bluuebunny/crossref_metadata_2025 huggingface dataset:
COMMON STOCK RETURNS, EXPECTED INFLATION, AND THE RATIONAL EXPECTATIONS HYPOTHESIS
Authors: Loo Jean C. H.
Published: August 2014

This paper provides empirical evidence that expected inflation has a cross‐sectional impact on common stock returns. The study differs from others in that (a) the relation between stock returns and expected inflation is investigated in a two‐factor asset pricing model, where the factors are the return on an equally weighted stock portfolio and the expected rate of inflation; (b) the estimation of the expected rate of inflation is based on the rational expectations hypothesis of Muth; and (c) a non‐linear seemingly unrelated regression technique is employed to determine consistent and asymptotically efficient estimates. The joint hypothesis of the two‐factor asset pricing model and rational expectations is not rejected in this study. It is found that the return on common stocks is significantly affected by expected inflation. Also stocks whose returns are positively correlated with expected inflation have lower expected returns.
COSTLY SHORT SALES AND THE CORRELATION OF RETURNS WITH VOLUME
Authors: Karpoff Jonathan M.
Published: August 2014

Previous researchers have documented an empirical correlation between returns and trading volume in some financial markets. In this paper, an explanation is proposed based on the notion that short positions are more costly than long positions in these markets. The hypothesis is consistent with previous findings and with futures markets data, in which the costs of assuming short and long positions are symmetric and in which the correlation between returns and volume is not significant.
YIELD VOLATILITY OF DISCOUNT COUPON BONDS
Authors: Gilmer RH , Stock Duane R.
Published: August 2014

In this research, the yield volatility of coupon‐taxable discount bonds is analyzed. The relationship of before‐tax yield changes on discounts as compared with changes in new, par issue (market) yields is developed in the form of a net yield factor (NYF). Also, the behavior of the NYF as dependent upon parameters such as maturity, coupon, market yield, and tax rates is examined. Then, the incorporation and impact of the NYF on price volatility are shown. Finally, results of empirical tests are reported, which validate the usefulness of NYFs in the measurement of yield volatility for discount bonds.
AN EVALUATION OF THE PERFORMANCE OF PORTFOLIOS SELECTED FROM VALUE LINE RANK ONE STOCKS: 1976–1982
Authors: Hall Thomas W. , Tsay Jeffrey J.
Published: August 2014

In this study, the performance of portfolios selected from among Value Line rank one stocks is compared with portfolios consisting of randomly selected New York Stock Exchange and American Stock Exchange stocks. Results indicate that before considering transactions costs, active traders who invest in Value Line rank one stocks can earn positive excess returns. However, after considering transaction costs, neither active traders nor passive investors in rank one stocks can earn returns that are statistically greater than returns achieved by portfolios of randomly selected stocks. These results are not sensitive to variations in portfolio size.
TESTING THE PREDICTIVE POWER OF EX‐POST EFFICIENT PORTFOLIOS
Authors: Levy Haim , Lerman Zvi
Published: August 2014

Tested here is the hypothesis that portfolios selected from among ex‐post efficient assets will attain better results ex‐ante than by following the naive strategy of holding an equally weighted portfolio of all the assets. The tests are conducted using the returns of the one hundred mutual funds that were continuously in operation from 1959 to 1980. Ex‐post efficient funds are identified using nine investment decision rules (Stochastic Dominance and Mean‐Variance rules with and without riskless asset and the Geometric Mean rule). Ex‐ante performance is assessed in terms of terminal wealth and expected utility. Results indicate that over the twenty‐two years tested, significantly better performance could be attained ex‐ante by investing in mutual funds selected by ex‐post efficiency analysis using the distribution‐free Second‐ and Third‐Degree Stochastic Dominance tests with Riskless Asset as well as by the more traditional Mean‐Variance test with Riskless Asset. Excess returns from using ex‐post information exceed the substantial transaction costs incorporated in the analysis.
THE EFFECT OF A SINKING FUND ON THE REOFFERING YIELDS OF NEW PUBLIC UTILITY BONDS
Authors: Kidwell David S. , Marr M. Wayne , Ogden Joseph P.
Published: August 2014

In this study, empirical tests are conducted to determine the impact of a sinking fund on reoffering yields of a sample of new public utility bonds sold between January 1977 and March 1982. The findings of the regression analysis are consistent with the hypotheses that the value of the sinking fund varies with the default risk of the issuer and with market expectations of future interest rate movements, and that the sinking fund improves the liquidity of a bond issue.
THE RISK BEHAVIOR OF EQUITY OF FIRMS APPROACHING BANKRUPTCY
Authors: Johnson Dana J.
Published: August 2014

The risk behavior of financially distressed companies is studied using the shifting regimes regression model originally suggested by Brown, Durbin, and Evans. In addition, the presence of nonsynchronous trading is detected and the regression model is adjusted accordingly using Dimson's technique. The results reveal that the behavior of systematic risk as firms approach bankruptcy depends to some degree on appropriate identification of periods over which beta is constant and adjusting for nonsynchronous trading. The results also lend support to the importance of skewness and to some extent beta but not unsystematic risk in explaining the security returns of firms approaching bankruptcy. Finally, the behavior of equity risk is examined according to the outcome of the bankruptcy filing.
ESTIMATION AND SELECTION BIAS IN MEAN‐VARIANCE PORTFOLIO SELECTION
Authors: Frankfurter George M. , Lamoureux Christopher G.
Published: August 2014

