bluuebunny/crossref_metadata_2025 huggingface dataset:
Capital Controls and International Capital Market Segmentation: The Evidence from the Japanese and American Stock Markets
Authors: GULTEKIN MUSTAFA N. , GULTEKIN N. BULENT , PENATI ALESSANDRO
Published: April 2012

The paper focuses on two countries, Japan and the U.S., to test the integration of capital markets. In Japan, the enactment of the Foreign Exchange and Foreign Trade Control Law in December of 1980 amounted to a true regime switch that virtually eliminated capital controls. Using multifactor asset pricing models, we show that the price of risk in the U.S. and Japanese stock markets was different before, but not after, the liberalization. This evidence supports the view that governments are the source of international capital market segmentation.
Insider Trading, Ownership Structure, and the Market Assessment of Corporate Sell‐Offs
Authors: HIRSCHEY MARK , ZAIMA JANIS K.
Published: April 2012

This paper finds that the generally favorable assessment of corporate sell‐off decisions is most apparent for closely held firms where insider net‐buy activity is prevalent during the prior six‐month period. This suggests that insider trader activity and ownership structure information are used by the market in the characterization of sell‐off decisions as favorable or unfavorable for investors.
Overreactions in the Options Market
Authors: STEIN JEREMY
Published: April 2012

This paper examines the “term structure” of options' implied volatilities, using data on S&P 100 index options. Because implied volatility is strongly mean reverting, the implied volatility on a longer maturity option should move by less than one percent in response to a one percent move in the implied volatility of a shorter maturity option. Empirically, this elasticity turns out to be larger than suggested by rational expectations theory—long‐maturity options tend to “overreact” to changes in the implied volatility of short‐maturity options.
The Resiliency of the High‐Yield Bond Market: The LTV Default
Authors: MA CHRISTOPHER K. , RAO RAMESH P. , PETERSON RICHARD L.
Published: April 2012

This paper investigates the resiliency of the new‐issue high‐yield bond market by examining the changes in implied default rates of such bonds before and after the largest high‐yield bond default, i.e., the LTV bankruptcy. Specifically, the paper compares implied default probabilities of high‐yield bonds during the post‐LTV period calculated from actual new‐issue yields with instrumental default probabilities calculated on the assumption that the default had not occurred. A comparison of these probabilities reveals that the market's perception of default on the high risk segment of the bond market increased significantly after the LTV bankruptcy. However, the effect was transitory, lasting only six months. Thus, the market was resilient to a major default.
Why Does Stock Market Volatility Change Over Time?
Authors: SCHWERT G. WILLIAM
Published: April 2012

This paper analyzes the relation of stock volatility with real and nominal macroeconomic volatility, economic activity, financial leverage, and stock trading activity using monthly data from 1857 to 1987. An important fact, previously noted by Officer (1973), is that stock return variability was unusually high during the 1929–1939 Great Depression. While aggregate leverage is significantly correlated with volatility, it explains a relatively small part of the movements in stock volatility. The amplitude of the fluctuations in aggregate stock volatility is difficult to explain using simple models of stock valuation, especially during the Great Depression.
The Number of Factors in Security Returns
Authors: BROWN STEPHEN J.
Published: April 2012

Both factor analysis of security returns and the analysis of eigenvalues seem to indicate that a market factor explains the major part of security returns. We find that such evidence is consistent with an economy where there are in fact k “equally important” priced factors; eigenvalue analysis in the context of such an economy will lead an investigator to the false inference that the one important “factor” is the return on an equally weighted market index.
Primes and Scores: An Essay on Market Imperfections
Authors: JARROW ROBERT A. , O'HARA MAUREEN
Published: April 2012

This paper investigates the reported relative mispricing of primes and scores to the underlying stock. Given transaction costs, we establish arbitrage‐based bounds on prime and score prices. We then develop a new nonparametric statistical technique to test whether prime and score prices violate these bounds. We find that prime and score prices do exceed stock prices, and often by a considerable amount. We demonstrate that this increased value is most likely due to the score's ability to save on the costs of dynamic hedging. We also show how short sale and trust size constraints impede the ability to arbitrage price disparities.
A Portfolio Approach to Estimating the Average Correlation Coefficient for the Constant Correlation Model
Authors: ANEJA YASH P. , CHANDRA RAMESH , GUNAY ERDAL
Published: April 2012

This paper presents a portfolio approach to estimating the average correlation coefficient of a group of stocks which are considered for portfolio analysis. The average correlation coefficient has been shown to produce a better estimate of the future correlation matrix than individual pairwise correlations. The advantage of the approach described here is that it does not require the estimation of pairwise correlations for estimating their average.
Institutional Markets, Financial Marketing, and Financial Innovation
Authors: ROSS STEPHEN A.
Published: April 2012

Firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations. Because of these agency theoretic relations, institutional behavior in financial markets is not a simple reflection of the preference structures of individuals. Institutional preferences give rise to a demand for new financial instruments and innovations, even when the returns on these instruments are “spanned” in the sense of complete pricing. The innovations can be thought of as solving moral hazard problems. An agency theoretic example serves to illustrate the demand, supply, and financial marketing of stripped securities. In short, institutions matter.
Market Created Risk
Authors: KRAUS ALAN , SMITH MAXWELL
Published: April 2012

We develop a multiperiod rational expectations model of securities market equilibrium in which equilibrium prices may move between periods even though it is common knowledge that no new information has arrived about ultimate security payoffs. This happens because investors know they have imperfect information about the endowments of other investors and this knowledge affects their probability beliefs about the prices that will prevail at the intermediate trading date. These beliefs are reflected in the equilibrium at the initial trading date when investors focus on the probabilities of intermediate capital gains and losses, rather than ultimate payoffs.
Free Cash Flow and Stockholder Gains in Going Private Transactions
Authors: LEHN KENNETH , POULSEN ANNETTE
Published: April 2012

We investigate the source of stockholder gains in going private transactions. We find support for the hypothesis advanced by Jensen that a major source of these gains is the mitigation of agency problems associated with free cash flow. Using a sample of 263 going private transactions from 1980 through 1987, our results indicate a significant relationship between undistributed cash flow and a firm's decision to go private. In addition, we find that premiums paid to stockholders are significantly related to undistributed cash flow. These results are especially strong for firms that went private between 1984 and 1987 and also for firms whose managers owned relatively little equity before the going private transaction.
Empirical Tests of the Consumption‐Oriented CAPM
Authors: BREEDEN DOUGLAS T. , GIBBONS MICHAEL R. , LITZENBERGER ROBERT H.
Published: April 2012

The empirical implications of the consumption‐oriented capital asset pricing model (CCAPM) are examined, and its performance is compared with a model based on the market portfolio. The CCAPM is estimated after adjusting for measurement problems associated with reported consumption data. The CCAPM is tested using betas based on both consumption and the portfolio having the maximum correlation with consumption. As predicted by the CCAPM, the market price of risk is significantly positive, and the estimate of the real interest rate is close to zero. The performances of the traditional CAPM and the CCAPM are about the same.
Signalling and the Pricing of New Issues
Authors: GRINBLATT MARK , HWANG CHUAN YANG
Published: April 2012

This paper develops a signalling model with two signals, two attributes, and a continuum of signal levels and attribute types to explain new issue underpricing. Both the fraction of the new issue retained by the issuer and its offering price convey to investors the unobservable “intrinsic” value of the firm and the variance of its cash flows. Many of the model's comparative statics results are novel, empirically testable, and consistent with the existing empirical evidence on new issues. In particular, the degree of underpricing, which can be inferred from observable variables, is positively related to the firm's post‐issue share price.
Seasoned Offerings, Imitation Costs, and the Underpricing of Initial Public Offerings
Authors: WELCH IVO
Published: April 2012

This paper presents a signalling model in which high‐quality firms underprice at the initial public offering (IPO) in order to obtain a higher price at a seasoned offering. The main assumptions are that low‐quality firms must invest in imitation expenses to appear to be high‐quality firms, and that with some probability this imitation is discovered between offerings. Underpricing by high‐quality firms at the IPO can then add sufficient signalling costs to these imitation expenses to induce low‐quality firms to reveal their quality voluntarily. The model is consistent with several documented empirical regularities and offers new testable implications. In addition, the paper provides empirical evidence that many firms raise substantial amounts of additional equity capital in the years after their IPO.
Stock Returns, Expected Returns, and Real Activity
Authors: FAMA EUGENE F.
Published: April 2012

Measuring the total return variation explained by shocks to expected cash flows, time‐varying expected returns, and shocks to expected returns is one way to judge the rationality of stock prices. Variables that proxy for expected returns and expected‐return shocks capture 30% of the variance of annual NYSE value‐weighted returns. Growth rates of production, used to proxy for shocks to expected cash flows, explain 43% of the return variance. Whether the combined explanatory power of the variables—about 58% of the variance of annual returns—is good or bad news about market efficiency is left for the reader to judge.
Pricing Warrants: An Empirical Study of the Black‐Scholes Model and Its Alternatives
Authors: LAUTERBACH BENI , SCHULTZ PAUL
Published: April 2012

This paper uses a sample of over 25,000 daily warrant prices to empirically investigate potential problems with the commonly used warrant pricing model proposed by Black and Scholes as an extension of their call option model. One problem seems to be especially important: the constant variance assumption of the dilution adjusted Black‐Scholes model appears to cause biases in model prices for almost all warrants and over the entire sample period. We show that more accurate price forecasts are obtained with a specific form of the constant elasticity of variance model.
The Effects of Stock Splits on Bid‐Ask Spreads
Authors: CONROY ROBERT M. , HARRIS ROBERT S. , BENET BRUCE A.
Published: April 2012

