bluuebunny/crossref_metadata_2025 huggingface dataset:
Adjusting for Beta Bias: An Assessment of Alternate Techniques: A Note
Authors: McINISH THOMAS H. , WOOD ROBERT A.
Published: April 2012

This paper tests the effectiveness of techniques proposed by: Scholes‐Williams; Dimson; Fowler, Rorke, and Jog; and Cohen, Hawawini, Maier, Schwartz, and Whitcomb to control for bias in beta estimates from thin trading and price adjustment delays. Each technique produces beta estimates that reduce the amount of this bias, but the amount of reduction in the best case is only 29%.
Valuation of Risky Assets in Arbitrage Free Economies with Frictions
Authors: PRISMAN ELIEZER Z.
Published: April 2012

This paper derives a framework for arbitrage models in markets with frictions. It generalizes the existence of a valuation operator to such markets. As in perfect markets, the valuation operator is a linear operator and its existence is implied by the no‐arbitrage condition. In imperfect markets the valuation operator is individual‐specific and depends on the agent's position in the market. The methodology employed in the paper is duality in convex programming.
Pricing New Corporate Bond Issues: An Analysis of Issue Cost and Seasoning Effects
Authors: FUNG W. K. H. , RUDD ANDREW
Published: April 2012

The pricing of new corporate bond issues is examined, with particular emphasis on the seasoning effect and the cost of underwriting. Considerable attention is paid to some special features of the corporate bond market, including the use of actual trader quotes so as to accurately measure holding period returns. Our results suggest that the cost of issuing corporate bonds is less than previously reported.
On Timing and Selectivity
Authors: ADMATI ANAT R. , BHATTACHARYA SUDIPTO , PFLEIDERER PAUL , ROSS STEPHEN A.
Published: April 2012

The dichotomy between timing ability and the ability to select individual assets has been widely used in discussing investment performance measurement. This paper discusses the conceptual and econometric problems associated with defining and measuring timing and selectivity. In defining these notions we attempt to capture their intuitive interpretation. We offer two basic modeling approaches, which we term the portfolio approach and the factor approach. We show how the quality of timing and selectivity information can be identified statistically in a number of simple models, and discuss some of the econometric issues associated with these models. In particular, a simple quadratic regression is shown to be valid in measuring timing information.
The Impact of Preferred‐for‐Common Exchange Offers on Firm Value
Authors: PINEGAR J. MICHAEL , LEASE RONALD C.
Published: April 2012

This paper examines the impact of capital structure changes which have no corporate tax consequences. Specifically, exchange offers involving preferred and common stock are analyzed. We find that systematic changes in firm value occur when companies announce preferred‐for‐common exchange offers. Consequently, we interpret our results to be consistent with a signalling hypothesis. We also find weaker evidence suggesting the existence of agency cost effects or wealth redistributions across security classes. Our findings imply that capital structure changes need not alter the tax status of the issuing firm to affect firm value.
Price and Volume Effects Associated with Changes in the S&P 500 List: New Evidence for the Existence of Price Pressures
Authors: HARRIS LAWRENCE , GUREL EITAN
Published: April 2012

Attempts to identify price pressures caused by large transactions may be inconclusive if the transactions convey new information to the market. This problem is addressed in an examination of prices and volume surrounding changes in the composition of the S&P 500. Since these changes cause some investors to adjust their holdings of the affected securities and since it is unlikely that the changes convey information about the future prospects of these securities, they provide an excellent opportunity to study price pressures. The results are consistent with the price‐pressure hypothesis: immediately after an addition is announced, prices increase by more than 3 percent. This increase is nearly fully reversed after 2 weeks.
Volume for Winners and Losers: Taxation and Other Motives for Stock Trading
Authors: LAKONISHOK JOSEF , SMIDT SEYMOUR
Published: April 2012

Capital gains taxes create incentives to trade. Our major finding is that turnover is higher for winners (stocks, the prices of which have increased) than for losers, which is not consistent with the tax prediction. However, the turnover in December and January is evidence of tax‐motivated trading; there is a relatively high turnover for losers in December and for winners in January. We conclude that taxes influence turnover, but other motives for trading are more important. We were unable to find evidence that changing the length of the holding period required to qualify for long‐term capital gains treatment affected turnover.
The Geometry of the Maximum Likelihood Estimator of the Zero‐Beta Return
Authors: KANDEL SHMUEL
Published: April 2012

This paper explores geometric relations, in mean‐variance space, among the sample frontier, the maximum likelihood estimator, and two other estimators of the zerobeta return. It is also demonstrated that a partition of the portfolio space is determined by a family of parabolas; the zeros of each parabola are the maximum likelihood estimators associated with all portfolios on the parabola. This observation is the basis for an additional interpretation of the statistic of the Likelihood Ratio Test of portfolio efficiency without a riskless asset.
Equilibrium Interest Rates and Multiperiod Bonds in a Partially Observable Economy
Authors: DOTHAN MICHAEL U. , FELDMAN DAVID
Published: April 2012

