bluuebunny/crossref_metadata_2025 huggingface dataset:
Economic Order Quantities, Volume Discounts, and Wealth Maximization
Authors: Followill Richard A. , Schellenger Michael , Marchand Patrick H.
Published: March 2005

This study challenges the generally accepted managerial decision to accept a quantity discount if total, perperiod inventory and acquisition costs are reduced. In this paper, the economic order quantity model is reformulated within an explicit wealth maximization framework, and the reformulated model is then utilized to analyze inventory decisions when volume discounts are available. The results of the study indicate that the traditional method of analyszing volume discount opportunities may invoke wealth decreasing decisions.
Price‐Fixing and Shareholder Returns: An Empirical Study
Authors: Skantz Terrance R. , Cloninger Dale O. , Strickland Thomas H.
Published: March 2005

This paper examines the market reaction to three different events related to allegations of price‐fixing: the initial charges, the firm's plea, and the resolution of the case. Negative, risk‐adjusted shareholder returns are associated with the initial charge of price‐fixing, while mixed results are observed during the two days immediately after the plea. The ultimate resolution of the case appears to be anticipated by the market. The overall decline in shareholder wealth from all three events combined is about 5 percent. These results suggest that shareholders are at least partial beneficiaries of price‐fixing and that the presumption of an agency problem may be incorrect.
Interest Rate Risk and the Optimal Gap for Commercial Banks: An Empirical Study
Authors: Wetmore Jill L. T. , Brick John R.
Published: March 2005

The optimal gap of a depository institution is derived using a market value optimization model. The gap is estimated using portfolios of returns on rate‐sensitive assets and liabilities and is found to be not significantly different from zero. The estimate is compared to the average gap position of a sample of banks. It is found that the average gap position of a sample of banks is “too positive.” This suggests that banks are not showing risk minimization behavior in the positioning of the gap.
Monitoring Accounts Payables
Authors: Gentry James A. , De La Garza Jesus M.
Published: March 2005

In creating shareholder value, one objective of management is to increase the speed of cash inflows and reduce the speed of cash outflows. To accomplish this task, management must understand the relationships that cause accounts receivable and accounts payable to change. The paper expands a receivable monitoring model by Gentry and De La Garza to incorporate the causes of changes in payables. Several examples are developed to show the operation of the model. The three primary contributions of the paper are (a) developing algorithms that measure the causes of changes in payables, plus an interpretation for each set of conditions; (b) showing that a present value approach to monitoring payables is superior to a recommended accounting approach based on variance analysis; (c) finally, presenting an approach for ranking the performance of payable and receivable strategies.
Arbitraging American Gold Spot and Futures Options
Authors: Ogden Joseph P. , Tucker Alan L. , Vines Timothy W.
Published: March 2005

This study empirically tests rational pricing conditions applicable to American gold spot and futures options. A number of ancillary pricing relations also are tested. Transactions data supplied by the Montreal Stock Exchange and the New York Commodity Exchange are used in these tests. Arbitrage trading strategies designed to exploit violations of these conditions also are provided. The results indicate potential intermarket inefficiency: a substantial number of violations of a condition applicable to call options are found, and most of these violations are sufficient in magnitude to cover the relevant transaction costs of arbitrage.
Markov Chains and Regression toward the Mean
Authors: Kolb Robert W. , Rodriguez Ricardo J.
Published: March 2005

Using the theory of stationary Markov chains, we uncover a previously unknown property of the behavior of betas. Specifically, if the cross‐sectional distribution of betas is stationary over time, then the set of firms that remain in an arbitrarily chosen beta interval between one period and the next will not regress toward the mean. This surprising result occurs in spite of the well‐known fact that the set of all the firms in the interval will exhibit the regression tendency. Our empirical tests indicate that betas behave in remarkable accordance with this prediction.
Direct Bankruptcy Costs: Evidence from the Trucking Industry
Authors: Guffey Daryl M. , Moore William T.
Published: March 2005

Direct costs of bankruptcy are measured for a sample of firms in the trucking industry that petitioned for bankruptcy protection from 1970 to 1985. Average direct bankruptcy costs represent 9.12 percent of the book value of total assets as of the year before filing. These costs are large compared with those reported in prior studies: 3.39 percent of book value of assets for retail firms, 4.31 percent for industrials, and .53 percent for railroads. We also find evidence of substantial economies of scale in bankruptcy costs in the trucking sample.
Long‐Term Asset Allocation under Dynamic Interaction of Earnings and Interest Rates
Authors: Bolten Steven E. , Besley Scott
Published: March 2005

The interaction of interest rates and corporate earnings over the economic cycle generates stock price movements. These movements are captured in the present valuation context. Superior returns are observed when long‐term asset allocation techniques are applied to the model.
Wealth Effects of Acquiring Financially Distressed Firms
Authors: Johnson Dana J. , Abbott Ashok
Published: March 2005