This paper examines the effects of stock splits on bid‐ask spreads for NYSE‐listed companies. Percentage spreads increase after splits, representing a liquidity cost to investors. These spread increases are directly related to decreases in share prices following splits and can explain part, but not all, of the observed increase in return variability after splits. The evidence thus suggests a liquidity cost of stock splits that must be weighed against any other perceived benefits of splits. Such a liquidity cost may validate that stock splits are a signal of favorable information about the firm.
Time Varying Term Premia and Traditional Hypotheses about the Term Structure
Authors: LONGSTAFF FRANCIS A.
Published: April 2012

Empirical evidence of time varying term premia in bond returns is frequently interpreted as evidence against the Expectations Hypothesis. This paper shows that the Expectations Hypothesis can actually imply time varying term premia if the time frame for which the Expectations Hypothesis holds differs from the return measurement period. Furthermore, many of the properties of these term premia are consistent with those of observed term premia. These results are important because they imply that the case against the Expectations Hypothesis is weaker than claimed in the empirical literature.
Optimal Hedging under Intertemporally Dependent Preferences
Authors: BRIYS ERIC , CROUHY MICHEL , SCHLESINGER HARRIS
Published: April 2012

This paper examines optimal hedging behavior in a market where preferences for current consumption are partly determined by the consumer's past consumption history. The model considers an individual exposed to price risk, who allocates wealth between consumption and futures contracts over a (continuous‐time) finite planning horizon. The speculative component of the hedge ratio is shown to be smaller and the consumption path smoother than in models where preferences are separable over time. Some comparative‐static properties of the hedge ratio are also examined.
Corporate Capital Structure, Agency Costs, and Ownership Control: The Case of All‐Equity Firms
Authors: AGRAWAL ANUP , NAGARAJAN NANDU J.
Published: April 2012

This paper provides evidence that all‐equity firms exhibit greater levels of managerial stockholdings, more extensive family relationships among top management, and higher liquidity positions than a matched sample of levered firms. Further, top managers of all‐equity firms with family involvement in corporate operations have greater control of corporate voting rights than managers of all‐equity firms without family involvement. These findings are consistent with the interpretation that managerial control of voting rights and family relationships among senior managers are important factors in the decision to eliminate leverage.
Changes in the Cost of Intermediation: The Case of Savings and Loans
Authors: COMPTE RICHARD L. B. LE , SMITH STEPHEN D.
Published: April 2012

The minimum cost output configuration for a firm may change as the result of a variety of factors, including changes in market structure. In this paper we test this structural change hypothesis with savings and loan data. We find support for the hypothesis that separable, constant returns to scale production functions characterize the average savings and loan in our sample in 1983. This is in contrast to the cost complementarities found in 1978. We argue that this result may be the result of regulatory changes that allowed savings and loans to alter their production mix to fully capture the benefits of joint production.
Valuing Flexibility as a Complex Option
Authors: TRIANTIS ALEXANDER J. , HODDER JAMES E.
Published: April 2012

This paper develops an approach for valuing flexible production systems using contingent claims pricing. Demand curves for our model's underlying assets (output products) may be downward sloping, in contrast with the standard option pricing assumption. Also, our marginal production(exercise) costs may be increasing. In addition, we allow for multiple products and a production capacity constraint. These elements of the model result in complex exercise decisions for the contingent claims which comprise the production system's value. We illustrate our approach by valuing a flexible system that produces two products which have profit margin functions with stochastic parameters.
Expectations and the Treasury Bill‐Federal Funds Rate Spread over Recent Monetary Policy Regimes
Authors: SIMON DAVID P.
Published: April 2012

This paper shows that the spread between the 3–month Treasury bill and the federal funds rate has significant predictive power for the future change in the federal funds rate during the volatile nonborrowed reserves operating regime, but it has less and no predictive power during the borrowed reserves regime and the federal funds targeting regime, respectively. These findings suggest that Treasury bill rates forecast future federal funds rates most accurately when the Federal Reserve follows a well‐defined rule that does not smooth the impact of shocks on the federal funds rate.
An Examination of Stock Market Return Volatility During Overnight and Intraday Periods, 1964–1989
Authors: LOCKWOOD LARRY J. , LINN SCOTT C.
Published: April 2012

This paper examines the variance of hourly market returns during 1964–1989. Results indicate that return volatility falls from the opening hour until early afternoon and rises thereafter and is significantly greater for intraday versus overnight periods. Market variance is also shown to change significantly over time, rising after NASDAQ began in 1971, rising after trading in stock options began in 1973, falling after fixed commissions were eliminated in 1975, rising after trading in stock index futures was introduced in 1982, and falling after margin requirements for stock index futures became larger in 1988.
Corporate Control and the Choice of Investment Financing: The Case of Corporate Acquisitions
Authors: AMIHUD YAKOV , LEV BARUCH , TRAVLOS NICKOLAOS G.
Published: April 2012

