Stock Markets—US or Japan? Empirical Evidence Based on the Theory of Cointegration
Authors: Ghosh Asim , Saidi Reza , Johnson Keith H.
Published: March 2005

This study examines the recent debacle of the Asian‐Pacific stock markets by utilizing the theory of cointegration to investigate which developing markets are moved by the markets of Japan and the United States. The empirical evidence suggests that some countries are dominated by the US, some are dominated by Japan, and the remaining countries are dominated by neither during the time period investigated. The appropriate error correction model is estimated and is used to perform out‐of‐sample forecasting.
Random Walks and Market Efficiency Tests of Latin American Emerging Equity Markets: A Revisit
Authors: Ojah Kalu , Karemera David
Published: March 2005

The few existing studies on equity price dynamics and market efficiency for Latin American emerging equity markets show conflicting results. This study uses multiple varianceratio and auto‐regressive fractionally integrated moving‐average tests and new data (U.S. dollar‐based national equity indices for the 1987–1997 period) to clarify these results. Documented evidence shows that equity prices in major Latin American emerging equity markets — Argentina, Brazil, Chile and Mexico—follow a random walk, and that they are, generally, weak‐form efficient. In sum, therefore, the evidence suggests that international investors in these markets cannot use historical information to design systematically profitable trading schemes because future long‐term returns are not dependent on past returns.
The Effects of Inverted Yield Curves on Asset Returns
Authors: McCown James Ross
Published: March 2005

Between 1954 and 1991, U.S. stocks, long‐term government bonds, and corporate bonds show negative risk premiums during periods preceded by inverted yield curves. Intermediate‐term government bonds do not. Going from safer to riskier asset classes, the negative risk premiums increase in absolute value and statistical significance. The consumption CAPM offers a possible explanation for the negative risk premiums. A negative covariance between the growth rate of consumption and the premium on the risky assets will result in a negative risk premium. Empirical tests of the conditional covariance show that the consumption CAPM does not explain the phenomena.
Bond Immunization for Affine Term Structures
Authors: Barber Joel R.
Published: March 2005

This paper generalizes a number of important immunization theorems. We show that the Fisher and Weil immunization, Bierwag and Khang minimax, Redington multiple liability, and Bierwag, Kaufman, and Toevs coverage theorems can be generalized to the class of affine term structures. This class of term structures contains many models that are commonly used in the finance literature.
The Industry Effects Regarding the Probability of Takeovers
Authors: Akhigbe Aigbe , Madura Jeff
Published: March 2005

This study attempts to determine whether an acquisition announcement signals potential gains to the corresponding industry rivals of the target, and whether these gains can be explained by industry‐specific and rival firm‐specific factors that reflect the likelihood of a takeover.

The research finds that the valuation effects of the target, combined acquirer and target, and industry rivals of the target are positive and significant. The mean valuation effects per corresponding industry are significantly related to industry‐specific characteristics that reflect the probability of a takeover. Specifically, industries characterized as having a higher level of free cash flow, a higher level of tangible assets, and a smaller market value experience a more favorable revaluation.

A supplemental analysis of the individual rival firms is also conducted, since the variation in the valuation effects between rival firms within each of the industries is distinctly different from the variation of mean industry effect across industries. The analysis of the individual rivals finds that the same rival‐specific variables are significant and in the same direction as the analysis of the industry‐specific variables. In addition, the valuation effects of individual rivals are also inversely related to their previous performance. Overall, the results suggest that industry‐specific and rival firm‐specific characteristics that reflect a higher probability of a takeover are important in explaining acquisition gains and motivation.
An Empirical Examination of The Nasdaq/CHX Dual‐Trading Experiment
Authors: Van Ness Bonnie F. , Van Ness Robert A. , Pruitt Stephen W.
Published: March 2005

We analyze the effects of the SEC's experimental Nasdaq/CHX dual‐trading program. The program, which began in 1987 and continues to the present, establishes an experiment in which the costs and benefits of competition between dealer and specialist market structures can be observed directly. Our primary finding is that the program led to significantly reduced mean quoted and percentage spreads for the dual‐traded issues. Further, even though the CHX specialists quote lower spreads, they are not able to garner a significant number of trades from Nasdaq.
Market‐Making in the Third Market for NYSE‐Listed Securities
Authors: Doran Lynn
Published: March 2005

