bluuebunny/crossref_metadata_2025 huggingface dataset:
Covariance Stationarity of International Equity Markets Returns: Recent Evidence
Authors: Wahab Mahmoud , Lashgari Malek
Published: March 2005

Intertemporal stationarity tests of the variance‐covariance matrix of monthly returns on seven international equity indices are conducted over the most recent period. Pairwise covariances are then decomposed into their component statistics for further examination of the source(s) of stationarity or nonstationarity. Historical analysis reveals that pairwise covariances were invariably highly nonstationary over forecast intervals that varied in length between one month and five years. Reliance on historical covariances to estimate future covariances over a hold‐out sample produced suboptimal results in comparison to an alternative naive forecasting model. These findings were robust in that they were invariant to whether nominal or real returns were used. Evidence on the intertemporal stationarity of the vector of mean returns is also provided.
Underwriter Reputation and Initial Public Offers: The Detrimental Effects of Flippers
Authors: Carter Richard B. , Dark Frederick H.
Published: March 2005

In this research, we examine the relationship between the reputation of investment banks and the investor clientele to whom they market initial public offers. We hypothesize that the most reputable investment banks have considerable distribution power but confine initial public offer sales to investors with long‐term horizons in an effort to maintain prestige. Using the level of relative after‐market trading volume to proxy for investor type, we find that as underwriter reputation increases investors with short‐term trading horizons (“flippers”) tend to dominate the offerings over the lower prestige levels. For underwriters in the upper reputation tier, however, this dominance begins to decline with increasing reputation. In addition, we find a negative relation between the after‐market price performance of the initial public offer firm and the first week's trading volume. The results suggest that flippers can be detrimental to the performance of initial public offer firms. While distributing power may be essential for the maintenance of the reputation of investment banks, the type of investor clientele also appears to be of major importance.
Dividend Yields and Stock Returns: Evidence of Time Variation between Bull and Bear Markets
Authors: Gombola Michael J. , Liu Feng‐Ying L.
Published: March 2005

This study documents persistent shifts in the relationship between stock returns and dividend yields over bull and bear markets. The shift in this relationship appears as a separate effect, distinct from the January effect, and after controlling for firm size and systematic risk. After controlling for these other factors, dividend yield is positively related to return during bear markets but negatively related to return during bull markets. This time‐varying relationship between dividend yield and stock return helps to explain the anomalous results of earlier studies.
Stock Market Reactions to SFAS No. 96: Evidence from Early Bank Adopters
Authors: Lee Insup , Stiner Frederic M.
Published: March 2005

Statement of Financial Accounting Standards (SFAS) No. 96, “Accounting for Income Taxes,” issued by the Financial Accounting Standards Board (FASB) in December 1987 changed accounting for income tax recognition and accrual. The original deadline for implementation of SFAS No. 96 was December 15, 1988, and earlier adoption was encouraged. This study examines empirically the stock price impact of four pertinent announcement dates regarding SFAS No. 96 for 19 banks that adopted the statement in late 1987 and early 1988. Our results suggest that these early bank adopters have different characteristics from other banks that cause them to benefit from the changes in accounting for deferred taxes and explain their voluntary adoption of the standard.
Impact of Acquisitions on Thrift Performance
Authors: Pantalone Coleen C. , Platt Marjorie B.
Published: March 2005

This study focuses on the risk and return performance of savings and loans that were active acquirers during the early and mid‐eighties relative to that of non‐acquirers. Acquirers took on more risks than nonacquirers, but were less profitable. Separating acquirers by the health of their acquisitions, acquirers of both healthy and troubled associations or of troubled associations only were more highly leveraged and saw their profitability erode over the post‐acquisition period. These results suggest that the problems of integration are compounded when there are multiple acquisitions over a relatively short period of time and when the acquired association is unhealthy.
Determinants of Corporate Dividend Policy: A Factorial Analysis
Authors: Alli Kasim L. , Khan A. Qayyum , Ramirez Gabriel G.
Published: March 2005

This paper re‐examines the dividend policy issue by conducting a simultaneous test of the alternative explanations of corporate payout policy using a two‐step procedure that involves factor analysis and multiple regression. Several new proxies for theoretical attributes that have appeared in the literature are introduced, including the role of managerial dimensions in determining dividend policy. Strong support is found for the transaction cost/residual theory of dividends. pecking order argument, and the role of dividends in mitigating agency problems. Strong support is also found for the role of managerial consideration in affecting the firm's payout policy; specifically, firms that maintain stable dividend policies and firms that enjoy financial flexibility pay higher dividends. The results appear to support the tax clientele argument.
Corporate Leverage and Nondebt Tax Shields: Evidence on Crowding‐Out
Authors: Downs Thomas W.
Published: March 2005