This paper analyzes the market for financial assets in a production and exchange economy with several realized outputs and a single unobservable source of nondiversifiable risk. The paper demonstrates that, for a large class of diffusion outputs and preferences, optimizing consumers first estimate the realizations of the unobservable factor and then use these estimates to determine portfolio and consumption rules. Moreover, the explicit consideration of this unobservable productivity factor affects equilibrium demands and prices. The equilibrium spot rate of interest emerges as the “best estimate” of the unobservable factor, and multiperiod default‐free bonds arise as the optimal hedge for the unobservable changes of the stochastic investment opportunity set.
A Model of Dynamic Takeover Behavior
Authors: GIAMMARINO RONALD M. , HEINKEL ROBERT L.
Published: April 2012

Several observed features of takeover contests appear to be inconsistent with value‐maximizing behavior on the part of the agents involved. For instance, managers occasionally resist takeover bids, presumably in order to facilitate competition among bidders. However, counterbids do not always materialize, suggesting that management resistance was not in the best interests of the firm's shareholders. On the other hand, a successful takeover is sometimes accompanied by a decrease in the value of the acquirer's shares. In addition, valuable combinations are occasionally not consummated.

We present a simple illustration of sequential takeover bidding in which all managers act in the best interests of their respective shareholders. Within the context of this model, we provide an explanation of the type of behavior described above.
Expectations of Exchange Rates and Differential Inflation Rates: Further Evidence on Purchasing Power Parity in Efficient Markets
Authors: HUANG ROGER D.
Published: April 2012

The paper tests the null hypothesis of ex ante purchasing power parity. The empirical evidence obtained is inconsistent with the null for major industrialized countries over the current floating exchange rate regime. Expected nominal exchange rate changes appear to deviate systematically from expected inflation rate differentials over the same holding period even though real exchange rate changes appear to be serially uncorrelated. This supports the presence of time‐varying risk premia in foreign exchange markets and real determinants of exchange rate movements as suggested by equilibrium theories of international asset markets.
The Pricing of Options with Default Risk
Authors: JOHNSON HERB , STULZ RENÉ
Published: April 2012

This paper considers the pricing of options with default risk. The comparative statics of such options can differ from those of ordinary options, and early exercise of such American call options can be optimal. Several examples of options with default risk are considered.
A Theory of Stock Price Responses to Alternative Corporate Cash Disbursement Methods: Stock Repurchases and Dividends
Authors: OFER AHARON R. , THAKOR ANJAN V.
Published: April 2012

This paper develops a model in which managers can signal their firms' true values by using either a dividend or a stock repurchase or both. The authors explain a number of stylized facts about these cash‐disbursement mechanisms, particularly those concerning the relative magnitudes of stock price responses to dividends and repurchases. Most importantly, they explain why a stock repurchase elicits a significantly higher price response, on average, than a dividend announcement.
Costless Signalling in Financial Markets
Authors: FRANKE GÜNTER
Published: April 2012

A costless, fully revealing signalling equilibrium is derived from two easily understandable conditions. The outsider‐rationality condition states that the outsiders relate the price that they offer to pay for a security inversely to the supply of this security, which they interpret as a quality signal. The no‐arbitrage condition requires that the marginal exchange rate for two securities be the same in both primary and secondary markets. These conditions restrict the firm's financing policy and have strong implications for the valuation of securities and of the total firm. A costless signalling equilibrium is obtained.
The Effect of Long‐Term Performance Plans on Corporate Sell‐Off‐Induced Abnormal Returns
Authors: TEHRANIAN HASSAN , TRAVLOS NICKOLAOS G. , WAEGELEIN JAMES F.
Published: April 2012

This study examines the association between long‐term performance plans and wealth effects accruing to stockholders of divesting firms at announcements of sell‐off proposals. The results indicate that divesting companies with long‐term performance plans experience a more favorable stock market reaction at the announcement of sell‐off proposals relative to firms without long‐term performance plans. The findings imply that long‐term performance plans serve as an effective mechanism to motivate managers to make better decisions.
Optimal Hedging in Futures Markets with Multiple Delivery Specifications
Authors: KAMARA AVRAHAM , SIEGEL ANDREW F.
Published: April 2012

Nearly all futures contracts allow delivery of any of several qualities of the underlying asset. Consequently, the price of the futures contract is associated more with the price of the expected cheapest deliverable variety than with the price of the par‐delivery variety. The delivery specifications introduce a delivery risk for every hedger in the market. We derive the optimal hedging strategies in these markets. Their hedging effectiveness is evaluated for wheat futures contracts in Chicago. Hedging optimally would have significantly reduced the variance of the rates of return on hedges while yielding similar mean returns.
Off‐Board Trading of NYSE‐Listed Stocks: The Effects of Deregulation and the National Market System
Authors: HAMILTON JAMES L.
Published: April 2012

