bluuebunny/crossref_metadata_2025 huggingface dataset:
THE EFFECTS OF COMPLEX CAPITAL STRUCTURE ON THE MARKET VALUES OF FIRMS
Authors: Frecka Thomas J.
Published: March 2005

The familiar Modigliani and Miller risk class model is the basis of a test for differences in value between simple and complex capital structure groups of firms. Cluster analysis, using market risk measures and debt‐equity ratio as input, provides the method for obtaining the risk class sample of firms. Crosssectional tests at three annual dates are made on twenty‐six simple and twentysix complex capital structure firms. For all periods examined, the complex capital structure firms are valued lower than the simple capital structure firms. Possible explanations for the results include failure of the arbitrage mechanism and the presence of certain costs associated with different types of capital structures.
THE NEGLECTED AND SMALL FIRM EFFECTS
Authors: Arbel Avner , Strebel Paul
Published: March 2005

This paper addresses the empirical question of whether the differential attention which companies receive affects the capital asset pricing process. The degree of attention was measured by research concentration rankings based on the number of analysts regularly following the firm's securities. The results suggest: (i) that there is a “neglected firm effect” in terms of superior performance for less researched companies and (ii) that the neglected firm effect persists over and above the small firm effect; namely, the excess returns are not fully attributable to size. The ex‐post capital asset pricing model is unable to account for the differences in return across security research ranking. Several possible explanations for the results are considered but not tested.
EVIDENCE OF SHIFTS IN PORTFOLIO ASSET COMPOSITION AS A MARKET TIMING TOOL
Authors: Cheney John M. , Veit E. Theodore
Published: March 2005

Abstract

Previous research has investigated portfolio timing success by analyzing possible shifts in the beta of professionally managed portfolios. The methodology used by these studies usually involves calculating the betas of portfolios under varing market conditions using ex post holding period yields. Since a portfolio's beta can shift for reasons other than timing efforts, the results and interpretation of this type of analysis are limited. This paper takes a more direct approach to the analysis of timing by analyzing shifts in the asset composition of professionally managed portfolios. The asset composition is first analyzed to determine if portfolio managers are attempting to adjust risk exposure. Any shifts that are identified are compared to the market conditions that existed subsequent to the shift to determine if the shift was appropriate in terms of correct timing.
NONPECUNIARY BENEFITS AND ASSET MARKET EQUILIBRIUM
Authors: Chua Jess H. , Schnabel Jacques A.
Published: March 2005

Investments that yield nonpecuniary benefits have been studied empirically in previous research; the existence of such benefits has been inferred as the difference between actual returns and returns predicted by the capital asset pricing model. The authors reformulate the security market line to reflect nonpecuniary benefits and examine the equilibrium conditions for a market wherein some assets yield nonpecuniary benefits for some investors. The reformulated security market line is shown to perform better in such a market. The authors also discuss implications for investors.
THE USER COST AND CAPITAL BUDGETING
Authors: Downs Thomas W.
Published: March 2005

This study describes the relationship between the user cost of capital and capital budgeting processes and presents a formula for computing the user cost of an investment, accommodating the existence of taxes, inflation, and a nonconstant level of production. A project acceptability criterion assigning positive net present value when cash operating income exceeds user cost is discussed and applied to several examples. The test is shown to be useful and easy to apply.
ON APPLICATION OF THE RANK TRANSFORMATION DISCRIMINATION METHOD TO FINANCIAL PROBLEMS
Authors: Skomp Stephen E. , Cronan Timothy P. , Seaver William L.
Published: March 2005

Multiple discriminant analysis is a powerful analytic tool for the financial researcher. However, data transformations are a near necessity for improving relevant sample characteristics, since the assumption of normality plays a critical role in successfully applying the technique to financial problems. The rank transformation approach is an alternative that offers considerable advantages over traditional mathematical transformation procedures. The strength of rank transformation is illustrated in this paper using the bond‐rating problem as an empirical example. The results are significant because a classic model is shown to be more robust than previously was assumed. We suspect that other multivariate financial problems could benefit from the approach as well.
RISK, SEGMENTATION, AND THE MUNICIPAL TERM STRUCTURE
Authors: Trzcinka Charles
Published: March 2005

This paper examines the impact of institutional demand on the tax‐exempt term structure while controlling for biases induced by using ratings as measures of risk. Using a more extensive database than any used in previous studies, the author controls for risk by employing a random coefficient model and by introducing several new variables. Results of the study indicate that the risk hypothesis provides a significantly better explanation of the rising term structure than does the institutional demand hypothesis.
THE ECONOMIC ORDERING QUANTITY PROBLEM AND WEALTH MAXIMIZATION
Authors: McDaniel William R.
Published: March 2005

The typical financial management text states that management's objective should be to maximize owners’ wealth. The same texts then economic ordering quantity (EOQ) as a method for analyzing inventory problems without typing EOQ back to wealth maximization. This article shows algebraically that EOQ is not entirely consistent with the assumed objective. However, by simulation, EOQ is shown to yield answers that are sufficiently accurate for practical application.
A MULTIPERIOD MEAN‐VARIANCE MODEL OF OPTIMAL CAPITAL STRUCTURE
Authors: Scherr Frederick C.
Published: March 2005