This paper empirically examines market making in the third market for common stocks that are listed on the NYSE. Although the same non‐NYSE members make a market on both types of stocks, bid‐ask spreads are wider on Rule 19c‐3 stocks than on Rule 390 stocks. Market‐making by NYSE members is minimal and spreads posted by NYSE members are wider than those posted on identical stocks by non‐NYSE members. This suggests that NYSE members do not compete on the basis of spread but use methods such as price matching and the internalization of orders to attract order flow to the third market.
Information Production, Insider Trading, and the Role of Managerial Compensation
Authors: Narayanan Ranga
Published: March 2005

We analyze the information production decision of a manager who can trade on this information and whose compensation is increasing in the stock price. The amount of information produced increases with the stock's volatility and liquidity and decreases with the manager's pay‐performance sensitivity. Insider trading regulations that symmetrically inhibit the manager's ability to buy and sell stock cause her to produce less information. But asymmetric insider trading regulations like the short sales prohibition have an ambiguous effect inducing her to produce more or less information depending on her pay‐performance sensitivity. This contradicts the standard argument made by opponents of insider trading regulations that such regulations always reduce information production.
“Marking‐to‐Market” and Treasury‐Bill Futures Prices: Some Empirical Evidence
Authors: Choi Seungmook , Jameson Mel
Published: March 2005

Financial economists have not found empirical evidence of a “marking‐to‐market” effect in Treasury‐bill futures contracts, despite a firm theoretical basis for its existence. Therefore, we speculate that confounding effects, possibly due to liquidity preferences, influence futures‐forward price spreads. By using an empirical specification that allows for both effects, we present empirical evidence that Treasury‐bill futures‐forward price spreads are sensitive to the volatility of the underlying commodity in ways predicted by the theory of the marking‐to‐market effect.
The “Dogs of the Dow” Myth
Authors: Hirschey Mark
Published: March 2005

The “Dogs of the Dow” (or “Dow Dog”) investment strategy, is a popular investment approach that promises huge abnormal returns for investors in the ten top yielding stocks from the Dow Jones Industrial Average (DJIA). However, periods of evident outperformance are balanced by periods of conspicuous underperformance. When strategy returns are adjusted for taxes and rebalancing costs, Dow Dogs perform in line with the DJIA over the 1961–1998 period. As a result, there is no robust evidence of an average return anomaly tied to Dow Dogs.
Real Activity, Inflation, Stock Returns, and Monetary Policy
Authors: Park Kwangwoo , Ratti Ronald A.
Published: March 2005

We find that contractionary monetary policy shocks generate statistically significant movements in inflation and expected real stock returns, and that these movements go in opposite directions. Since positive shocks to output precipitate monetary tightening, we argue that the countercyclical monetary policy process is important in explaining the negative correlation between inflation and stock returns. Examining the 1979–1982 period, we find that monetary policy tightens significantly in response to positive shocks to inflation, and that the impact of monetary policy shocks on stock returns is negative and volatile. Therefore, we see evidence that an “anticipated policy” hypothesis is at work.
January Anomalies: Implications for the Market's Incorporation of News
Authors: Christie‐David Rohan , Chaudhry Mukesh
Published: March 2005

We examine the responses of five interest rate instruments to the release of macroeconomic announcements to determine whether January returns behave differently from returns in other months when information is released. Our results suggest that in all instruments, returns in January are less sensitive to macroeconomic news, compared with other months. This is true even though the number and type of announcements are much the same in January as in other months. The instruments examined feature important differences in liquidity, maturity, credit risk, and other institutional differences, suggesting that our evidence is robust.
The Predictive Ability of Dividend and Earnings Yields for Long‐Term Stock Returns
Authors: Wu Chunchi , Wang Xu‐Ming
Published: March 2005