An econometric time‐series model of off‐board trading of NYSE‐listed stocks shows that high NYSE commission rates were an incentive for third‐market trading but that trading on the regional exchanges, which is most of the off‐board trading, has been affected very little by commissions or their deregulation. The effects of some changes in the trading organization and rules are estimated, including several that are part of the emerging National Market System. The estimates imply that the NMS has increased competition for the NYSE, as Congress intended, and has prompted the NYSE to improve its performance to retain market share.
The Market Reaction to Stock Splits
Authors: LAMOUREUX CHRISTOPHER G. , POON PERCY
Published: April 2012

In this paper, a model of market reaction to stock splits is presented and tested. We argue that the announcement of a split sets off the following chain of events. The market recognizes that, subsequent to the (reverse) split ex‐day, the daily number of transactions along with the raw volume of shares traded will increase (decrease). This increase in volume results in an increase in the noisiness of the security's return process. The increase in noise raises the tax‐option value of the stock, and it is this value that generates the announcement effect of stock splits. Empirical evidence using security returns, daily trading volume, and shareholder data strongly supports this theory. The evidence, in conjunction with this theory, also agrees with extant literature that splits result in decreased liquidity, but there is no evidence that this reduction in liquidity is priced.
Trading Mechanisms and Stock Returns: An Empirical Investigation
Authors: AMIHUD YAKOV , MENDELSON HAIM
Published: April 2012

This paper examines the effects of the mechanism by which securities are traded on their price behavior. We compare the behavior of open‐to‐open and close‐to‐close returns on NYSE stocks, given the differences in execution methods applied in the opening and closing transactions. Opening returns are found to exhibit greater dispersion, greater deviations from normality and a more negative and significant autocorrelation pattern than closing returns. We study the effects of the bid‐ask spread and the price‐adjustment process on the estimated return variances and covariances and discuss the associated biases. We conclude that the trading mechanism has a significant effect on stock price behavior.
Growth Opportunities and Risk‐Taking by Financial Intermediaries
Authors: HERRING RICHARD J. , VANKUDRE PRASHANT
Published: April 2012

We show that growth opportunities which cannot be converted to cash under conditions of financial distress are a critical determinant of an intermediary's choice of risk. Financial institutions in which is a low proportion of total assets will be much more likely to engage in go‐for‐broke behavior. The model leads to a reevaluation of the effectiveness of several traditional remedies for dealing with banks that take excessive risks such as raising insurance premiums, intervening before capital is depleted, and restricting investment options. The model also has implications about a new approach to the examination of financial intermediaries.
Risk‐Shifting Incentives and Signalling Through Corporate Capital Structure
Authors: JOHN KOSE
Published: April 2012

This paper examines optimal corporate financing arrangements under asymmetric information for different patterns of temporal resolution of uncertainty in the underlying technology. An agency problem, a signalling problem and an agency‐signalling problem arise as special cases. The associated informational equilibria and the optimal financing arrangements are characterized and compared. In the agency‐signalling equilibrium the private information of corporate insiders at the time of financing is signalled through capital structure choices which deviate optimally from agency‐cost minimizing financing arrangements, which in turn induce risk‐shifting incentives in the investment policy. In the pure signalling case the equilibrium is characterized by direct contractual precommitments to implement investment policies which are riskier than pareto‐optimal levels. Empirical implications for debt covenants and the announcement effect of investment policies and leverage increasing transactions on existing stock and bond prices are explicitly derived.
The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study
Authors: COPELAND THOMAS E. , FRIEDMAN DANIEL
Published: April 2012

A complete understanding of security markets requires a simultaneous explanation of price behavior, trading volume, portfolio composition (ie., asset allocation), and bid‐ask spreads. In this paper, these variables are observed in a controlled setting—a computerized double auction market, similar to NASDAQ. Our laboratory allows experimental control of information arrival—whether simultaneously or sequentially received, and whether homogeneous or heterogeneous. We compare the price, volume, and share allocations of three market equilibrium models: telepathic rational expectations, which assumes that traders can read each others minds (strong‐form market efficiency); ordinary rational expectations, which assumes traders can use (some) market price information, (a type of semi‐strong form efficiency); and private information, where traders use no market information. We conclude 1) that stronger‐form market models predict equilibrium prices better than weaker‐form models, 2) that there were fewer misallocation forecasts in simultaneous information arrival (SIM) environments, 3) that trading volume was significantly higher in SIM environments, 4) and that bid‐ask spreads widen significantly when traders are exposed to price uncertainty resulting from information heterogeneity.
Implied Spot Rates as Predictors of Currency Returns: A Note
Authors: PETERSON DAVID R. , TUCKER ALAN L.
Published: April 2012

Currency call option transactions data and the Black‐Scholes option pricing model, as modified by Merton for continuous dividends and as adapted to currency options by Biger and Hull and by Garman and Kohlhagen, are used to imply spot foreign exchange rates. The proportional deviation between implied and simultaneously observed spot rates is found to be a direct and statistically significant determinant of subsequent returns on foreign currency holdings after controlling for interest rate differentials. Further, an ex ante trading rule reveals that the additional information contained in implied rates often is sufficient to generate significant economic profits.
Term Structure Multiplicity and Clientele in Markets with Transactions Costs and Taxes
Authors: DERMODY JAIME CUEVAS , PRISMAN ELIEZER ZEEV
Published: April 2012