A negative relationship between corporate leverage and tax shields has been predicted because a large nondebt tax shield reduces the expected value of interest tax savings and lessens the advantage of debt financing. Previous studies, however, have provided inconclusive and contradictory evidence on whether nondebt tax shields crowd‐out debt financing. The analysis herein relies on unique constructs of discounted depreciation tax shields and presents evidence that crowding‐out does not occur. Furthermore, it is shown that contradictory inferences may result from analysis of annual tax depreciation deductions instead of discounted tax shields. The findings suggest that firms with substantial cash flow from depreciation exploit their higher debt capacity by maintaining a capital structure with significantly more debt than otherwise.
Dividend Announcements and Changes in Beta
Authors: Carroll Carolyn , Sears R. Stephen
Published: March 2005

This study examines changes in beta risk around dividend announcement dates. The evidence shows that beta changes are strongly influenced by the changing behavior of large and small betas. This implies that researchers who attribute risk changes to specific announcements may need to control their research design for regression order bias. Further research may also be needed to ascertain whether or not this regression order bias plays a significant role in the estimation of abnormal returns in event studies.
The Valuation of Stock Purchase Rights as Call Options
Authors: Bae Sung C. , Levy Haim
Published: March 2005

The predictability of rights valuation models is tested, viewing the rights as call options. The results show that rights valuation models, on average, overprice the rights. The bias in the model prices of rights found in this paper is opposite to that predicted by Merton. Among several factors considered, possible volatility changes associated with raising capital through a rights offering account for some of the observed pricing deviation. A further regression analysis shows that while the pricing deviation is positively related to both the degree that the rights are in the money and the allocation ratio, it is negatively related to the time to expiration and the daily trading volume of the rights.
The Linkages between Dividends and Earnings
Authors: Olson Gerard T. , McCann P. Douglas
Published: March 2005

The purpose of this paper is to empirically test the linkages between dividends and earnings. Using the Granger test of statistical causality, it is found that some firms use dividends for signaling, some follow a residual policy, and some firms simultaneously signal and follow a residual policy. Segmenting firms according to dividend policy, the results indicate that firms that follow a residual or signaling dividend policy tend to have a higher growth in asset turnover, but a lower growth in revenues. Signaling firms also tend to be smaller, have higher variability in revenues, and use less debt throught time.
Common Stock Returns in Corporate Takeover Bids: The Case of Brokerage House Acquisitions
Authors: Davidson Wallace N. , Hatfield Gay , Glascock John L.
Published: March 2005

This paper examines the common stock returns of three groups of bidders that purchased brokerage houses. Only in the cases of horizontal mergers, one brokerage house purchasing another, are there abnormal returns associated with the purchase. Neither bank holding company bidders nor non‐financial bidders gain significantly when purchasing a brokerage house. Bank holding company bidders face considerable regulatory delays, and these economic disturbances may eliminate their gains. Bank holding company expansion into these non‐bank activities does not appear, at the time of announcement, to either hurt or benefit them; hence, this expansion does not appear to further the loss exposure of the Federal Deposit Insurance Corporation.
Regulatory Climate and Electric Utility Capital Structure Decisions
Authors: Rao Ramesh , Moyer R. Charles
Published: March 2005

A theoretical model of the role of regulatory climate in the capital structure decisions of regulated electric utilities is developed that indicates managers can mitigate the consequences of unfavorable regulation by increasing the proportion of debt in the capital structure. The increase in leverage is limited by increased bankruptcy risk with higher levels of debt. The model predicts that utilities will react to their regulatory climate by adjusting capital structure. This behavior may be an undesirable consequence of the regulatory process. Empirical support for the model, both cross sectional and over time, is provided.
The Stochastic Properties of Major Canadian Exchange Rates
Authors: Theodossiou Panayiotis
Published: March 2005

This paper extends the results of Akgiray and Booth [2] on the stochastic properties of five major Canadian exchange rates using the EGARCH‐M model along with the generalized error distribution (GED). In addition to the issue of first‐ and second‐order dependencies, explored by the authors, the paper (1) addresses the issue of asymmetric volatility, (2) examines the extent to which volatility affects future movements in these exchange rates, (3) measures the amount of kurtosis in the data, and (4) investigates the transmission mechanism of innovations and volatility shocks across the five Canadian exchange rate markets. The five Canadian dollar exchange rates are for the U.S. dollar, the Japanese yen, the British pound, the German mark, and the French franc. Changes in Canadian exchange rates are conditionally heteroskedastic, a finding which is in line with that of Akgiray and Booth [2]. There is no evidence supporting the assertion that volatility triggers such changes. The hypothesis of asymmetric volatility is rejected for all Canadian exchange rates; thus unexpected appreciations and depreciations of the Canadian currency have similar impact on future volatility of these exchange rates. Innovations in the Canadian exchange rate markets for the U.S. dollar, the British pound, and French franc influence the Japanese yen market, while innovations in the markets of the British pound and German mark influence the French franc market. Significant but negative volatility spillovers radiate from the German mark market to the U.S. dollar market and from the French franc market to the German mark market, resulting in lower levels of volatility in both the U.S. and German markets. The distributions of all five series of Canadian exchange rates are highly leptokurtic relative to the normal distribution. The GED distribution provides a good characterization of these distributions.
Bank Holding Company Acquisition Activity: Evidence From Pre‐ and Post‐Deregulation Periods
Authors: Holdren Don P. , Bowers Helen M. , Mason W. Joe
Published: March 2005