The purpose of the present research is to study target and acquirer shareholder wealth effects of acquisition announcements in which the target is financially distressed. The abnormal returns and the dollar abnormal gains to both the target and acquiring firms are examined according to whether the mode of acquisition is a merger or a tender offer. A regression analysis is also undertaken to examine the importance of the mode of acquisition, an industry effect, and tax variables in determining the abnormal dollar gains in acquisitions of financially distressed targets.
An Intraweek Seasonality in the Implied Volatilities of Individual and Index Options
Authors: Morse Joel N.
Published: March 2005

This paper studies intraweek seasonalities in the implied volatilities of options on stock market indices. Oneway analysis of variance isolates the daily behavior of implied volatilities. The differential between call implied volatility and put implied volatility tends to drop on Friday and rise on Monday. Relying on a synthetic futures contract created from options, an explanatory model is proposed. The model complements previous research on the difference between the intraweek behavior of stock market indices and that of derivative instruments based on the indices.
Conditional Dependence in Precious Metal Prices
Authors: Akgiray Vedat , Booth G. Geoffrey , Hatem John J. , Mustafa Chowdhury
Published: March 2005

This study investigates the time‐series properties of gold and silver spot prices. Both precious metal price series are found to exhibit time dependence and pronounced generalized autoregressive conditional heteroscedastic (GARCH) effects. Splitting the data into similar economic subperiods provides superior explanation of these effects because of the observed long‐run nonconstancy of the unconditional variance. Further, the power exponential distribution, as opposed to the Student‐t, is found to portray accurately the thick‐tailed conditional variance that remains after the GARCH effects are removed. These findings imply that constant variance pricing models are inappropriate for securities that are based on precious metal prices.
Gains from Corporate Multinationalism: Evidence from the China Experience
Authors: Gupta Atul , McGowan Carl B. , Misra Lalatendu , Missirian Agnes
Published: March 2005

This paper examines the valuation impact of U.S. multinational corporations' expansion into the Peoples Republic of China (PRC during 1979 to 1987. The market response to the announcement of a firm's initial entry into the PRC is found to be positive and statistically significant, suggesting that expansion into China was a value‐enhancing activity. Equity joint venture modes of entry are found to result in greater shareholder gains than nonequity expansion modes. The influence of degree of multinationality, market share, growth, and technology‐related variables on the size of shareholder gains is also analyzed.
Further Ambiguity When Performance Is Measured by the Security Market Line
Authors: Grauer Robert R.
Published: March 2005

This paper employs the optimality conditions for expected utility and mean‐variance portfolio problems to examine the ambiguities associated with the security market line criterion both at a point in time and through time. At a point in time, we show that the security market line criterion can be irrelevant, even in meanvariance economies. In a multiperiod setting, we show that the analysis of performance based on portfolio choice is inconsistent with the analysis based on return generating models. Empirical work suggests that the inconsistency can lead to dramatically different estimates of a security's required return.
The Effect of SEC‐Ordered Suspensions on Returns, Volatility, and Trading Volume
Authors: Ferris Stephen P. , Kumar Raman , Wolfe Glenn A.
Published: March 2005

This study evaluates the effect of SEC‐ordered suspensions on securities' returns, volatility, and trading volume during 1963–1987. It is found that there is a permanent devaluation of these securities during the suspension. This result, however, is sensitive to the announced reason for the suspension. Both the variance and the trading volume are found to be substantially higher than normal in the presuspension period. This trend continues in the immediate postsuspension period. The variance and volume levels return to more normal levels only at a much later date. We conclude that trading suspensions are not associated with the immediate elimination of unusual market activity.
The Impact on Stock Returns and Liquidity for OTC Equity Issues Added to the List of Marginable OTC Stocks
Authors: Wolfe Glenn A. , Klein Daniel P. , Bowyer Linda E.
Published: March 2005

This paper studies the impact of being placed on the List of Marginable Over‐the‐Counter (OTC) Stocks for OTC stocks that were not, at the same time, placed on the National Association of Security Dealers' Automated Quotations National Market System. As such, the study provides relatively unconfounded evidence on the effects brought about by changes in the regulatory status of these stocks. The results indicate that the event of being added to the List of Marginable OTC Stocks provides positive excess returns. The benefit appears to be greater for smaller market value stocks than for larger market value stocks. This result primarily supports a Federal Reserve endorsement effect as larger market value stocks may already have a larger investor following relative to the smaller, relatively unknown issues. This finding supports results from other studies, dealing with listing on exchanges—that all stocks do not benefit to the same degree from such an event. Finally, stock liquidity, as measured both by average relative turnover and average relative bid‐ask spread, does not appear to be significantly affected based on a comparison of 60‐day trading periods before and after the placement of the stocks on the marginability list. Thus, it appears that the Federal Reserve does not induce speculative activity in these stocks.
Altered Common Stock Offerings
Authors: Phelps Katherine L. , Kremer Joseph W.
Published: March 2005