The continuing interest in the capital structure issue among financial researchers is evidenced by the stream of capital structure models that have appeared in the literature. Much of this research has used a risk‐neutral and/or a single‐period framework. In this paper, we develop a capital structure model for multiperiod firms and allow for the firm's cash flows to grow over time, for the firm to issue new debt, and for two types of bankruptcy costs to occur. The types of bankruptcy costs that occur are determined by the firm's uncertain operating cash flows and negotiations between the firm and creditors. Risk is priced via the Sharpe‐Lintner capital asset pricing model. Multiperiod risk‐priced models, we argue, realistically represent actual firms and are thus an important step toward the development of more testable and usable models of capital structure. We execute a demonstration example in which the value of the levered firm achieves a maximum and discuss the steps the firm would take to maximize shareholder wealth within this example. The example illustrates that the value of the firm passes through an interior optimum as the promised debt payment is increased. A simulation of the effect of changes in firm‐specific parameters shows that the model exhibits expected and appealing relationships between these parameters and the value of the levered firm.
LEVERAGED BOND PORTFOLIO OPTIMIZATION UNDER UNCERTAINTY
Authors: Pieptea Dan R.
Published: March 2005

This paper develops a multiperiod management model for balance sheets of bond assets and liabilities. The decision variables are the amounts to buy, sell, or hold for each bond maturity class and the amount to borrow or debt to be repurchased for each liability class. Decisions are made at the beginning of each period conditional on the revealed interest rates scenario. The investor's utility is maximized in a state‐preference approach. The maturity structure of the initial holdings is an important component of the input parameters. The possible states of the world are described in terms of interest rate scenarios. The solution is subject to funds flow, inventory, liquidity, leverage, policy, and expiration constraints. The model leads to a large‐scale linear programming model, with multi‐indexed variables, that is solved with the Dantzig‐Wolfe decomposition algorithm. A numerical application that was motivated by discussions with top management at the RepublicBank Trust Department is presented. The experiments suggest that optimal portfolios frequently have a barbell structure consisting of short and long maturities with few intermediate maturities.
PERFORMANCE OF STOCKS RECOMMENDED ON THE BASIS OF INSIDER TRADING ACTIVITY
Authors: Benesh Gary A. , Pari Robert A.
Published: March 2005

The purpose of this paper is to assess whether abnormal returns could have been earned by an investor who concentrated solely on the stocks listed in the Consensus of Information (COI) monthly newsletters. Using residual‐based techniques, the authors find that (1) stocks listed in the COI newsletters were characterized by excess positive returns over the four months immediately preceding listing and that (2) users of the COI's recommendations could have earned moderate excess returns by systematically acquiring shares of these companies and holding them over a twelve‐month period starting in the month the newsletter is published or one month hence. Given that the recommendations yielding the largest abnormal returns to noninsiders were based on a mixture of open market purchases and exercised stock options, definitive conclusions with respect to the predictive implications of exercised stock options cannot be drawn.
BOND PORTFOLIO IMMUNIZATION: TESTS OF MATURITY, ONE‐ AND TWO‐FACTOR DURATION MATCHING STRATEGIES
Authors: Bierwag G. O. , Kaufman George G. , Latta Cynthia M.
Published: March 2005

This paper provides additional evidence on the usefulness of duration as a strategy tool by developing a two‐factor duration model and by using a reasonably reliable database to compare empirically the relative performance of maturity, one‐factor duration, and two‐factor duration matching strategies in immunizing portfolios of default‐free and option‐free bonds against interest rate risk. The results suggest that, on average, duration models, even for arbitrarily assumed simple stochastic processes, are more accurate than maturity models and that increased accuracy may be achieved by increasing the length of the planning period and the number of factors in the model.
THE ADOPTION OF NEW‐ISSUE DIVIDEND REINVESTMENT PLANS AND SHAREHOLDER WEALTH
Authors: Peterson Pamela P. , Peterson David R. , Moore Norman H.
Published: March 2005

This study examines security price reactions to the adoption of new‐issue dividend reinvestment plans. The sample is broken down into three subsamples: nonutilities, utilities adopting plans prior to May 1981, and utilities adopting plans after July 1981. For the nonutility corporations, no significant market reaction is observed. The utilities adopting prior to the change in the tax law experience a negative reaction the day following registration for the plan. Corporations adopting after July 1981, whose dividends receive preferential tax treatment, experience abnormal returns significantly greater than those of the utilities without preferential tax treatment.
EXAMINING MERGER SYNERGY WITH THE CAPITAL ASSET PRICING MODEL
Authors: Davidson Wallace N. , Garrison Sharon Hatten , Henderson Glenn V.
Published: March 2005

