bluuebunny/crossref_metadata_2025 huggingface dataset:
THE ROLE OF CAPITAL ADEQUACY REGULATION IN THE HEDGING DECISIONS OF FINANCIAL INTERMEDIARIES
Authors: Morgan George Emir , Smith Stephen D.
Published: August 2014

This paper identifies the effect of capital adequacy requirements, which have been ignored to date in the hedging literature, on the forward hedging decisions of financial intermediaries. Using a more general framework than has been used in the literature on intermediary behavior in forward markets, cases are developed where capital and forward contracting are substitutes as well as where increasing the capital requirement increases the volume of desired forward contracting. The model shows that the most important factors in determining the equilibrium rate and the equilibrium position of intermediaries are the statistical association between the level of the forward rate and the spread between interest rates, the level of the capital‐to‐assets ratio, and the degree of risk aversion of intermediaries and other participants in the forward market. To characterize whether the intermediary's optimal forward position is long or short, one must have knowledge of at least the sign of the association between the level and spread for the particular intermediary, the intermediary's capital position, and whether the forward market equilibrium corresponds to a positive or negative premium. The model also demonstrates that a full hedge of assets is always sub‐optimal, and a universally applicable expression for the optimal hedge ratio when hedging is costless is derived.
AN EXAMINATION OF THE SMALL‐FIRM EFFECT ON THE BASIS OF SKEWNESS PREFERENCE
Authors: Booth James R. , Smith Richard L.
Published: August 2014

This paper tests the hypothesis that the small‐firm effect can be explained on the basis of investor preference for positive skewness. Traditional stochastic dominance methodology is extended to consider portfolios including variable weights of investment in a riskless asset. Including a riskless asset provides the result that small‐firm portfolios stochastically dominate all other portfolios. This result, which is derived on the basis of 19 years of monthly returns, indicates that the small‐firm effect cannot be fully attributed to tax effects, benchmark error, or incorrect assumptions of the CAPM about investor risk aversion.
MATURITY AND REFUNDING EFFECTS ON TREASURY‐BOND FUTURES PRICE VARIANCE
Authors: Barnhill Theodore M. , Jordan James V. , Seale William E.
Published: August 2014

Both Samuelson's maturity hypothesis and the Anderson‐Danthine state variable hypothesis are tested in this study of the variance of Treasury‐bond futures prices. Both maturity and the quarterly refunding of Treasury debt have statistically and economically significant effects on futures price variance. The evidence for a monotonic maturity effect is highly statistically significant and robust to changes in model specification. The quarterly refunding is less statistically significant, and it is not clear whether the greatest effect is in the auction week or two weeks thereafter. Economically, these two predictable effects are of greater importance than a change in the discount rate.
SYSTEMATIC RISK IN A PURELY RANDOM MARKET MODEL: SOME EMPIRICAL EVIDENCE FOR INDIVIDUAL PUBLIC UTILITIES
Authors: Rahman Abdul , Kryzanowski Lawrence , Sim Ah Boon
Published: August 2014

A minimum norm quadratic (MINQU‐) type of OLS estimator is derived. The estimator is used to test if the betas of the single factor market (SFM) model are random for a sample of utilities for two contiguous periods. The estimated betas for individual utilities vary considerably over time. The statistical significance of such nonstationarity depends on both the utilities and period studied. The relative reduction in the mean square error (MSE) from using a GLS (and not OLS) estimator of beta, when beta is purely random, can be substantial for some utilities but is modest on average.
THE MARKET PRICING OF NET OPERATING LOSS CARRYFORWARDS: IMPLICATIONS OF THE TAX MOTIVATIONS OF MERGERS
Authors: Moore Norman H. , Pruitt Stephen W.
Published: August 2014

An empirical analysis of the market pricing of net operating loss carryforwards (NOLs) and the ability for tax considerations to contribute to mergers and the substantial merger premiums often observed by target firms is presented. The restrictive anti‐merger tax‐transfer provisions of Section 382 of the Tax Reform Act of 1976 (TRA) serve as the legislative vehicle through which performance differentials of NOL and non‐NOL firms are measured. The results of the study are consistent with the hypothesis that NOLs are at least partially priced in the absence of a merger, a fact that suggests that tax‐motivated mergers may be more myth than reality. Since the anti‐merger tax‐transfer penalties contained within the Tax Reform Act of 1986 merely represent incremental increases over those of the TRA, the results of the study remain relevant in the current legislative environment.
BOND RETURNS, DISCRETE STOCHASTIC PROCESSES, AND DURATION
Authors: Bierwag Gerald O.
Published: August 2014

A particular duration measure may correspond to many different stochastic processes that generate fluctuations in the term structure of interest rates. There does not exist a one‐to‐one correspondence between the duration measure and an underlying stochastic process. In particular, durations derived from disequilibrium processes also correspond to equilibrium processes. Furthermore, it is shown that multi‐factor discrete models of bond returns may also correspond to multi‐duration models of bond returns.
THE INFORMATIONAL CONTENT OF BOND RATINGS
Authors: Ederington Louis H. , Yawitz Jess B. , Roberts Brian E.
Published: August 2014