This study examines share price behavior when firms alter the size of their primary common stock offerings subsequent to the announcement date. The empirical evidence supports the theory that, given asymmetric information between management and investors, equity issuance is a function of prior stock returns. Average prediction errors in the announcement and postannouncement intervals, taken together or separately, have relative magnitudes that may be logically related to subsequent management decisions concerning these issues. Logistic regressions document significant relationships between the announcement and postannouncement excess returns and managerial decisions.
The N‐Stage Discount Model and Required Return: A Comment
Authors: Bower Richard S.
Published: March 2005

A number of financial economists have observed that estimates of the market discount rate have a downward bias when dividend timing is ignored. They have done so in academic and utility industry journals as well as in testimony. Most conclude or imply that such a downward bias carries over to the calculation of a regulated utility's required rate of return. This paper demonstrates that in fact the conventional cost of equity calculation, ignoring quarterly compounding and even without adjustment for fractional periods, serves very well as a measure of required return.
Further Evidence on the Relationship Between Ownership and Performance
Authors: Hudson Carl D. , Jahera John S. , Lloyd William P.
Published: March 2005

The objective of this paper is to extend prior research into the relationship between ownership and performance while controlling for the known market anomalies of firm size and earnings to price. The empirical results do support recent works indicating a positive relationship between the degree of insider ownership and performance. Using a piecewise regression model, both size and ownership are found to be significant. An additional finding of the paper supplements several recent works questioning the earlier works of Basu [6, 7].
Poison Pill Securities: Shareholder Wealth and Insider Trading
Authors: Loh Charmen
Published: March 2005

Existing empirical studies on poison pill securities have examined their overall effect on shareholder wealth. This paper segregates the wealth‐increasing poison pills from the value‐reducing ones by examining the pattern of insider trading activity prior to the pill adoption announcement. Our results show that pill adoptions that are preceded by net insider purchases are associated with significant stock price increases. This finding is consistent with the proposition that corporate insiders buy their own securities because they do not view the adoption of poison pills as an antitakeover strategy, but rather one that enables the board of directors to extract a greater share of the economic gains from the bidder. Our findings also indicate that firms with net insider sales prior to pill adoption announcement experience generally negative but insignificant changes in value. Finally, firms with no insider trading or with an equal number of insider purchases and sales register marginally significant negative returns.
A Note on the Stock Market Reaction to Dividend Announcements
Authors: Impson C. Michael , Karafiath Imre
Published: March 2005

In this paper, we examine the stock market reaction to dividend announcements. A sample of dividend increases and decreases is partitioned by payout ratio increases and decreases. Previous research has examined the differential reaction to payout ratio increases and decreases only for dividend increases. In addition to an event study, cross‐sectional regressions are estimated using the percent changes in payout ratio and dividend to explain abnormal returns. We conclude that payout ratio changes appear to be only an artifact of an earnings stream that is more variable than the dividend stream, rather than revealing any significant shifts in managerial policy.
Interest Rates Fluctuations and the Advantage of Long‐Term Debt Financing: A Note on the Effect of the Tax‐Timing Option
Authors: Brick Ivan E. , Palmon Oded
Published: March 2005

When interest rates fluctuate, issuing long‐term debt may implicitly generate a valuable tax‐timing option. The holder of long‐term debt has an optimal‐trading taxtiming option to immediately realize capital losses if an increase in interest rates lowers the price of the bond below the original issue price. In contrast, if interest rates decrease and the bond price is greater than the original issue price, the holder would prefer to defer the realization of capital gains. This tax‐timing option confers an advantage for issuing long‐term debt. Our formal presentation also highlights how the tax‐timing options of long‐term debt may increase the debt capacity of the firm.
Black‐Scholes Revisited: Some Important Details
Authors: Beck Thomas M.
Published: March 2005

The traditional derivation of the Black‐Scholes formula is mathematically unsatisfactory. In this paper, the problems associated with the traditional derivation are pointed out and an alternative, more rigorous derivation is presented.
International Evidence on the Predictability of Stock Returns
Authors: Cochran Steven J. , DeFina Robert H. , Mills Leonard O.
Published: March 2005

This article examines the predictability of stock returns using international stock market data from eighteen countries. The study finds that the ability of dividend yields to predict stock returns increases as the return horizon lengthens from one month to forty‐eight months. These results add to earlier ones, based on U.S. data only, showing that predictability grows with the return horizon. The study also explores why the observed pattern of predictability arises and provides evidence supporting the reasons suggested by Fama and French.
Joint Cross‐Section/Time‐Series Maximum Likelihood Estimation for the Parameters of the Cox‐Ingersoll‐Ross Bond Pricing Model
Authors: Daves Phillip R. , Ehrhardt Michael C.
Published: March 2005