Much research has focused on the problem of selecting portfolios without the benefit of parametric measures of risk and return. In this paper, a Monte Carlo technique is used to isolate the extent and nature of the problems introduced by this practice. The technique is employed in the context of classical statistical methodology without permitting short sales. It is shown that using estimators of expected return and risk not only obscures parametric values, but also affects portfolio composition in the Markowitz framework. In this study, these two components of bias are isolated and measured.
THE UNDERPRICING OF “SECOND” INITIAL PUBLIC OFFERINGS
Authors: Muscarella Chris J. , Vetsuypens Michael R.
Published: August 2014

The underpricing of initial public offerings (IPOs) of equity represents a well‐documented empirical phenomenon. One prominent explanation for this underpricing relies on the uncertainty investors feel about the value of the issuer. In this paper, this asymmetric information hypothesis is tested by examining the underpricing of IPOs of seventy‐four firms for which the uncertainty about the value of the firm is likely to be substantially reduced. These firms were once publicly owned, then taken private, and subsequently returned to public ownership. Findings show that the IPOs of these “reverse leveraged buyouts” are significantly less underpriced than typical IPOs. These results support the asymmetric information hypothesis.
INTRINSIC UNCERTAINTY AND COMMON‐KNOWLEDGE PRIORS IN FINANCIAL ECONOMICS
Authors: Guth Michael A. S.
Published: August 2014

This article introduces the concept of intrinsic uncertainty, which occurs in the absence of common knowledge, and its relation to the standard homogeneous beliefs assumption of finance theory. When individuals in an informed environment have homogeneous beliefs (common priors), they objectively agree; however, they can agree without knowing they agree. With homogeneous beliefs, individuals still face intrinsic uncertainty over unknown beliefs of others. If two people have homogeneous beliefs and their informed posteriors for an event E are common knowledge, then—contrary to the widely held view—these posteriors may be unequal. The two people can agree to disagree. Consensus over the probabilities of the possible states requires an agreed common‐knowledge priors assumption.
DIRECT TESTS OF THE DIVERGENCE OF OPINION HYPOTHESIS IN THE MARKET FOR RACETRACK BETTING
Authors: Lusht Kenneth M. , Saunders Edward M.
Published: August 2014

The “divergence of opinion” hypothesis suggests predictable pricing effects in markets where assumptions of homogeneous investor expectations and unrestricted short selling do not hold. Direct tests of the hypothesis in traditional financial markets do not exist apparently because of the severity of several requirements, including that measurement of divergent ex‐ante expectations be unambiguously paired with associated ex‐post results. This and remaining conditions are met in direct tests of the hypothesis in a pricing arena where divergence of opinion influences are likely to be present: racetrack betting. Results provide no statistically significant support for the divergence of opinion hypothesis.
THE EFFECT OF MARKET PROXY REBALANCING POLICIES ON DETECTING ABNORMAL PERFORMANCE
Authors: Zivney Terry L. , Thompson Donald J.
Published: August 2014

In this paper, effects on the measured abnormal performance of test portfolios are compared against market proxies having the same or different rebalancing policies. Results show that the common practice of comparing buy‐and‐hold test portfolios with equally weighted market proxies produces lower Jensen [7] alphas and lower alpha t‐values. Comparing buy‐and‐hold test portfolios with value‐weighted market proxies produces higher portfolio betas and alphas, but lower alpha t‐values. Finally, comparing buy‐and‐hold test portfolios with buy‐and‐hold market proxies produces the most powerful tests of abnormal performance.
THE ELIMINATION OF DIRECTOR LIABILITY AND STOCKHOLDER RETURNS: AN EMPIRICAL INVESTIGATION
Authors: Janjigian Vahan , Bolster Paul J.
Published: August 2014

In this paper, the performance of the common stock of Delaware and non‐Delaware firms is examined during the Delaware legislature's debate and approval of an amendment to the Delaware General Corporation Law permitting the elimination of director liability. In addition, stockholder returns surrounding the proxy and meeting dates for certain Delaware firms are examined. Results indicate that Delaware firms performed worse than non‐Delaware firms during the legislative period; however, strong differences between the two groups are not documented.
AN EMPIRICAL EXAMINATION OF THE EXISTENCE OF A SIGNALING VALUE FUNCTION FOR DIVIDENDS
Authors: Manakyan Herman , Carroll Carolyn
Published: August 2014

The purpose of this study is to address the reliability of dividend signals. To determine if dividend signals are followed by changes in earnings in a direction consistent with the signal, the dividend‐earning relationship is examined using both Granger tests of causality and nonparametric tests. Results are consistent with the hypothesis that dividend signals are followed by unanticipated changes in earnings in the subsequent two quarters.
STATE ANTITAKEOVER LEGISLATION AND SHAREHOLDER WEALTH
Authors: Pugh William N. , Jahera John S.
Published: August 2014

The market reaction to state antitakeover legislation is examined case by case and in aggregate for six bills from four influential states that passed second‐generation antitakeover statutes. Prior research offers mixed conclusions concerning the effect. In contrast to the reactions in some earlier studies, negative market reactions in this study are weak, producing little evidence of any permanent harm to shareholder wealth.
HEDGING PERFORMANCE AND HEDGING OBJECTIVES: TESTS OF NEW PERFORMANCE MEASURES IN THE FOREIGN CURRENCY MARKET
Authors: Hammer Jerry A.
Published: August 2014