This paper analyzes the impact of mergers on the alphas and betas of actual merged firms compared to those of the homemade mergers an investor could have created by buying proportional shares of the two firms. The results provide some evidence of merger synergy. Where alpha and beta shifts were observed, the evidence did not indicate that either the relative size of target firms or concurrent capital structure changes were related to these shifts as current theory suggests. There is weak evidence that nonconglomerate mergers were more frequently synergistic.
A SIMPLIFIED APPROACH TO SHORT‐TERM INTERNATIONAL DIVERSIFICATION
Authors: Cotner John S. , Seitz Neil E.
Published: March 2005

Using Eurocurrency deposit interest rates, currency exchange rates, and inflation rates in a mean‐variance portfolio analysis, the authors develop portfolios of interest‐bearing deposits in London banks denominated in various currencies. These easily constructed multicurrency portfolios are shown to provide better risk‐return positions than comparable single currency holdings.
STOCK MARKET PERCEPTION OF INDUSTRIAL FIRM BANKRUPTCY
Authors: Ramaswami Murali
Published: March 2005

The objectives of this study are to determine (1) when the stock market first perceives the impending bankruptcy of a potentially bankrupt firm and (2) what firm‐specific factors explain the interval between the perception time and the eventual date of bankruptcy (i.e., market lead time). A computational methodology based on the Hillmer‐Yu technique is used to determine the month in which a structural change in the mean and variance of monthly stock return occurs for a potentially bankrupt firm. This parametric change month or the “market perception time” is computed for a sample of 47 industrial firms. The range of market lead times cautions against the common assumption of a uniform event period in event studies. The lead time interval (for both the mean and variance of monthly market return) of poteintially bankrupt firms is found to be positively related to the firm's earnings per share at the time of stock market perception of eventual bankruptcy. Neither the firm's asset size nor systematic risk appear to be significant indicators of lead time interval. Also, change in investment at market perception time is positively related to percentage change in the market lead times. This suggests that innovations in the investment variable are a source of new information to the security market in assesing the probability of future bankruptcy of a firm.
TRUCKING DEREGULATION AND MOTOR‐CARRIER PERFORMANCE: THE SHAREHOLDERS' PERSPECTIVE
Authors: Michel Allen , Shaked Israel
Published: March 2005

This paper utilizes an event study methodology to investigate the effects of deregulation on carriers' shareholders. This methodology compares the expected returns during a time period surrounding a particular event with actual returns during the same time period. These differences are referred to as prediction errors. The study investigates the prediction errors associated with individual trucking firms, as well as those associated with groups composed of regional carriers, national carriers, and the aggregate sample of firms used in the study. The results suggest that the passage of the Motor Carrier Reform Act on July 1, 1980, halted a serious 18‐month downward trend in the aggregate sample's cumulative prediction error. Nearly all firms showed significant gains in the 18 months subsequent to deregulation. Using two control groups, the authors show that a large portion of this gain from the industry sample can be explained by lower and more stable fuel prices and a sharp upturn in the economy. The results also indicate that due to deregulation, the large regional trucking firms were able to outperform the small regional firms and the national firms in the more favorable economic environment present after deregulation.
ON THE CORRESPONDENCE BETWEEN THE BAUMOL‐TOBIN AND MILLER‐ORR OPTIMAL CASH BALANCE MODELS
Authors: Bagamery Bruce D.
Published: March 2005

In this note, the author identifies a correspondence relationship between the Baumol‐Tobin (BT) and Miller‐Orr (MO) optimal cash balance frameworks and specifies the conditions under which both models imply the same level of optimal cash balances. Realistic applications of these models will concern net cash flows that exhibit behavior somewhere between the two extremes of BT entirely deterministic and MO completely random. The author demonstrates that if the correspondence relationship is satisfied, either the BT or the MO cash balance model can be employed since both models imply the same result. One conjecture open for empirical verification is that cash balance models perform more (less) adequately for groups of firms that satisfy (violate) the correspondence relationship.
THE MARGINAL‐EFFICIENCY‐OF‐CAPITAL FUNCTION OF THE FIRM
Authors: Barges Alexander
Published: March 2005

In this paper, the author points out that over a decade ago E. Norman Bailey identified the marginal‐efficiency‐of‐capital (MEC) function as erroneous and argued that revisions in capital budgeting theory and teaching were necessary. The author develops more fully the arguments against the function and offers the theoretically correct MEC function. The development of the correct MEC function is a straightforward application of basic price theory; however, this application requires that the capital of the firm be viewed as a collection of complementary resources, in addition to its role as an income‐producing investment.
OPTIMAL LIQUIDITY IN PERSONAL FINANCIAL PLANNING
Authors: Warschauer Thomas , Cherin Antony
Published: March 2005

This paper investigates the question of optimal portfolio liquidity in a personal financial planning framework. The difficulties encountered in answering this question are discussed, liquidity is defined, and a variety of motives for maintaining liquidity are examined in depth. The major thrust of the paper is the development of a theoretical model of liquidity needs, which is then simplified in a stepwise manner through the inclusion of cash substitutes, need interdependence, and other devices. It is concluded that a significantly reduced liquidity needs model is hypothetically possible, permitting the planner to think in terms of substantially smaller client cash balances.
INFLUENCE OF TREASURY BILL FUTURES TRADING ON THE PRIMARY SALE OF THE DELIVERABLE TREASURY BILL
Authors: Lasser Dennis J.
Published: March 2005

