bluuebunny/crossref_metadata_2025 huggingface dataset:
INTEREST RATE SENSITIVITY OF BANK STOCK RETURNS: SPECIFICATION EFFECTS AND STRUCTURAL CHANGES
Authors: Akella Srinivas R. , Chen Su‐Jane
Published: August 2014

In this paper the interest rate sensitivity of bank stock returns under alternative econometric specifications and the changes in the sensitivity over time are studied. Results indicate that the sensitivity depends on the econometric specification and the period considered. Bank stock returns show a sensitivity to long‐term government security returns and innovations, but not to short‐term government security returns and innovations except under one specification. Since 1980, banks seem to have reduced their interest rate risk exposure. Finally, while long‐term returns are positively associated with stock returns, short‐term returns show a positive association only since 1980.
DIVIDENDS, UNCERTAINTY, AND UNDERWRITING COSTS UNDER ASYMMETRIC INFORMATION
Authors: Kale Jayant R. , Noe Thomas H.
Published: August 2014

This paper presents a two‐period model in which dividends act as a signal of the stability of the firm's future cash flows. It is demonstrated that firms with more stable future cash flows pay a higher dividend. Dividends are a credible signal because the promise of a higher dividend, ceteris paribus, increases the probability that the firm will have to issue equity and pay underwriting costs. Empirically testable implications of the model relating to the cross‐sectional determinants of the level of dividends are also discussed.
THE ARBITRAGE PRICING THEORY AND COST‐OF‐CAPITAL ESTIMATION: THE CASE OF ELECTRIC UTILITIES
Authors: Goldenberg David H. , Robin Ashok J.
Published: August 2014

Capital asset pricing model (CAPM) and alternative arbitrage pricing theory (APT) methodologies are used to estimate the cost of capital for a sample of electric utilities. The statistical factors APT method is found to produce significantly different estimates depending on the number of factors specified and the set of firms factor analyzed. The use of macroeconomic factors is explored, and it is shown that this methodology has advantages over the statistical factors APT and the market model.
FURTHER ANALYSIS OF THE PUT‐CALL PARITY IMPLIED RISK‐FREE INTEREST RATE
Authors: Frankfurter George M. , Leung Wai K.
Published: August 2014

In this paper the put‐call parity implied riskless rate of borrowing and lending is re‐examined. Using a rigorous model, it is shown that, given the level of an observable proxy of the risk‐free rate of lending (T‐bill rates, for example), the put‐call parity provides an opportunity to borrow at rates substantially below the market rate of lending. This is especially true when high interest rates prevail. The major conclusion is either that American option prices may invalidate the parity, or that option markets are not as frictionless as one might wish.
CAUSALITY TESTS OF SHORT SALES ON THE NEW YORK STOCK EXCHANGE
Authors: Bhattacharya Anand K. , Gallinger George W.
Published: August 2014

Published statistics on short sales of stock are used by investors as a technical indicator of market timing. Research on this topic is mixed. Findings in this article rely on causality tests that use white noise residuals generated from time‐series analysis of short sales. Results indicate that specialists' short sales lead short sales of other investors, but these other investors are unable to take advantage of the information because a time lag exists in the published data.
DIVISION MANAGEMENT BUYOUTS OF UNRELATED DIVISIONS WITHOUT A SALES PRICE REPORTED
Authors: Roenfeldt Rodney L. , Sicherman Neil W. , Trifts Jack W.
Published: August 2014

Shareholder wealth effects of division management buyouts are examined: (1) for selling divisions with business operations unrelated to the parent, and (2) for announcements that do not report the sales price. Initial evidence suggests that both of these characteristics result in smaller abnormal returns. Further analysis, however, indicates that these individual effects are interdependent and that only their combined effect is accompanied by an abnormal return that is not significant.
QUALITY DISPERSION AND THE FEASIBILITY OF DIVIDENDS AS SIGNALS
Authors: Rodriguez Ricardo J.
Published: August 2014

A dividend signaling equilibrium may not be feasible if some firms must pay an unrealistically high dividend to signal their quality. Therefore, feasibility requires a relatively narrow quality dispersion among signaling firms. However, the literature does not offer a characterization of the maximum quality dispersion that is consistent with a feasible signaling schedule. In this paper explicit quality dispersion constraints leading to feasible dividend signaling equilibria are determined.
ALL‐EQUITY FIRMS AND THE BALANCING THEORY OF CAPITAL STRUCTURE
Authors: Gardner John C. , Trzcinka Charles A.
Published: August 2014

Despite the benefits of leverage, many firms exist that at some point in their corporate history had no debt. This study provides evidence that the balancing theory of capital structure can predict the behavior of such firms. All‐equity firms allow a more precise measurement of firm market value and risk, and provide a less ambiguous relationship between independent variables and dependent variables than the firms used in previous studies. Using a logit function to avoid spurious correlation between the dependent and independent variables, we find that for most years during 1964–88 all‐equity firms listed in the Compustat industrial file exhibited a consistently significant negative relationship between the Myers growth option variable and the probability of borrowing. Positively significant but less consistent relationships exist between the risk measures and the nondebt tax shields, and the probability of borrowing. These results do not qualitatively change when the data are aggregated over twenty years or over five‐year subperiods. The tests are also conducted by industry according to the one‐digit Standard Industrial Classification (SIC) code. Significant relationships are found in the 2000 and 3000 SIC code manufacturing industries.
EARLY EXERCISE OF AMERICAN INDEX OPTIONS
Authors: French Dan W. , Maberly Edwin D.
Published: August 2014