Two related approaches are introduced for measuring the performance of hedging strategies. The first summarizes the risk‐return trade‐off as a single annotated numerical value, and the second displays it as a performance curve. Two bounded sets of hedging strategies are used to evaluate empirically the performance measures. One set is divided according to whether it best satisfies short or long hedging objectives. Results show that market conditions often provide opportunities to reduce variance and increase expected return. They also suggest that the Commodity Futures Trading Commission's typical definition of “bona fide” hedging should be reconsidered.
THE 1982 DEPOSITORY INSTITUTIONS ACT AND SECURITY RETURNS IN THE SAVINGS AND LOAN INDUSTRY
Authors: Fraser Donald R. , Kolari James W.
Published: August 2014

This paper provides empirical evidence on the market response to the 1982 Garn‐St. Germain Depository Institutions Act (DIA), as measured by changes in the prices of savings and loan associations' common stock. The analyses indicate positive, significant abnormal returns in the weeks immediately preceding both the passage of the DIA and the subsequent announcement of the specific terms of money market deposit accounts (MMDAs). No reaction to the surprise announcement of Super NOWs is found. Also, no significant changes in risk for savings and loans is detected surrounding the DIA and MMDA events. Consistent with the primary intent of DIA, this evidence suggests that investors perceived savings and loans to benefit from this legislation.
NEW EVIDENCE CONCERNING THE EXPECTATIONS THEORY FOR THE SHORT END OF THE MATURITY SPECTRUM
Authors: Choi Seungmook , Wohar Mark E.
Published: August 2014

This paper re‐examines the evidence rejecting the expectations theory of the term structure. Weekly, monthly, and quarterly data on three‐ and six‐month interest rates are employed for five subperiods—1910–1914, 1919–1933, 1934–1959, 1959–1978, and 1979–1989. Econometric techniques are used to correct standard errors for overlapping data and for heteroscedasticity. Findings indicate that the weekly and monthly data are consistent with a weak form of the expectations hypothesis in which the yield curve has substantial predictive power for short rates for each subperiod except 1934–1959 and 1979–1989. Results for the period before the founding of the Federal Reserve indicate that a strong version of the expectations hypothesis cannot be rejected in which the joint hypothesis of rational expectations and expectations theory is hypothesized. The use of cointegration tests and an error‐correction model framework to determine whether short and long rates have a common stochastic trend indicates that long and short rates are cointegrated.
EQUITY VALUATION EFFECTS OF WARRANT‐DEBT FINANCING
Authors: Phelps Katherine L. , Moore William T. , Roenfeldt Rodney L.
Published: August 2014

Stock price reactions to warrant‐debt unit financing announcements are examined and a significant two‐day average abnormal return of −1.32 percent is found. The negative average abnormal return is similar to that observed for convertible debt financing announcements in previous research. Warrant‐debt financing decisions result in large increases in capitalization; on average, issuers' long‐term debt increases by 84 percent, and common shares outstanding increase by 18 percent assuming full exercise of the warrants.
AN ANALYSIS OF REGULATED RATES OF RETURN FOR WHOLLY OWNED SUBSIDIARIES
Authors: Ezzell John R. , Hsu H. Christine , Miles James A.
Published: August 2014

Two methods are used by public utility regulators to set the allowed rate of return to a wholly owned subsidiary: the “independent firm” approach and the “double leverage” approach. Neither approach is consistent with any existing theory of firm valuation. The contribution of this paper is to derive from standard valuation theory a “divisional cost of capital” specification of the allowed rate of return to a wholly owned subsidiary. On the basis of this specification it is shown that the independent firm approach allows shareholders to capture the value created by the interest tax savings on parent debt. It is also reconfirmed that the double leverage approach induces cross‐subsidization since it allows each subsidiary to earn the same rate of return on equity regardless of the level of risk specific to the subsidiary.
A CERTAINTY EQUIVALENT APPROACH TO MUNICIPAL BOND DEFAULT RISK ESTIMATION
Authors: Wu Chunchi
Published: August 2014

This paper extends the risk‐neutrality default model of municipal bonds to consider the effect of risk aversion on the estimation of default probability. A model is proposed to separate the default risk assessment from the investor's risk aversion. Empirical results show that the risk‐neutrality model consistently overestimates the default probability but that the magnitude of this overestimate is generally small and statistically insignificant.
THE EARNINGS‐PRICE AND STANDARDIZED UNEXPECTED EARNINGS EFFECTS: ONE ANOMALY OR TWO?
Authors: Wiggins James B.
Published: August 2014

In this paper prior work on earnings‐price (E/P) and standardized unexpected earnings (SUE) anomalies is re‐examined and extended. A relation between excess returns and E/P is tested controlling for SUE. Results suggest that both anomalies are still present in the data, and that the E/P effect exists independently of the most recent earnings surprise.
DEALER BID‐ASK SPREADS AND OPTIONS TRADING ON OVER‐THE‐COUNTER STOCKS
Authors: Rao Ramesh P. , Tripathy Niranjan , Dukes William P.
Published: August 2014