The authors investigate term structure with realistic transactions costs and taxes. Its properties are derived from a certain no‐arbitrage condition via duality theory in convex programming. Transactions costs imply an infinite multiplicity of term structures. A simple example with realistic transactions costs shows that this multiplicity can induce a valuation range of over 277 basis points. Transactions costs also allow equilibrium without short sale restrictions. The authors find the minimum transactions costs that prevent arbitrage. In addition, the exact conditions for weak clientele, in which investors will not buy some bonds and may not sell any that they already hold, are established.
Was the Tax‐Exempt Bond Market Inefficient or Were Future Expected Tax Rates Negative?
Authors: KOCHIN LEVIS A. , PARKS RICHARD W.
Published: April 2012

This paper shows that the sharp narrowing with maturity of the spread between taxable and tax‐exempt yields leaves room for tax arbitrage. At times, tax‐exempt forward rates have exceeded taxable forward rates. At such times, only expectations of higher taxes on Treasury than on municipal bonds would eliminate profit opportunities. The authors develop the idea of forward tax rates and compute forward tax rates for 1955 through 1984. They also outline tax‐arbitrage mechanisms involving private forward sale of long municipal bonds or the use of the Municipal Bond Futures Contract and show the potential profits.
Capital Structure Theory and REIT Security Offerings
Authors: HOWE JOHN S. , SHILLING JAMES D.
Published: April 2012

In this paper, we examine the stock price reactions to announcements of new security offerings by Real Estate Investment Trusts (REITs). REITs offer a unique setting in which to study these events because they do not pay taxes at the firm level. Theory suggests that the net tax gain to corporate borrowing is unambiguously negative for a REIT. Contrary to some recent studies, however, we find a positive stock price reaction to debt offerings, while the negative equity‐issuance effect is preserved. Further empirical evidence lends support to signalling as the explanation for the positive significant debt‐issuance effect.
Option Bounds with Finite Revision Opportunities
Authors: RITCHKEN PETER H. , KUO SHYANJAW
Published: April 2012

This article generalizes the single‐period linear‐programming bounds on option prices by allowing for a finite number of revision opportunities. It is shown that, in an incomplete market, the bounds on option prices can be derived using a modified binomial option‐pricing model. Tighter bounds are developed under more restrictive assumptions on probabilities and risk aversion. For this case the upper bounds are shown to coincide with the upper bounds derived by Perrakis, while the lower bounds are shown to be tighter.
An Unconditional Asset‐Pricing Test and the Role of Firm Size as an Instrumental Variable for Risk
Authors: CHAN K. C. , CHEN NAI‐FU
Published: April 2012

In an intertemporal economy where both risk (stock beta) and expected return are time varying, the authors derive a linear relation between the unconditional beta and the unconditional return under certain stationarity assumptions about the stochastic process of size‐portfolio betas. The model suggests the use of long time periods to estimate the unconditional portfolio betas. The authors find that, after controlling for the betas thus estimated, a firm‐size proxy, such as the logarithm of the firm size, does not have explanatory power for the averaged returns across the size‐ranked portfolios.
Bond Covenants and Delegated Monitoring
Authors: BERLIN MITCHELL , LOEYS JAN
Published: April 2012

This paper examines alternative contracting arrangements available to a firm seeking to finance an investment project. The authors consider the choice between loan contracts with covenants based on noisy indicators of the firm's financial health and loan contracts enforced by a monitoring specialist. In one interpretation, the specialist is a financial intermediary. The firm's choice is shown to depend upon the firm's credit rating, the accuracy of financial indicators of the firm's condition, the loss from premature liquidation of the firm's project, and the cost of monitoring.
Estimating the Volatility of Discrete Stock Prices
Authors: CHO D. CHINHYUNG , FREES EDWARD W.
Published: April 2012

This paper introduces an estimator of stock price volatility that eliminates, at least asymptotically, the biases that are caused by the discreteness of observed stock prices. Assuming that the observed stock prices are continuously monitored, an estimator is constructed using the notion of how quickly the price changes rather than how much the price changes. It is shown that this estimator has desirable asymptotic properties, including consistency and asymptotic normality. Also, through a simulation study, the authors show that it outperforms natural estimators for the low‐ and middle‐priced stocks. Furthermoret, he simulation study demonstratest hat the proposed estimator is robust to certain misspecifications in measuring the time between price changes.
Risk in Banking and Capital Regulation
Authors: KIM DAESIK , SANTOMERO ANTHONY M.
Published: April 2012