This paper explores the risk structure of interest rates. The focus is on whether yields on industrial bonds indicate that market participants base their evaluations of a bond issue's default risk on agency ratings or on publicly available financial statistics. Using a non‐linear least squares procedure, the yield‐to‐maturity is related to Moody's rating, Standard and Poor's (S&P) rating, and accounting measures of creditworthiness such as coverage and leverage. Market yields are found to be significantly correlated with both the ratings and a set of readily available financial accounting statistics. These results indicate (1) that market participants base their evaluations of an issue's creditworthiness on more than the agencies' ratings and (2) that the ratings bring some information to the market above and beyond that contained in the set of accounting variables. The paper also asks whether the market views Moody's and Standard and Poor's ratings as equally reliable measures of risk or whether the market attaches more weight to one agency's ratings than the other. Finally, the hypothesis that the market pays more attention to the accounting measures and less to the ratings if the rating has not been reviewed recently is tested.
APT VS. CAPM ESTIMATES OF THE RETURN‐GENERATING FUNCTION PARAMETERS FOR REGULATED PUBLIC UTILITIES
Authors: Pettway Richard H. , Jordan Bradford D.
Published: August 2014

In public utility rate hearings, there are extensive arguments concerning the most appropriate model of the return‐generating function. Bower, Bower, and Logue (1984) suggest that the APT is superior to the CAPM, but their results have troublesome ranking differences between the two models when applied to returns from electric versus natural gas utilities. The purposes of this paper are to develop forward estimates of the parameters for both of these models applied to five different utility portfolios of electric and natural gas companies at a point in time, and to test whether these estimates are valid during a subsequent or future period. Also, forecasting errors for each model are compared to determine which model is best and to ascertain if there are any ranking conflicts. There are no ranking conflicts with the models as the market model consistently underestimates the actual return. Thus, the analysis suggests that the arbitrage model is a superior representation of the return‐generating process of these utilities.
AN ANALYTICAL MODEL OF RISKY YIELD CURVES
Authors: Kolari James W.
Published: August 2014

This paper proposes a multiperiod certainty equivalent model of present valuation that takes a dynamic approach to valuation, as opposed to a recursive approach employed traditionally in financial economics. Assuming a flat basic, or riskless, yield curve and risk‐averse investors, the model is used to examine the potential effects of default risk on the shape of the yield curve. The shape of the yield curve is shown to be directly related to the level and time pattern of default probabilities.
DETERMINANTS OF THE RATINGS AND YIELDS ON CORPORATE BONDS: TESTS OF THE CONTINGENT CLAIMS MODEL
Authors: Ogden Joseph P.
Published: August 2014

A contingent claims model for corporate bonds is tested on newly issued bonds of firms with very simple capital structures. Two default risk measures derived from the model — firm return standard deviation (σ) and leverage (D/V) — explain approximately 78 percent of the variation in the agency ratings on the bonds, based on a probit analysis. Model yield premiums explain almost 60 percent of the variation in market yield premiums. In both analyses, however, firm size is a significant additional variable, suggesting that the contingent claims model is not robust to changes in scale. The assumption of nonstochastic interest rates also appears to be an important misspecification. Institutional restrictions on investments in speculative grade bonds, however, do not affect market yield premiums on such bonds, and thus do not appear to represent a serious misspecification.
THE TERM PREMIA RELATIONSHIP IMPLICIT IN THE TERM STRUCTURE OF TREASURY BILLS
Authors: Heuson Andrea J.
Published: August 2014

This paper considers a single coefficient representation of the term premia relationship that appears in treasury bill yield curves. Term premia are defined as positive or negative maturity‐dependent differentials versus the instantaneous nominal spot rate. The term premia function is developed in the context of the Cox, Ingersoll, and Ross [3] Risk‐Averse Preferred Habitat Model and proxies for the degree of risk aversion exhibited by the universe of treasury bill investors at a point in time. Empirical results indicate that term premia are influenced by a set of macroeconomic variables in the expected manner.
BOUNDARY CONDITION TESTS OF BID AND ASK PRICES OF INDEX CALL OPTIONS
Authors: Chance Don M.
Published: August 2014

Boundary conditions are established and tested for call options on the S&P 100 Index. The data consist of daily closing bid and ask quotes for the first four months of 1984. Four types of tests—the immediate exercise, European lower bound, vertical spread, and butterfly spread (convexity rule)—are performed on both an immediate and delayed execution basis. Violations are infrequent and those that occur tend to reverse by the end of the following day. Index options, therefore, are priced consistently with rational boundary conditions.
A COMPREHENSIVE EXAMINATION OF VOLUME EFFECTS AND SEASONALITY IN DAILY SECURITY RETURNS
Authors: Pettengill Glenn N. , Jordan Bradford D.
Published: August 2014

In this study, an integrated model of return seasonality is developed and the hypothesis that seasonality is associated with changes in relative trading volume is examined. Return regularities associated with the turn of the month, the week of the month, and holiday closings are documented. Beyond these effects, neither the turn of the year nor the January effect is significant for large firms. Relative volume is shown to display calendar regularities similar to those in returns, and tests indicate a causal relationship flowing from volume to returns.
INVESTOR EVALUATION OF OVERFUNDED PENSION PLAN TERMINATIONS
Authors: Haw In‐Mu , Ruland William , Hamdallah Ahmed
Published: August 2014