This paper investigates the impact of the presence of Treasury bill (T‐bill) futures market contracts on the primary auction price of deliverable T‐bills. Of the 52 weekly three‐ and six‐month T‐bill auctions, only four are deliverable against the T‐bill futures market contract. This unique ability to deliver may command a premium price in the primary market. The results of this study support this hypothesis with regard to the six‐month auction but are inconclusive with regard to the three‐month auction. Furthermore, there is some evidence that the 1983 rule change making the one‐year T‐bill a deliverable instrument reduced the size of the premium in the six‐month bill auction.
AUTOMOTIVE RECALLS AND INFORMATIONAL EFFICIENCY
Authors: Hoffer George E. , Pruitt Stephen W. , Reilly Robert J.
Published: March 2005

This study provides an empirical test of the informational efficiency of the stock market by exploring the stock price and volume patterns exhibited by Chrysler, Ford, and General Motors around the time of announcement of severe automotive recall campaigns. Because information concerning automotive recalls is released to the public via two distinct methods, which differ only with respect to the number of market participants notified of the recall campaigns, a differential performance analysis of stock returns and trading volume around both events provides evidence of the degree of informational aggregation in the stock market for three closely followed U.S. firms. The results of the study fail to support the definitional notion of informational efficiency with respect to the first public release date of severe recalls, as the vast majority of the stock market's response to recall announcements does not occur until the information is reported to all market participants. Further, tests of differential trading volume around the announcements suggest that some members of the financial community may be trading securities on the basis of the information contained in the first public announcement.
DEBT REFUNDING AND SHAREHOLDER WEALTH: THE PRICE EFFECTS OF DEBT‐FOR‐DEBT EXCHANGE OFFER ANNOUNCEMENTS
Authors: Johnson W. Bruce
Published: March 2005

This study examines the impact of debt refunding on common stock prices for a sample of 48 exchange offers announced from 1970 through 1981. Exchange offer announcements do not have a significant impact on average common stock returns but appear to produce idiosyncratic share price effects. Refunding‐induced price effects were unrelated to several exchange offer characteristics including tax shield increases, exchange offer premia, and transaction costs of refunding. Common stock excess returns were negatively related to reductions in debt service payments and relaxation of dividend payment constraints. Thus, the evidence is consistent with theories predicting that certain debt refundings generate negative information‐signaling price effects.
BLACK‐SCHOLES REVISITED: SOME IMPORTANT DETAILS
Authors: Kutner George W.
Published: March 2005

This paper discusses some of the important details not presented in the original derivation of the Black‐Scholes option valuation model. The associated economic rationale is also discussed. A simple alternative derivation based upon risk‐neutrality arguments is presented.
EXPENSE PREFERENCE AND MINORITY BANKING: A NOTE
Authors: Scott William L. , Gardner Mona J. , Mills Dixie L.
Published: March 2005

Previous research has concluded that, in comparison to nonminority institutions, minority‐owned banks have lower profitability and higher operating costs. This note examines such findings in the context of the expense preference theory of managerial behavior. Rather than focusing on the effect of regulated product markets, however, this research investigated whether imperfections in the capital markets, introduced through government deposit programs making low‐cost funds available to participating minority banks, were associated with expense preference practices by minority bank managers. The results suggest that managers of minority banks did not practice the traditional forms of expense preference but instead appeared to act in a manner consistent with public policy objectives.
REINCORPORATION: MOTIVES AND SHAREHOLDER WEALTH
Authors: Peterson Pamela P.
Published: March 2005

This study provides evidence on the wealth effects of reincorporation and the association of these wealth effects with motives to change the state of incorporation. There are no wealth effects observed on the announcement of the change for shareholders of corporations that change as part of a set of measures to defend against a pending or possible hostile takeover. However, for corporations that reincorporate without stated antitakeover intentions, a positive reaction is observed at the announcement of the change. These results indicate that the defensive posture assumed by reincorporating may offset other positive effects of the change in corporate charters.
JOINT VENTURES IN CHINA: PROBLEMS AND SOLUTIONS
Authors: Ouyang Ling‐Nan
Published: March 2005

The author reviews problems associated with joint ventures in China and discusses new regulations designed (1) to give more decision‐making rights to joint ventures, (2) to help reduce project expenses, and (3) to provide more loans for joint ventures' short‐term revoling funds. The author also suggests changes in labor management, raw materials management, financial management, and export orientation to ensure the success of joint ventures in China.
A NOTE ON BOND DEFEASANCE
Authors: Pari Robert , Caks John
Published: March 2005

This paper provides an after‐tax cash flow analysis of insubstance defeasance versus open market debt repurchase under the current tax law. Depending upon interest rates, term to maturity, and the riskiness of the corporate bond issue that managers with to remove from the balance sheet, defeasance may be the cheapest restructuring alternative available. Managers must consider all these factors before reaching a decision that is consistent with the maximization of shareholder wealth.
TEXTBOOK INCONSISTENCIES IN GRAPHING VALUATION EQUATIONS: A FURTHER NOTE
Authors: Conine Thomas E. , Tamarkin Maurry
Published: March 2005