This paper investigates the role of bank capital regulation in risk control. It is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance. Bank capital regulation is a way to redress this bias toward risk. Utilizing the mean‐variance model, the following results are shown: (a) the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks; (b) as a solution to problems of the capital ratio regulation, the “theoretically correct” risk weights under the risk‐based capital plan are explicitly derived; and (c) the “theoretically correct” risk weights are restrictions on asset composition, which alters the optimal portfolio choice of banking firms.
A Note on Unsuccessful Tender Offers and Stockholder Returns
Authors: FABOZZI FRANK J. , FERRI MICHAEL G. , FABOZZI T. DESSA , TUCKER JULIA
Published: April 2012

Recent research shows that unsuccessful tender offers may affect target share returns for two years past the offer's announcement. This note examines target returns in the interim between the announcement and one year after the offer's withdrawal. Analyzing a recent sample of targets that did not get another bid in the year following a failed tender offer, this study reaches two conclusions. First, all of an offer's premium disappears by the time failure becomes public. Second, excess returns are zero in the post‐failure year. An explanation that is based on the causes of the tender offers' failures is presented.
Efficient Signalling with Dividends, Investment, and Stock Repurchases
Authors: WILLIAMS JOSEPH
Published: April 2012

The efficient mix of dissipative dividends, investments in real and financial assets, and repurchases of stock is computed for a continuum of firms with inside information about the return on risky real assets. In the efficient signalling equilibrium, the representative firm optimally distributes dividends, invests in risky real assets to maximize net present value, holds no financial securities, and sells new stock in the market. This firm finances its value‐maximizing investment first from internal funds and second from stock sold to new investors.
Portfolio Rebalancing and the Turn‐of‐the‐Year Effect
Authors: RITTER JAY R. , CHOPRA NAVIN
Published: April 2012

This paper finds that, for the 1935–1986 period, the market's risk‐return relation does not have a January seasonal. The findings differ from those of other studies due to the use of value‐weighted, rather than equally weighted, portfolios. Inferences are sensitive to the weighting procedure because of the small‐firm return patterns in January. In particular, even in those Januaries for which the market return is negative, small‐firm returns are positive, and they are more positive the higher is beta. This is consistent with the portfolio rebalancing explanation of the turn‐of‐the‐year effect.
An Analysis of Intertemporal Pricing for Forward Foreign Exchange Contracts
Authors: HUANG ROGER D.
Published: April 2012

An asset‐pricing model with an unobservable time‐varying risk premium is used to price forward foreign exchange contracts. Specifically, the term spectrum of forward foreign exchange contracts is examined in order to focus on country‐specific and maturity‐specific information. The testable restrictions imposed by the model are consistent with both cross‐country and cross‐maturity forward contracts except at the short end of the maturity spectrum for cross‐country forward exchange rates. This indicates that the intertemporal model is relatively robust in valuing forward contracts of different maturities and for different exchange rates but that it may fail when there are significant short‐term country‐specific shocks.
Computing the Constant Elasticity of Variance Option Pricing Formula
Authors: SCHRODER MARK
Published: April 2012

This paper expresses the constant elasticity of variance option pricing formula in terms of the noncentral chi‐square distribution. This allows the application of well‐known approximation formulas and the derivation of a whole class of closed‐form solutions. In addition, a simple and efficient algorithm for computing this distribution is presented.
Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, and Calls
Authors: ASQUITH PAUL , MULLINS DAVID W. , WOLFF ERIC D.
Published: April 2012

This paper presents an aging analysis of 741 high yield bonds and finds default, exchange, and call percentages substantially higher than reported in earlier studies. By December 31, 1988, cumulative defaults are 34 percent for bonds issued in 1977 and 1978 and range from 19 to 27 percent for issue years 1979–1983 and from 3 to 9 percent for issue years 1984–1986. Exchanges are also a significant factor although they often are followed by default. Moreover, a significant percentage of high yield debt, 26–47 percent for 1977–1982, has been called. By December 31, 1988, approximately one third of the bonds issued in 1977–1982 has defaulted or been exchanged, and an additional one third had been called. On average, only 28 percent of these issues are still outstanding. There is no evidence that early results for more recent issue years differ markedly from issue years 1977 to 1982.
Estimating the Strategic Value of Long‐Term Forward Purchase Contracts Using Auction Models
Authors: PARSONS JOHN E.
Published: April 2012

We demonstrate how an auction model can be used in a traditional capital budgeting context to assign a value to the strategic advantage of long‐term forward contracts. Research in the field of industrial organization has pointed to the danger of ex post opportunistic bargaining as a motivation for the use of forward contracts in natural resources and manufactured products, but no operational procedure exists for estimating the value secured by these contracts. Arbitrage methods for valuing forward contracts assume a competitive market in which the factors creating the bargaining problem and motivating the use of long‐term contracts are not present. Use of the model is illustrated in the case of take‐or‐pay contracts for natural gas.
Capital Flow Controls, International Asset Pricing, and Investors' Welfare: A Multi‐Country Framework
Authors: ERRUNZA VIHANG , LOSQ ETIENNE
Published: April 2012