We test the proposition that corporate control considerations motivate the means of investment financing—cash (and debt) or stock. Corporate insiders who value control will prefer financing investments by cash or debt rather than by issuing new stock which dilutes their holdings and increases the risk of losing control. Our empirical results support this hypothesis: in corporate acquisitions, the larger the managerial ownership fraction of the acquiring firm the more likely the use of cash financing. Also, the previously observed negative bidders' abnormal returns associated with stock financing are mainly in acquisitions made by firms with low managerial ownership.
Dividend Policy and Financial Distress: An Empirical Investigation of Troubled NYSE Firms
Authors: DeANGELO HARRY , DeANGELO LINDA
Published: April 2012

This paper studies the dividend policy adjustments of 80 NYSE firms to protracted financial distress as evidenced by multiple losses during 1980–1985. Almost all sample firms reduced dividends, and more than half apparently faced binding debt covenants in years they did so. Absent binding debt covenants, dividends are cut more often than omitted, suggesting that managerial reluctance is to the omission and not simply the reduction of dividends. Moreover, managers of firms with long dividend histories appear particularly reluctant to omit dividends. Finally, some dividend reductions seem strategically motivated, e.g., designed to enhance the firm's bargaining position with organized labor.
Do Taxes Affect Corporate Financing Decisions?
Authors: MacKIE‐MASON JEFFREY K.
Published: April 2012

This paper provides clear evidence of substantial tax effects on the choice between issuing debt or equity; most studies fail to find significant effects. The relationship between tax shields and debt policy is clarified. Other papers miss the fact that most tax shields have a negligible effect on the marginal tax rate for most firms. New predictions are strongly supported by an empirical analysis; the method is to study incremental financing decisions using discrete choice analysis. Previous researchers examined debt/equity ratios, but tests based on incremental decisions should have greater power.
Sequential Tests of the Arbitrage Pricing Theory: A Comparison of Principal Components and Maximum Likelihood Factors
Authors: SHUKLA RAVI , TRZCINKA CHARLES
Published: April 2012

We examine the cross‐sectional pricing equation of the APT using the elements of eigenvectors and the maximum likelihood factor loadings of the covariance matrix of returns as measures of risk. The results indicate that, for data assumed stationary over twenty years, the first vector is a surprisingly good measure of risk when compared with either a one‐ or a five‐factor model or a five‐vector model. We conclude that in some circumstances principal components analysis may be preferred to factor analysis.
The Quality Delivery Option in Treasury Bond Futures Contracts
Authors: HEMLER MICHAEL L.
Published: April 2012

This paper uses three methods to estimate quality option values for CBOT Treasury bond futures contracts. It presents evidence regarding: (1) payoffs from exercising this option at delivery, (2) estimates from a T‐bond futures pricing model that incorporates this option, and (3) estimates obtained from an exchange option pricing formula. The results indicate that this option is worth considerably less than reported by Kane and Marcus (1986a). For example, payoffs obtained by switching from the bond cheapest to deliver three months prior to delivery to the one cheapest at time of delivery average less than 0.30 percentage points of par.
The Distribution of Daily Stock Returns and Settlement Procedures: The Paris Bourse
Authors: SOLNIK BRUNO
Published: April 2012

In many countries settlements take place a fixed number of business days after the transaction (U.S., Japan). In other countries settlements take place periodically on a fixed date when all transactions performed before this date are settled (U.K., France, Italy). In both cases settlement procedures should cause returns not to be identically distributed over all days. The effect is likely to be the largest on markets where all trades are settled only once a month. An empirical investigation of the largest of those markets, the Paris Bourse, demonstrates the importance of the settlement procedure on the distribution of daily returns.
Product Market Imperfections and Loan Commitments
Authors: MAKSIMOVIC VOJISLAV
Published: April 2012

I show in a model of competitive banks that the characteristics of loan contracts are affected by product market imperfections in the borrower's industry. A bank loan commitment increases the value of a borrower firm operating in an imperfectly competitive industry and thus dominates a simple loan even in the absence of risk sharing considerations and informational asymmetries between the borrower and the bank. While it is individually rational for a firm to obtain a loan commitment, all the firms in that industry taken together are made worse off by the existence of loan commitments.
Margin Regulation and Stock Market Volatility
Authors: HSIEH DAVID A. , MILLER MERTON H.
Published: April 2012

Using daily and monthly stock returns we find no convincing evidence that Federal Reserve margin requirements have served to dampen stock market volatility. The contrary conclusion, expressed in recent papers by Hardouvelis (1988a, b), is traced to flaws in his test design. We do detect the expected negative relation between margin requirements and the amount of margin credit outstanding. We also confirm the recent finding by Schwert (1988) that changes in margin requirements by the Fed have tended to follow rather than lead changes in market volatility.
Financial Intermediaries and Liquidity Creation
Authors: GORTON GARY , PENNACCHI GEORGE
Published: April 2012