Both acquisition activity and deregulation have had an impact upon share price and performance of commercial bank holding companies. The purpose of this study is twofold: First, to discern the effects of acquisition activity from the effects of the passage of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) and Garn‐St Germain Depository Institutions Act of 1982 (GSG) on balance sheet composition of bank holding companies; and second, to examine the effects of deregulation on returns to shareholders of acquiring bank holding companies. This study finds that commercial bank holding companies involved in acquisitions experience significant changes in their balance sheet composition, not as a result of acquisition activity, but as a result of deregulation. Additionally, bank holding companies that announced acquisitions prior to the effective date of deregulation earned abnormal returns that were significantly negative, whereas holding companies announcing acquisitions after enactment of deregulation earned returns that were not significantly different from zero. Also, the abnormal returns found in previous studies of bank acquisitions may be biased upward because of increases in systematic risk associated with the passage of DIDMCA and GSG.
Voting Rights and Market Reaction to Dual Class Common Stock Issues
Authors: Shum Connie M. , Davidson Wallace N. , Glascock John L.
Published: March 2005

This paper examines the return of the original class of common stock around the announcement of the creation of a second class of stock. As in previous studies, this one finds a generally ambiguous market reaction on the first public announcement. However, this paper offers new evidence that both the voting rights and the compensation for loss of voting rights are important determinants of the market's reaction. Specifically, it demonstrates that a second class stock issue that contains no compensation for the lost voting rights results in negative returns. When the original stockholders are compensated for lost voting rights, they experience positive abnormal returns.
Capital Structure Determinants in Real Estate Limited Partnerships
Authors: Allen Marcus T.
Published: March 2005

This paper models the capital structure decision facing partnerships and tests the implications using panel‐data regression analysis for a sample of real estate limited partnerships. The model shows that if an optimal capital structure exists for non‐taxed firms, it is a function of personal tax effects, costs of financial distress, and substitute tax shields. The empirical tests indicate a positive relationship between leverage and the proportion of real estate assets held, and a negative relationship between leverage and both growth rates and non‐debt tax shields. Furthermore, the findings suggest that changes resulting from the Tax Reform Act of 1986 are positively related to partnership leverage.
Refining the Degree of Earnings Surprise: A Comparison of Statistical and Analysts' Forecasts
Authors: Alexander John C.
Published: March 2005

This paper compares the relative predictive ability of several statistical models with analysts' forecasts. It is one of the first attempts to forecast quarterly earnings using an autoregressive conditional heteroskedasticity (ARCH) model. ARCH and autoregressive integrated moving average models are found to be superior statistical forecasting alternatives. The most accurate forecasts overall are provided by analysts. Analysts have both a contemporaneous and timing advantage over statistical models. When the sample is screened on those firms that have the largest structural change in the earnings process, the forecast accuracy of the best statistical models is similar to analysts' predictions.
Analysts' Forecasts: Low‐Balling, Market Efficiency, and Insider Trading
Authors: Guo Enyang , Sen Nilanjan , Shome Dilip K.
Published: March 2005

The phenomenon of low‐balling reported in the financial press involves downward biased projections of earnings by managers or analysts, thereby artificially lowering market expectations and creating a positive earnings surprise when actual earnings are announced. This study reports that the stock market does respond to such surprises relative to analysts' reported forecasts. Further, the proportion of insider buy‐transactions in the period prior to the earnings forecast is significantly higher for the sample with high positive earnings surprise than for the control sample with zero forecast errors. The study cannot distinguish whether managers or analysts are the source of the low‐balling and therefore makes no statement on the legality of such insider trades.
Market Microstructure Empirical Regularities: Behavior of the Bid‐Ask Spread and Closing Prices
Authors: Branch Ben , Echevarria David P.
Published: March 2005

A substantial number of last reported transactions for stocks trading on the New York Stock Exchange occur inside the quoted closing bid‐ask spread. The tendency to close inside the spread results in price change magnitudes much smaller than those predicted from binomial models. Moreover, although the change magnitude is biased by the underlying trend of the market, the distribution of next day price change relatives is largely unaffected. The result is a systematic regularity between the location of today's close and tomorrow's close relative to the bid‐ask spread.
A Spectral Analysis of Transactions Stock Market Data
Authors: McCullough B. D.
Published: March 2005