We show that exercise of American call options on stock indexes frequently occurs before expiration and attribute this early exercise to the “wild card” option that results from the cash settlement exercise process. The wild card represents an “implied option” to sell the index option at the fixed settlement price; it is therefore a put option on the index call option. We derive a simple one‐period valuation model using compound option pricing. Analysis of observed early exercise demonstrates that the wild card feature is a factor influencing early exercise of index options.
A RE‐EXAMINATION OF THE RELATIONSHIP BETWEEN CLOSED‐END FUND DISCOUNTS AND EXPENSES
Authors: Kumar Raman , Noronha Gregory M.
Published: August 2014

In this paper the role of expenses in explaining closed‐end fund discounts is re‐examined. A present value model is developed to illustrate the relationship between expenses and discounts. Earlier studies find that discounts are not related to management fees. In this paper, using a larger sample over a longer and different period and a better specification of the expense variable consistent with the model developed, discounts are found to be significantly related to expenses. The relationship between expenses and discounts holds in the presence of other control variables.
LEVERAGING THE UNDERINVESTMENT PROBLEM: HOW HIGH DEBT AND MANAGEMENT SHAREHOLDINGS SOLVE THE AGENCY COSTS OF FREE CASH FLOW
Authors: Garvey Gerald T.
Published: August 2014

It is argued that leveraged buyouts (LBOs) provide managers with a powerful incentive to release excess cash rather than invest in negative net present value projects. This incentive is attributed to the large debt obligations associated with “junk” bond financing and to an increase in the shareholdings of top management. In this paper I explore the conditions under which leverage and management shareholdings complement one another in resolving the agency costs of free cash flow and would therefore optimally be used “together” as in an LBO. Complementarity is shown to obtain under plausible conditions, essentially because increased leverage reduces equityholders' share of investment returns. Increased management shareholdings then leverage this underinvestment effect. My analysis also helps explain why top managers who participate in an LBO receive a highly leveraged equity claim rather than a share of the “strip” that is generally provided to outside investors.
INTRADAY VARIATIONS IN TRADING ACTIVITY, PRICE VARIABILITY, AND THE BID‐ASK SPREAD
Authors: Wei Pei‐Hwang
Published: August 2014

In this paper intraday variations in trading activity and the bid‐ask spread are examined. Intraday variations in volume and price variability demonstrate a U‐shaped pattern as in previous studies. However, I find a U‐shaped pattern for a measure of the spread component that is related to the degree of information asymmetry between the specialist and informed traders and an inverted U‐shaped pattern for the other spread component related to inventory and order costs. Two alternative explanations are given.
MARKET MODEL CORRECTED FOR GENERALIZED AUTOREGRESSIVE CONDITIONAL HETEROSCEDASTICITY AND THE SMALL FIRM EFFECT
Authors: Ghosh Asim K.
Published: August 2014

Prior studies show that heteroscedasticity and serial correlation are present in the market model. In this paper I estimate the market model parameters under generalized autoregressive conditional heteroscedastic processes. Employing daily stock rate of return data from the Center for Research in Security Prices for 1985 through 1989, excluding October 1987 and October 1989, I show that previous estimates of beta coefficients are overstated significantly, suggesting model improvements are needed to take these problems into account. The efficiency of the market model parameters is significantly improved across all firms during the period investigated.
THE TERM STRUCTURE OF INTEREST RATES AS A COINTEGRATED SYSTEM: EMPIRICAL EVIDENCE FROM THE EUROCURRENCY MARKET
Authors: Mougoué Mbodja
Published: August 2014

In this paper I examine the term structure of Eurocurrency interest rates from six countries (with maturities of one, two, three, and six months) using unit root tests and cointegration tests that are robust to departures from independent and identically distributed errors. The main conclusions are: (1) Eurocurrency interest rates have one (and only one) unit root when viewed individually, and (2) for each of the countries examined, Eurocurrency interest rates are cointegrated—with one equilibrium relationship—when viewed jointly. These conclusions are consistent with the weak form of the efficient market hypothesis and suggest that in efficient markets arbitrage generally prevents rates on different maturities of a given asset from drifting too far for an extended period.
TWENTY‐FIVE YEARS OF TAX LAW CHANGES AND INVESTOR RESPONSE
Authors: Skinner David Lynn
Published: August 2014

Ex‐dividend day research detects dividend‐clientele effects that the tax‐clientele hypothesis attributes to personal taxation. In this study I examine all ten personal tax changes between 1963 and 1988 and find little support for the tax‐clientele hypothesis. Few tax changes are accompanied by significant changes in the ex‐day ratio, and more than half are opposite the direction predicted. In particular, the largest tax changes, in 1982 and 1987, fail to support the tax‐clientele hypothesis. The results are consistent with some unknown, non‐tax‐induced clientele effect(s).
VARIANCE BOUND TESTS OF BOND MARKET EFFICIENCY
Authors: Huang Chao‐Hsi , Ederington Louis H.
Published: August 2014