Trading losses associated with information asymmetries can be mitigated by designing securities which split the cash flows of underlying assets. These securities, which can arise endogenously, have values that do not depend on the information known only to informed agents. Bank debt (deposits) is an example of this type of liquid security which protect relatively uninformed agents, and we provide a rationale for deposit insurance in this content. High‐grade corporate debt and government bonds are other examples, implying that a money market mutual fund‐based payments system may be an alternative to one based on insured bank deposits.
Equilibrium Block Trading and Asymmetric Information
Authors: SEPPI DUANE J.
Published: April 2012

This paper investigates the existence of equilibria with information‐based block trading in a multiperiod market when no investor is constrained to block trade. Attention is restricted to equilibria in which a strategic uninformed institution (i.e., one which is forced to rebalance its portfolio but is free to choose an optimal rebalancing strategy) is willing to trade a block rather than “break up” the block into a series of smaller trades. Examples of such equilibria are found and analyzed.
How Target Shareholders Benefit from Value‐Reducing Defensive Strategies in Takeovers
Authors: BERKOVITCH ELAZAR , KHANNA NAVEEN
Published: April 2012

This paper shows that target shareholders can be made better off through the use of certain types of defensive strategies that reduce the value of the target by different amounts for different bidders. In many cases, simply the threat of such strategies can make target shareholders better off. Therefore, empirical tests based on stock price reactions at the adoption of defensive strategies may be underestimating the effect of such strategies. The paper also identifies the necessary characteristics that make these strategies effective and shows that many observed defenses possess similar properties.
Intraday Price Change and Trading Volume Relations in the Stock and Stock Option Markets
Authors: STEPHAN JENS A. , WHALEY ROBERT E.
Published: April 2012

This study investigates intraday relations between price changes and trading volume of options and stocks for a sample of firms whose options traded on the CBOE during the first quarter of 1986. After purging the price change series of the effects of bid/ask spreads, multivariate time‐series analysis is used to estimate the lead/lag relation between the price changes in the option and stock markets. The results indicate that price changes in the stock market lead the option market by as much as fifteen minutes. The analysis of trading volume indicates that the stock market lead may be even longer.
The Weekend Effect: Trading Patterns of Individual and Institutional Investors
Authors: LAKONISHOK JOSEF , MABERLY EDWIN
Published: April 2012

In this paper, we document regularities in trading patterns of individual and institutional investors related to the day of the week. We find a relative increase in trading activity by individuals on Mondays. In addition, there is a tendency for individuals to increase the number of sell transactions relative to buy transactions, which might explain at least part of the weekend effect.
On Arbitrage‐Free Pricing of Interest Rate Contingent Claims
Authors: RITCHKEN PETER , BOENAWAN KIEKIE
Published: April 2012

Unlike most interest rate claim models, the Ho‐Lee model utilizes full information on the current term structure. Unfortunately, the model has a major deficiency in that negative interest rates can occur. This article modifies the model such that interest rates are well behaved.
Financial Contracting and Leverage Induced Over‐ and Under‐Investment Incentives
Authors: BERKOVITCH ELAZAR , KIM E. HAN
Published: April 2012

This paper investigates the effects of seniority rules and restrictive dividend convenants on the over‐ and under‐investment incentives associated with risky debt. We show that increasing seniority of new debt decreases the incidence of under‐investment but increases over‐investment, and vice versa. Under symmetric information, the optimal seniority rule is to give new debtholders first claim on a new project without recourse to existing assets (i.e., project financing). Under asymmetric information, the optimal debt contract requires equating the expected return to new debtholders in the default state to the new project's cash flow in the same rate. If this is not possible, the optimal seniority rule calls for strict subordination of new debt if the expected cash flow in default is small and full seniority if it is large. With regard to dividend convenants, we show that their effect depends on whether or not dividend payments are conditioned on future investments. When they are unconditioned, allowing more dividends increases the under‐investment incentive. In contrast, conditional dividends decrease the underinvestment incentive and increase the over‐investment incentive.
Information Content of Insider Trading Around Corporate Announcements: The Case of Capital Expenditures
Authors: JOHN KOSE , MISHRA BANIKANTA
Published: April 2012

There is gathering evidence of insider trading around corporate announcements of dividends, capital expenditures, equity issues and repurchases, and other capital structure changes. Although signaling models have been used to explain the price reaction of these announcements, a usual assumption made in these models is that insiders cannot trade to gain from such announcements. An innovative feature of this paper is to model trading by corporate insiders (subject to disclosure regulation) as one of the signals. Detailed testable predictions are described for the interaction of corporate announcements and concurrent insider trading. In particular, such interaction is shown to depend crucially on whether the firm is a growth firm, a mature firm, or a declining firm. Empirical proxies for firm technology are developed based on measures of growth and Tobin's q ratio. In the underlying “efficient” signaling equilibrium, investment announcements and net insider trading convey private information of insiders to the market at least cost. The paper also addresses issues of deriving intertemporal announcement effects from the equilibrium (cross‐sectional) pricing functional. Other announcement effects relate the intensity of the market response to insider trading, variance of firm cash flows, risk aversion of the insiders, and characteristics of firm technology (growth, mature, or declining).
Evidence of Predictable Behavior of Security Returns
Authors: JEGADEESH NARASIMHAN
Published: April 2012