In this note, the authors demonstrate that if a firm's leverage ratio is measured by debt‐to‐total value (debt‐to‐equity) in the pure capital structure rearrangement framework implicit in research reported by Modigliani and Miller (e.g., debt‐to‐equity exchanges), the market value of levered equity will be a concave (convex) function, and the market value of debt will be a convex (concave) function. These nonlinearities exist even without bankruptcy costs.
AN INVESTIGATION INTO THE ROLE OF THE MARKET PORTFOLIO IN THE ARBITRAGE PRICING THEORY
Authors: Born Jeffery A. , Moser James T.
Published: March 2005

This paper investigates the role of the market portfolio in the arbitrage pricing theory (APT). We show that if the multifactor return‐generating process put forth in the APT is valid, then unexpected deviations in the return on the market portfolio must be completely explained by unexpected deviations in the underlying return‐generating factors. As well, market betas are developed as a combination of return‐generating factor sensitivity coefficients. These results lead us to conclude that an empirically significant “market factor’ is evidence of omitted return‐generating factors, rather than evidence that the market is a factor. Finally, results obtained when market betas are regressed against factor sensitivity coefficients are consistent with these insights. The results suggest that there are at least three return‐generating factors. This evidence does not rely on ex post pricing of estimated factors.
LOW PRICE, PRICE‐EARNINGS RATIO, MARKET VALUE, AND ABNORMAL STOCK RETURNS
Authors: Tseng Kuo C.
Published: March 2005

In this research, the individual and net effects of low price, low price/earnings (P/E) ratio, and small size on the risk‐adjusted excess returns are investigated for the fourth quarter of 1975 to the fourth quarter of 1985. The entire sample is divided into quintiles, and the resulting portfolios are rebalanced at the end of each quarter. Low price, low P/E ratio, and small value portfolios did experience greater excess returns. By applying the experimental control technique, the net effect of stock price is significant after controlling the size. Similarly, the net effect of the market value is significant after the stock price is controlled. The net effect of the P/E ratio is insignificant after controlling either the stock price or the market value.
THE VALUATION OF SEMIANNUAL BONDS BETWEEN INTEREST PAYMENT DATES
Authors: Taylor Richard W.
Published: March 2005

Recently, a geometric mean approach has been advocated for the valuation of bonds when interest payments take place more than once a year. The author extends the recent work in this area by deriving a geometric mean formula for the valuation of semiannual bonds between interest payment dates.
DISCOUNTED CASH FLOW WITH EXPLICIT REINVESTMENT RATES: TUTORIAL AND EXTENSION
Authors: McDaniel William R. , McCarty Daniel E. , Jessell Kenneth A.
Published: March 2005

This article discusses and critiques yield‐based capital budgeting techniques that have arisen over the past 30 years. Some have theoretical inconsistencies, while some work well only for certain kinds of problems. A new method, the marginal return on invested capital, is presented. The method's application is general; it gives accept/reject signals and rankings consistent with the net present value method.
THE OVER‐THE‐COUNTER MARKET AND NEW YORK STOCK EXCHANGE TRADING HALTS
Authors: Fabozzi Frank J. , Ma Christopher K.
Published: March 2005

This paper examines the over‐the‐counter (OTC) market activities for stocks temporarily suspended by the New York Stock Exchange (NYSE). Unlike previous studies, we use transaction‐to‐transaction data on the NASDAQ during NYSE trading halts to investigate the price adjustment process between market equilibria. The evidence indicates that while being halted by the NYSE, the same stocks have exhibited significantly greater volatility in the OTC market. Since the volatile price movement is mainly random and provides no arbitraging opportunities for the OTC market traders, we do not find support for the proposal that trading halts should be mandatory for all trading locations.
AN ECONOMETRIC ANALYSIS OF EQUITY COSTS AND RISK PREMIUMS IN THE ELECTRIC UTILITY INDUSTRY: 1971–1985
Authors: Shome Dilip K. , Smith Stepehn D.
Published: March 2005

This paper develops a varying parameter econometric model that estimates the cost of equity of individual utility firms from 1971 to 1985. The equity costs estimated in this framework can be analyzed in terms of their statistical precision. The paper also examines, theoretically and empirically, the relationship between the econometric estimates of the equity risk premiums and the risk‐free interest rates. The data do not support the hypothesis that risk premiums are independent of interest rates. Also, the relationship appears to vary over time. These results invalidate the risk premium approach in which equity costs are estimated by adding a constant, historical average risk premium to the prevailing interest rates.
ILLEGAL INSIDER TRADING: IS IT RAMPANT BEFORE CORPORATE TAKEOVERS?
Authors: Gupta Atul , Misra Lalatendu
Published: March 2005

This paper investigates the role of insider trading as an explanation for the observed pre‐announcement price run‐ups for takeover targets. We hypothesize that if insider trading is a significant contributor to such price run‐ups, then observed run‐ups should be smaller for takeovers occurring after May 1986 (the beginning of the “insider trading scandal”) relative to those occurring prior to May 1986. The evidence suggests that insider trading is not, on average, a significant contributor to pre‐announcement price run‐ups.
MULTIPRODUCT COST FUNCTIONS AND SCALE ECONOMIES IN BANKING
Authors: Cebenoyan A. Sinan
Published: March 2005