In this study the impact of option listings on bid‐ask spreads for over‐the‐counter stocks is examined. Option listings are hypothesized to impact spreads by affecting the inventory‐holding cost and/or the informed risk component of spreads. Univariate tests reveal that the commencement of options trading is accompanied by a statistically significant decline in percentage spreads. In addition, it is found that there is a significant rise in the average daily stock trading volume in the post‐option‐listing period, while there is no significant change in variance of the underlying stock returns in the short term. Regression results indicate that some stocks experience a decline in spreads even after controlling for changes in inventory‐holding costs. The univariate and regression results taken in conjunction indicate a favorable impact of option listings on both the inventory‐holding cost and informed‐trading risk components of spread determinants. The combined evidence suggests that initiation of options trading enhances the overall liquidity of the underlying stock.
FORECASTING THE TREASURY BILL RATE: A TIME‐VARYING COEFFICIENT APPROACH
Authors: Chiang Thomas C. , Kahl Douglas R.
Published: August 2014

In this paper a time‐varying coefficient model is developed using a Kalman filter methodology to test the term structure of interest rates. Since the model is characterized by continuing revision of the estimates when new information arrives, it is capable of capturing the dynamic interest rate behavior, thereby increasing the forecasting accuracy of the future spot rates. With the constant expectations hypothesis rejected, the forecasting accuracy is substantially increased.
ERODING MARKET IMPERFECTIONS, REINTERMEDIATION, AND DISINTERMEDIATION
Authors: Easterwood John C. , Morgan George Emir
Published: August 2014

In this paper a search model of a financial market, generalized to include costly contracting, is employed to demonstrate that: (i) relative cost efficiency for an intermediary is not sufficient to explain a role for intermediation services, and (ii) eroding market imperfections do not produce hypothesized effects on “reintermediation” from traditional depository‐type intermediaries to brokerage‐type intermediaries and on “disintermediation” from indirect financing to direct financing under a set of justifiable assumptions.
FILTER RULE TESTS OF THE ECONOMIC SIGNIFICANCE OF SERIAL DEPENDENCIES IN DAILY STOCK RETURNS
Authors: Corrado Charles J. , Lee Suk‐Hun
Published: August 2014

In this paper we examine the ability of filter rules to predict variation in expected daily returns for a sample of 120 Dow Jones and S&P 100 stocks from 1963 through 1989. Equally weighted portfolios of filter‐rule‐traded stocks consistently outperform a buy‐and‐hold portfolio of the same stocks before accounting for transaction costs. The difference in returns between filter rule and buy‐and‐hold portfolios is eliminated by one‐way transaction costs of 12 basis points. The economic significance of daily stock return autocorrelations is estimated. A marginal 1 percent increase in a first‐order autocorrelation increases filter rule returns by an estimated 3.84 percent.
THE LINKS BETWEEN TRADING TIME AND MARKET VOLATILITY
Authors: Houston Joel F. , Ryngaert Michael D.
Published: August 2014

In this paper the impact of reduced New York Stock Exchange trading hours on stock return variance and trading volume is examined. Trading hours were reduced during the summers of 1945–52 by eliminating Saturday trading and in parts of 1968 by eliminating Wednesday trading. For the most part, these closings do not affect weekly volume or stock return variance. However, volume and variance are shifted from periods within the week with reduced trading hours to days following market closings. This is consistent with reduced trading temporarily reducing the transmission of private information into market prices.
AN EMPIRICAL TEST OF THE TIMING OF BOND‐REFUNDING DECISIONS
Authors: Thatcher Janet S. , Thatcher John G.
Published: August 2014

In this paper we measure the ability of firms to time bond‐refunding decisions. The timing performance achieved on a sample of 161 public utility bond refundings is compared with the timing performance achieved by three benchmark models. We find that firms achieve levels of timing performance significantly better than the random selection and 100‐basis‐point benchmark models, but not significantly better than a stopping‐time model based on present value analysis.
CONSIDERING DIVIDEND STABILITY IN THE RELATION BETWEEN DIVIDEND YIELDS AND STOCK RETURNS
Authors: Gombola Michael J. , Liu Feng‐Ying
Published: August 2014

Previous studies show that firms with long records of paying stable dividends are unique. However, research on the relation between dividend yields and stock returns focuses on shorter‐term dividend yield measures without considering long‐term dividend stability. This article shows that high‐yield stocks are not in fact homogeneous, but that stocks with high yields and stable dividends behave differently from stocks with only a high yield. These differences persist even after controlling for firm size, the January effect, and systematic risk, suggesting distinctive risk characteristics for stocks with both high yields and stable dividends.
FIRM PERFORMANCE AND SECURITY TYPE IN SEASONED OFFERINGS: AN EMPIRICAL EXAMINATION OF ALTERNATIVE SIGNALING MODELS
Authors: Patel Ajay , Emery Douglas R. , Lee Yul W.
Published: August 2014

In this paper we examine the long‐term performance of publicly traded firms that issue straight debt, convertible debt, or common stock. Declines in firm performance following issuance are consistent with declines in firm value at announcement and issuance, and suggest that convertible debt and common stock are substantially equivalent. This study is consistent with the pecking‐order and Miller‐Rock models, but inconsistent with the leverage‐signaling model. Despite a significant decline following issuance, firms issuing common stock or convertible debt perform better, on average, than the industry before, at, and after issuance. This is consistent with younger, riskier, higher‐growth firms being the predominant issuers of common stock and convertible debt.
THE EFFECTS OF OVERPAYMENT AND FORM OF FINANCING ON BIDDER RETURNS IN MERGERS AND TENDER OFFERS
Authors: Sung Hyun Mo
Published: August 2014