This paper investigates the impact of capital flow restrictions on the pricing of securities, on the optimal portfolio composition for investors of different nationalities, and on their welfare. Under capital flow controls, the equilibrium price of a security is determined jointly by its international and national risk premiums, and investors acquire nationality‐specific portfolios along with a market‐wide proxy for the world market portfolio. Removal of investment barriers generally leads to an increase in the aggregate market value of the affected securities, and all investors favor a move toward market integration. Introduction of different types of index funds in the world market generally increases world market integration and investor welfare.
A Re‐Examination of the Wealth Expropriation Hypothesis: The Case of Captive Finance Subsidiaries
Authors: MALITZ ILEEN B.
Published: April 2012

This paper re‐examines Kim, McConnell, and Greenwood's (1977) study of captive finance subsidiaries. We suggest that, as long as firms are concerned with reputation, shareholders will find it costly to engage in deliberate wealth expropriation and thus have no incentives to do so. Using a sample of fourteen firms with publicly traded debt, we compute and test the statistical significance of abnormal returns to shareholders, bondholders, and the firm when captives are incorporated. We find that shareholders gain 14.9 percent, bondholders lose 2.3 percent, and firm value increases a significant 10.4 percent. Our results are inconsistent with wealth expropriation and lend support to the importance of reputation to firms.
S&P 500 Cash Stock Price Volatilities
Authors: HARRIS LAWRENCE
Published: April 2012

S&P 500 stock return volatilities are compared to the volatilities of a matched set of stocks, after controlling for cross‐sectional differences in firm attributes known to affect volatility. No significant difference in volatility is observed between 1975 and 1983—before the start of trade in index futures and index options. Since then, S&P 500 stocks have been relatively more volatile. The difference is statistically, but not economically, significant. The relative increase occurs primarily in daily returns and only to a lesser extent in longer interval returns. Other factors besides the start of derivative trade could be responsible for the small increase in volatility.
Firm Size and Turn‐of‐the‐Year Effects in the OTC/NASDAQ Market
Authors: LAMOUREUX CHRISTOPHER G. , SANGER GARY C.
Published: April 2012

This paper examines the turn‐of‐the‐year effect, the firm size effect, and the relation between these two effects for a sample of OTC stocks traded via the NASDAQ reporting system over the period 1973–1985. We find results similar to those based solely on listed stocks. The importance of these findings stems from the existence of nontrivial differences between the characteristics of the OTC/NASDAQ sample and the samples of listed firms examined previously in the literature. We also find that NASDAQ quoted bid‐ask spreads are highly negatively correlated with firm size, are not highly seasonal, and are large enough to preclude trading profits based upon a knowledge of the seasonality of small firms' returns.
LDC Debt: Forgiveness, Indexation, and Investment Incentives
Authors: FROOT KENNETH A. , SCHARFSTEIN DAVID S. , STEIN JEREMY C.
Published: April 2012

We compare different indexation schemes in terms of their ability to facilitate forgiveness and reduce the investment disincentives associated with the large LDC debt overhang. Indexing to an endogenous variable (e.g., a country's output) has a negative moral hazard effect on investment. This problem does not arise when payments are linked to an exogenous variable such as commodity prices. Nonetheless, indexing payments to output may be useful when debtors know more about their willingness to invest than lenders. We also reach new conclusions about the desirability of default penalties under asymmetric information.
The Effect of Temporal Risk Aversion on Optimal Consumption, the Equity Premium, and the Equilibrium Interest Rate
Authors: AHN CHANG MO
Published: April 2012

This paper demonstrates that temporal risk aversion makes smoothing consumption over time less attractive, while the usual risk aversion makes it more attractive. As temporal risk aversion increases, the equilibrium interest rate decreases and the equity premium increases. This paper also shows a striking and novel result that an increase in time impatience can lead to either a decrease or an increase in the interest rate, depending on the nature of the nonseparability.
Corrections for Trading Frictions in Multivariate Returns
Authors: KORKIE BOB
Published: April 2012

When observed stock returns are obtained from trades subject to friction, it is known that an individual stock's beta and covariance are measured with error. Univariate models of additive error adjustment are available and are often applied simultaneously to more than one stock. Unfortunately, these multivariate adjustments produce non‐positive definite covariance and correlation matrices, unless the return sample sizes are very large. To prevent this, restrictions on the adjustment matrix are developed and a correction is proposed, which dominates the uncorrected estimator. The estimators are illustrated with asset opportunity set estimates where daily returns have trading frictions.
Disclosure Decisions by Firms and the Competition for Price Efficiency
Authors: FISHMAN MICHAEL J. , HAGERTY KATHLEEN M.
Published: April 2012

This paper develops a model of the relationship between investment decisions by firms and the efficiency of the market prices of their securities. It is shown that more efficient security prices can lead to more efficient investment decisions. This provides firms with the incentive to increase price efficiency by voluntarily disclosing information about the firm. Disclosure decisions are studied. It is shown that firms may expend more resources on disclosure than is socially optimal. This is in contrast to the concern implicit in mandatory disclosure rules that firms will expend too few resources on disclosure.
The Term Structure of Interest Rates in a Partially Observable Economy
Authors: FELDMAN DAVID
Published: April 2012

