bluuebunny/crossref_metadata_2025_split huggingface dataset:
The Meaning of Internal Rates of Return
Authors: DORFMAN ROBERT 
Published: April 2012

ABSTRACTNearly one hundred years after Irving Fisher' persuasive argument that net present value is the fundamental criterion for appraising investment projects, businessmen and bankers continue to consider the internal rate of return. Business practice is justified in some circumstances. It has long been recognized that a firm will grow asymptotically at a rate equal to the largest real positive root of an individual project' rate of return equation if the net cash flows are continually reinvested in projects of the same type. That same root also controls the firm' asymptotic growth rate if any fixed proportion of the cash flows is reinvested. The other roots of the equation are important also, since the stability of the firm' growth path depends on them.
Market Response to the Weekly Money Supply Announcements in the 1970s
Authors: URICH THOMAS , WACHTEL PAUL 
Published: April 2012

ABSTRACTThe hypothesis that the weekly announcement of the money supply affects interest rates is examined. The announcement effect is interpreted as a policy anticipation effect. That is, an unanticipated increase in the money supply leads to an increase in interest rates in anticipation of future tightening by the Federal Reserve. Estimates of this effect with proxies for the unanticipated change constructed from a survey of money supply forecasts and an ARIMA model indicate that: (a) financial markets respond very quickly to the announcement; and (b) the response was largest when policymakers emphasized the importance of the monetary aggregates.
The Monetary Approach to Exchange Rate in an Efficient Foreign Exchange Market: Tests Based on Volatility
Authors: HUANG ROGER D. 
Published: April 2012

ABSTRACTThe variance bounds on exchange rate movements implied by the monetary approach to exchange rate in an efficient foreign exchange market is shown to be violated by sample data. The paper also presents evidence showing that the forecast errors implied by the monetary model can be forecasted using historical data. The results are interpreted to suggest either the incompatibility of the monetary approach with sample data, or an inefficient foreign exchange market or both.
On the Matter of Parity among Financial Obligations
Authors: LEWELLEN WILBUR G. , EMERY DOUGLAS R. 
Published: April 2012

ABSTRACTThe lessons of the leasing literature concerning the impact of leases on the debt capacity of a firm are reviewed and summarized to establish an approach to the analysis of the corporate bond refunding decision. A general proposition regarding financial obligation parity is established, and from that a clear bond refunding decision rule is developed. Previous debates in the literature about appropriate discount rates and about the appropriate cash flows to be discounted for refunding decisions are clarified.
Investment Policy Implications of the Capital Asset Pricing Model
Authors: GRAUER ROBERT R. 
Published: April 2012

ABSTRACTThe results of previous generalized Security Market Line (SML) tests of the Mean Variance (MV) and Linear Risk Tolerance (LRT) Capital Asset Pricing Models indicate that the models are empirically identical. A very widely accepted, but technically incorrect, explanation for the results is that with normal return distributions all expected utility maximizing riskaverse investors will pick MV portfolios. The paper shows that the generalized SML tests cannot distinguish between the MV model and a much wider variety of power utility LRT models than has previously been entertained. On the other hand, with approximately normal, or real world, return distributions the investment policies of the various models are shown to be different from each other, and from the MV policy in particular. To the extent the results of the portfolio selection calculations are robust, the results of, and implications drawn from, the tests of the macro pricing relations are not based on firm micro foundations.
An Equilibrium Model of Asset Trading with Sequential Information Arrival
Authors: JENNINGS ROBERT H. , STARKS LAURA T. , FELLINGHAM JOHN C. 
Published: April 2012

ABSTRACTIn an effort to better understand the dynamic market price adjustment process, this paper develops a model which describes the impact of new information on a financial market. The primary emphasis is on the price change‐volume relationship in the presence of a margin requirement. We find that the margin requirement significantly affects the relation of price change to volume. Furthermore, this relationship is shown to be affected by the number of investors in the market, the degree of information dissemination, differences in interpretation of information and the implicit cost of the margin requirement.
A Re‐examination of Traditional Hypotheses about the Term Structure of Interest Rates
Authors: COX JOHN C. , INGERSOLL JONATHAN E. , ROSS STEPHEN A. 
Published: April 2012

ABSTRACTThe term structure of interest rates is an important subject to economists, and has a long history of traditions. This paper re‐examines many of these traditional hypotheses while employing recent advances in the theory of valuation and contingent claims. We show how the Expectations Hypothesis and the Preferred Habitat Theory must be reformulated if they are to obtain in a continuous‐time, rational‐expectations equilibrium. We also modify the linear adaptive interest rate forecasting models, which are common to the macroeconomic literature, so that they will be consistent in the same framework.
Effects of the 1970 Bank Holding Company Act: Evidence from Capital Markets
Authors: AHARONY JOSEPH , SWARY ITZHAK 
Published: April 2012