We develop a joint maximum likelihood estimator for the interest rate risk premium and the parameters of the Cox, Ingersoll, and Ross bond pricing model. This new approach resolves difficulties inherent in previous approaches that use only time‐series data or cross‐sectional data. We apply the new approach to a large sample of joint time‐series/cross‐sectional data. The resulting estimated parameters explain simultaneously the changes in short‐term interest rates and the prices of zero‐coupon bonds with various maturities. We also identify and provide solutions to potential computational difficulties that other researchers are likely to face.
Effects of Preferred Stock Re‐rating on Common Stock Prices: Further Evidence
Authors: Chandy P. R. , Hsueh L. Paul , Liu Y. Angela
Published: March 2005

This study examines the price reactions of common stocks to changes in preferred stock ratings, with focuses on firms with less information available in the market as well as on firms with a relatively larger proportion of preferred stock financing. Emphasis on differential information and the relative size of preferred stocks across firms provide a more powerful test of the effect of rating changes on stock prices. Contrary to previous studies that report no price effect on common stocks due to preferred stock re‐ratings, these results show that for low‐information firms and for firms with a larger proportion of preferred stocks in their capital structure, a preferred stock rating downgrade exerts significant negative price effect on common stocks during the two‐day announcement period. Our findings also have implications for future studies of other firm‐specific events such as security offerings, stock repurchases, and convertible calls.
Downside Risk and Investment Choice
Authors: Maurice Tse K. S. , Uppal Jamshed , White Mark A.
Published: March 2005

This paper develops an optimal investment strategy for individuals concerned with avoiding the possibility of realizing returns below a predetermined target level within a prescribed period of time. Assuming a Brownian motion process, a model is developed which allows computation of the exact probability of failure. The algorithm and associated comparative statics with respect to the mean and standard deviation of returns, target return, time horizon, and risk‐free rate of return are likely to have many useful practical applications.
Does Sentiment Explain Closed‐end Fund Discounts? Evidence from Bond Funds
Authors: Abraham Abraham , Elan Don , Marcus Alan J.
Published: March 2005

This paper documents that discounts and premia on closed‐end bond funds exhibit the same sensitivity to broad market returns as stock fund discounts. Despite this, stock funds sell on average at discounts from net asset value while bond funds sell at small premia. This pattern calls into question the conclusion that the average level of the discount rate can be rationalized by appealing to the systematic nature of discount risk. These results indicate that appeals to investor sentiment, which have been hypothesized as a source of fund discounts, do not fully resolve the puzzle of closed‐end fund discounts.
The International Transmission of Money Market Fluctuations
Authors: Ahmad Syed M. , Sarver Lee
Published: March 2005

This study analyzes the interdependence of money markets in Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Switzerland, the United Kingdom, and the United States. The authors estimate a vector‐autoregression system using daily data on three‐month money market rates from December 31, 1979, through February 28, 1990. Consistent with the notion of informational efficiency, money markets respond very rapidly to a shock in any one country. The U.S. market plays a leading role, in that the after‐effects of a shock there are much stronger and last much longer than those of a shock elsewhere. In contrast with previous studies on stock markets, the responses are larger and more persistent, the markets are less interdependent, and the U.S. market is relatively less influential.
The Impact of Publication of Analysts' Recommendations on Returns and Trading Volume
Authors: Palman Oded , Sun Huey‐Lian , Tang Alex P.
Published: March 2005

Publication of security analysts' recommendations in the column “Inside Wall Street,” which is published in Business Week, induces abnormal returns on the publication day and the following day. The abnormal returns are robust to the use of alternative samples and methodologies. The publication increases trading volumes for the securities that are recommended to be purchased, but not for securities that are recommended to be sold. The abnormal returns and trading volumes support the view that stock prices do not adjust instantaneously when new information arrives, and that the time pattern of price adjustment depends on the time pattern of the accessibility of the information. The authors find no statistically significant difference between the average abnormal returns that are induced by recommendations that appear at the beginnings of “Inside Wall Street” columns (and are covered more extensively than others) and the average abnormal returns induced by other recommendations.
The Relationship between Investment and Asset Life
Authors: Prezas Alexandros P.
Published: March 2005

Optimal investment in an asset and its optimal life are shown to be interrelated through operating cash flows and depreciation allowance, as well as book and salvage values upon termination; thus they are determined simultaneously. Asset life and investment are positively (negatively) related if delaying abandonment increases (reduces) the benefit of marginal investment. If investment and asset life are positively related, increased debt financing or allowable depreciation positively impact on them; otherwise, the impact is ambiguous in sign. Further, investment in a zero salvage value asset and its holding period increase with depreciation or leverage when (1) its cash flows form an annuity or (2) the firm employing it is tax‐exempt.
A Comparative Analysis of Takeovers of Single and Dual Class Firms
Authors: Smith Brian F. , Amoako‐Adu Ben
Published: March 2005