In this paper I examine the effects of overpayment and form of financing on bidding firms' stock returns and the determinants of the form of financing in mergers and tender offers. First, I find that in the 1980s potential overpayments to target shareholders and the form of financing are important for explaining cross‐sectional differences in bidding firms' returns upon the announcement of mergers or tender offers. Second, I find that in the 1980s cash offers were likely to be chosen by cash‐rich firms relative to their industry, and stock exchange offers were likely to be chosen by normal cash‐generating firms relative to their industry. The latter finding is consistent with the pecking order hypothesis and casts doubt on recent signaling explanations of the form of financing.
TACTICAL ASSET ALLOCATION: CAN IT WORK?
Authors: Nam Joong‐soo , Branch Ben
Published: August 2014

Market events of the past ten years have sparked an interest in tactical asset allocation. In the current study we develop and test a model that incorporates currently available information into the tactical asset allocation process. The model provides an estimate of the probabilities that the upcoming market period will be bullish or bearish. Logit analysis is employed to determine which of the various timely and readily available data significantly affect these probabilities. These estimated probabilities are used to suggest the optimal allocations of funds over time between the risk‐free asset and the market portfolio. Then, several timing strategies are compared with a buy‐and‐hold portfolio. An asset allocation strategy based on the probabilities assigned by the logit model appears to achieve greater terminal wealth with less variability of returns. Similar results are obtained for both an initial sample (1962–76 in our model) and a holdout sample (1977–88).
STOCKHOLDER RETURNS AMONG HOMOGENEOUS GROUPS OF MERGERS
Authors: Sawyer Granville M. , Shrieves Ronald E.
Published: August 2014

A sample of cash and stock merger transactions consummated between 1975 and 1987 is used to form homogeneous groups based on financial characteristics of both bidding and target firms. The results are used to determine how group heterogeneity with respect to financial characteristics influences intergroup differences in both bidding firm and target firm merger returns. Stockholders of bidding firms with attributes that fit the free cash flow hypothesis of merger motivation suffer wealth losses relative to firms that have characteristics consistent with achievement of scale or scope economies or financial synergies. Differences in target and merger portfolio returns are also found.
THE INFLUENCE OF PREDICTABILITY ON DIFFERENCES IN THE MARKET REACTION TO DEBT AND EQUITY ISSUE ANNOUNCEMENTS
Authors: Bayless Mark
Published: August 2014

Existing empirical evidence suggests that the announcement‐day reaction to equity issuance is about 2.88 percent more negative than the reaction to debt. However, announcement‐day returns do not accurately reflect investor reaction if issue announcements are anticipated. I re‐examine the announcement‐day reaction to equity and debt issues after controlling for the predictability of security type and for firms' previous issue experience. Results indicate that the reaction to a first‐time seasoned equity issue is more than 4.15 percent more negative than the reaction to debt. This increase over the conventional estimate suggests that the reaction to equity may be more negative, relative to debt, than previously believed. The evidence supports the assertion that giving preference to debt over equity could reduce issue costs when asymmetric information is a problem. Timing and certification strategies for lowering issue costs appear to be relatively unimportant for debt issues.
NONLINEAR DYNAMICS AND THE DISTRIBUTION OF DAILY STOCK INDEX RETURNS
Authors: Brorsen B. Wade , Yang Seung‐Ryong
Published: August 2014

Three alternative models of daily stock index returns are considered: (1) a diffusion‐jump process; (2) an extended generalized autoregressive conditional heteroskedasticity (GARCH) process; and (3) a combination of the GARCH and jump processes. Non‐nested tests between the diffusion‐jump process and a GARCH(1.1) process with t‐distributed errors reject the diffusion‐jump process, but do not always reject the GARCH process. Kolmogorov‐Smirnov tests of fit, however, reject the GARCH(1,1)‐t process for all cases. Nonlinear dependence is not removed for the value‐weighted index and the S&P 500 stock index; therefore, deterministic chaos cannot be dismissed.
THIN TRADING AND THE ESTIMATION OF BETAS: THE EFFICACY OF ALTERNATIVE TECHNIQUES
Authors: Bartholdy Jan , Riding Allan
Published: August 2014

Infrequent trading induces biased estimates of the beta risk coefficient. This paper reports on the efficacy of approaches that seek to correct for this bias and documents the extent of thin trading among New Zealand securities. Parameter estimates free of the thin‐trading bias are obtained. These are compared with estimates obtained using ordinary least squares (OLS) applied in the conventional manner to nonsynchronous data, with and without bias‐correcting procedures. OLS beta estimates are found to be less biased, more efficient, and as consistent when compared with Dimson or Scholes‐Williams estimators. Lower beta estimates are associated with lower trading frequencies.
BID‐ASK SPREAD COMPONENTS AROUND ANTICIPATED ANNOUNCEMENTS
Authors: Brooks Raymond M.
Published: August 2014