Several studies have used spectral analysis to analyze stock market data and conclude that the spectrum of price changes is “white noise” or very nearly so. This paper argues that such results are an artifact of improperly analyzing the data. For a random sample of twenty stocks from the NYSE, it is shown that stock price changes are not even approximately white noise, and the spectra of individual stocks vary substantially. Additionally, cross spectral analysis reveals marked differences between the interaction of price change and volume, and contradicts “stylized facts” from time domain analyses of the price‐volume relation.
Further Evidence of Unsatisfied Clienteles in International Capital Financing
Authors: Pettway Richard H. , Kaneko Takashi , Young Michael T.
Published: March 2005

Numerous studies find that shareholders do not gain from the security sales. This study documents a significant exception, new capital offerings by Japanese banks. Market reactions to these sales are significantly positive; however, these issues have two unusual features. First, new convertible bonds and equity shares are simultane‐ously offered. Second, the issues are often denominated in multiple currencies and sold in multiple countries. Tests indicate that the multiple markets/multiple currency feature is strongly related to abnormal performance. These findings are consistent with an unsatisfied clientele in international security sales of creditworthy firms.
A Test for Increased Capital Market Integration
Authors: Alford Alan , Folks William R.
Published: March 2005

This study examines the pricing of assets under differential ownership restrictions. A model is developed which yields a coefficient of integration that is dimension free and is directly related to the strength of all barriers to international investment. These characteristics enable an intertemporal comparison of the level of capital market integration. The model is then used to test the hypothesis of increased capital market integration over time. Using data from Morgan Stanley Capital International and analyzing them with the non‐parametric Page test, support is found for this hypothesis. The results are robust to the currency numeraire used.
CEO Influence and Executive Compensation
Authors: Sridharan Uma V.
Published: March 2005

The sales‐maximization hypothesis and the shareholder wealth‐maximization hypothesis have been suggested in prior finance literature to explain the determinants of CEO pay. This paper proposes that CEO influence over the board is an additional explanation for the size of CEO pay. Evidence from the 1989–1991 period indicates that CEO pay is positively related to measures of CEO influence over the board. Results of this study suggest that CEO salary levels are mostly a function of CEO influence over the board, the growth in sales and the size of the firm.
The Effect of Commercial Paper Rating Changes and Credit‐Watch Placement on Common Stock Prices
Authors: Elayan Fayez A. , Maris Brian A. , Young Philip J.
Published: March 2005

The common stock price response to the announcement by Standard and Poor of CreditWatch placement and commercial paper reratings is examined. Results indicate a negative stock price response to negative placements on the CreditWatch list and to commercial paper rating reductions. A cross‐sectional model is estimated to identify firm characteristics associated with the stock market response.
On “q”
Authors: Howe Keith M. , Vogt Stephen
Published: March 2005

The introduction of Tobin's q‐ratio in the literature has prompted noteworthy advances in economic model‐building and empirical analysis. A major shortcoming has been the lack of a convincing measure of marginal q. Herein an alternative approach for measuring marginal q is presented, one based on an event study of capital expenditure announcements. The measures of marginal q are shown to yield reasonable and consistent estimates. The marginal q variables perform well against the hypothesized relationships developed from q theory. A key result is that classifying firms according to their average q measures as a proxy for marginal q is likely to lead to misclassification problems.
Market Dependence and Economic Events
Authors: Nawrocki David N.
Published: March 2005

Recent studies on stock market pricing have rejected the random walk model for short‐term periods and have concentrated on long‐term persistent or mean‐reverting dependence. The problem with these studies is that their statistical results can be biased by the shorter term dependence. Rather than trying to develop a unified theory that explains both short‐ and long‐term dependence, current studies use different methodologies to correct for the short‐term dependence while trying to test for long‐term dependence. This paper uses a sequential information theory to focus attention on short‐term dependence effects. This theory states that the market process is a nonstationary mean process surrounded by a nonstationary autocovariance error process. A nonstationary mean process implies short‐term dependence resulting from changing economic events (new information). Long‐term persistent dependence then derives from nonperiodic economic cycles. A new empirical approach, a cross‐sectional autocorrelation coefficient is used since it is free from the stationarity problems of previous techniques.
In‐the‐Money Warrant Extensions
Authors: Howe John S.
Published: March 2005

This paper examines the warrant price and stock price reactions to the extension of the expiration date of in‐the‐money warrants. The warrant prices increase significantly in response to the announcement, consistent with option pricing theory. Shareholders experience no significant abnormal returns at the announcement, contrary to the conjecture that an extension will transfer wealth from shareholders. There is support for the idea that firms extend warrant life because the existing assets' cash flow obviates the need for additional financing. The data show that both the stocks and the warrants perform poorly in the month following the extension announcement.
A Test of the Conditional CAPM with Simultaneous Estimation of the First and Second Conditional Moments
Authors: Ellis David M.
Published: March 2005