ABSTRACTThis study measures the effects of the 1970 amendment to the Bank Holding Company (BHC) Act on the profitability and risk of BHCs using capital market data. Differences in abnormal returns and risk among three portfolios of bank shares which differ in their regulatory status are examined in various periods preceding and following the enactment. No significant differences in performance and no change in the relative risk of any pair of portfolios were observed. Thus, the null hypothesis that the nonbank expansion provisions of the 1970 amendment had no effect on BHCs' risk and profitability cannot be rejected.
Portfolio Analysis with Factors and Scenarios
Authors: MARKOWITZ HARRY M. , PEROLD ANDRÉF. 
Published: April 2012

ABSTRACTRecently there has been a growing interest in the scenario model of covariance as an alternative to the one‐factor or many‐factor models. We show how the covariance matrix resulting from the scenario model can easily be made diagonal by adding new variables linearly related to the amounts invested; note the meanings of these new variables; note how portfolio variance divides itself into “within scenario” and “between scenario” variances; and extend the results to models in which scenarios and factors both appear where factor distributions and effects may or may not be scenario sensitive.
Optimal Regulation Under Uncertainty
Authors: MARSHALL WILLIAM J. , YAWITZ JESS B. , GREENBERG EDWARD 
Published: April 2012

ABSTRACTThis paper is concerned with the problem of price regulation when demand is uncertain. Uncertainty gives rise to substantial difficulties in determining both the return a firm's owners should be provided and a set of prices capable of producing that return. We argue that conventional approaches to price regulation are incapable of attaining the economically desirable objectives of efficiency and an equitable return to investors. The deficiencies in current practices are attributable to the separation of the risk measurement‐return determination and price setting activities in the conventional approach. We present a model of the regulated firm that synthesizes contemporary financial market theory and the theory of the firm under uncertainty.1 In our approach, the income stream produced by the firm is valued ex ante in the financial market according to investors' perceptions and preferences over riskreturn characteristics. We portray the firm as producing risk and return by choosing among available production technologies to maximize its market value, given the prices set by regulators. Within this framework, it is shown that regulators can choose the lowest prices consistent with an equitable return to investors. We also show that prices so chosen induce the choice of the optimal technology by the firm.
Effects of Shifting Saving Patterns on Interest Rates and Economic Activity
Authors: FRIEDMAN BENJAMIN M. 
Published: April 2012

ABSTRACTIndividuals in the United States consistently do most of their saving through financial intermediaries, but over time there have been and continue to be major shifts in people's reliance on specific kinds of intermediary institutions. This paper assesses the potential effects on interest rates, and via interest rates (and asset prices and yields more generally) on nonfinancial economic activity, of four specific shifts in saving behavior: additional pension contributions financed by individuals, additional pension contributions financed by businesses, additional purchases of life insurance by individuals, and additional deposits in thrift institutions by individuals. The paper's results indicate that such shifts, in plausible magnitudes, would have significant effects not only on interest rates and asset‐liability flows but also on both the level and the composition of nonfinancial economic activity. In particular, although the specific effects differ from one shift to another, each would disproportionately stimulate capital formation in comparison to other forms of spending.
Monetary Policy and Short‐term Interest Rates: An Efficient Markets‐Rational Expectations Approach
Authors: MISHKIN FREDERIC S. 
Published: April 2012

ABSTRACTThis paper is an application of efficient markets‐rationael xpectations theory to analyze empirically the relationship of money supply growth and short‐term interest rates, a hotly debated issue in the literature. This approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests. The empirical results uniformly do not support the proposition that increases in money growth are correlated with declines in short rates.
Information Diversity and Market Behavior
Authors: FIGLEWSKI STEPHEN 
Published: April 2012

ABSTRACTThe paper addresses two major issues raised by information diversity in a speculative market. First, we analyze what property of an investor's information leads to an expected speculative profit and show that independence is more important than accuracy. Second, we consider whether the market price must become fully efficient, in the sense that every investor's information is accurately discounted, when traders use it rationally as an information source. We prove that for any information structure there is a unique equilibrium weighting of investor beliefs at which the price is fully efficient and also every trader's expected profit is zero. Except for special structures, however, this equilibrium need not be attained in finite time.
Borrower Risk under Alternative Mortgage Instruments
Authors: WEBB BRUCE G. 
Published: April 2012

ABSTRACTThis paper analyzes differences in borrower risk under alternative mortgage instruments and various borrower characteristics. The traditional approach of measuring borrower risk in terms of actual delinquency and foreclosure data is rejected in favor of a model based on potential delinquency‐that is, changes in the mortgage payment to income ratio. The combinations of mortgage terms and borrower characteristics that are most likely to produce a potential delinquency are isolated based on the calculation of hypothetical payment to income ratios over an eight year period.
Direct Equity Financing: A Resolution of a Paradox
Authors: HANSEN ROBERT S. , PINKERTON JOHN M. 
Published: April 2012

ABSTRACTWhen raising new equity capital managers have historically rejected the direct offer method favoring instead the seemingly more expensive underwritten public issue. This paper provides a resolution for this equity financing paradox by demonstrating empirically that firms which engage in direct offers enjoy a comparative cost advantage that is more than sufficient to account for the absolute reported cost differences between the two methods of equity financing.
The Effect of Errors in Variables on Tests for a Risk Premium in Forward Exchange Rates
Authors: JACOBS RODNEY L. 
Published: April 2012