This study provides new and efficient estimates of scale economies in banking. Recent criticism of the incorrect specification of homogeneity restrictions on the translog cost functions is addressed, and correct estimations are provided. The results indicate that such misspecifications do affect measures of scale economies. The study covers 1980 to 1983 for unit and branch banks. The estimation is further enhanced by introducing factor share equations invoking Shephard's lemma and using an iterative Zellner procedure. The results fail to indicate scale economies for the overall sample. Some evidence of small degrees of scale economies is observed in parts of the sample.
PRICE PERFORMANCE OF INITIAL PUBLIC OFFERINGS OF MASTER LIMITED PARTNERSHIP UNITS
Authors: Muscarella Chris J.
Published: March 2005

This paper is the first to provide evidence on the pricing of initial public offerings of master limited partnerships (MLPs). A sample of fifty MLP offerings from January 1983 through July 1987 is analyzed. No significant underpricing (or overpricing) is found for the sample taken as a whole, although some slight overpricing is found for certain industry subsamples. These findings are in sharp contrast to the pervasive evidence from previous studies that document significantly positive initial returns for common stock initial offerings.
An Investigation into the Equilibrium Structure of the Commodity Futures Market Anomaly
Authors: Murphy J. Austin , Hilliard Jimmy E.
Published: March 2005

Commodity futures contracts are shown to be characterized by indivisibility problems and tax disadvantages. An empirical test demonstrates that long futures investors were compensated for these drawbacks prior to the mid‐1970s. However, compensation for the investment disadvantages of commodity futures ceased to exist after 1974. The year 1974 is significant because barriers to institutional investment in the futures market were removed in that year.
Diversification of the Banking Firm
Authors: Rose Peter S.
Published: March 2005

Diversification of banks and bank holding companies into nonbank product lines may reduce the risk to banking returns or cash flows provided appropriate portfolio conditions are satisfied. This study of bank and nonbank financial‐service firms and nonfinancial corporations over the 1966–1985 period finds evidence consistent with the proposition that individual banking firm risk may be reduced through selected product‐line diversification, particularly in the insurance and data processing fields. Moreover, there is evidence of less cash‐flow sensitivity of selected nonbank product lines to exogenous economic and financial‐market variables compared to banking firms. While public policy continues to insulate banking firms from most nonbank product and service lines, the potential benefits of risk reduction suggest that a careful review of current policy is needed.
The Rationality and Efficiency of Stock Price Relative to Money Announcement Information
Authors: Foote William G.
Published: March 2005

Recent studies find that stock price reacts only to unanticipated changes in the money supply. These studies assume a joint hypothesis of rationality and efficiency in their tests. This paper formulates a model in which stock price depends both upon anticipated and unanticipated money supply forecasts. From this model, an econometric model that separates the hypotheses of rationality and efficiency is estimated. The results show that investors rationally incorporate forecasts of the weekly current money announcement into stock price during the pre‐October 6, 1979, sample period. However, efficiency with respect to money information cannot be corroborated in this period. Cross‐equation restrictions implied by rationality are rejected during the post‐October 6, 1979, period. In this period, efficiency again cannot be corroborated. Alternative money prediction specifications indicate the robustness of these results.
An Empirical Test of Ross's Cash Flow Beta Theory of Capital Structure
Authors: Sugrue Timothy F. , Scherr Fredrick C.
Published: March 2005

This paper empirically investigates Ross's cash flow beta theory of capital structure. Ross hypothesizes that, for firms of similar cash flow variance, there will be an inverse relationship between financial leverage and cash flow beta. This paper provides empirical support for Ross's theory, though the extent of the support depends upon the sample period and the leverage specification.
The Effect of Bankruptcy Laws on the Valuation of Risky Consumer Debt
Authors: Kon Stanley J. , Thatcher John G.
Published: March 2005

In a market setting with perfect information, a consumer recognizes that he can influence the state‐contingent returns, and hence the pric, of his risky debt by the decision variables that determine the collateral and promised payments. This paper examines the effect of bankruptcy laws on the feasible consumption opportunities of borrowers and lenders in order to determine the necessary requirements for the bilateral debt market to be perfectly competitive.
Deregulation, Deposit Markets, and Banks' Costs of Funds
Authors: Bundt Thomas P. , Schweitzer Robert
Published: March 2005

Deposit interest rate deregulation and financial service innovation have led to dramatic changes in large banks' deposit composition. This paper presentes a statistical cost analysis of changes in unit costs faced by banks under comprehensive financial deregulation. The results of this paper show that the unit cost of retail deposits‐demand and passbook savings deposits‐has increased relative to wholesale deposits‐federal funds, certificates of deposit, and money market time deposits. We show, contrary to conventional wisdom, that changes in unit costs have been caused by processing costs rather than by interest expenses.
The Investment Performance of Common Stocks in Relation to Their Price–Earnings Ratios: An Update of the Basu Study
Authors: Johnson R. Stafford , Fiore Lyle C. , Zuber Richard
Published: March 2005