Recent studies of the conditional Capital Asset Pricing Model (CAPM) are extended by modeling the first and second conditional moments separately, but estimating them jointly, allowing the isolation of time‐varying influences in the different moments. Results support evidence that both conditional moments and conditional risk parameters are time varying, and help shed light on previous rejections of the conditional CAPM. The GMM test of the over‐identifying restrictions fails to reject the null that the CAPM holds through time when a non‐linear specification is used, and only weakly rejects the null with a linear specification.
The Relationship Between Stock and Option Price Changes
Authors: Diltz J. David , Kim Suhkyong
Published: March 2005

This paper documents an important step in reconciling conflicting results by Manaster and Rendleman [16] and Stephan and Whaley [21] regarding price change relationships between options and their underlying stocks. Using recent advances in bi‐directional causality testing and data sources available only fairly recently, statistical tests are conducted that mitigate the nonsynchroneity and bid‐ask bias problems that may have affected the Manaster and Rendleman [16] study. Even with these adjustments, empirical results are consistent with Manaster and Rendleman [16], indicating that stock price changes adjust to lagged option price changes over two trading days. Moreover, results suggest that the causality is bi‐directional.
Risk Premia in Foreign Currency Futures: A Reexamination
Authors: Tse Yiuman , Booth G. Geoffrey
Published: March 2005

This paper reexamines the significant autocorrelation results of foreign currency futures reported by Liu and He [12] in this journal. It argues that extremely thin trading early in the life of individual futures contracts induces unreliable results in [12]. Moreover, the Monte Carlo results clarify the power performance between Lo and MacKinlay's [13] variance ratio tests and Diebold's [3] Q‐statistics; both tests are used by Liu and He.
The Factors Behind Put‐Call Parity Violations of S&P 100 Index Options
Authors: Wagner Drew , Ellis David M. , Dubofsky David A.
Published: March 2005

This paper examines the determinants of intraday violations of put‐call parity of S&P 100 Index options. In particular, tobit regression analysis is used to explain the fraction of daily observations that are apparently mispriced. Compared to a previous study, a much smaller fraction (21 percent) is found of option pairs that violate parity. Dividends are found to be significant, but inversely related to the frequency of violations. The other significant explanatory variable is the options' time to expiration. When the upper bound is violated, the coefficient is positive; i.e., calls are overpriced relative to puts more often for longer term options. The coefficient for the time to expiration is significantly negative for lower bound violations.
Further Evidence on Foreign Exchange Market Efficiency: An Application of Cointegration Tests
Authors: Lajaunie John P. , McManis Bruce L. , Naka Atsuyuki
Published: March 2005

This study extends and expands the body of evidence related to foreign exchange market efficiency by employing the single‐equation cointegration test proposed by Phillips and Ouliaris [19], and the Johansen [12] 1991 Full Information Maximum Likelihood procedure for a system of equations. Through the use of these updated techniques and a global data set, the authors are able to more carefully test for the presence of cointegrating relationships and examine the consistency of the results in three trading locations. The results are quite consistent across locations and are highly supportive of efficiency in the global foreign exchange market.
Ex Ante Stock Market Return Volatility Implied by the OEX Option Premium
Authors: Weber Carlene E.
Published: March 2005

Previous empirical evidence suggests that stock return volatility expectations change over time, but the existing models of time‐varying variance lack a theoretical structure that is rigorously linked to the efficient markets dividend discount model. This paper develops and tests such a model. The conditional forecast variance of the return on the stock market portfolio is expressed as a linear combination of the adjusted conditional forecast variance of the interest rate and the dividend growth rate. An empirical test using the implied variance of the S&P 100 index option provides evidence that supports the model's predictions.
An Examination of the Short‐Term and Long‐Term Behavior of Foreign Exchange Rates
Authors: Pan Ming‐Shiun , Liu Y. Angela , Bastin Hamid
Published: March 2005

This study employs the heteroskedasticity‐robust variance ratio test and the modified rescaled range analysis to examine the short‐term and long‐term behavior of foreign exchange rates. The empirical results suggest that four of the five weekly nominal exchange rates examined exhibit short‐term dependence. Further, there is evidence of long‐term dependence in the nominal exchange rate series. The results also indicate that the real exchange rates generally exhibit short‐term independence, and the lack of strong evidence in favor of long‐term dependence in real exchange rates indicates that the purchasing power parity may not hold in the long run.
Convertible Debt Issuance and Market Completeness
Authors: Broughton John B. , Smith David M.
Published: March 2005