Hundreds of large firms have terminated overfunded pension plans and obtained substantial cash reversions in the past few years. This study reveals a positive and significant market reaction at the time of the termination announcement. The strongest stock price reaction is for firms with large terminations relative to prereversion income. This study demonstrates that real economic gains result from the termination. Specifically, firms terminating overfunded pension plans tend to have tax loss carryforwards that effectively increase the after‐tax returns from termination.
OPTIMAL PORTFOLIOS: MARKOWITZ FULL COVARIANCE VERSUS SIMPLE SELECTION RULES
Authors: Burgess Richard C. , Bey Roger P.
Published: August 2014

Two major problems faced by portfolio managers are estimating the risk and return characteristics of individual securities and combining individual security risk and return estimates into optimal portfolios. The second problem is investigated in this paper by using the simple ranking criteria suggested by Elton, Gruber, and Padberg (EGP). The empirical results indicate that the EGP procedure is effective in estimating Markowitz efficient portfolios and can be an effective screening procedure for large numbers of securities.
TESTS OF THE BLACK‐SCHOLES AND CONSTANT ELASTICITY OF VARIANCE CURRENCY CALL OPTION VALUATION MODELS
Authors: Tucker Alan L. , Peterson David R. , Scott Elton
Published: August 2014

An adaptation of the Cox‐Ross/Emanuel‐MacBeth call option valuation model for constant elasticity of variance diffusion processes is tested here against an adaptation of the Black‐Scholes call option valuation model for the pricing of call currency options. Synchronized transactions data supplied by the Philadelphia Exchange are used. A maximum likelihood estimation procedure indicates a significant association between currency return variances and exchange rate levels. The constant elasticity of variance model exhibits significantly superior pricing accuracy for predictive intervals of three or fewer trading days.
THE SHAREHOLDER WEALTH EFFECTS OF CORPORATE GREENMAIL
Authors: Ang James S. , Tucker Alan L.
Published: August 2014

In this study, the abnormal return dynamics of firms undertaking premium targeted block share repurchases are examined empirically. The positive returns accruing to nonparticipating shareholders for the period encompassing the buy‐in and repurchase announcements are attributable to the expectation of subsequent acquisition activity. Firms that are not acquired realize, on average, a zero abnormal return. The probability of subsequent acquisition is not related to the targeted repurchase. Managers who engage in targeted block share repurchases frequently are expelled from corporate ranks. Firms that are acquired exhibit abnormal returns only similar to those of other merger and tender offer targets.
AN ANALYSIS OF SHAREHOLDER REACTION TO DIVIDEND CUTS AND OMISSIONS
Authors: Ghosh Chinmoy , Woolridge J. Randall
Published: August 2014

In this paper the proposition is tested that stock market reaction to a dividend change is a function of its information content. A multiple regression model is formulated to identify the factors that contribute significantly to the capital loss suffered by shareholders when firms decide to cut/omit dividends. Results indicate that, in conformity with the information content hypothesis, the announcement period capital loss induced by a dividend deduction significantly depends on the percentage change in dividends, the size and risk of the firm, and the price performance of the firm's stock in the immediately preceding period. The results further reveal that (1) simultaneous announcements of poor earnings cause larger capital losses; (2) prior announcements of loss/lower earnings, strikes, etc. attenuate the negative impact of dividend cuts; (3) managerial reassurances that the dividend reduction is growth‐motivated produces a weakly favorable effect, and (4) institution of stock dividends concurrently with the dividend cut significantly reduces the negative valuation effect. It is concluded from the evidence that stock market reaction to managerial signals is a function of the perceived costs associated with these signals.
FIRM SIZE AND DIVIDEND ANNOUNCEMENTS
Authors: Eddy Albert , Seifert Bruce
Published: August 2014

This study documents an association between firm size and abnormal returns from the announcement of large dividend increases. Dividend announcements are examined only where there are no contemporaneous earnings announcements. The methodology controls for both the payout ratio of firms and the size of the dividend increase. Using means tests and analysis of variance, the findings indicate that the abnormal stock price reaction to a dividend increase is greater for small firms.
THE SEASONALITY IN CONVERTIBLE BOND MARKETS: A STOCK EFFECT OR BOND EFFECT?
Authors: Ma Christopher K. , Rao Ramesh P. , Weinraub Herbert J.
Published: August 2014

There is a strong January effect in convertible bond returns that has been partially attributed to seasonality in the underlying stock. January returns for convertible bonds are positively influenced by the degree to which the bond reflects the underlying equity, which suggests that the anomaly in one asset market may carry over to its derivative asset market. Significant evidence presented here indicates that the January effect also is attributable to unique tax‐loss selling in the convertible bond market. A peripheral contribution of this study is that, similar to findings in the stock market, the risk‐return trade‐off appears to hold only in January for convertible bonds.
A BIAS‐CORRECTING PROCEDURE FOR BETA ESTIMATION IN THE PRESENCE OF THIN TRADING
Authors: Fowler David J. , Rorke C. Harvey , Jog Vijay M.
Published: August 2014