This paper analyzes takeovers of dual class companies listed on the Toronto Stock Exchange over the period 1976 to 1989. It finds support for the hypothesis that despite the evidence that restricted shares sell at a discount compared to superior voting shares, takeover returns are the same for both classes of shares. Secondly, it tests the hypothesis that the classification of common equity into two classes confers differential takeover value on controlling shareholders and find that superior voting shares of dual class firms experience higher returns during takeovers than do shares of single class firms.
Regular Dividend Announcements and Future Unexpected Earnings: An Empirical Analysis
Authors: Aharony Joseph , Dotan Amihud
Published: March 2005

Previous studies have interpreted stock price reaction to dividend announcements as being consistent with the hypothesis that any changes are forecasts of future corporate profits. Recent studies seem to provide evidence to this effect. This study provides additional empirical evidence pertaining to the issue of whether quarterly cash dividend announcements convey useful information about a firm's future profitability, beyond that contained in contemporaneous quarterly earnings announcements. The association between unexpected changes in quarterly dividends and unexpected accounting earnings in subsequent quarters is examined, after controlling for information contained in past and current earnings series. The results, based on a large sample of regular quarterly cash dividend changes, indicate that firms that increased (decreased) their dividends realized, on average, greater (smaller) unexpected accounting earnings in subsequent periods than firms that did not change their dividends.
Financial Innovation, Investment Opportunities, and Corporate Policy Choices for Large Bank Holding Companies
Authors: Collins M. Cary , Blackwell David W. , Sinkey Joseph F.
Published: March 2005

This study determines the effects of agency costs on bank management by investigating the relationship between investment opportunities and corporate policy choices for large bank holding companies from 1977 to 1985. The financial innovations in this period resulted in numerous investment opportunities for banks and their holding companies. The market‐to‐book ratio, a proxy for these opportunities or growth options, reveals significant differences in the opportunity sets of regional and money center banks. Since the growth options are negatively related to both debt financing and dividend payout, a policy prescription for reducing bank holding company (BHC) leverage is to allow bank/BHC investment opportunities to expand through product and geographic deregulation.
Tax Policy and Shareholder Wealth: Some Evidence from the Tax Reform Act of 1986
Authors: Cox Raymond A. K. , Kleiman Robert T. , Stout R. Gene
Published: March 2005

This paper presents additional evidence regarding the stock market reaction to the Tax Reform Act (TRA) of 1986. A prediction model of the change in the profitability index for thirty‐three industry groups as a result of the TRA is developed. This prediction model is then tested by examining abnormal industry returns surrounding the announcement of the TRA. The authors find that the distribution of the abnormal returns is related to the distribution of the predicted changes in industry equity investment returns, which suggests that the stock market was efficient in the pricing of news related to the TRA of 1986.
Shareholder Wealth Responses to Bankruptcy Filing Announcements under the Chandler and Reform Acts
Authors: Rimbey James N. , Anderson Seth C. , Born Jeffery A.
Published: March 2005

This paper examines shareholder wealth responses to bankruptcy filing announcements between 1974 and 1989 to draw inferences about the impact of the adoption of the Bankruptcy Reform Act of 1978. The authors find that post‐Reform Act announcements are associated with more negative pre‐filing and announcement period returns to shareholders. Unlike prior research, this study finds that large firms and NYSE‐listed firms experience more negative returns. It also finds that the market can discriminate between firms that are ultimately worthless and those that may retain some value for shareholders.
The Impact of the Source and Sequence of Information in Primary Equity Offerings
Authors: Bonomo Vittorio A. , Johnson Dana J. , Thompson G. Rodney
Published: March 2005

Empirical studies of the announcement effects of equity offerings have generally defined the event date as the earlier of the SEC registration date or the first mention in the Wall Street Journal (WSJ), the implicit assumption being that the two types of announcements are equally informative. This study examines whether the source of the event announcement might influence a study's results and whether subsequent announcements from other sources elicit a market reaction. Specifically, this paper investigates whether Dow Jones News Wire (DJNW) announcements that differ in timing from either of these information events elicit a market response and, more important, whether impacts from the DJNW announcements alter the validity of the widely used methodology. The results of the paper indicate that, for issues that are not mentioned in the WSJ Index, there is a negative and significant return on the registration date. However, no matter whether the registration occurs before or after its mention on the DJNW, the share price reaction is greater from mention on the DJNW than at registration. This finding leads to the conclusion that the DJNW should be used as the event date and that press coverage
The 1985 Ohio S&L Crisis: An Examination of S&L Stockholder Wealth Effects
Authors: Cooperman Elizabeth S. , Wolfe Glenn A. , Verbrugge James A. , Lee Winson B.
Published: March 2005