In this paper we examine variance bound tests of the joint hypothesis that (1) bond markets are efficient and (2) the term structure is determined by the expectations hypothesis. Both the Singleton and Shiller tests are shown to be seriously biased toward rejecting the joint hypothesis in finite samples. Flavin's test is unbiased but has a very high variance leading to many false rejections of the joint hypothesis. When corrected as suggested by Flavin, Shiller's test is unbiased and has a relatively low variance. Unfortunately, it is also sensitive to measurement error.
UNLISTED TRADING PRIVILEGES, LIQUIDITY, AND STOCK RETURNS
Authors: Khan Walayet A. , Baker H. Kent
Published: August 2014

In this study we examine the effect of dual trading through unlisted trading privileges (UTPs) on liquidity and stock returns. Stocks with UTPs trade in a different market structure than stocks listed and traded only on the AMEX and NYSE. Differences in market structure may affect stock returns through liquidity services provided by the competing markets. The sample comprises 852 AMEX and NYSE firms that began unlisted trading on the Philadelphia, Pacific, Midwest, or Cincinnati exchanges between 1984 and 1988. The results show significantly positive abnormal returns around the SEC's announcement of a regional exchange's filing for UTPs. The results also suggest that increased competition improves trading liquidity. Only stocks with low liquidity before UTPs announcements experience significantly improved liquidity and positive stock returns.
DUAL BETAS FROM BULL AND BEAR MARKETS: REVERSAL OF THE SIZE EFFECT
Authors: Bhardwaj Ravinder K. , Brooks LeRoy D.
Published: August 2014

Significant firm‐size‐related differences in abnormal returns and systematic risks occur in bull and bear market months from 1926 to 1988. Potential differential return premiums between recessions and expansions appear to be captured by the varying risk model and not the constant risk model. Using a dual‐beta market model to adjust for risk differences in bull and bear markets, we find that large firm stocks on average earn significant positive excess returns and small firm stocks earn significant negative excess returns. Superior performance of large firm stocks is even more pronounced outside January.
INTRADAY TRADING PATTERNS IN THE EQUITY OPTIONS MARKETS
Authors: Aggarwal Raj , Gruca Edward
Published: August 2014

Based on the analysis of data for over two million options transactions on the Chicago Board of Options Exchange, we find significant U‐shaped intraday patterns in trading volume, transaction size, proportion of trades at the ask or bid, and other variables in the equity options market. These previously undocumented intraday temporal patterns are largely consistent with exogenous temporal influences on transactions volume in anticipation of and following nontrading periods. These patterns are also largely consistent with strategic trading endogenous to the market and are related to interactions between informed and liquidity or noise traders.
THE FINANCING AND INVESTMENT OF A LEVERED FIRM UNDER ASYMMETRIC INFORMATION
Authors: Raymar Steven
Published: August 2014

This research extends the literature on financing and investment under asymmetric information by considering the effect of initial leverage. Because decisions affect the value of outstanding bonds, realistic behaviors arise that are absent in extant unlevered analyses. Leverage may induce social improvements in investment. Further, a stock offering may be a positive signal if lower‐value firms face greater default risk and thus have lower debt values. Conditions that support positive reactions to equity funding appear to be present in the early 1990s.
SIMULTANEOUS DEBT AND EQUITY ISSUES AND CAPITAL STRUCTURE TARGETS
Authors: Billingsley Randall S. , Smith David M. , Lamy Robert E.
Published: August 2014

Numerous empirical studies find evidence that managers behave as if they pursue target debt ratios. A possible alternative to the use of conventional, separate issuances of debt and equity to effect desired adjustments toward a target ratio is the simultaneous issuance of such securities. We extend prior research on such issues by exploring their use in the pursuit of capital structure targets. We find that the issuance of securities in general and the use of simultaneous issues of debt and equity in particular are at least partially influenced by where a firm's capital structure is relative to the average position in its industry. Further, shareholders' reactions to the announced plan to issue and to the issuance of securities are influenced, in part, by whether the issue moves the firm toward or away from the average capital structure in the industry. We also find evidence that the infrequent use of simultaneous issues relative to unaccompanied debt and equity issues is explained by their comparative flotation costs.
FOREIGN EXCHANGE MARKET REACTION TO THE U.S.‐CANADA FREE TRADE AGREEMENT
Authors: Hogan Kedreth , Sultan Jahangir
Published: August 2014

In this paper we investigate the effect of news about the advent of the U.S.‐Canada Free Trade Agreement (FTA) on the exchange rate between the Canadian dollar and the U.S. dollar. We find evidence that information flows related to the likelihood of the FTA influenced the volatility of the daily spot rate. In particular, information that increased the likelihood of the FTA subsequently diminished exchange rate volatility. In contrast, information that decreased the likelihood of the FTA subsequently increased exchange rate volatility.
CONVERTIBLE DEBT AND INVESTMENT INCENTIVES
Authors: Harikumar T. , Kadapakkam P. , Singer Ronald F.
Published: August 2014