In this paper, an alternative technique is developed for obtaining consistent estimates of beta in the presence of thin trading. The new estimator is tested on simulated data and the results are compared with those obtained from the Dimson [4] Scholes and Williams [9] techniques. The new estimator is found to have approximately the same bias as the others, but it has a considerably lower variance.
ON STOCHASTIC DOMINANCE ANALYSIS OF DAY‐OF‐THE‐WEEK RETURN PATTERNS
Authors: Wingender John , Groff James E.
Published: August 2014

Studies show that significant differences exist among return distributions of days of the week. While these results are ubiquitous, their validity depends on the robustness of statistical procedures used. Virtually every day‐of‐the‐week study has used mean/variance analysis despite it being well documented that daily return distributions are nonnormal. This study uses stochastic dominance analysis, which is not distribution dependent, to test for a day‐of‐the‐week effect. Results indicate that the day‐of‐the‐week effect is robust and that previous findings are not artifacts deriving from violations of distributional assumptions.
THE INFORMATIONAL CONTENT OF FORWARD RATES: FURTHER EVIDENCE
Authors: Walz Daniel T. , Spencer Roger W.
Published: August 2014

Using single‐equation estimation techniques, researchers have generally found that forward rates have little ability to predict future spot rates. In this paper, Generalized Least Squares is used to estimate simultaneously the forecastive ability of multiple forward rates. It is discovered that current forward rates significantly predict future spot rates for various rate maturities up to twelve months ahead. Also found are instances in which the Treasury bill market does not conform to the weak form of market efficiency.
OPTIMUM CORPORATE LEVERAGE WITH RISKY DEBT: A DEMAND APPROACH
Authors: Choi Jongmoo Jay , Fabozzi Frank J. , Yaari Uzi
Published: August 2014

Traditional models of corporate interior optimum leverage rely on institutional schemes such as taxes, bankruptcy, and agency costs. Theories of leverage indifference in the presence of risky debt depend on various features of perfect and complete markets and on the assumption that all investors hold a uniform portfolio. In the model developed here, corporate interior optimum leverage is obtained as a result of a fundamental risk‐return trade‐off for investors who hold nonuniform portfolios of risky equity and debt claims in the absence of market mechanisms, forcing leverage indifference. The dynamic optimization solution accommodates bankruptcy costs and specialized institutional factors but does not rely on their presence.
BASIS VOLATILITY: IMPLICATIONS FOR HEDGING
Authors: Castelino Mark G.
Published: August 2014

Most hedges placed in futures markets must be lifted before contract expiration, which necessitates incurring “basis risk.” The focus of this paper is on quantifying such risk as a function of the timing of a hedge, its duration, distance from contract expiration, hedge life, and other market‐observable variables. The development of basis‐risk profiles provides a hedger with estimates of hedging risks that reasonably can be expected before the actual placement of hedges, thus serving as a useful input in the hedging decision.
REGULATORY AND PROCEDURAL EFFECTS ON THE UNDERPRICING OF INITIAL PUBLIC OFFERINGS
Authors: Affleck‐Graves John , Miller Robert E.
Published: August 2014

In this paper, the pricing of initial public offerings (IPOs) is examined from the underwriter's point of view. It is shown that because of the regulations and procedures governing the underwriting and pricing of IPOs, underwriters can maximize expected income by underpricing IPOs. Thus, it is argued that in addition to other feasible explanations of the underpricing phenomenon (e.g., compensation to uninformed investors, insurance against legal liability, etc.), regulatory and procedural factors contribute to the underpricing of IPOs. This is shown to be true both when uninformed investors are present and absent from the market for IPOs.
RESTRICTED VOTING SHARES, OWNERSHIP STRUCTURE, AND THE MARKET VALUE OF DUAL‐CLASS FIRMS
Authors: Ang James S. , Megginson William L.
Published: August 2014

In this study, financial implications of differential voting right/multiple ordinary share class capitalizations are examined using data from British dual‐class firms. Positive wealth effects are observed after announcements of plans to issue restricted voting (RV) shares, and also after announcements of RV share enfranchisement plans. The two share classes are usually created through large, noncash stock dividends or recapitalizations and, although corporate insiders hold about three times as large a fraction of superior voting (SV) shares, their RV shareholdings average a nontrivial 10.1 percent. Finally, compensation is usually paid to SV shareholders when RV shares are enfranchised.
EARNINGS FORECAST REVISIONS ASSOCIATED WITH STOCK SPLIT ANNOUNCEMENTS
Authors: Klein Linda S. , Peterson David R.
Published: August 2014

Recent studies document abnormal stock returns at stock split announcements. Three hypotheses related to expected future earnings—the trading range, attention, and signaling hypotheses—have been offered as explanations. Evidence has also been provided that splitting firms have greater postannouncement earnings growth than control nonsplitting firms. Using earnings expectation data from the Institutional Brokers Estimate System, significantly greater forecast revisions are found in this study for split firms than for control nonsplit firms. The difference is significantly related to abnormal stock returns of splitting firms.
THE RELATIONSHIP BETWEEN THE VARIABILITY OF INFLATION AND STOCK RETURNS: AN EMPIRICAL INVESTIGATION
Authors: Buono Mark J.
Published: August 2014