In this paper I re‐examine spreads around dividend and earnings announcements and provide new evidence on patterns by examining the components of the bid‐ask spread. Transaction data are examined through a recently developed spread decomposition model that decomposes the bid‐ask spread into a fixed (execution) component and an adverse selection component. In addition, this model does not rely on a constant spread as previous spread decomposition models require. The results show that around earnings announcements, the bid‐ask spreads and spread components have significant changes indicating that the anticipated announcement is informative. However, the actual public announcement of a dividend does not alter the bid‐ask spread and spread components of actively traded securities.
ON COMPUTING BOND RETURNS: THE EVALUATION OF LOW‐GRADE DEBT
Authors: Alderson Michael J. , Zivney Terry L.
Published: August 2014

Previous research attributes disparities in the reported performance of junk bonds to differences in bond issues and time periods. The potential effect of apparently subtle differences in methodology is overlooked. We find that the methodologies used in computing performance vary significantly across representative junk bond studies. The differences in methodology can induce dramatic differences in reported performance, even with identical price data. These findings lead to the conjecture that the entire junk bond controversy might never have occurred had bond portfolio returns been computed consistent with the well‐established computations of stock returns.
THE SPEED OF ADJUSTMENT OF PRICES TO PRIVATE INFORMATION: EMPIRICAL TESTS
Authors: Lin Ji‐Chai , Rozeff Michael S.
Published: August 2014

We estimate speeds of adjustment of individual stock prices to private information using daily data. We use a model in which private information gives rise to return variance and private information decays linearly over time. We find that, on average, about 85 percent to 88 percent of private information is incorporated into prices within one trading day, with variation depending upon the stock's trading volume and whether the stock is listed on an exchange. The findings support strong form market efficiency.
BID‐ASK SPREAD AND OWNERSHIP STRUCTURE
Authors: Kini Omesh , Mian Shehzad
Published: August 2014

In this paper we examine the relation between bid‐ask spread and ownership structure variables based on 1985 data for 1,063 NYSE firms. We document a nonpositive relation between bid‐ask spread and insider ownership and conclude that spread is unrelated to insider trading. We also find a robust significantly negative relation between spread and institutional ownership. Finally, we find a positive but generally insignificant relation between spread and blockholdings. Overall, our evidence does not support the predictions of asymmetric information models in markets with anonymous trading.
ABNORMAL RETURNS AND ANALYSTS' EARNINGS FORECAST REVISIONS ASSOCIATED WITH THE PUBLICATION OF “STOCK HIGHLIGHTS” BY VALUE LINE INVESTMENT SURVEY
Authors: Peterson David R. , Peterson Pamela P.
Published: August 2014

We examine the reaction of stocks and the response of financial analysts' earnings forecasts to securities recommended as “Stock Highlights” by Value Line Investment Survey. Significant abnormal returns appear around the publication of stock highlights. Stock price responses are relatively efficient and permanent. Using earnings expectation data provided by the Institutional Brokers Estimate System, we find analysts raise their forecasts significantly following Value Line recommendations. Near‐term forecast revisions are significantly related to stock returns at the time of the recommendations. Thus, an explanation for Value Line's security recommendation success is its ability to generate firm‐specific earnings information.
THE RELATION BETWEEN THE FEDERAL FUNDS CASH AND FUTURES MARKETS
Authors: Griffiths Mark D. , Winters Drew B.
Published: August 2014

The introduction of futures contracts did not alter the regularity in the cash market that results from the Federal Reserve regulation of the bank‐settlement process. Although we find a positive preholiday effect in the Fed funds futures returns, we do not find evidence that Federal Reserve regulations cause that effect. Contrary to previous observations for other futures contracts, we find Fridays and preholidays have the largest net volume. We suggest this finding of high volume is consistent with hedging activity by financial institutions before market closings.
EXCESS RETURNS AND RISK AT THE LONG END OF THE TREASURY MARKET: AN EGARCH‐M APPROACH
Authors: Brunner Allan D. , Simon David P.
Published: August 2014

In this paper we model weekly excess returns of ten‐year Treasury notes and long‐term Treasury bonds from 1968 through 1993 using an exponential generalized autoregressive conditional heteroskedasticity in mean (EGARCH‐M) approach. The results indicate the presence of conditional heteroskedasticity and a strong tendency for the ex‐ante volatility of excess returns to increase more following negative excess return innovations compared with positive innovations of equal magnitude. In addition, increases in ex‐ante volatility are associated in some subperiods with rising excess returns on longer‐term instruments, although the slope of the yield curve and lagged excess returns generally remain significant predictors of excess returns.
TRADING OF NASDAQ STOCKS ON THE CHICAGO STOCK EXCHANGE
Authors: Lau Sie Ting , McCorry Michael S. , McInish Thomas H. , Van Ness Robert A.
Published: August 2014

We use a linear programming model to form two portfolios with approximately equal levels of attributes such as financial leverage. One portfolio comprises stocks that trade exclusively on NASDAQ and the other, stocks that trade on both the Chicago Stock Exchange (CSE) and NASDAQ (CSE/NASDAQ). We find that spreads are lower for the CSE/NASDAQ portfolio, but so is the percentage of quotes at spreads of $0.125. In fact, the lower spreads observed for the CSE/NASDAQ portfolio arise from fewer quotes with spreads of more than $0.25.
BUSINESS CYCLES AND STOCK MARKET RETURNS: EVIDENCE USING INDUSTRY‐BASED PORTFOLIOS
Authors: Eleswarapu Venkat R. , Tiwari Ashish
Published: August 2014