We use empirical models to examine the predictive ability of dividend and earnings yields for long‐term stock returns. Results show that dividend and earnings yields share a similar predictive power for future stock returns and growth. We find that the predictive power of dividend yields increases with the return horizon, but that yields forecast future returns and growth over a much longer horizon. Finally, dividend and earnings yields exhibit high autocorrelation and strong contemporaneous relations.
Ownership Structure as a Determinant of Firm Value: Evidence from Newly Privatized Czech Firms
Authors: Makhija Anil K. , Spiro Michael
Published: March 2005

Using a sample of 988 newly privatized Czech firms, with part of the ownership structure exogenously determined prior to voucher privatization, we find that share values are positively related with the ownership stakes of foreigners, insiders, and restituents. While the findings for foreigners and insiders can be attributed to their superior ability to identify more profitable firms, we interpret the findings on restituents as evidence of the beneficial effect of blockholdings. On the other hand, we find that the ownership of the fund with the largest stake is not significantly related with share value, suggesting that the value of external blocks depends on the identity of the owner. However, when the fund is also the largest blockholder in the firm, it has an adverse effect on share value. The negative effect of the dominant block owned by a fund is mitigated when a bank sponsors the fund. Although funds are legally separated from their sponsoring institutions, bank‐sponsored funds may nevertheless have inherited a better access to the innards of these firms, and may be in a better position to monitor them.
The Performance Persistence of Closed‐End Funds
Authors: Bers Martina K. , Madura Jeff
Published: March 2005

The purpose of this study is to extend the research on mutual fund performance persistence to net asset value and market price performance of domestic closed‐end funds. While research has assessed the performance persistence of open‐end mutual funds, it has not assessed the performance persistence of closed‐end funds. Yet, the unique characteristics of closed‐end funds allow stronger arguments for their persistence than the arguments previously submitted for open‐end mutual funds. The results show evidence for risk‐adjusted performance persistence.
Asymmetric Effects of Interest Rate Changes on Stock Prices
Authors: Lobo Bento J.
Published: March 2005

This study examines the stock price adjustment process around announcements of changes in the federal funds rate target in the 1990s using an asymmetric autoregressive exponential GARCH model (ASAR‐EGARCH). We find that target change announcements convey new information to the stock market. Risk aversion increases before the announcement of a rate change, and especially before the announcement of a joint target and discount rate change. The volatility estimates suggest that such joint rate changes send a clearer signal to the stock market about monetary policy objectives relative to unilateral target changes. Our findings are consistent with overreaction in the wake of bad news (rate hikes), and point to a shift in volatility from before to after the rate change announcement since the adoption of the immediate disclosure policy of the Federal Open Market Committee in February 1994.
Open‐Market Stock Repurchase and Stock Price Behavior When Management Values Real Investment
Authors: Isagawa Nobuyuki
Published: March 2005

This paper provides a simple explanation of open‐market stock repurchases and the stock price behavior surrounding them. There is ex ante asymmetry of information with regard to the private benefits that corporate managers can attain from real investments. In our model, open‐market repurchase announcements reveal information about the managers' private benefits when real investment opportunities are unprofitable in terms of firm values. This study differs from previous studies in that we show that announcements of open‐market repurchase programs can be believable without the restriction that the announcements are commitments. Empirically, the model simultaneously predicts that a stock price will drop prior to an open‐market repurchase announcement and will rise in response to the announcement. These predictions are consistent with stylized facts.
Managerial Motives and Merger Financing
Authors: Chang Saeyoung , Mais Eric
Published: March 2005

We examine how managerial motives influence the choice of financing for a sample of 209 completed mergers from 1981–1988. Our evidence indicates that bidding firm management is more likely to finance mergers with cash when target firm ownership concentration is high, preventing the creation of an outside blockholder. This suggests bidding firm managers prefer to keep ownership structure widely diffused to reduce external monitoring. We also find that bidding firm management is more likely to finance mergers with stock when the variance of bidding firm's stock return is high. This suggests managers of risky firms prefer leverage‐reducing transactions to reduce their personal risk.
Forced Versus Voluntary Dividend Reduction: An Agency Cost Explanation
Authors: D'Mello Ranjan , Mukherjee Tarun , Tawatnuntachai Oranee
Published: March 2005