Several researchers find a negative correlation between the rate of inflation and stock returns. This phenomenon may be explained by the variability hypothesis, which posits that the negative correlation is caused by the combination of a positive relation between the rate of inflation and the variability of inflation and a negative relation between the variability of inflation and stock returns. An autoregressive conditional heteroscedastic model of inflation is used to measure the variability of inflation. Empirical results do not support the ability of the variability hypothesis to explain the negative correlation between stock returns and inflation.
AN ANALYSIS OF THE JANUARY EFFECT IN STOCKS AND INTEREST RATES UNDER VARYING MONETARY REGIMES
Authors: Jones Charles P. , Wilson Jack W.
Published: August 2014

In this paper the meaning of the January effect is clarified. The early literature indicates that differing views on the existence of such an effect were based on different data sets, various time periods, and different measurement tools. A model is formulated to test the January effect hypothesis with seven assets from 1871 to 1986, including tests performed for subperiods corresponding to different monetary regimes. The hypothesis tests incorporate an unbiased estimator to avoid the biases caused by heteroscedasticity and autocorrelation. Findings suggest that asset return behavior differs among assets and regimes.
PRICING CRB FUTURES CONTRACTS
Authors: Ehrhardt Michael C. , Tucker Alan L.
Published: August 2014

This study provides a valuation model to price Commodity Research Bureau Index futures contracts, now traded at the New York Futures Exchange. An empirical analysis suggests that substantial mispricing was exhibited during the early months of trading in an unseasoned Commodity Research Bureau Index futures market.
SINGLE‐FACTOR DURATION MODELS: CANADIAN TESTS
Authors: Bierwag G. O. , Roberts Gordon S.
Published: August 2014

Single‐factor duration models of bond returns are derived from an underlying stochastic process of the term structure of interest rates. It is shown that beta in these models is a function of the parameters of the stochastic process and of implied measures of duration. Using unsmoothed Canadian monthly prices on default‐free government bonds, the single‐factor duration model is found to perform well from 1963 to 1986, but the hypothesis of stationarity of the duration‐based bond returns model for the period cannot be accepted. Some of the underlying stochastic processes imply stationary models and some of them imply nonstationary bond return models. The models of this paper open the door to a variety of linear bond return models having a strong theoretical support based on a theory of the stochastic motion of the term structure.
THE IMPACT OF FINANCING SOURCES ON MULTINATIONAL PROJECTS
Authors: Madura Jeff , Fosberg Richard H.
Published: August 2014

It is shown here that market imperfections, such as corporate taxes, are not a necessary condition for a firm to have a debt denomination preference. When the stochastic nature of project cash flows and exchange rates are explicitly considered, the risk of the project is affected by the source of borrowing used to finance the project. It is also shown that the existence of income taxes causes the expected net present value and risk of a foreign project to depend on the source of the firm's borrowing. The debt denomination preference in both cases depends on project‐ and country‐specific variables.
INTEREST RATE CHANGES AND COMMON STOCK RETURNS OF FINANCIAL INSTITUTIONS: REVISITED
Authors: Bae Sung C.
Published: August 2014

In this paper the interest rate sensitivity of common stock returns of financial firms is re‐examined. Considered here are (1) current, anticipated, and unanticipated changes in interest rates; (2) depository and nondepository firms; and (3) three different‐maturity interest rate indices. Results lend strong support for a negative effect of both current and unanticipated interest rate changes. Although some exceptions are observed, stock returns of most subsectors of both financial and nonfinancial firms are not sensitive to anticipated interest rate changes. The findings of this study are robust to the choice of a particular model of interest rate expectations.
ON USING THE BLACK‐SCHOLES MODEL TO VALUE WARRANTS
Authors: Leonard David C. , Solt Michael E.
Published: August 2014

In this paper ad hoc procedures that employ the Black‐Scholes model in the valuation of warrants are examined. Findings indicate that the Black‐Scholes model unadjusted for either dividends or dilution undervalues out‐of‐the‐money warrants with short expirations. An adjustment for dilution improves the valuation for longer‐term warrants of firms that do not pay dividends. For dividend‐paying firms, findings suggest that it is better to adjust for dividends than for dilution when warrants are in the money or have expirations exceeding four years.
TAX‐TIMING OPTIONS AND THE PRICING OF GOVERNMENT BONDS
Authors: Heuson Andrea J. , Lasser Dennis J.
Published: August 2014

Internal Revenue Code provisions affect trading strategies for long‐term, fixed‐payment securities when investment income is subject to taxation and can create tax‐timing options of varying nontrivial values for specific bonds at specific times. In this paper, an estimate of the tax bracket of the marginal investor is used to measure the relative impact of changing tax‐timing option values on government bond prices. Results support the argument that tax‐timing options help to explain an apparent discrepancy between theoretical arguments regarding the tax bracket of the marginal investor and observed market relationships.
THE EFFECT OF PAYMENT DELAYS ON STOCK PRICES
Authors: DeGennaro Ramon P.
Published: August 2014

In this paper stock returns are modeled as a function of payment delays. Three hypotheses are tested: (1) that buyers compensate sellers for a six‐business‐day payment delay; (2) that the rate of compensation is the riskless rate; and (3) that this delay is solely responsible for day‐of‐the‐week effects. Results support the first and second hypotheses, but not the third. The coefficient on the variable that controls for payment delays is correctly signed and statistically significant. It is the correct size in all periods but one. However, the estimated rate of compensation probably differs across days of the week. Finally, controlling for a six‐business‐day payment delay fails to eliminate the weekly pricing pattern.
DIVESTITURE TO UNIT MANAGERS AND SHAREHOLDER WEALTH
Authors: Trifts Jack W. , Sicherman Neil W. , Roenfeldt Rodney L. , Cossio Francisco de
Published: August 2014