Much evidence has emerged recently that suggests stock returns are predictable. In representative agent consumption‐based asset pricing models, asset returns are related to aggregate output and consumption through changes in the intertemporal marginal rate of substitution. An alternative view is that the amount of variation required in the intertemporal marginal rate of substitution is too large to be rationally explained. We shed further light on this debate by investigating whether the stock returns of certain sectors of the economy can predict future market returns even after controlling for the information contained in the aggregate market index. In the consumption‐based models, aggregate output and consumption affect the discount rates of all assets synchronously; no particular sectoral return should have any more predictive ability than the others. We find evidence that the stock returns of five industry‐based portfolios have significant information about future market returns that is not in the market index. This stylized empirical result is not consonant with existing models relating output to stock returns.
THE RELATION BETWEEN OPTION MISPRICING AND VOLUME IN THE BLACK‐SCHOLES OPTION MODEL
Authors: Long D. Michael , Officer Dennis T.
Published: August 2014

We investigate the relation between mispricing in the Black‐Scholes option pricing (BSOP) model and volume in the option market. Our results indicate heavily traded call options are priced more efficiently and have lower mispricing errors than thinly traded options. However, this relation shifts significantly on days when call option trading is high. On high‐volume days, the BSOP model mispricing errors are significantly larger than mispricing errors on normal‐volume days. We believe large increases in volume may reflect new and changing market information, thus making pricing less efficient in the BSOP model.
A VARIANCE DECOMPOSITION ANALYSIS OF THE INFORMATION IN THE TERM STRUCTURE
Authors: Ederington Louis H. , Goh Jeremy C.
Published: August 2014

Based on a market efficiency assumption, we use variance decomposition analysis to separate information in the term structure on expected future spot rates from information on time‐varying term premia and to examine the market's ability to forecast both future rate changes and excess returns on long versus short securities. We find that fluctuations in the slope of the yield curve are due more to changing term premia than to fluctuations in expected future spot rates and that the market correctly predicts about 40 percent of the month‐to‐month changes in spot rates, a considerably higher percentage than that found by previous studies.
AN INVESTIGATION OF ALTERNATIVE ESTIMATORS OF EXPECTED RETURNS IN MEAN‐VARIANCE ANALYSIS
Authors: Fletcher Jonathan
Published: August 2014

In this paper I examine the out‐of‐sample performance of five mean‐variance strategies using different models of expected returns within a U.K. industry asset‐allocation framework between January 1970 and December 1991. The performance of the five strategies is evaluated with different measures. I find superior performance for the strategy that uses conditioning information to estimate expected returns. This consistently outperforms the two passive benchmarks and earns positive abnormal returns over the sample period regardless of how frequently the portfolio is revised and whether portfolio restrictions are imposed.
EMERGING EQUITY MARKETS: ARE THEY FOR REAL?
Authors: Hargis Kent , Maloney William F.
Published: August 2014

Using the methodology developed by Fama (1990) and Schwert (1990), we measure the degree to which six of the largest emerging equity markets in Latin America and Asia are rational in the sense that they incorporate domestic and global shocks to future expected cash flows and time variation in the discount rates that price these flows. The Chilean, Mexican, and, to a lesser extent, Malaysian markets appear more rational than either the Korean and Taiwanese markets or the base case U.S. and Japanese markets. However, we argue that numerous factors make the methodology unable to rank markets by relative efficiency. We also find evidence of the influence of real global variables on the Taiwanese and Korean markets.
PRIOR UNCERTAINTY, ANALYST BIAS, AND SUBSEQUENT ABNORMAL RETURNS
Authors: Ackert Lucy F. , Athanassakos George
Published: August 2014

In this paper we examine the relation between analysts' overoptimism and uncertainty as proxied by the standard deviation of earnings forecasts. We find a positive relation between overoptimism and uncertainty, but very little or no optimism when uncertainty is low. If the uncertainty surrounding a firm is high, analysts have fewer reputational concerns when they act on their inclinations to issue optimistic forecasts. Portfolio strategies based on these findings generate abnormal returns. The results suggest that greater prior uncertainty leads to higher analyst optimism, which in turn causes market overvaluation and profitable portfolio strategies.
AN INVESTIGATION OF PREFERRED STOCK FINANCING BY BANK AND NONBANK FINANCIAL INSTITUTIONS
Authors: Fields L. Paige , Webb Shelly E.
Published: August 2014

We investigate the shareholder wealth effects of announcements of preferred stock issues made by financial institutions. Fixed‐rate straight preferred stock and convertible preferred stock issue announcements result in insignificant common share price responses. However, the average stock price reaction to announcements of adjustable‐rate preferred stock issues is positive and significant for banking firms. Our findings suggest that banks' common shareholders react positively to adjustable‐rate preferred stock issue announcements because such securities provide a relatively low‐cost way of increasing the primary capital used to satisfy legal minimum capital requirements without diluting common equity voting rights.
EARNINGS ANNOUNCEMENTS, QUALITY AND QUANTITY OF INFORMATION, AND STOCK PRICE CHANGES
Authors: Chen Carl R. , Wuh Lin James , Sauer David A.
Published: August 2014