In this paper we examine the effect of convertible debt on the investment incentives facing stockholders. The effect depends critically on the value of existing assets relative to the firm's investment requirements. With a restrictive dividend covenant, convertible debt mitigates the overinvestment incentive associated with risky debt but exacerbates the underinvestment incentive at higher values of existing assets. A less‐restrictive dividend covenant exacerbates overinvestment under straight debt financing but reduces the underinvestment incentive induced by the conversion feature. In this context, a convertible debt contract with a less‐restrictive dividend covenant maximizes firm value.
AN ANALYSIS OF THE UNDERWRITER SELECTION PROCESS FOR INITIAL PUBLIC OFFERINGS
Authors: Wolfe Glenn A. , Cooperman Elizabeth S. , Ferris Stephen P.
Published: August 2014

This study extends previous research that shows prestigious underwriters avoided underwriting smaller, more speculative initial public offerings (IPOs) during a post‐SEC period, 1966–77. Estimating a logit model with a sample of 1,192 IPOs from 1977 to 1988, we evaluate the effect of offering characteristics and prevailing market conditions on the probability a prestigious investment banker will underwrite an IPO. Similar to previous studies, we find that prestigious underwriters avoid smaller, riskier issues. However, we also find stock market volatility, interest rate volatility, and the strength and profitability of the recent market for seasoned new issues to be important determinants of a prestigious underwriter's decision to underwrite an IPO.
CAPITAL STRUCTURE MANAGEMENT AS A MOTIVATION FOR CALLING CONVERTIBLE DEBT
Authors: Emery Douglas R. , Iskandar‐Datta Mai E. , Rhim Jong‐Chul
Published: August 2014

Using a matched‐pairs methodology, we present empirical evidence of systematic changes within a corporation that are associated with calls of convertible debt. We find that calling firms experience significantly greater growth than noncalling firms in the same industry, as measured by retained earnings and long‐term debt. Also, the converted debt provides a significant source of new book equity, and calling firms issue significantly less other new equity. The pattern of growth in balance sheet accounts is consistent with the pecking order hypothesis and supports the notion that some firms call convertible debt to reduce their total cost of obtaining additional external financing. The evidence also shows that, on average, calling firms experience a significant decline in their leverage ratio based on book value but no significant change in their leverage ratio based on market value of equity. This is consistent with the call's being used as part of the firm's management of its capital structure.
PROBABILITY OF PRICE REVERSAL AND RELATIVE NOISE IN STOCK AND OPTION MARKETS
Authors: Gendron Michel , Khoury Nabil , Yourougou Pierre
Published: August 2014

In this paper we take a new approach to the study of the interrelation between stock and option markets by extending Stoll's (1989) model of cost components of the bid‐ask spread to include an error component in prices. Building upon Stoll's estimates of the probability of price reversals, we determine which of the option or stock markets carries more noise. The empirical results indicate that option markets are noisier than stock markets. Such findings are consistent with the view that option markets serve as a testing ground for noisy new information because of their comparative advantage regarding transaction costs, liquidity, and potential leverage.
INTRADAY CHANGES IN TARGET FIRMS' SHARE PRICE AND BID‐ASK QUOTES AROUND TAKEOVER ANNOUNCEMENTS
Authors: Jennings Robert
Published: August 2014

This paper documents changes in share prices, bid‐ask spreads, and quote sizes for target firms during the day a takeover proposal is announced. The mean 21.2 percent announcement‐day return consists primarily of a 19.5 percent return at the announcement. There is little evidence that spreads increase before the announcement, except when trading is suspended because of an order imbalance. Quote sizes show some sign of decreasing just before the announcement. The quoted bid‐ask spread and size increase immediately after the announcement, but spreads quickly return to normal.
REGULARITIES IN THE VARIATION OF SKEWNESS IN ASSET RETURNS
Authors: Alles Lakshman A. , Kling John L.
Published: August 2014

This paper documents regularities in the comparative skewness characteristics across several classes of assets and over time. We find smaller capitalized stock indices are more negatively skewed than larger stock indices. Over time, the skewness of stock indices follows a business‐cycle‐related variation. Skewness is more negative during economic upturns and less negative, even positive, during downturns. Three alternative methods for testing the statistical significance of skewness and for making confidence interval estimates of skewness are presented. These include a bootstrap methodology and a test that allows for nonindependent observations.
REORGANIZATION AND FINANCIAL DISTRESS: AN EMPIRICAL INVESTIGATION
Authors: Datta Sudip , Iskandar‐Datta Mai E.
Published: August 2014

Prior studies on financial distress focus on the restructuring of one aspect of the firm. By examining various forms of restructuring, we provide empirical evidence that asset restructuring and governance restructuring play significant roles before bankruptcy filing. Our analysis shows that financial restructuring before bankruptcy is influenced by the holdout problem among creditor groups. Evidence suggests that the fraudulent conveyance provision does not pose a serious impediment to divestitures during the two years before bankruptcy. The evidence also indicates that Chapter 11 reorganization is lenient toward management. Although Chapter 11 allows the firm to breach burdensome executory contracts with employees, our findings suggest that union busting is not an important part of the reorganization process. Finally, we identify various financial characteristics to predict the different types of restructuring a firm may undertake.
THE RELATION AMONG DIVIDEND POLICY, FIRM SIZE, AND THE INFORMATION CONTENT OF EARNINGS ANNOUNCEMENTS
Authors: Mozes Haim , Rapaccioli Donna
Published: August 2014