The impact on shareholder wealth from selling units to management is examined. The two‐day announcement period average abnormal return for parent firms divesting units to managers of those units is positive (0.80 percent) and significant. On average, the impact on shareholder wealth of parent firms divesting assets to managers of the unit is similar to the shareholder wealth effect for divestiture to third parties.
STOCK RETURNS AND OPTION PRICES: AN EXPLORATORY STUDY
Authors: Ancel Esther Weinstock , Rao Ramesh K. S.
Published: August 2014

This study is an investigation of estimates of expected stock returns implicit in option data. The Lee‐Rao‐Auchmuty option valuation model provides a unique opportunity to examine whether return measurements derived by nonlinear estimation techniques show any correlation with future stock returns. During the short period covered in this study, the Lee‐Rao‐Auchmuty estimates give preliminary indications that they are better predictors of actual stock returns than are estimates obtained from historical data.
REGIONAL VARIATION OF MORTGAGE YIELDS AND SIMULTANEITY BIAS
Authors: Jameson Mel , Shilling James D. , Sirmans C. F.
Published: August 2014

This paper has important methodological implications for the literature on regional variation of mortgage yields. Previous studies typically estimate models of regional disparities in mortgage yields using single‐equation regression techniques. It is well known, however, that such methods can lead to biased estimates when simultaneity exists. In this paper it is demonstrated that the single‐equation approach, when applied to mortgage data from the 1980s, produces radically different results from the previous literature. It is further demonstrated that simultaneous‐equations techniques resolve these apparent anomalies.
USING THE CAPM AS A GENERAL FRAMEWORK FOR ASSET PRICING ANALYSIS
Authors: Murphy J. Austin
Published: August 2014

In this paper a model of asset pricing is derived that relaxes the restrictive assumptions of standard theories. The model leads to a tractable capital asset pricing model framework that can be used to test empirical hypotheses and draw important insights on capital market equilibrium.
REGULARITIES IN TOKYO STOCK EXCHANGE SECURITY RETURNS: P/E, SIZE, AND SEASONAL INFLUENCES
Authors: Aggarwal Raj , Rao Ramesh P. , Hiraki Takato
Published: August 2014

Regularities in risk‐adjusted returns for securities listed on the Tokyo Stock Exchange (TSE) are examined in this study. A significant price‐to‐earnings (P/E) ratio effect is documented for the first time for a non‐U.S. market, the TSE. Significant interactions between the P/E effect and the previously documented size and seasonal effects for the TSE are also documented. These results imply that studies of TSE companies must account for these return regularities and that explanations for such effects observed for U.S. and other markets that are based on some unique aspect of these markets are likely to be inadequate.
IS THE DISTRIBUTION OF BETAS STATIONARY?
Authors: Kolb Robert W. , Rodriguez Ricardo J.
Published: August 2014

The stationarity of the beta distribution for 1926–1985 is rejected for the entire period as a single sample. However, results for pairs of five‐year estimation periods are more consistent with stationarity. Over all possible pairs of five‐year periods, stationarity in the pair‐wise tests is rejected more often than expected merely by chance. However, excluding two aberrant periods, the number of rejections of stationarity is consistent with chance. Therefore, the distribution of betas is nearly stationary in both the short run and long run. For practical purposes the distribution of betas may be regarded as stationary.
OTC MARKET SWITCHING AND STOCK RETURNS: SOME EMPIRICAL EVIDENCE
Authors: Baker H. Kent , Edelman Richard B.
Published: August 2014

In this study the effect on the common stock returns of 278 firms that switched OTC market segments from 1982 to 1987 is examined. It is hypothesized that abnormally positive returns are associated with news of the move from the NASDAQ to the NASDAQ National Market System (NMS) and that the market responds more favorably during pre‐NMS inclusion for stocks with low versus high liquidity before switching. Using event study methodology, results support these hypotheses. Unlike post‐listing studies, the evidence reveals no anomalous return behavior during the post‐NMS inclusion period studied.
DIVIDEND CHANGE ANNOUNCEMENT EFFECTS AND EARNINGS VOLATILITY AND TIMING
Authors: Wansley James W. , Sirmans C. F. , Shilling James D. , Lee Young‐jin
Published: August 2014

Recent modeling using the asymmetric information framework suggests that the magnitude of a market response to dividend change announcements should be related to the timing of the dividend announcement vis‐a‐vis the earnings release and to the stability of those earnings. The announcement effects of regular quarterly dividend changes are tested and these effects are related to the percentage change in the dividend yield, to the stability of the firm's earnings, to the timing of dividend and earnings announcements, and to the level of earnings compared with prior quarters. Analysis indicates that significant relationships exist between the announcement effect and changes in the dividend yield, and whether the dividend change is positive or negative. Only weak evidence exists that dividend announcement effects are larger when current earnings are unknown.
PE RATIOS, EARNINGS EXPECTATIONS, AND ABNORMAL RETURNS
Authors: Klein April , Rosenfeld James
Published: August 2014