This paper investigates the term structure of interest rates in a multiperiod production and exchange economy with incomplete information. Unable to observe their stochastic investment opportunities, investors engage in dynamic Bayesian inference. This results in the endogenous identification of a more complex production function which generates a richer term structure, resembling the one that actual market prices imply. In addition, this paper introduces a characteristic function of the term structure and demonstrates that, in contrast with a fully observable economy, the widely investigated expectations hypothesis holds true only if interest rates are nonstochastic.
Prepayment and the Valuation of Mortgage‐Backed Securities
Authors: SCHWARTZ EDUARDO S. , TOROUS WALTER N.
Published: April 2012

This paper puts forward a valuation framework for mortgage‐backed securities. Rather than imposing an optimal, value‐minimizing call condition, we assume that at each point in time there exists a probability of prepaying; this conditional probability depends upon the prevailing state of the economy. To implement our valuation procedure, we use maximum‐likelihood techniques to estimate a prepayment function in light of recent aggregate GNMA prepayment experience. By integrating this empirical prepayment function into our valuation framework, we provide a complete model to value mortgage‐backed securities.
Adverse Selection in a Model of Real Estate Lending
Authors: CHARI V. V. , JAGANNATHAN RAVI
Published: April 2012

We provide a rationale for the presence of points in mortgage loan contracts. Our analysis builds on two key features. First, insurance markets are unavailable for labor income. Second, the “due‐on‐sale” clause allows banks to offer loan contracts which partially insure against fluctuations in labor income. If explicit prepayment penalties are prohibited by law, points serve effectively as prepayment penalties. We also examine environments where such penalties are not prohibited and show that points will be used if interest rates cannot depend on the size of the loan.
The Intertemporal Relation Between the U.S. and Japanese Stock Markets
Authors: BECKER KENT G. , FINNERTY JOSEPH E. , GUPTA MANOJ
Published: April 2012

This paper finds a high correlation between the open to close returns for U.S. stocks in the previous trading day and the Japanese equity market performance in the current period. In contrast, the Japanese market has only a small impact on the U.S. return in the current period. High correlations among open to close returns are a violation of the efficient market hypothesis; however, in trading simulations, the excess profits in Japan vanish when transactions costs and transfer taxes are included.
An Examination of the Super Bowl Stock Market Predictor
Authors: KRUEGER THOMAS M. , KENNEDY WILLIAM F.
Published: April 2012

Few prediction schemes have been more accurate, and at the same time more perplexing, than the Super Bowl Stock Market Predictor, which asserts that the league affiliation of the Super Bowl winner predicts stock market direction. In this study, we examine the record and statistical significance of this anomaly and demonstrate that an investor would have clearly outperformed the market by reacting to Super Bowl game outcomes.
Efficiency and Organizational Structure: A Study of Reverse LBOs
Authors: MUSCARELLA CHRIS J. , VETSUYPENS MICHAEL R.
Published: April 2012

This paper is a report on 72 firms which went public since 1983 but previously underwent a full or divisional LBO. Accounting measures of performance reveal significant improvements in profitability which resulted mainly from these firms' ability to reduce costs. Firms experience dramatic increases in leverage at the LBO, but the leverage ratios are gradually reduced. The evidence is consistent with the hypothesis that the change in the governance structure of these firms towards more concentrated residual claims created a new organizational structure which is more efficient than its predecessor.
Managerial Share Ownership and the Stock Price Effects of Antitakeover Amendment Proposals
Authors: MCWILLIAMS VICTORIA B.
Published: April 2012

Studies that test for an average stock price effect of antitakeover amendments present different results, disagreeing with respect to both the significance and the direction of the effect. This study determines whether effects can be identified when managerial share ownership and amendment type are considered. Results suggest a negative relation between managerial share ownership and the stock price reaction to all but fair price amendment proposals.
A Comment on Excess Asset Reversions and Shareholder Wealth
Authors: MOORE NORMAN H. , PRUITT STEPHEN W.
Published: April 2012

This study re‐examines the earlier finding of Alderson and Chen (1986a) that financial markets do not consider excess pension assets in determining share prices and that significant increases in shareholder wealth occur when an overfunded pension plan is terminated. The results document that specific event‐time contamination (corporate restructuring announcements) provides the driving force for all the earlier findings.
Purchasing Power Parity in the Long Run
Authors: ABUAF NISO , JORION PHILIPPE
Published: April 2012

This paper re‐examines the evidence on Purchasing Power Parity (PPP) in the long run. Previous studies have generally been unable to reject the hypothesis that the real exchange rate follows a random walk. If true, this implies that PPP does not hold. In contrast, this paper casts serious doubt on this random walk hypothesis. The results follow from more powerful estimation techniques, applied in a multilateral framework. Deviations from PPP, while substantial in the short run, appear to take about three years to be reduced in half.
Disentangling the Coefficient of Relative Risk Aversion from the Elasticity of Intertemporal Substitution: An Irrelevance Result
Authors: KOCHERLAKOTA NARAYANA R.
Published: April 2012