Recent empirical evidence on option listings supports the notion that equity options help to span the market. This paper investigates the role of convertible debt in market completion. To the extent that the warrant portion of convertible instruments is similar to a call option, the securities can provide payoffs in states of nature that were previously unspanned. Stockholders of firms without listed options or pre‐existing warrant‐related securities suffer less severe wealth declines around convertible offerings than do owners of firms with contingent claims on their stock. The results suggest that, particularly before the rise of options on index futures, convertible debt played a market‐spanning role similar to that of equity options.
Effect of Underwriter Prestige on the Interest Cost of Municipal Bond Offerings
Authors: Roden Peyton Foster , Bassler John
Published: March 2005

The authors use tombstones from Investment Dealers' Digest to develop continuous and bracket prestige measures of underwriters in the municipal bond market. The measures are used in multivariate analysis of 409 offerings to examine the relationship between net interest cost to the issuer and prestige of the lead underwriter. Multiple regression analysis reveals that issuers in the sample do not receive statistically significant positive benefits from using prestigious underwriters. The authors note that their results are consistent with segmentation of the market for municipal bonds.
Macroeconomic Forces and Mutual Fund Betas
Authors: Lockwood Larry J.
Published: March 2005

This paper develops and tests a model in which fund betas are linearly related to changes in macroeconomic factors. Tests using monthly returns for 171 mutual funds over 1978–1991 were run. Results indicate that equity funds betas, on average, are negatively related to inflation changes and default risk premia while bond fund betas, on average, are negatively related to changes in risk‐free rates, industrial production growth, and the term structure. Betas for passive portfolios, however, are not related to the macroeconomic factors examined.
Investor Response to Mutual Fund Policy Variables
Authors: Santini Donald L. , Aber Jack W.
Published: March 2005

The effects of investment performance and macro‐economic influences on money flow to individual mutual funds previously have been investigated and found to provide little explanatory power. In this article we investigate an additional category of factors that may logically be thought to affect the flow of money to funds, namely, the fund policy factors over which managers have some degree of control. These are: load/no‐load status, sales commission structures, minimum dollar investment levels, and expenses. We establish associations between these factors and new money flows. Several significant relationships are found. Overall, however, the policy variables we investigated explain little of the variability in new money flows. A competitive equilibrium appears to exist such that no single fund attracts new money at disproportionately high rates through its policies. Our results, like those obtained for performance and macro‐economic variables, highlight the inability of mutual fund research to date to explain adequately the flow of new money to individual funds.
Expected Inflation, Interest Rates, and Stock Returns
Authors: Domian Dale L. , Gilster John E. , Louton David A.
Published: March 2005

This paper documents a long‐lived asymmetrical relationship between interest rate changes and subsequent stock returns. Drops in interest rates are followed by twelve months of excess stock returns, while increases in interest rates have little effect. The results are robust to the choices of short‐term interest rate and stock index. These findings cannot be explained by Geske and Roll's [10] reversed causality argument; nor do they appear to result from periods of unusual interest rates or stock returns. Since interest rate changes are generally used as proxies for changes in expected inflation, the results provide new insights into previous research on inflation and stock returns, and there are important implications for the literature on time‐varying risk premia.
Differences in Information and Common Stock Returns: Estimation Risk or Unequal Distribution of Information?
Authors: Marston Felicia
Published: March 2005

Information can be differential or “incomplete” in two different ways: as a result of the quality of information itself or as a result of the manner in which information is distributed to investors. The effect on capital market equilibrium under either scenario is that higher returns will be required for low information securities. Prior empirical studies documenting a relationship between low information firms and positive abnormal returns have generally attributed such results to the quality of information; the current research tests the possibility that these results are instead due to the manner in which information is distributed to investors.
Voluntary Divestitures and the Choice Between Sell‐Offs and Spin‐Offs
Authors: Khan A. Qayyum , Mehta Dileep R.
Published: March 2005

A voluntary divestiture may either be a sell‐off or a spin‐off. In a sell‐off, the divesting firm receives cash (or cash equivalents) and gives up ownership and control of the divested asset. In a spin‐off, the divested asset becomes an independent entity under a new management but ownership remains with the old stockholders of the original firm. The study investigates the divestiture decision and the choice between sell‐offs and spin‐offs by constructing a model of the multi‐divisional firm. The results show that firms undertake voluntary divestitures because of low marginal return coupled with high joint operating and financial costs. The form of the divestiture is determined by the operating risk of the division being divested. The implications of the model are empirically tested for the period 1969–87 and the results support the postulates of the model.
Day‐of‐the‐Week Effects in the Long‐Run Performance of Initial Public Offerings
Authors: Perfect Steven B. , Peterson David R.
Published: March 2005