This paper presents new empirical evidence of predictability of individual stock returns. The negative first‐order serial correlation in monthly stock returns is highly significant. Furthermore, significant positive serial correlation is found at longer lags, and the twelve‐month serial correlation is particularly strong. Using the observed systematic behavior of stock returns, one‐step‐ahead return forecasts are made and ten portfolios are formed from the forecasts. The difference between the abnormal returns on the extreme decile portfolios over the period 1934–1987 is 2.49 percent per month.
The Term Structure as a Predictor of Real Economic Activity
Authors: ESTRELLA ARTURO , HARDOUVELIS GIKAS A.
Published: April 2012

A positive slope of the yield curve is associated with a future increase in real economic activity: consumption (nondurables plus services), consumer durables, and investment. It has extra predictive power over the index of leading indicators, real short‐term interest rates, lagged growth in economic activity, and lagged rates of inflation. It outperforms survey forecasts, both in‐sample and out‐of‐sample. Historically, the information in the slope reflected, inter alia, factors that were independent of monetary policy, and thus the slope could have provided useful information both to private investors and to policy makers.
The Price Elasticity of Demand for Common Stock
Authors: LODERER CLAUDIO , COONEY JOHN W. , VAN DRUNEN LEONARD D.
Published: April 2012

We study the price elasticity of demand for the common stock of an individual corporation. Despite the prevelance of assumptions that demand is perfectly elastic, there is little if any direct evidence in the literature to either support or reject that contention. Consistent with the notion of finite price elasticities, we find that the announcement of primary stock offerings by regulated firms depresses their stock prices and little if any evidence that this decline is the result of adverse information about future cash flows. Attempts to relate offer announcement effects directly to possible determinants of price elasticities, however, are inconclusive.
The Mode of Acquisition in Takeovers: Taxes and Asymmetric Information
Authors: BROWN DAVID T. , RYNGAERT MICHAEL D.
Published: April 2012

We develop a model in which the mode of acquisition conveys information concerning the value of the bidder. The model incorporates the possibility that offers containing both cash and stock can be made in a setting consistent with the U.S. tax code. We demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers. The model yields a number of unique predictions about the construction of acquisition offers. We present evidence consistent with the model.
Inferring Trade Direction from Intraday Data
Authors: LEE CHARLES M. C. , READY MARK J.
Published: April 2012

This paper evaluates alternative methods for classifying individual trades as market buy or market sell orders using intraday trade and quote data. We document two potential problems with quote‐based methods of trade classification: quotes may be recorded ahead of trades that triggered them, and trades inside the spread are not readily classifiable. These problems are analyzed in the context of the interaction between exchange floor agents. We then propose and test relatively simple procedures for improving trade classifications.
A Variance‐Ratio Test of Random Walks in Foreign Exchange Rates
Authors: LIU CHRISTINA Y. , HE JIA
Published: April 2012

The separate variance‐ratio tests under homoscedasticity and heteroscedasticity both provide evidence rejecting the random walk hypothesis, using five pairs of weekly nominal exchange rate series over the period from August 7, 1974 to March 29, 1989. The rejections cast doubt on the random walk hypothesis in exchange rates, which has received support in the existing literature. Furthermore, since the rejections are robust to heteroscedasticity, they suggest autocorelations of weekly increments in the nominal exchange rate series, which may be consistent with the exchange rate overshooting or undershooting phenomenon.
The Long‐Run Performance of initial Public Offerings
Authors: RITTER JAY R.
Published: April 2012

The underpricing of initial public offerings (IPOs) that has been widely documented appears to be a short‐run phenomenon. Issuing firms during 1975–84 substantially underperformed a sample of matching firms from the closing price on the first day of public trading to their three‐year anniversaries. There is substantial variation in the underperformance year‐to‐year and across industries, with companies that went public in high‐volume years faring the worst. The patterns are consistent with an IPO market in which (1) investors are periodically overoptimistic about the earnings potential of young growth companies, and (2) firms take advantage of these “windows of opportunity.”
The Investment Performance of Low‐grade Bond Funds
Authors: CORNELL BRADFORD , GREEN KEVIN
Published: April 2012

This study extends the literature on the pricing of low‐grade bonds by examining the performance of low‐grade bond funds. The findings reveal that over the long run low‐grade bond fund returns are approximately equal to the returns provided by an index of high‐grade bonds. The relative risks of high and low‐grade bonds are more difficult to assess. Because of their shorter durations, low‐grade bonds are less sensitive to movements in interest rates than high‐grade bonds. On the other hand, low‐grade bonds are much more sensitive to changes in stock prices than high‐grade bonds. When adjusted for risk using a simple two‐factor model, the returns on low‐grade bond funds are not statistically different from the returns on high‐grade bonds.
Partial Revelation of Information in Experimental Asset Markets
Authors: COPELAND THOMAS E. , FRIEDMAN DANIEL
Published: April 2012