This paper examines the savings and loan (S&L) equity market reaction to the 1985 Ohio S&L Crisis. In contrast to the expectation of negative abnormal returns associated with contagion, the authors find, during the crisis period, significant positive abnormal returns that are larger for a portfolio of less solvent S&Ls, and a significant decline in systematic risk. The results are consistent with an insurance subsidy hypothesis whereby news of the FSLIC's inadequacy in conjunction with the crisis signaled greater future reluctance by regulators to close large federally‐insured S&Ls.
The Market Reaction to Canceled Equity Offerings
Authors: Jensen Marlin R. H. , Pugh William N.
Published: March 2005

Investors appear to respond to both an investment‐opportunity signal and a valuation signal when an equity offering is announced or canceled. While prices fall in response to equity offers and rise when offers are withdrawn, the price changes are greater for offers used to reduce debt than for offers used for capital expenditures. Consistent with asymmetry theory, offerings and withdrawals of convertible debt and utility stock cause less price change when compared to industrial stock offers. Finally, the reaction to cancellations made because of market conditions, indicating undervaluation, are similar to the reaction to cancellations made for other reasons.
Announcement and Publication Decisions and the Use of Prediction Errors in Cross‐Sectional Analysis: Evidence on Seasoned Equity Issues
Authors: Griggs Frank T. , Kim Dong Man , Smith Richard L.
Published: March 2005

An important concern for empirical analysis of market responses to public releases of information is whether the voluntary nature of announcement and publication decisions imparts a selectivity bias and, if so, how this bias affects empirical results. Using a database of SEC filings of equity issues, all related Wall Street Journal published announcements are identified. The published announcements are used to classify proposed issues into subsamples with homogeneous information structures. Announcement and WSJ publication decisions are found to be non‐random but, for industrial firms, not significantly related to firm size or exchange listing. Coefficients estimated without controlling for selectivity are found not to be significantly biased for either industrial or utility issues. However, for industrial issues, significance levels are considerably lower when selectivity bias is controlled. The hypothesis common to other studies of new issue announcement effects that observations from different information structures can be pooled, with coefficient estimates restricted to be equal across information structures, is rejected. The results have implications for the methods used to study cross‐sectional market responses
An Empirical Examination of the Ex Ante International Interest Rate Transmission
Authors: Fung Hung‐Gay , Lo Wai‐Chung
Published: March 2005

Using U.S. Treasury bill and Eurodollar futures to proxy for domestic and external interest rates, respectively, this study examines ex ante interest rate transmission across markets for the period 1982‐1991. The results indicate that these interest rates are cointegrated and that they Granger‐cause each other, implying that both domestic and offshore interest rates move together and that both markets are integrated. Interest rate transmission is found to be more rapid in recent years, a result supporting the idea that the international financial markets are becoming more integrated.
Information Asymmetry and Valuation Effects of Debt Financing
Authors: Alam Pervaiz , Walton Karen Schuele
Published: March 2005

This study demonstrates that under conditions of information asymmetry, shareholders earn positive returns around the shelf registration date of straight debt. The results provide evidence to support Miller and Rock's conclusion that new expected financing by firms can result in positive returns to shareholders and Blazenko's contention that positive returns around the announcement date of straight debt issuance may be found by studying firms with asymmetric information. Firms with reported research and development expenses are assumed to have a higher level of asymmetric information and a greater chance of requiring new outside financing. Research and development expense intensity and abnormal earnings in future periods are found to be significant in a cross‐sectional regression explaining abnormal returns for days surrounding the announcement period.
Executive Compensation and Agency Effects
Authors: Goldberg Lawrence G. , Idson Todd L.
Published: March 2005

The separation of ownership from control in large corporations can cause agency problems. This study analyzes the effects of the dispersion of corporate ownership on the compensation of the top executives of Fortune 500 companies. The effects are estimated across the executive hierarchy and for different components of the compensation package in contrast to more limited previous studies. The results indicate that there is a significant agency effect on executive pay, though the magnitude is small relative to company size. The effects are greatest for the most liquid form of remuneration, salaries, and are nonuniform across executive categories, with the strongest effect found for the Chairman of the Board.
A Test of Stulz's Overinvestment Hypothesis
Authors: Klock Mark , Thies Clifford F.
Published: March 2005

In a world with agency costs and asymmetric information, managers will have difficulty raising external funds since they have incentives to overinvest. Stulz argues that this leads to an optimal level of debt since this is one way to bond cash flows and reduce managerial discretion. However, unexpected cash flows cannot be so easily bonded. Thus, an implication of the Stulz hypothesis is that investment will be affected more by unexpected cash flows. Additionally, Stulz's hypothesis is most compelling for firms with low q ratios. Support is found for Stulz's hypothesis, and the support is strongest for low q firms.
Rational Expectations and Security Analysts' Earnings Forecasts
Authors: Ackert Lucy F. , Hunter William C.
Published: March 2005