For homothetic time and state separable preferences, the coefficient of relative risk aversion (CRRA) is equal to the reciprocal of the elasticity of intertemporal substitution (EIS). This paper shows that, when the growth rate of consumption is i.i.d., asset pricing models based upon preferences in which the CRRA and the EIS are no longer linked do not have more explanatory power. Further, in these stochastic environments, estimates of the CRRA in the standard preferences are measures of the true CRRA and not the EIS. These results are fairly accurate descriptions of economies calibrated using United States annual data.
Corporate Sale‐and‐Leasebacks and Shareholder Wealth
Authors: SLOVIN MYRON B. , SUSHKA MARIE E. , POLONCHEK JOHN A.
Published: April 2012

In this paper, we examine the market valuation effects of corporate sale‐and‐leasebacks. Specifically, we test whether such transactions offer a net benefit to lessees or lessors by evaluating the impact on share prices from announcements of sale‐and‐leasebacks of major corporate assets. Our evidence indicates that the announcements are associated with positive abnormal returns to lessees. We conclude that this positive market reaction results from an overall reduction in the present value of expected taxes occasioned by the transactions. Our evidence also suggests that the gains from sale‐and‐leasebacks accrue solely to lessee firms.
Patterns of Productivity in the Finance Literature: A Study of the Bibliometric Distributions
Authors: CHUNG KEE H. , COX RAYMOND A. K.
Published: April 2012

This study finds a bibliometric regularity in the finance literature that the number of authors publishing n papers is about of those publishing one paper. We find that the finance literature conforms very well to the inverse square law if data are taken from a large collection of journals. When applied to individual finance journals, we find that values of c range from 1.95 to 3.26. We also find that top‐rated journals have higher concentrations among their contributors. This implies that the phenomenon “success breeds success” is more common in higher quality publications.
Principal‐Agent Problems in S&L Salvage
Authors: KANE EDWARD J.
Published: April 2012

New legislation and traditional FDIC insolvency‐resolution procedures transform and intensify the principal‐agent problems most responsible for the FSLIC mess. These problems explain counterproductive constraints on the governance and operating policies of the agency responsible for rescuing and salvaging assets in insolvent thrifts: the RTC. The constraints slow insolvency resolution, increase interim financing costs, and undermine RTC recovery of asset value. Operationalizing its task as preserving evanescent and economically misconceived “franchise values,” the RTC allows insolvents to seek financing on an unconsolidated basis, initiates bidding for one institution at a time, holds back seriously troubled assets, and recruits an overly narrow range of bidders.
Debt and Input Misallocation
Authors: KIM MOSHE , MAKSIMOVIC VOJISLAV
Published: April 2012

We investigate a class of agency costs of debt that arise because debt financing affects the firm's incentives to use inputs efficiently. A methodology for estimating this class of costs is presented and applied to a major industry, air transport. Our results are consistent with agency models that predict a decrease in efficiency as the debt increases. A part of the loss of efficiency that we identify is attributable to the greater use by levered firms of inputs that can be monitored and are collateralizable.
The Default Risk of Swaps
Authors: COOPER IAN A. , MELLO ANTONIO S.
Published: April 2012

We characterize the exchange of financial claims from risky swaps. These transfers are among three groups: shareholders, debtholders, and the swap counterparty. From this analysis we derive equilibrium swap rates and relate them to debt market spreads. We then show that equilibrium swaps in perfect markets transfer wealth from shareholders to debtholders. In a simplified case, we obtain closed‐form solutions for the value of the default risk in the swap. For interest‐rate swaps, we obtain numerical solutions for the equilibrium swap rate, including default risk. We compare these with equilibrium debt market default risk spreads.
Animal Spirits, Margin Requirements, and Stock Price Volatility
Authors: KUPIEC PAUL H. , SHARPE STEVEN A.
Published: April 2012

A simple overlapping generations model is used to characterize the effects of initial margin requirements on the volatility of risky asset prices. Investors are assumed to exhibit heterogeneous preferences for risk‐bearing, the distribution of which evolves stochastically across generations. This framework is used to show that imposing a binding initial margin requirement may either increase or decrease stock price volatility, depending upon the microeconomic structure behind fluctuations in economy‐wide average risk‐bearing propensity. The ambiguous effect on volatility similarly arises when the source of heterogeneity is noise trader beliefs.
The Reversal of Large Stock‐Price Decreases
Authors: BREMER MARC , SWEENEY RICHARD J.
Published: April 2012

Extremely large negative 10‐day rates of return are followed on average by larger‐than‐expected positive rates of return over following days. This price adjustment lasts approximately 2 days and is observed in a sample of firms that is largely devoid of methodological problems that might explain the reversal phenomenon. While perhaps not representing abnormal profit opportunities, these reversals present a puzzle as to the length of the price adjustment period. Such a slow recovery is inconsistent with the notion that market prices quickly reflect relevant information.