In this paper we investigate the role of dividends in explaining the size effect. The previous literature concludes that before the firm's earnings announcement, small firm stock prices impound less information than large firm stock prices. This size effect is evidenced by the greater market reaction to small firm earnings announcements than to large firm earnings announcements. We find that if the dividend announcement precedes the earnings announcement, no size effect exists. The implication is that the information conveyed by dividend announcements includes the information conveyed to investors in large firms by other information sources. However, if the firm does not pay dividends or if the firm's earnings announcement precedes its dividend announcement, the size effect exists. The implication is that dividends do not completely explain the size effect. That is, there are information sources other than dividends that are exclusively available to investors in large firms, and the information provided by these sources is reflected in the stock price of large firms before the earnings announcement.
TIME‐TO‐BUILD EFFECTS AND THE TERM STRUCTURE
Authors: Strauss Jack , Zhou Guofu
Published: August 2014

This paper shows that real macroeconomic variables have power to predict movements in the term structure of interest rates. This complements recent evidence that links the term structure to expected stock returns. We find that up to 86 percent of the variation in the term premia are due to the changes in macroeconomic variables. The predictive power can be attributed to the time‐to‐build effect of investments.
MANAGERIAL OWNERSHIP CHANGE AND FIRM VALUE: EVIDENCE FROM DUAL‐CLASS RECAPITALIZATIONS AND INSIDER TRADING
Authors: Hanson Robert C. , Song Moon H.
Published: August 2014

We explore the relation between managerial ownership and firm value by examining a sample of firms that announce dual‐class recapitalizations and the insider trading activity that precedes these announcements. Insider trading activity, unlike recapitalization, requires managers to commit their personal wealth and therefore serves as an indicator of the motivation behind the recapitalization. The recapitalization, in effect, allows managers to magnify the increase in vote ownership that results from insider buying and offsets the decrease in vote ownership that results from insider selling. This study adds to our understanding of dual‐class recapitalizations by linking the wealth effects and changes in ownership concentration with ***manager‐shareholder agency issues that follow from recapitalization and insider trading activity. Results show a positive relation between the change in firm value and ownership for recapitalizations before the 1984 New York Stock Exchange moratorium on delisting dual‐class firms when ownership was high and control was firmly established. Results show a negative relation for recapitalizations since 1984 when ownership levels were lower and voting control was not assured. These results support the notion that more recent recapitalizations entrench managers.
PRICE AND VOLUME EFFECTS ASSOCIATED WITH THE CREATION OF STANDARD & POOR'S MIDCAP INDEX
Authors: Collins M. Cary , Wansley James W. , Robinson Breck
Published: August 2014

In this paper we explore price and volume effects associated with the 1991 creation of Standard & Poor's MidCap 400 index. Prior work on changes in the composition of existing indices finds a significant price response to the announcement. Various authors link the effect to price pressure, information, an outwardly shifting demand curve for securities, and the increased attention that comes with inclusion in an index. Using event study methodology, we find significant price and volume effects during the two weeks leading up to the Standard & Poor's announcement, but no significant effect in the two‐day interval around the event. Apparently, information leakage and/or anticipation preceded the creation of the index. The price run‐up is permanent since the positive abnormal returns leading up through the announcement are not associated with significantly negative abnormal returns after the announcement. In addition, MidCap stocks significantly outperform the market during the fifty‐two weeks following the announcement. Using cross‐sectional regressions, we show that these prior‐period abnormal returns are positively related to abnormal volume and institutional holdings. We also find that firms trading over‐the‐counter had larger price run‐ups than NYSE or AMEX firms.
A NO‐ARBITRAGE MARTINGALE ANALYSIS FOR JUMP‐DIFFUSION VALUATION
Authors: Chang Carolyn W.
Published: August 2014

This study presents a jump‐diffusion valuation framework using the no‐arbitrage martingale approach. Equilibrium conditions needed to support a jump‐diffusion pricing standard process are derived. The results are a generalized jump‐diffusion security market line and its corresponding equilibrium valuation relation that prices both jump and diffusion risk. To value options, a fundamental formula is derived that includes existing jump‐diffusion option valuation formulas as special cases. 1 find Merton's (1976a) assumption of diversifiable jump risk to be consistent with no‐arbitrage only when the aggregate consumption flow does not jump. Simulation shows that Merton's formula undervalues/overvalues options on hedging/cyclical assets. When the jump arrival frequency is larger, the mispricing is larger/smaller for in‐the‐money/out‐of‐the‐money options.
ON ESTIMATING STOCK MARKET VOLATILITY: AN EXPLORATORY APPROACH
Authors: MacDonald John A. , Shawky Hany A.
Published: August 2014

Traditional methods of estimating market volatility use daily return observations from a stock index to calculate monthly variance. We break with tradition and estimate stock market volatility using the daily, cross‐sectional standard deviation of returns for all firms trading on the New York Stock Exchange and the American Stock Exchange. We find a significantly positive relation between risk and return. Market volatility is estimated to be about half the volatility level previously reported. The intraday, cross‐sectional market volatility measure provides findings consistent with risk‐return theory.
EVIDENCE ON THE EFFECT OF TAXES ON FIRMS' DECISIONS TO RETIRE DEBT EARLY
Authors: Manzon Gil B. , Porter Thomas L. , Potter Mark E.
Published: August 2014