We examine whether the agency cost arising from shareholder‐bondholder conflict is an important determinant of the timing of dividend reduction decisions. Firms forced to reduce dividends owing to bond covenant violations experience lower earnings, more frequent losses, and greater earnings declines around the dividend reduction year than do firms that voluntarily reduce dividends. Relative to voluntary‐reduction firms, forced‐reduction firms have higher debt‐to‐equity ratios and managerial holdings. These findings coupled with the increased dividend payout ratios and lower announcement period returns suggest that financially distressed firms that anticipate poor performance have greater incentives to delay reducing dividends to avoid a wealth transfer to bondholders.
Underwriter Lock‐up Releases, Initial Public Offerings and After‐market Performance
Authors: Keasler Terrill R.
Published: March 2005

The lock‐up agreement between an underwriter and an issuing firm's principals prohibits sale of securities for a period of time following the offering date. Investment banks must support the stock following an offering. The lock‐up assures investors that the restricted shares will not enter the market, at least for a period of time. Negative abnormal returns prior to the lock‐up release show that unrestricted investors liquidate positions prior to the scheduled lock‐up release. Negative abnormal returns are more robust for firms that are not influenced by SEC Rule 144 than for firms that are.
Informed Trading around Merger Announcements: An Empirical Test Using Transaction Volume and Open Interest in Options Market
Authors: Jayaraman Narayanan , Frye Melissa B. , Sabherwal Sanjiv
Published: March 2005

This paper provides empirical evidence on the level of trading activity in the stock options market prior to the announcement of a merger or an acquisition. Our analysis shows that there is a significant increase in the trading activity of call and put options for companies involved in a takeover prior to the rumor of an acquisition or merger. This result is robust to both the volume of option contracts traded and the open interest. The increased trading suggests that there is a significant level of informed trading in the options market prior to the announcement of a corporate event. In addition, abnormal trading activity in the options market appears to lead abnormal trading volume in the equity market. This finding supports the hypothesis that the options market plays an important role in price discovery.
Combining Bond Rating Forecasts Using Logit
Authors: Kamstra Mark , Kennedy Peter , Suan Teck‐Kin
Published: March 2005

Companies sometimes use statistical analysis to anticipate their bond ratings or a change in the rating. However, different statistical models can yield different ratings forecasts, and there is no clear rule for which model is preferable. We use several forecasting methods to predict bond ratings in the transportation and industrial sectors listed by Moody's bond rating service. A variant of the ordered‐logit regression‐combining method of Kamstra and Kennedy 1998 yields statistically significant, quantitatively meaningful improvements over its competitors, with very little computational cost.
Determinants of Foreign Ownership in Newly Privatized Companies in Transition Economies
Authors: Anderson Christopher W. , Jandik Tomas , Makhija Anil K.
Published: March 2005

We investigate determinants of foreign ownership in newly privatized firms. We analyze data on privatized Czech firms to address two related general questions. First, what characteristics distinguish transition firms that attract a foreign investor? Second, how do firm‐specific characteristics influence the size of the foreign equity stake? Our results suggest that foreign investors i) seek safe, profitable firms in which they can exert unchallenged influence on corporate governance and then ii) structure their equity stakes to mitigate agency costs and political risk.
Synthetic Trades and Calendar Day Patterns The Case of the Dollar/Sterling Markets
Authors: Thatcher Janet S. , Blenman Lloyd P.
Published: March 2005

Significant day of the week patterns are shown to exist in the dollar/sterling market. These patterns are associated with the returns to synthetic and actual forward trades as well as to spot trades. These trading strategies, geared to buying or selling sterling, reflect different timing, if not valuation, considerations on the part of traders. Nevertheless, pronounced calendar patterns are observed on Wednesdays for all the trading strategies evaluated. This is attributable to significantly different risks on Wednesdays. The observed end‐of‐the‐week patterns in forward returns persist and reinforce the returns at the start of the next week of trading. Furthermore, the overall returns to forward speculation on Fridays and Mondays are of opposite sign. Our results on calendar day patterns are thus supported by both parametric and non‐parametric tests. We provide evidence that the frequency of synthetic trading opportunities is inversely related to maturity. We also find that the period of market turbulence analyzed did not trigger abnormal opportunities for covered interest arbitrage.