We develop a model of market efficiency assuming private information is partially revealed to uninformed traders via the behavior of those who are informed. This partial revelation of information (PRE) model is tested in fourteen computerized double auction laboratory markets. It explains the market value and allocation of purchased information, and asset allocations, better than either a fully revealing information model (FRE strong‐form efficiency) or a nonrevealing expectations model; but it takes second place to FRE in explaining asset prices. We conjecture that refined versions of PRE may provide insight into “technical analysis” and minibubbles in securities markets.
Payout Policy and Tax Deferral
Authors: DeANGELO HARRY
Published: April 2012

Equilibrium in the standard finance model implies that value‐maximizing firms make taxable equity payouts, even when deferral effectively allows complete tax escape. Since tax deferral and consumption deferral are inherently jointly supplied goods, an excess aggregate supply of future consumption would result if firms followed conventional wisdom and adopted low or zero payout policies to capture tax deferral benefits. The market provides incentives for firms to supply both taxable payouts and capital gains by overriding any tax deferral advantage, just as it provides incentives for equity financing by overriding the corporate tax advantage of debt in “Debt and Taxes.”
Consistency between Predicted and Actual Bid‐Ask Quote‐Revisions
Authors: JANG HASUNG , VENKATESH P. C.
Published: April 2012

This paper employs a “transaction” data‐base to study whether observed quote‐revisions are consistent with those predicted by the adverse selection and inventory cost theories of the bid‐ask spread. We find that actual quote‐revisions are consistent with the theoretical prediction in only 25% of the cases. Furthermore, quote‐revision patterns are found to be strongly dependent on the level of the outstanding spread and, to a lesser extent, on the transaction size. These systematic patterns, unrelated to the inventory cost and adverse selection theories, are consistent with the effect on quote‐revisions of the limit order book and the minimum 1/8 price‐change rule.
Information Asymmetries and Security Market Design: An Empirical Study of the Secondary Market for U.S. Government Securities
Authors: UMLAUF STEVEN R.
Published: April 2012

This paper examines the empirical implications of an information asymmetry between primary and secondary dealers in the U.S. Government Securities market. This asymmetry arises because primary dealers are permitted to trade through all brokers operating in the marketplace while secondary dealers are restricted to trade through only a subset of brokers. Brokers distribute valuable information over video screens to their trading clients including dealers' up‐to‐date bid‐ask spreads and recent transaction prices. As such, all brokers' video screen information is available to primary dealers, while only a subset of brokers' information is available to secondary dealers. Empirical analyses detect the resulting information asymmetry.
Tax Shields, Sample‐Selection Bias, and the Information Content of Conversion‐Forcing Bond Calls
Authors: CAMPBELL CYNTHIA J. , EDERINGTON LOUIS H. , VANKUDRE PRASHANT
Published: April 2012

The information content of conversion‐forcing bond calls depends on the after‐tax cash flow to bondholders. If the dividend after conversion exceeds the after‐tax coupon but is less than the before‐tax coupon, the call reveals unanticipated decreases in dividends and/or earnings that reduce the tax shield from interest payments. In contrast, a call when the dividend is less than the after‐tax coupon reveals the timing of an anticipated shift from exceptional firm‐specific positive growth to the industry norm. Efforts to document properties of convertible calls are subject to sample‐selection bias because calls are disproportionately associated with positive pre‐call firm‐specific growth.
Liquidity, Maturity, and the Yields on U.S. Treasury Securities
Authors: AMIHUD YAKOV , MENDELSON HAIM
Published: April 2012

The effects of asset liquidity on expected returns for assets with infinite maturities (stocks) are examined for bonds (Treasury notes and bills with matched maturities of less than 6 months). The yield to maturity is higher on notes, which have lower liquidity. The yield differential between notes and bills is a decreasing and convex function of the time to maturity. The results provide a robust confirmation of the liquidity effect in asset pricing.
Seasonality in Stock Price Mean Reversion: Evidence from the U.S. and the U.K.
Authors: JEGADEESH NARASIMHAN
Published: April 2012

The evidence of slowly mean‐reverting components in stock prices has been controversial. The hypothesis of stock price mean‐reversion is tested using a regression model that yields the highest asymptotic power among a class of regression tests. Although the evidence that the equally weighted index of stocks exhibits mean‐reversion is significant in the period 1926–1988, this phenomenon is entirely concentrated in January. In the post‐war period both the equally weighted and the value‐weighted indices exhibit seasonal mean‐reversion in January. A similar phenomenon is also observed for the equally weighted index of stocks traded on the London Stock Exchange.
An Investigation of Market Microstructure Impacts on Event Study Returns
Authors: LEASE RONALD C. , MASULIS RONALD W. , PAGE JOHN R.
Published: April 2012