We examine the effect of marginal tax rates on the decision to retire debt early. Other factors that have been linked to the debt retirement decision are also investigated, including leverage adjustment and the value associated with the immediate recognition of a loss for tax purposes on early retirement. Results indicate that firms that retire debt early have lower marginal tax rates than firms that do not retire debt early. This finding is consistent with the proposition that firms are motivated to retire debt early by an incentive to reduce tax shields that cannot be used efficiently. Further, firms that retire debt early are more highly leveraged than firms that do not retire debt early. Evidence also suggests that some firms retire debt early at a loss to reduce currently taxable income.
MARKET REACTION TO NATIONAL DISCRETION IN IMPLEMENTING THE BASLE ACCORD
Authors: Wagster John , Kolari James , Cooper Kerry
Published: August 2014

We report the wealth effects among banks in the United States, Japan, Canada, and the United Kingdom in reaction to public announcements concerning their respective national implementation of the 1988 Basle Accord, an international risk‐based capital regulatory agreement. Previous survey findings indicate bankers in different countries perceive that national discretion could threaten the competitive equity goals of the new risk‐based capital rules. Based on a multivariate regression model using seemingly unrelated equations, we find significantly positive and negative market reactions by bank investors to individual announcements of different countries' post‐Accord capital rules. However, no particular country's banks were systematically advantaged or disadvantaged with national discretion announcements viewed in aggregate. Although national discretion does affect bank wealth, the evidence does not suggest that national implementation compromises the competitive goals of the Accord.
AN EMPIRICAL STUDY OF A NEW CLASS OF NO‐ARBITRAGE‐BASED DISCRETE MODELS OF THE TERM STRUCTURE
Authors: Sim Ah Boon , Thurston David C.
Published: August 2014

We present empirical tests of the new no‐arbitrage‐based term structure paradigm in discrete time. We derive and test empirical specifications for deterministic one‐factor forward rate volatility models and examine the compatibility of these forward rate volatility functions using term structure dynamics. Our estimation technique uses the generalized method of moments and is based on forward bond price deviations. We do not impose restrictions on the market price of risk, and we incorporate all available term structure information. Our data consist of four sets of pure discount bonds derived from the CRSP bond files and U.S. Treasury bill quotes.
BIVARIATE BINOMIAL OPTIONS PRICING WITH GENERALIZED INTEREST RATE PROCESSES
Authors: Hilliard Jimmy E. , Schwartz Adam L. , Tucker Alan L.
Published: August 2014

We extend existing pricing models and develop a bivariate binomial option pricing technique that accommodates correlated state variables. This technique offers the ability to price American‐style options, thereby accommodating early exercise, despite the existence of two correlated underlying state variables. Our technique is computationally efficient and can be further generalized for multiple‐state variables, albeit with an accompanying rise in computational expense.
DETECTING ABNORMAL RETURNS USING THE MARKET MODEL WITH PRE‐TESTED DATA
Authors: Graham A. Steven , Pirie Wendy L. , Powell William A.
Published: August 2014

The current literature suggests various alternative procedures for increasing the power of tests to detect abnormal returns in event studies. Using randomly constructed portfolios, we simulate events and compare the results of tests using three alternative procedures: traditional, cross‐sectional, and cross‐sectional with standardized residuals. For each test, we compare results when all observations are included with results when the observations with high trading volume are omitted from the estimation period. The simulation results indicate that both the traditional approach with omitted observations and the cross‐sectional approach using standardized residuals with all observations yield approximately the correct test sizes and significantly improve the power of tests to detect abnormal returns. However, the cross‐sectional approach using standardized residuals is clearly dominant among the three procedures.
ADVERSE CONTRACT INCENTIVES AND INVESTMENT BANKER REPUTATION: TARGET FIRM TENDER OFFER FEES
Authors: McLaughlin Robyn M.
Published: August 2014

I measure the potential economic importance of fee‐contract incentives and investment banker reputation as factors that can mitigate conflicts of interest between investment bankers and their target firm clients in tender offers. I find that the fee contracts used between target firms and their investment bankers contain incentives that can create substantial conflicts of interest. Simulated losses from these adverse incentives can be large—up to 16.7 percent of target firm value. I also find, however, that when investment banker reputation capital is included in the simulation, losses are substantially reduced.
A SIMULTANEOUS TEST OF COMPETING THEORIES REGARDING THE JANUARY EFFECT
Authors: Ligon James A.
Published: August 2014

In a multivariate context, the January effect appears most significantly related to excess individual liquidity (i.e., high cash balances and low expected taxes), but multicollinearity may obscure the relation between other variables and the effect. In a univariate context, prior February–December returns and the standard deviation of prior‐year returns are most significantly related to the January effect. In both contexts, higher January volume and lower real interest rates are correlated with higher January returns. I find no evidence that window dressing by professional managers or macroeconomic seasonality (other than real interest rate seasonality) are significantly related to the January effect.
INTERTEMPORAL ASSET PRICING WITHOUT CONSUMPTION DATA: EMPIRICAL TESTS
Authors: Li Yuming
Published: August 2014