This study provides evidence that the price‐earnings (PE) ratio effect is not homogeneous across firms with similar PE ratios. Instead, firms with the lowest PE ratios and those with the lowest expected annual earnings per share outperform all other groups in January. These results can be partially attributed to security analysts consistently underestimating reported earnings of firms with the lowest level of expected earnings and the lowest PE ratios. A negative October effect is also found for the same‐firms, which appears to be caused by downward revisions in analysts' forecasts between September 16 and November 16.
THE TWO‐STATE INTEREST RATE MODEL FOR PRICING BONDS: AN EMPIRICAL ANALYSIS
Authors: Bhagwat Yatin N. , Ehrhardt Michael C. , Johnson David W.
Published: August 2014

The two‐state interest rate model is evaluated on the basis of its ability to price samples of government bonds. Its accuracy is shown to be comparable to that of a sophisticated continuous time model.
THE DEALER AND MARKET CONCEPTS OF BID‐ASK SPREAD: A COMPARISON FOR NASDAQ STOCKS
Authors: Hamilton James L.
Published: August 2014

Two models of bid‐ask spread are estimated with a unique sample of matched observations of dealer spreads and market (inside) spreads for NASDAQ stocks. The estimates demonstrate that dealer and market spreads relate differently to their common determinants, indicating that the two measures are not interchangeable. Consequently, studies must select the spread concept that is appropriate to the hypothesis being tested to get unbiased estimates and correct interpretations of model parameters. In particular, the cost of immediacy to investors is measured directly by market spreads, while market‐making costs and interdealer competition relate directly to dealer spreads.
BANK FAILURE AND CONTAGION EFFECTS: EVIDENCE FROM HONG KONG
Authors: Gay Gerald D. , Timme Stephen G. , Yung Kenneth
Published: August 2014

In this paper the influence of three Hong Kong bank failures on stock prices of the colony's banking industry is examined. As deposit insurance is nonexistent in Hong Kong, the world's fourth‐largest financial center, an interesting environment is provided for testing contagion effects of bank failure on other healthy financial institutions. By examining contagion effects in an environment void of explicit deposit insurance, this study should provide interesting insights into the resiliency of modern‐day financial markets. In turn, insights should also be provided into debates concerning the role and reform of deposit insurance and the rationale for regulation of the financial services industry in general. The results indicate that unexpected bank failure causes significant negative stock price reactions within the banking industry; yet, some banks are less affected than others.
A TEST OF THE RISK PREMIUM HYPOTHESIS
Authors: Najand Mohammad
Published: August 2014

Contrary to economic theory, there is international evidence that common stock returns and inflation are negatively related. This negative relationship is examined in this paper and the applicability of the risk premium hypothesis is tested. According to this hypothesis, an increase in unanticipated inflation causes the market risk premium to rise, which in turn lowers current stock prices. A model is developed and the effect of uncertain inflation on the market risk premium across four countries is tested empirically. Results indicate that the market risk premium is positively related to uncertain inflation.
TAX SCHEDULE CHANGES AND DISCOUNT BOND PRICES
Authors: Rodriguez Ricardo J.
Published: August 2014

Research on the impact of marginal tax changes on bondholder wealth focuses on changes along a given tax schedule. In this paper the valuation consequences of changing the tax schedule are analyzed. Although previous researchers show that the price of all discount bonds falls if the marginal ordinary income tax rate increases along a tax schedule, it is found that this result holds only under specific conditions when the tax schedule changes. Various comparative statics are discussed.
EX‐DIVIDEND DAY PRICE CHANGES AND IMPLIED TAX RATES: AN EVALUATION
Authors: Gagnon Jean‐Marie , Suret Jean‐Marc
Published: August 2014

The ratio of price changes to dividends is sometimes used to assess personal tax rates and detect tax clientele for dividends. It is suggested here that the model is unable to detect possible tax effects, given the sample sizes available to most researchers.
HOURLY RETURNS, VOLUME, TRADE SIZE, AND NUMBER OF TRADES
Authors: McInish Thomas H. , Wood Robert A.
Published: August 2014

Previous research identifies a causal relationship between returns and trading volume. But volume has two components: number of trades and number of shares per trade. In this paper the relationship between each of these volume components and returns is examined and the number of trades is found to be the dominant component. Results show that return activity in a period is associated with the level of trading frequency in a subsequent period and also with the number of shares in a subsequent period. This is consistent with small traders reacting to returns while professional traders largely ignore previous returns in their trading.
EFFECTS OF AGENCY AND TRANSACTION COSTS ON DIVIDEND PAYOUT RATIOS: FURTHER EVIDENCE OF THE AGENCY‐TRANSACTION COST HYPOTHESIS
Authors: Dempsey Stephen J. , Laber Gene
Published: August 2014

In this study we replicate and extend an agency‐transaction cost model of dividend payout previously hypothesized and supported in the literature. We find no statistical difference between the estimated regression model obtained for the original seven‐year sample period, 1974–80, and that obtained for our seven‐year period, 1981–87. The latter period is characterized by significantly lower inflation, stronger economic growth, and lower taxes. The intertemporal stability of the model suggests that it is useful for predicting dividend payout at the individual firm level.
HEDGING INTEREST RATE RISK UNDER TERM STRUCTURE EFFECTS: AN APPLICATION TO FINANCIAL INSTITUTIONS
Authors: Hilliard Jimmy E. , Jordan Susan D.
Published: August 2014