We investigate the importance of bid‐ask spread‐induced biases on event date returns as exemplified by seasoned equity offerings by NYSE listed firms. We document significant negative return biases on the offering day which explain a large portion of the negative event date return documented in the literature. Buy‐sell order flow imbalance is prominent around the offering and induces a relatively large spread bias. If order imbalances are suspected, the researcher can use returns calculated from the midpoint of the closing bid and ask quotes instead of returns calculated from closing transaction prices to avoid this return bias.
Stock Prices and the Supply of Information
Authors: BRENNAN MICHAEL J. , HUGHES PATRICIA J.
Published: April 2012

We develop a model in which the dependence of the brokerage commission rate on share price provides an incentive for brokers to produce research reports on firms with low share prices. Stock splits therefore affect the attention paid to a firm by investment analysts. Managers with favorable private information about their firms have an incentive to split their firm's shares in order to reveal the information to investors. We find empirical evidence that is consistent with the major new prediction of the model, that the number of analysts following a firm is inversely related to its share price.
Volatility, Efficiency, and Trading: Evidence from the Japanese Stock Market
Authors: AMIHUD YAKOV , MENDELSON HAIM
Published: April 2012

We study the joint effect of the trading mechanism and the time at which transactions take place on the behavior of stock returns using data from Japan. The Tokyo Stock Exchange employs a periodic clearing procedure twice a day, at the opening of both the morning and the afternoon sessions. This enables us to discern the effect of the clearing mechanism from the effect of the overnight trading halt. While the periodic clearing at the beginning of the trading day is noisy and inefficient, the midday clearing transaction appears to be no worse than the two closing transactions.
Industrial Structure and the Comparative Behavior of International Stock Market Indices
Authors: ROLL RICHARD
Published: April 2012

Stock Price Indices are compared across countries in an attempt to explain why they exhibit such disparate behavior. Three separate explanatory influences are empirically documented. First, part of the behavior can be attributed to a technical aspect of index construction; some indices are more diversified than others. Second, each country's industrial structure plays a major role in explaining stock price behavior. Third, for the majority of countries, a portion of national equity index behavior can be ascribed to exchange rate behavior. Exchange rates explain a significant portion of common currency denominated national index returns, although the amount explained by exchange rates is less than the amount explained by industrial structure for most countries.
Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity
Authors: BAGWELL LAURIE SIMON
Published: April 2012

This paper documents that firms face upward‐sloping supply curves when they repurchase shares in a Dutch auction, and it analyzes the market reaction to these offers. The announcement price increase is highly correlated with the ultimate repurchase premium. Prices decline at expiration only for pro‐rated offers. The cumulative return is positive and highly correlated with the repurchase premium, excepting pro‐rated offers. Much of this price increase is consistent with movement along an upward‐sloping supply curve. Trading volume around the Dutch auction parallels fixed‐price repurchases. Supply elasticity is larger for firms with large trading volume, firms included in the S&P 500 Index, and takeover targets.
Accounts Receivable Management Policy: Theory and Evidence
Authors: MIAN SHEHZAD L. , SMITH CLIFFORD W.
Published: April 2012

This paper develops and tests hypotheses that explain the choice of accounts receivable management policies. The tests focus on both cross‐sectional explanations of policy‐choice determinants, as well as incentives to establish captives. We find size, concentration, and credit standing of the firm's traded debt and commercial paper are each important in explaining the use of factoring, accounts receivable secured debt, captive finance subsidiaries, and general corporate credit. We also offer evidence that captive formation allows more flexible financial contracting. However, we find no evidence that captive formation expropriates bondholder wealth.
Publish or Perish: What the Competition is Really Doing
Authors: ZIVNEY TERRY L. , BERTIN WILLIAM J.
Published: April 2012

This study provides comprehensive publications performance data over a 25‐year period for finance doctorates. These data indicate that publishing one article per year in any finance journal (or finance, accounting, economics, or business journal) over any prolonged period of time is a truly remarkable feat, met by only 5% of the graduates. Tenure screens combining various quantity and quality requirements are examined to assess their ability to predict future publication productivity. Faculty and administrators seeking defensible benchmarks for evaluating faculty research productivity in finance will find that these data and results are particularly useful.
Intra‐Day Arbitrage Opportunities in Foreign Exchange and Eurocurrency Markets
Authors: RHEE S. GHON , CHANG ROSITA P.
Published: April 2012

We have two primary objectives in this study. First, we examine the frequency of attaining simultaneous equilibrium on spot and forward foreign exchange markets and on domestic and foreign securities markets. Second, we measure the profitability of covered interest arbitrage and one‐way arbitrage. Our empirical analysis has been conducted using real‐time quotations. The empirical results indicate that: (a) the markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage are rarely available; and (b) the frequency of attaining simultaneous market equilibrium is surprisingly low, thus opening the door for one‐way arbitrage.