In this paper I conduct tests of an intertemporal asset pricing model using variables that forecast stock returns as the risk factors. I document that the forecasting variables are priced so that expected excess returns are related to their conditional covariances with the forecasting variables. The variability in the covariance risk fails to explain the cross‐sectional and time‐series variation in expected stock returns. Evidence rejects restrictions on the prices of covariance risk imposed by the model with constant volatilities. I also find that an extended model that allows time‐varying conditional volatilities is misspecified.
MARKET STRUCTURE AND REPORTED TRADING VOLUME: NASDAQ VERSUS THE NYSE
Authors: Atkins Allen B. , Dyl Edward A.
Published: August 2014

Trading volume for common stocks is of interest to financial economists, investors, and securities lawyers. NASDAQ is a dealer market where trades with dealers are included in reported trading volume. This procedure does not accurately measure the trading volume by public buyers and sellers. Trading volume reported on the NYSE, which is primarily an auction market, provides a much closer measure of trades by public investors. We examine a sample of firms whose stock traded on the NASDAQ/NMS and subsequently on the NYSE. When trading switches to the NYSE, the firms' trading volume drops to about 50 percent of the volume previously reported on NASDAQ. A control group of firms that switched from the AMEX to the NYSE shows a small, but statistically insignificant, increase in trading volume.
INTERNATIONAL TRANSFER OF PRICING INFORMATION BETWEEN DUALLY LISTED STOCKS
Authors: Hauser Shmuel , Tanchuma Yael , Yaari Uzi
Published: August 2014

International multiple listing offers a unique opportunity to study the efficiency of information transmission across national markets. The knowledge gained from observing a stock of the same company priced in multiple markets differs from what may be gained from observing relations across markets of aggregate price indices. We investigate five companies based in Israel whose stocks are listed on both the Tel Aviv Stock Exchange and NASDAQ. Our empirical tests of causality in price changes use the side‐by‐side Box‐Jenkins ARIMA models and the Sims VAR model. Overall, the results show that price causality in dually listed stocks is unidirectional from the domestic market to the foreign market.
THE COST OF MUTUAL FUND DISTRIBUTION FEES
Authors: Livingston Miles , O'Neal Edward S.
Published: August 2014

Many individuals purchase shares in mutual funds as investments. With a lack of evidence supporting performance persistence in fund returns, investors should consider expenses as a fund‐selection tool since fund expenses have a negative effect on fund returns. One of the largest expenses incurred by fund investors is distribution expenses, which include both load charges and annual fees. Close to two‐thirds of all equity funds charge investors for fund distribution. The true cost of these distribution fees to investors is hard to measure because a myriad of distribution arrangements have evolved that vary both the timing and magnitude of distribution charges. We derive a simple methodology that expresses the present value of distribution costs as a percentage of the original investment in fund shares for any expected holding period. This methodology allows direct comparison of the effect on investors of distribution fees for mutual funds with different types of sales arrangements.
EARLY UNWINDING STRATEGY IN INDEX OPTIONS‐FUTURES ARBITRAGE
Authors: Cheng Louis T. W. , Fung Joseph K. W. , Pang Castor
Published: August 2014

We first re‐examine buy‐and‐hold arbitrage strategies using both ex‐post and ex‐ante index options and futures data in Hong Kong. The results show that the arbitrage profit is not large enough to cover the transaction costs for both individual and institutional investors. Second, we find that, when an early unwinding strategy is employed, the arbitrage profit improves significantly under ex‐post analysis but only improves slightly under ex‐ante analysis. In addition, opportunities for same‐day unwinding are limited. Finally, our regression results indicate the magnitude of the arbitrage profit is positively related to the volatility of the stock market.
LINEAR CONDITIONAL EXPECTATION, RETURN DISTRIBUTIONS, AND CAPITAL ASSET PRICING THEORIES
Authors: Wei K. C. John , Lee Cheng F. , Lee Alice C.
Published: August 2014

We show that E[X(g(Y1, …, Yn)] (where E[.] is the expectation operator) can be decomposed into a product of two expected values plus a sum of n comovement terms, if X, Y1, …, Yn follow a distribution that admits linear conditional expectation (LCE). We then apply this relation to show that if each asset return is LCE distributed with the market and/or the factors, many capital asset pricing models and the mutual fund separation theorem can be obtained. A well‐known example of a class of distributions that admits LCE is the elliptical distributions, of which the normal is a special case. A larger family, not mentioned in the existing literature, that admits LCE is the Pearson system. As a result, the distribution assumption to derive the capital asset pricing theories can be relaxed to the wider LCE family. We also present the relation of the LCE family to Ross's (1978) separating distribution family.
FURTHER EVIDENCE ON DIVIDEND YIELDS AND THE EX‐DIVIDEND DAY STOCK PRICE EFFECT
Authors: Bhardwaj Ravinder K. , Brooks LeRoy D.
Published: August 2014