In this paper we investigate the use of the structured full rank model for hedging the balance sheet of a financial institution. Simulation results suggest that the optimal hedge is insensitive to changes in parameter estimates. In addition, we hedge a portfolio of Treasury bills using both the full information covariance matrix and the structured covariance matrix. We then contrast these results with those obtained from a duration‐based model. Empirical results suggest that the structured full rank model is generally more effective in hedging applications than either the full information model or duration‐based model.
ADVERSE SELECTION, SPREAD BEHAVIOR, AND OVER‐THE‐COUNTER SEASONED EQUITY OFFERINGS
Authors: Tripathy Niranjan , Rao Ramesh P.
Published: August 2014

In this paper the effects of over‐the‐counter seasoned equity issuances on the percentage bid‐ask spreads around announcement and offer dates are examined. A declining spread in the pre‐announcement period suggests that resolution of information asymmetry begins well before the announcement date. Further, using issue size as a proxy for the extent of information asymmetry, we observe that spreads for larger issues reach “normal” levels before the first public disclosure of the offering. For smaller issues this occurs only on the offer date. Results are consistent with the dealer experiencing reduced adverse information risk as a result of information‐gathering efforts during the underwriting process.
ANTITAKEOVER CHARTER AMENDMENTS: EFFECTS ON CORPORATE DECISIONS
Authors: Pugh William N. , Page Daniel E. , Jahera John S.
Published: August 2014

In recent years many shareholders have voted to amend their corporate charters to decrease the likelihood of a hostile takeover. Critics of antitakeover amendments argue that by sheltering management from the market for corporate control, management may become entrenched and be less likely to act in the best interest of shareholders. The counter argument holds that the threat of a hostile takeover and possible job loss may move management toward “short‐sighted” decision making. In this study we test the hypothesis that, upon passage of antitakover amendments, managers adopt a longer‐term view with respect to capital expenditures and research and development. Empirical results support the hypothesis, as both capital expenditures and research development display significant increases relative to the year of enactment.
STOCK PRICE REACTIONS TO DIVIDEND AND EARNINGS ANNOUNCEMENTS: CONTEMPORANEOUS VERSUS NONCONTEMPORANEOUS ANNOUNCEMENTS
Authors: Eddy Albert , Seifert Bruce
Published: August 2014

In this paper we examine stock price reactions to contemporaneous and noncontemporaneous dividend and earnings announcements. Overall, the stock price reaction to joint announcements is significantly greater than the reaction to just one signal. This implies that there is information content to two signals being given simultaneously, and that announcements are not perfect substitutes. Some evidence shows that the reaction to a joint announcement is approximately twice that to a noncontemporaneous announcement. On average, the stock price reaction to joint contradictory announcements is not significant. Finally, for joint announcements where only one of the two announcements is expected to affect the stock price significantly, the market reaction is determined by the nonzero signal.
DUTCH AUCTION VERSUS FIXED‐PRICE SELF‐TENDER OFFERS: DO FIRMS OVERPAY IN FIXED‐PRICE OFFERS?
Authors: Peterson David R. , Peterson Pamela P.
Published: August 2014

We investigate differences in purchase premiums and returns of common stock the day following the offer expiration of firms conducting Dutch auction self‐tender offers versus those conducting fixed‐price self‐tender offers to see whether firms overpay for shares in fixed‐price offers. After controlling for the proportion of shares sought and firm size, no statistically significant differences in premiums or returns are found between the two types of offers.
AN IMPLICIT MEASURE OF THE EFFECTIVE BID‐ASK SPREAD: A NOTE
Authors: Chang Carolyn W. , Chang Jack S. K.
Published: August 2014

We extend Roll's study of the effective bid‐ask spread in an efficient market environment by allowing for serially correlated order arrival and quote behavior. This extension results in a more general effective bid‐ask spread measure, which precludes imaginary spreads and includes Roll's measure as a special case when the serial correlation is zero. This new measure is related to the length of the measurement interval due to the serial correlation, and thus has the potential to explain the previously observed differential between weekly and daily derived spreads.
INTRADAY MARKET BEHAVIOR AND THE EXTENT OF FEEDBACK BETWEEN S&P 500 FUTURES PRICES AND THE S&P 500 INDEX
Authors: Kawaller Ira G. , Koch Paul D. , Koch Timothy W.
Published: August 2014

In this study we empirically examine the intraday lead/lag relation between S&P 500 futures prices and the S&P 500 index, and whether daily market characteristics are associated with changes in the relation. We estimate daily Geweke measures of feedback and regress time series of these measures on daily price volatility and volume characteristics. Results indicate that the contemporaneous price relation is substantive and that measures of contemporaneous feedback are positively associated with the daily range of the futures price. The primary implication is that the relation between cash and futures prices becomes stronger as futures price volatility increases. As volatility increases, information is being impounded at a faster rate so that futures and equity markets operate more closely as one market. Large futures price moves, by themselves, are not responsible for breakdowns in the stock‐futures price relation.