This paper investigates the rationality of security analysts' forecasts. The forecasts of analysts participating in Lynch, Jones, and Ryan's Institutional Brokers Estimate System (I/BE/S) data base are evaluated relative to past values of their own forecast errors, past values of forecasted earnings per share, and quarterly percentage changes in publicly available macroeconomic and financial time series. The publicly available series include the consumer price index, unemployment rate, oil prices, stock prices, gross national product, and corporate profits. The authors conduct a generalized orthogonality test and include only information available to analysts at the time the forecasts are made. The empirical results reject analyst forecast rationality, but not without exception.
The Relationship between Bankruptcy Model Predictions and Stock Market Perceptions of Bankruptcy
Authors: Dugan Michael T. , Forsyth Timothy B.
Published: March 2005

This study uses a cumulative sum technique to determine the point at which the stock market first perceives that a firm may file for bankruptcy. The study then attempts to identify information, whether from financial statements or from other sources, that may have influenced the market in its reassessment of the firm's prospects. The results indicate that the switching point of the mean and variance of stock returns appears to be related both to financial statement information (as measured by changes in bankruptcy model probability assessments) and the release of unfavorable news in the Wall Street Journal.
Stock Price Reactions to Securities Recommended in Business Week's “Inside Wall Street”
Authors: Mathur Ike , Waheed Amjad
Published: March 2005

The price behavior of stocks of firms that were favorably mentioned in the “Inside Wall Street” column in Business Week are studied. These firms have been the subject of rumors or have been recommended by analysts or brokerage houses and, therefore, their mention in Business Week constitutes dissemination of secondary information. Positive, significant excess returns are observed the day prior to the publication date, the publication date, and the two days after publication. Positive, significant excess returns are observed for long‐term holding periods prior to the publication date, while negative, significant excess returns are observed for the post‐publication holding periods. The observations appear to be consistent with the price performance of firms that might have been subject of either rumors or recent recom‐mendations by analysts or brokerage houses. The results suggest that secondary information is of value only to low transaction cost, short‐term traders. Investors who buy for the longer term based on secondary information generally receive below market rates of return.
Option Valuation with Information Costs: Theory and Tests
Authors: Bellalah Mondher , Jacquillat Bertrand
Published: March 2005

In this paper, the valuation of stock and index options is analyzed in the context of Merton's model of capital market equilibrium with incomplete information. It is possible to derive a partial differential equation for options in such a context. The derivation gives more understanding of the way an option's future payoff is discounted to the present. In order to estimate some of its parameters, the model is calibrated to market prices. It is tested using market prices and the authors' valuation formula. It is found that model prices are not significantly different from market prices, especially when out‐of‐the‐money and deep‐in‐the‐money options are considered.

The model gives an explanation to the “strike bias” and the “smile effect.” Simulations of models based respectively on stochastic volatilities and gamma processes, are in accordance with the findings in this paper concerning biases in the Black and Scholes model, especially for pricing deep‐in‐the‐money and out‐of‐the‐money options. Even if the estimation method has its drawbacks, the costs of gathering and processing information regarding the option and its underlying asset play a central role in explaining the biases observed in the Black and Scholes model and help also the understanding of the U‐shaped curve known as the smile of volatilities.
A Comparison of the Power of Parametric and Nonparametric Tests of Location Shift for Event Studies
Authors: Chandra Ramesh , Rohrbach Kermit , Willinger G. Lee
Published: March 2005

This paper distinguishes between testing approach (parametric t, sign, cross‐sectional rank, and longitudinal rank) and test type (conventional, standardized, and weighted least squares). Similar tests (i.e., tests of the same type) are compared for each testing approach using constant and unequal shift models. Thus the results given here are free of confounding effects present in prior comparisons of dissimilar tests. While all the tests compared are sensitive to the underlying location shift model, if the shift is independent of the security standard deviation, then the weighted least squares longitudinal rank test is most. powerful.
Examination of the Equivalent Relationship between the Two Credit Policy Decision Approaches: The Opportunity Cost and NPV Approaches
Authors: Kim Sang‐Hoon , Feist William R.
Published: March 2005

The net benefits resulting from credit policy decisions can be evaluated based on either the opportunity cost approach or the net present value (NPV) approach. It is known that the two approaches are equivalent in that they provide the same accept/reject decision. Consequently, most text books cover the opportunity cost approach which is much simpler to formulate. This paper reexamines the equivalent relationship based on the NPV models formulated under a capital budgeting framework, and shows that the equivalent relationship only holds for very restrictive conditions. Also, the discount rate for the NPV models is examined along with other models.
Bond Yields, Taxes, and the Dimensions of Default Risk
Authors: Skinner Frank S.
Published: March 2005