In this paper, the relationship between the investment performances of equity securities and their price–earnings ratios is examined using an approach similar to the one employed by Basu in a 1977 paper. From the tests, we conclude that, from 1979 through 1984, there were some moderate excess rates of return earned by selecting stocks based on their price–earnings ratios but that these excess rates were not obtained from investing in low price–earnings stocks.
The Reconciliation of the Smith's and Jarrow and Rudd's Option Sensitivity Formulae: A Teaching Note
Authors: Choi Daniel F. S. , Ward Charles W. R.
Published: March 2005

Smith and Jarrow and Rudd have presented different expressions for the same option sensitivities. With the mathematical derivations omitted, the apparent differences have never been explained before. This note points out that an important identity can reconcile the differences. The usefulness of the identity is further explored.
Investment Decision Making with Derivative Securities
Authors: Brooks Robert
Published: March 2005

This paper examines strategies employing stock options, index options, index futures options, and index futures contracts in an effort to establish under what conditions a portfolio manager should diversify into these derivative assets. The results show that futures option call writing and put buying were dominated by third‐order stochastic dominance when compared to similar index options. Thus, when covered call writing or protective put buying are being considered, index options appear to be the better choice.
An Analysis of Merger Financing
Authors: Murphy Austin , Nathan Kevin
Published: March 2005

This research analyzes a theory of merger financing that indicates that the terms of payment for target shares should be used to optimally influence the post‐merger liquidity and capital structure of the combined firm. In an empirical test on a large sample of mergers, the stock market reaction to the announcement of acquisition financing is support the theory. The empirical results also indicate that a large portion of the cross‐sectional return differences on acquirers' shares can be explained by financing theory.
The Impact of Taxes on Discount Bond Valuation and Risk
Authors: Bey Roger P. , Johnson Larry J.
Published: March 2005

If the effective tax rates on ordinary income and capital gains are identical, the assumption of independence or dependence between ordinary income and capital gains tax rates is shown to have no impact on discount bond valuation or risk. However, even if the effective tax rates are identical, the shape and the sensitivity of the bond valuation and risk functions with respect to taxes are not identical under the alternative assumptions. A mathematical and numerical analysis of the sensitivity of changes in the discount bond valuation and risk functions with respect to income tax rates is provided. Comparisons between the sensitivities of changes in the discount bond valuation and risk functions and taxes under conditions of dependence or independence between ordinary income and capital gains tax rates are made.
A Simple Formula for Duration: An Extension
Authors: Moser James T. , Lindley James T.
Published: March 2005

This paper extends a recent algorithm to calculate Macaulay's duration for the case of intra‐period coupon bonds. The extended algorithm overcomes errors introduced by bond‐price formulae that incorrectly compound yields to maturity. These results simplify the computation of Macaulay's duration.
Dealers’ Adverse Selection Costs and the Evaluation of Alternative Measures of the Earnings Release Signal
Authors: Senteney David L.
Published: March 2005

This study investigates the relationship between over‐the‐counter dealers' adverse selection costs and alternative measures of the earnings release signal to evaluate the quality of the signal. The measure of the earnings release signal most associated with dealers' adverse selection costs is suggested as being the least noisy measure of the information impounded in security prices during earnings release periods. The results suggest that the seasonal Box‐Jenkins earnings expectation model known as the Brown‐Rozeff “premier” model generates the signal most consistent with the information impounded in security prices during earnings release periods.
Institutional Ownership and Distribution of Equity Returns
Authors: Aggarwal Raj , Rao Ramesh P.
Published: March 2005

Although there is considerable evidence of the importance of skewness and kurtosis in equity returns, much less attention has been paid to their determinants. Recent theoretical and empirical advances in the literature suggest that the information structure and other market characteristics affect the nature of return distributions. One such characteristic is the degree of institutional ownership in the stock. This study hypothesizes and documents a significant inverse relationship between the degree of institutional ownership and the standard deviation, skewness, and kurtosis of equity returns.
Preferred Stock Returns, CreditWatch, and Preferred Stock Rating Changes
Authors: Wansley James W. , Elayan Fayez A. , Maris Brian A.
Published: March 2005

This paper examines the announcement effects of CreditWatch placement and reratings upon a sample of preferred stock issues that were placed on CreditWatch and later rerated or affirmed by Standard & Poor's. Results indicate that CreditWatch provides information to market participants and may have reduced the surprise associated with subsequent reratings. CreditWatch placement may be an erroneous signal, however, since nearly 50 percent of the issues placed for negative reasons were not downgraded, but affirmed, upon removal from Credit Watch.
An Empirical Evaluation of the Friedman Hypothesis of Inflation on Capital Asset Pricing
Authors: Burnie David A.
Published: March 2005