This study examines the influence of day‐of‐the‐week patterns in security returns on long‐run IPO underperformance. Comparisons are made between the IPOs in Ritter's [20] database, and a constructed set of matching firms based on SIC code and size, using NYSE, AMEX, and NASDAQ securities. It is found that virtually all of the IPO underperformance occurs on Mondays and Tuesdays and that the degree of underperformance significantly differs from other days. Thus, a common explanation may exist for the general day‐of‐the‐week pattern in security returns and IPO long‐run underperformance.
Ex‐Dividend Returns and the Tax Reform Act of 1986
Authors: Siddiqi Mazhar A.
Published: March 2005

As previously recognized, the Tax Reform Act of 1986 reduced observed ex‐day returns to stocks that do not attract dividend capture trading. However, by decreasing the top corporate tax rate, and decreasing the corporate dividend income deduction, the Act also reduced the return to dividend capture by U.S. corporations. The ex‐day returns for stocks that had previously attracted corporate dividend capture should therefore increase. This prediction is consistent with evidence that ex‐day returns increased after the Act was implemented, among low‐transaction cost, high‐dividend yield stocks and among low‐risk, high‐dividend yield stocks.
Implied Risk Aversion Parameter from Option Prices
Authors: Bartunek Kenneth S. , Chowdhury Mustafa
Published: March 2005

This paper estimates the representative investor's coefficient of relative risk aversion using option price data. Estimation is carried out using the method of simulated moments. Employing the following assumptions: a) agents have constant proportional risk averse preferences, b) complete markets exist, and c) asset returns are distributed lognormally, an objective function is constructed within the equivalent martingale measure framework. Unlike the case of equity markets, the implied risk aversion parameter from option prices is quite low and stays between zero and one.
Unbiasedness of the Forward Exchange Rates
Authors: Bakshi Gurdip S. , Naka Atsuyuki
Published: March 2005

This paper derives an error correction model under the assumption that the spot and the forward rates are cointegrated, the first difference of forward rates is stationary, and the first order autocorrelation in the forecast error is allowed. When tests of the unbiasedness hypothesis are conducted with an error correction model using generalized methods of moments [GMM], the unbiasedness hypothesis cannot be rejected. Furthermore, the multivariate GMM estimation supports the hypothesis of unbiasedness of the forward exchange rates and the absence of a risk premium in the foreign exchange markets.
The Relationship Between Market Efficiency and Insider Ownership in Large and Small Firms
Authors: Dowen Richard J. , Bauman W. Scott
Published: March 2005

The study examines insider ownership in large and small firms in relation to market efficiency. Recent studies have found a positive and significant relation between inside ownership and stock market performance. Such a finding is predicated upon the idea that inside ownership minimizes agency costs caused by the conflict between hired managers and shareholders. It is argued here that semi‐strong form market efficiency requires that all public information, including insider ownership, be quickly impounded into the price of a stock. If that is the case, the expected present value of a change in agency cost should be incorporated into the stock price shortly after any significant change in ownership. Hence, if the estimate is unbiased, the longer‐term performance of firms should not be effected by such changes. The issue is examined for both large, well‐known firms and for smaller, less‐known firms. The hypothesis that markets are generally efficient with respect to insider ownership information is rejected.
Equity‐for‐Debt Exchange Offers: Theory, Practice, and Evidence
Authors: Born Jeffery A. , McWilliams Victoria B.
Published: March 2005

Studies of investor responses to exchange offer (EO) announcements find a positive relation between abnormal returns and the proposed change in leverage: a result consistent with the performance signaling hypothesis. In this study of equity‐for‐debt EO announcements, shareholder wealth declines and the relation between Tobin's Q and announcement effects is consistent with the free cash flow hypothesis. There is no pattern of contemporaneous and subsequent performance of EO firms that systematically supports the signaling, income smoothing, or free cash flow hypotheses. We infer that EOs are motivated by sinking fund considerations, rather than signaling or compensation motives.
Bank Holding Company Risk from 1976–1989 with a Two‐Factor Model
Authors: Maher Matt
Published: March 2005

This paper employs a two‐factor model of security returns to investigate the intertemporal risk of bank holding company stock returns over the 1976–1989 period. Uniquely, the two‐factor model is estimated in separate regressions for each of the fourteen years between 1976 and 1989, thus exposing intertemporal changes in the model coefficients. The results show that bank holding companies have increased in risk over the sample period and also reveal that much of the controversy over the two‐index model stems from the transitory nature of the interest rate coefficient through time, making long time series groupings of data misspecified. The above holds for both short‐term and long‐term interest rates. Interest rates have little impact on bank returns.
Profit Multiplier in Covered Currency Trading with Leverage
Authors: Ghosh Dilip K.
Published: March 2005