This work develops and empirically estimates models of bond yields subject to default risk. Parameters for the probability of survival and the recovery rate subsequent to default are included in a model of corporate bond yields that allow a study of interactions among them. The municipal version of the model includes the tax rate as an additional factor. Empirical evidence is found that supports the notion that both dimensions of default, considered jointly, are related to bond quality. In addition, statistically significant differences in tax rates suggest that higher tax rates are associated with higher grade municipal bonds.
Convertible Bond Issues: Evidence from Security Markets
Authors: Mehta Dileep R. , Khan A. Qayyum
Published: March 2005

A convertible bond (CB) is a hybrid security containing elements of both common stock and straight debt. Still, empirical investigations on CB issue announcements have failed to discern any pattern in the stock market reaction that is consistent with announcements of either common equity or straight debt issues. This study shows that (a) motives for issuing the CB and (b) its rating (and to a less extent the riskiness of the issuing firm) help explain the stock market reaction to CB issue announcements. Specifically, announcement of a CB issue with an explicitly stated motive for the use of proceeds, when coupled with a high (low) bond rating, generates a stock market response similar to a straight debt (common stock) issue. On the other hand, the preference of CB holders is dictated by the motive for the use of proceeds and the conversion premium. These findings highlight the critical importance of the motive of issue in determining reactions in both the stock and bond markets.
The Impact of Warrants and Convertible Securities on the Systematic Risk of Common Equity
Authors: Ehrhardt Michael C. , Shrieves Ronald E.
Published: March 2005

This paper addresses the relationship between the capital structure and the systematic risk of common equity for a firm whose capital structure includes convertible securities. Adding warrants to the capital structure reduces the systematic risk of equity, which is consistent with the fact that warrants dampen the volatility of equity by reducing the upside potential gains of existing stockholders. Expressions showing the impact of conversion features in debt and preferred stock on the systematic risk of equity are derived, and contrasted with the systematic risk effects of non‐convertible debt or non‐convertible preferred stock financing. Failure to incorporate conversion features may lead to serious errors in assessing the impact of financing alternatives on the risk of equity.
Tender Offers and Target Management Responses: Managerial Entrenchment Versus Stockholder Interest Revisited
Authors: Thosar Satish
Published: March 2005

Defensive actions by managements facing hostile tender offers have generally been interpreted as entrenchment‐oriented behavior. In this paper, longitudinal wealth effects on target firm stockholders are examined for the 1978–1985 period. The sample of firms where target management resists the tender offer registers significantly higher post‐tender offer announcement gains as compared to the sample of firms where target management remains passive. The evidence appears to support the stockholder interest hypothesis.
Determinants of Managerial Stock Ownership: The Case of CEOs
Authors: Bathala Chenchuramaiah T.
Published: March 2005

Research on the determinants of managerial equity ownership in firms is scant. To a limited extent, prior researchers have examined the variations in insider ownership proportions by combining the officers and directors into one group. This paper differs from earlier studies by focusing on the CEO. The evidence suggests that agency costs, free cash flow, and potential non‐diversification losses and CEO attributes are important in explaining variations in CEOs' equity proportions in firms. Specifically, the paper finds that the proportion of CEO's ownership is related positively to the firm's debt level, diversification potential of the firm's common stock, free cash flows, and earnings volatility, and related negatively to the firm size.
Macrofactor Conditional Volatilities, Time‐Varying Risk Premia and Stock Return Behavior
Authors: Koutoulas George , Kryzanowski Lawrence
Published: March 2005

An Arbitrage Pricing Model is estimated in which the risk premia vary in proportion to the conditional volatilities of the macroeconomic innovations which follow an autoregressive specification. The conditional volatilities of the macroeconomic innovations exhibit strong timevariation from month to month. For size‐ranked portfolios of all the shares traded on the Toronto Stock Exchange over the period from March 1962 through March 1988, five macrofactors (namely, the lag of industrial production, the Canadian index of 10 leading indicators, the U.S. composite index of 12 leading indicators, the exchange rate and the residual market factor) have time‐varying and priced risk premia. The small‐firm effect is absent in the risk‐adjusted returns, and a significant portion of the observed January seasonality is explained by the model with time‐varying risk premia.
Corporate Investment and Dividend Tax Imputation
Authors: Boyle Glenn W.
Published: March 2005

The capital investment/dividend decision of the firm is analyzed under alternative assumptions about the system of dividend taxation. Relative to the classical system, imputation can yield (1) more disagreement amongst shareholders as regards the optimal investment plan, (2) less capital investment on aggregate and (3) fewer gains from mergers. Moreover, in contrast to the classical system, shareholders with high marginal tax rates can be more disadvantaged by dividend deferral than shareholders with low marginal tax rates.