An empirical model incorporating the Friedman inflation uncertainty hypothesis is evaluated on capital asset pricing in conjunction with the covariance effect of the Fisher inflation hypothesis. The Fisher‐Friedman capital asset pricing empirical model (FFCAPM) is compared to the capital asset pricing model (CAPM) and the Chen‐Boness (C‐B) model for explanatory power and significance over three periods. The FFCAPM performed better than the two competing models in explaining the variation in equity returns. The Friedman hypotheses of a positive economy‐wide inflation adjustment and a negative inflation uncertainty impact are supported. A firm‐specific inflation response of Fisher inflation covariance was also supported. These results indicate that empirical support for the Fisher effect may be limited given the normal testing procedure of simply adding an inflation term as in previous studies.
Issue Costs in Fisher's Two‐Period Model
Authors: Howe Keith M. , Gronewoller Paul L.
Published: March 2005

This paper analyzes the impact of issue costs on firm investment and dividend policies within the context of the two‐period Fisher model. Consistent with its pedagogical tone, the paper illustrates graphically the loss in value stemming from a high dividend payout by a firm subject to issue costs in its external financing. Two components compose the overall loss in value. The “substitution effect” results from a shift in the investment opportunity set, while the “wealth effect” stems from the loss in value owing to issue costs. The paper suggests that the firm, when increasing its dividend payout, must weigh the marginal loss in firm value against the offsetting benefits, which may take the form of reduced monitoring costs.
Interest Rate Futures Options and Interest Rate Options
Authors: Ho Thomas S. Y. , Lee Sang Bin
Published: March 2005

This paper derives pricing models of interest rate options and interest rate futures options. The models utilize the arbitrage‐free interest rate movements model of Ho and Lee. In their model, they take the initial term structure as given, and for the subsequent periods, they only require that the bond prices move relative to each other in an arbitrage‐free manner. Viewing the interest rate options as contingent claims to the underlying bonds, we derive the closed‐form solutions to the options. Since these models are sufficiently simple, they can be used to investigate empirically the pricing of bond options. We also empirically examine the pricing of Eurodollar futures options. The results show that the model has significant explanatory power and, on average, has smaller estimation errors than Black's model. The results suggest that the model can be used to price options relative to each other, even though they may have different expiration dates and strike prices.
Long‐Term Earnings Forecasts in the Electric Utility Industry: Accuracy and Valuation Implications
Authors: Chatfield Robert E. , Hein Scott E. , Moyer R. Charles
Published: March 2005

This paper integrates research on the accuracy of alternative long‐term earnings forecasts, the gain in accuracy achievable from combining various forecasts, and the power of different long‐term earnings forecasts to explain stock prices. The tests are performed on 82 electric utility firms because of the relative homogeneity of accounting data in that industry and because of the importance of the findings for the determination of the cost of capital in a regulatory proceeding. The results are consistent with earlier research findings that analyst forecasts of long‐term earnings growth are more accurate than forecasts from extrapolative models. Combined forecasts applied to out‐of‐sample data, however, did not result in markedly improved forecasting accuracy. Finally, valuation tests of alternative forecasting techniques offered strong evidence that investors place the greatest weight on forecasts from Value Line.
Simulating and Forecasting Utility Stock Returns: Arbitrage Pricing Theory vs. Capital Asset Pricing Model
Authors: Bubnys Edward L.
Published: March 2005

Just when the capital asset pricing model (CAPM) has become accepted by public utility regulators as a method for estimating a utility's screening rate, academic criticism of the model's theoretical and empirical shortcomings has led to empirical testing of the alternative arbitrage pricing theory (APT). This paper expands on recent APT‐CAPM performance comparisons by simulating returns of public utility stocks using versions of both models, as was done by Bower, Bower, and Logue in a 1984 paper. In addition, the models are used for ex‐post forecasting of returns in a subsequent time period. The Litzenberger‐Ramaswamy method is used to correct for errors‐in‐variables in the CAPM cross‐sectional equation. This allows for estimating the security market line using firm betas. The same methodology is used in the APT stages. Three different criteria—the Theil inequality, the sources of mean square error, and Chen's estimated weights of expected return‐are used to compare CAPM and APT simulation and forecasting of the equity screening rates. Tested on a sample of 128 public utility companies, results show that neither model is clearly dominant. There is a tendency for reversal of performance. The model that is superior for simulating returns tends to be inferior for forecasting them, and vice‐versa.
Sinking Funds and the Agency Costs of Corporate Debt
Authors: Kao Chihwa , Wu Chunchi
Published: March 2005

This paper examines whether a firm's sinking fund decision is affected by agency costs. The paper argues that sinking funds can be an effective device to resolve the problems of information asymmetry, risk incentives, and suboptimal investments. Empirical tests are provided. Results show that firms with certain characteristics related to agency problems tend to adopt a sinking fund provision in the bond indenture.
Scope Economies in Banking: The Hybrid Box‐Cox Function
Authors: Cebenoyan A. Sinan
Published: March 2005

This paper provides evidence on scope economies in banking using the Box‐Cox hybrid functional form on five products and two inputs. A factor demand equation augmented system of equations in estimated using the iterative Zellner technique. Strict Willig‐type scope estimates indicate that there are scope diseconomies in the sample of banks in the Functional Cost Analysis (FCA) Program data for 1983.