Currency trading, fully hedged with forward contracts and propelled by leverage, is enunciated within a microstructure of trade in foreign exchange with real‐time data from Reuters data banks, and verified with banks and exchange dealers, first without and then with transactions costs. It is shown that iterative trading operations compound net profits significantly, and the existing academic maxim on arbitrage is thus raised to a new height—both in terms of theory and practice.
Forward Hedging the Exchange Risks of U.S. Equity Investments in the U.K., Germany and France
Authors: Varela Oscar , Naka Atsuyuki
Published: March 2005

This paper simulates forward hedging of foreign exchange risks for U.S. investments in U.K., German and French equities. Rolling OLS and SUR regressions are used to obtain monthly exposure coefficients (hedge ratios), and the micro‐market mechanics of the exchange rate bid‐ask spread are considered throughout. While the coefficient of variation favors not hedging, no statistically significant differences are found between no hedge and hedge strategies. However, hedging produces a nontrivial incidence of cases where liquidated foreign equity values are less than amounts sold forward. The results, robust to rising and falling dollar sub‐periods, do not support forward hedging.
Insider ownership and signals: evidence from stock split announcement effects
Authors: Han Ki C. , Suk David Y.
Published: March 2005

This study examines whether investors regard the level of insider ownership of a firm as useful for evaluating stock split decisions. Results show that the abnormal returns at the announcement of stock splits are positively related to the level of insider ownership. The results prevail even after controlling for other relevant factors. Further analysis indicates the positive relation exists for small firms, but not for large firms. This indicates the market evaluates stock split decisions within the context of both insider ownership and information asymmetry.
Failed takeovers, methods of payment, and bidder returns
Authors: Chang Saeyoung , Suk David Y.
Published: March 2005

This study documents bidding‐firm stock returns upon the announcement of takeover terminations. On average, bidding firms that offer common stock experience a positive abnormal return, and firms that offer cash experience a negative abnormal return. The positive performance is primarily driven by bidders initiating the takeover termination. Commonstock‐financed bidders earn a return not significantly different from that earned by cashfinanced bidders when terminations are initiated by the target firm. The results are consistent with the asymmetric information hypothesis, that the decision not to issue common stock conveys favorable information to the market. In addition, bidder returns at takeover termination are positively related to the amount of undistributed cash flow, supporting the free cash flow hypothesis.
Geographical deregulation and competition in U.S. banking markets
Authors: Zardkoohi Asghar , Fraser Donald R.
Published: March 2005

The effects of geographical deregulation on competition in banking markets is examined. Using a model that develops an index of competition as proposed by Bresnahan and applied to banking markets by Shaffer, the empirical evidence suggests that geographical deregulation has not had a significant impact on competition. The limited effects of geographical deregulation on competition is consistent with other evidence presented, suggesting that banking markets were already highly competitive. In those states where a significant effect was observed, geographical deregulation increased the degree of competition in some states but had the opposite effect in others.
Active management, fund size, and bond mutual fund returns
Authors: Philpot James , Hearth Douglas , Rimbey James N. , Schulman Craig T.
Published: March 2005

Conventional wisdom holds that bonds are relatively homogenous investments compared to equities. Consequently, factors that explain variation in returns among bond mutual funds may differ in magnitude from those for equity mutual funds. In this study, a time‐series cross‐sectional analysis is employed to investigate the relationship between a bond fund's risk‐adjusted return and specific fund attributes. Results indicate that a bond fund's past performance does not predict future performance and that bond fund managers are generally ineffective at increasing risk‐adjusted returns. However, unlike equity mutual funds, bond mutual funds do appear to enjoy economies of scale.
A transactions data analysis of intraday betas
Authors: Kim Suhkyong , Lockwood Larry J. , McInish Thomas H.
Published: March 2005

Using a sample of 27 stocks from the Dow Jones Industrial Average for the years 1986–1992, we examine the equality of beta for individual firms during the trading day. Both alphas and betas are found to differ through the trading day. Evidence suggests these changes are systematic for individual stocks. Using the midday beta as the base, the number of rejections of beta equality follow a U‐shaped pattern through the trading day, indicating the differing distributions (U‐shaped patterns) for intraday returns are reflected in similar changes in beta. These results have implications for further developing and testing market microstructure models.
Bid‐Ask Spread Estimation For A Correlated Value Innovation Process
Authors: Bhardwaj Ravinder K. , Moore William T.
Published: March 2005

Previous studies of bid‐ask spread estimators based on serial covariance in returns document high proportions of positive serial covariances and therefore negative spread estimates. These findings may be due to the effects of time‐variation in expected returns. Although purging the effects of time‐varying expected returns yields more reasonable results, the bid‐ask spread estimates from daily and weekly returns are still materially different. We present a method that avoids the need for removing the effects of time‐varying expected returns by using a spread estimator developed directly for a correlated value innovation process. The new spread estimator not only yields more reasonable estimates of the bid‐ask spread than the Roll (1984) model, but the spread estimates from daily and weekly returns are almost equal.