We analyze the informational effect of earnings announcements on stock price changes. Although prior studies postulate that the direction and magnitude of earnings surprises contribute to abnormal stock price changes, we attribute earnings surprises and subsequent stock price changes to the quality and quantity of available information. If a stock is followed by many financial analysts, the amount of information available to investors contributes to higher quality information, which in turn is reflected by a small earnings surprise. Furthermore, we demonstrate that as the quality and quantity of information increase, stock prices adjust more quickly, which sheds additional light on the post‐earnings‐announcement drift issue. Finally, cross‐sectional analysis reveals that the flow of information, as measured by the rate of trading volume changes, and the stock of information, as measured by the number of financial analysts, contributes significantly to the variations in excess returns and return volatility. Traditional variables, such as earnings surprises, earnings reporting lag, and firm size, do not perform well.
CORPORATE CONTROL IN COMMERCIAL BANKS
Authors: Prowse Stephen
Published: August 2014

Unique factors in commercial banks' legal and regulatory environment may influence their mechanisms of corporate control. I investigate this issue in a sample of U.S. bank holding companies (BHCs) by analyzing how many underwent a change in corporate control by hostile takeover, friendly merger, management turnover by the board, or intervention by regulators. I compare the relative importance of these methods with those in nonfinancial firms. 1 relate the use of these methods to BHC board and ownership structure and performance. I find that the most important corporate control mechanism in banks is regulatory intervention, and that the primary market‐based corporate control mechanism is action by the board of directors. Overall, however, BHC boards are much less assertive than their counterparts at nonfinancial firms. I examine reasons for this.
THE DIFFERENTIAL INFORMATION CONVEYED BY SHARE REPURCHASE TENDER OFFERS AND DIVIDEND INCREASES
Authors: Choi Dosoung , Chen Sheng‐Syan
Published: August 2014

We identify the difference in the private information conveyed by the announcements of a share repurchase tender offer and of a regular dividend increase. We find that, after controlling for timing, industry, size of cash distribution, and other firm‐specific characteristics, a share repurchase tender offer causes a much larger stock price response than a regular dividend increase. The results suggest that the two cash distribution mechanisms convey differential information. Further examination of the differential information indicates that (1) the upward revision in financial analysts' earnings forecasts following a share repurchase is, on average, greater than that following a regular dividend increase, and (2) a repurchase announcement is followed by a permanent decline in the firms' systematic risk while a dividend‐increase announcement is not.
JUNK BOND BEHAVIOR WITH DAILY RETURNS AND BUSINESS CYCLES
Authors: Patel Jayen B. , Evans Dorla A. , Burnett John E.
Published: August 2014

Using the Merrill Lynch daily junk bond index, we re‐examine and extend previous junk bond return results. We include the effect of business cycles on junk and investment‐grade bonds, the sensitivity of junk bond returns to economic activity and/or interest rates, and sample periods that allow us to investigate periods of reduced junk bond liquidity. Daily data confirm the same curious return behavior identified in studies using monthly returns. However, we reveal for the first time that junk bond returns track the movement of interest rates during economically good times but track stock returns during bad times.
CO‐MOVEMENTS OF THE PRIME RATE, CD RATE, AND THE S&P FINANCIAL STOCK INDEX
Authors: Ewing Bradley T. , Payne James E. , Forbes Shawn M.
Published: August 2014

We examine the relation among the prime lending rate, certificate of deposit rate, and the S&P Financial Stock Index using cointegration and error correction modeling techniques. We find that these three financial time series share a long‐run cointegrating relation. Subsequent vector autoregressive error correction results imply that the movement of these stock prices toward eliminating disequilibrium is about 1 percent within the first month. Impulse response functions indicate that changes in the deposit rate have a larger effect on changes in the price index of financial service sector stocks than do changes in the lending rate.
THE CROSS‐AUTOCORRELATION OF SIZE‐BASED PORTFOLIO RETURNS IS NOT AN ARTIFACT OF PORTFOLIO AUTOCORRELATION
Authors: Richardson Terry , Peterson David R.
Published: August 2014

Prior studies find evidence of asymmetric size‐based portfolio return cross‐autocorrelations where lagged large firm returns lead current small firm returns. However, some studies question whether this economic relation is independent of the effect of portfolio return autocorrelation. We formally test for this independence using size‐based portfolios of New York Stock Exchange and American Stock Exchange securities and, separately, portfolios of Nasdaq securities. Results from causality regressions indicate that, across all markets, lagged large firm returns predict current small firm returns, even after controlling for autocorrelation in small firm returns. These cross‐autocorrelation patterns are stronger for Nasdaq securities.
INTERNATIONAL INVESTORS' EXPOSURE TO RISK IN EMERGING MARKETS
Authors: Eftekhari Babak , Satchell Stephen E.
Published: August 2014

We examine the empirical differences in emerging market betas (β's) taken across four major currencies (U.S. dollar, British sterling, Japanese yen, and German mark) where the β's are either mean‐variance or mean‐lower partial moment β's. The mean variance β's are found to be statistically similar to lower partial moment β's in most cases, which suggests they are robust to nonnormality in the data. The difference between the two β's has become less significant in recent years as emerging markets have become more stable. Furthermore, evidence is presented that β's obtained from both risk measures and calculated from returns denominated in different currencies have the same ordinal association. This shows the primacy of local risk over foreign exchange risk. We conclude that international investors can continue to use the mean‐variance β in assessing risk in emerging markets, although investors should not give it a conventional equilibrium interpretation.