Ex‐dividend day stock price behavior supports a tax clientele effect. This effect is still found after the Tax Reform Act of 1986. Results reflect an effective tax advantage for capital gains taxes payable at realization, versus dividend taxes due quarterly. Evidence also supports short‐term trader participation in the ex‐day phenomenon when the difference between dividend income and the ex‐dividend‐day price decrease exceeds transactions costs to trade. Results contradict prior research where a tax clientele effect is not found, but align with this prior research when including a small number of contaminated observations.
BID‐ASK SPREAD COMPONENTS IN AN ORDER‐DRIVEN ENVIRONMENT
Authors: Brockman Paul , Chung Dennis Y.
Published: August 2014

The purpose of this study is to extend the bid‐ask spread decomposition literature into the order‐driven environment. The use of electronic limit order books, combined with order‐driven market making, has been increasing rapidly in recent years because of improvements in information technology and financial market deregulation. To date, reported bid‐ask spread decompositions rely almost exclusively on quote‐driven or hybrid systems. This study provides bid‐ask spread component estimates from one of the world's largest order‐driven markets, the Stock Exchange of Hong Kong. Based on a sample of over six million observations, we estimate a median adverse selection component of 33 percent and a median order processing component of 45 percent of the spread. Dollar‐volume‐based decile portfolios show significant cross‐sectional variation for adverse selection costs but insignificant variation for order processing costs. Finally, order persistence is consistently positive for all deciles and displays a direct relation with the level of trading activity.
ECONOMIES OF SCALE IN MUTUAL FUND ADMINISTRATION
Authors: Latzko David A.
Published: August 2014

Since many mutual fund expenses are fixed costs, asset growth should reduce the ratio of fund expenses to average net assets. A translog cost function is estimated for a sample of 2,610 funds to evaluate the existence and extent of economies of scale in mutual fund administration. The elasticity of fund expenses with respect to fund assets is significantly less than one, indicating there are economies of scale in mutual fund administration. Average costs diminish over the full range of fund assets; however, the rapid decrease in average costs is exhausted by about $3.5 billion in fund assets.
BORROWING RELATIONSHIPS, MONITORING, AND THE INFLUENCE ON LOAN RATES
Authors: Athavale Manoj , Edmister Robert O.
Published: August 2014

While monitoring borrowers, a bank obtains private information about its customers, giving the bank an informational advantage in the production of subsequent services. Competing theories exist on the way banks use this advantage in the pricing of subsequent services to the customer. If moral hazard limits the transfer of private information, the borrowing relationship transforms into an informational monopoly and can be characterized as a “wasting asset.” Alternately, if the banks' competitive environment necessitates that cost economies are shared, the relationship has “value.” Ordering pairs of successive loans made to a particular borrower as prior loans and subsequent loans, and controlling for environmental, borrower, and loan characteristics, we show that the subsequent loan is priced significantly lower than the prior loan.
ILLIQUIDITY RISK, PROJECT CHARACTERISTICS, AND THE OPTIMAL MATURITY OF CORPORATE DEBT
Authors: Sarkar Sudipto
Published: August 2014

I derive the optimal maturity period for corporate debt used to finance a specific project, when costly financial distress is triggered by the inability to meet coupon obligations. My model predicts a negative relation between bond risk and maturity, and it explains why high‐grade bonds show greater maturity dispersion than low‐grade bonds, as observed in U.S. corporate bond markets. The major determinant of bond maturity is project duration for low‐risk bonds and project risk for high‐risk bonds. Other determinants of bond maturity are debt burden, reorganization costs, corporate tax rate, interest rate, and project growth rate.
THE RELATION BETWEEN THE MAGNITUDE OF GROWTH OPPORTUNITIES AND THE DURATION OF EQUITY
Authors: Kadiyala Padmaja
Published: August 2014

I examine the relation between the magnitude of growth opportunities in a firm and the duration of the firm's equity. Conventional wisdom holds that because cash flows from growth opportunities occur late relative to cash flows from existing projects, firms that can be characterized as growth firms have a higher duration. I adopt the real option approach to the valuation of growth opportunities and show that under certain circumstances the opposite can be true; equity duration can be lower for growth firms. I further show that the relation between equity duration and the magnitude of growth opportunities depends on (a) the magnitude of the duration of assets in place, (b) dominance of the firm in its industry, (c) the magnitude of R&D expenditure, and (d) the volatility of expected cash flows generated by the investment project underlying the growth opportunity. I empirically test these predictions and find the predictions are not rejected, particularly for the utility and banking industries.

JEL classification: G31, G12.
IS THERE NEWS IN THE CLUB?
Authors: Rahman Hamid , Yung Kenneth
Published: August 2014

In September 1994, the Wall Street Journal started the Annual Report and Earning Service. Firms participating in this service volunteer to provide on request, to any reader, their annual report and current quarterly information. The daily price quotations of such firms appear with a small symbol like the club in playing cards. We examine the utility of voluntarily disclosing this second‐hand information to the public and seek to find the motivation for this disclosure. Our results show that most of the firms that joined this service had below‐industry‐average performance, or at least were headed in that direction. Membership in the Annual Report and Earning Service brought some short‐term benefits in the form of average excess returns, but the economic fundamentals reasserted, and most firms had significant below‐average returns at the end of our sample period.

JEL classification: G10, G14.