ABSTRACTConventional tests for a risk premium in the price of forward exchange use the subsequently realized spot rate as a proxy for prior expectations. Use of this proxy creates a serious errors‐in‐variables problem which makes it difficult to reject the null hypothesis of zero risk premium. Use of a better proxy for expectations indicates the presence of a risk premium in the forward exchange rate of all countries analyzed.
Risk Assessments and Risk Premiums in the Eurodollar Market
Authors: FEDER GERSHON , ROSS KNUD 
Published: April 2012

ABSTRACTIncreasing awareness of the potential risks involved in lending to heavily indebted governments focuses attention on credit pricing in the Eurodollar market. This paper utilizes a recent survey of country‐by‐country risk assessments as perceived by lenders to show that a systematic relationship exists between these assessments and interest rates in the Euromarket. The relationship is derived from an underlying model described in the paper. The estimated parameters verify a number of hypotheses, providing insights on the loss rates lenders expect to incur in case of default.
An Exploration of Competitive Signalling Equilibria with “Third Party” Information Production: The Case of Debt Insurance
Authors: THAKOR ANJAN V. 
Published: April 2012

ABSTRACTIn markets in which sellers know more about product quality than buyers, but cannot convey their superior information either by directly issuing costly signals of the Spence type or by successfully funding the production of information, I suggest another way in which the informational asymmetry problem can be resolved; a third party can produce the necessary information at a cost and use it to price a service consumed by the sellers. Buyers can then observe a seller's choice of service consumption level and be well informed in equilibrium. In this framework I construct a model in which a borrower's choice of insurance coverage signals its default probability to lenders, and explore the properties of the resulting signalling equilibrium in a variety of cases.
Debt Financing, Corporate Financial Intermediaries and Firm Valuation
Authors: FRANKS J. R. , PRINGLE J. J. 
Published: April 2012

ABSTRACTIn this paper we consider the role of financial intermediaries in the valuation of firms and projects. We show that security prices should reflect both used and unused debt capacity if some corporations can act as financial intermediaries and can capture the tax benefits of debt capacity unused by the operating firm. We also provide some reasons why the value of the firm might be increased if the financing and operating risks of the firm are separated and financial intermediaries issue debt rather than the unit operating the asset.
An Analysis of Bank Loan Rate Indexation
Authors: JAMES CHRISTOPHER 
Published: April 2012

ABSTRACTThis paper examines the economic rationale for the use of bank loan commitments and the effect on the allocation of bank credit of indexing the loan rate offered through the commitment to the prime. A simple model of the loan market is constructed and used to examine the effect changes in loan demand and the cost of bank funds have on the allocation of bank credit under indexation. It is shown that indexing implies changes in the relative cost of borrowing for certain groups of bank customers. For nonprime customers, an increase in the cost of bank funds results in a decline in the relative cost of borrowing under commitments. The pattern of commitment use is found to be consistent with the predictions of the model.
A Theory of Capital Structure Relevance under Imperfect Information
Authors: HEINKEL ROBERT 
Published: April 2012

ABSTRACTFirms raise debt and equity capital to finance a positive net present value project in perfectly competitive capital markets; firm insiders know the function generating the random firm cash flow but potential capital suppliers do not. Taking into account the incentives of insiders to misrepresent their firm type, capital suppliers attempt to design financing mixes of debt and equity that eliminate the adverse incentives of insiders and correctly price securities. Necessary conditions for a costless separating equilibrium are developed to show that the amount of debt used by a firm is monotonically related to its unobservable true value.
Rational Expectations and Risk Premia in Forward Markets: Primary Metals at the London Metals Exchange
Authors: HSIEH DAVID A. , KULATILAKA NALIN 
Published: April 2012

ABSTRACTThis paper tests whether forward prices equal the traders' expectations of the future spot prices at maturity, under two different models of expectations formation: full information rational expectations and incomplete information mechanical forecasting rule. The tests are performed, over the period January 1970 through September 1980, on the forward markets for the primary metals—copper, tin, lead, and zinc‐traded in the London Metals Exchange. We find evidence consistent with the existence of time varying risk premia.
Optimum Distribution‐Free Tests and Further Evidence of Heteroscedasticity in the Market Model
Authors: GIACCOTTO CARMELO , ALI MUKHTAR M. 
Published: April 2012

ABSTRACTIn this paper several powerful distribution‐free tests for heteroscedasticity are introduced and are used to test the hypothesis of constant variance in the market model. These tests are noted for their flexibility in specifying alternative hypotheses. It is found that the assumption of homoscedasticity is untenable for the majority of stocks analyzed. The implications of this finding for the efficient estimation of the parameters of the market model are also discussed.
An Analysis of the Impact of Deposit Rate Ceilings on the Market Values of Thrift Institutions
Authors: DANN LARRY Y. , JAMES CHRISTOPHER M. 
Published: April 2012

ABSTRACTThis paper examines the impact of changes in deposit interest rate regulations on the common stock values of savings and loan institutions. The analysis indicates that stockholder‐owned savings and loans (S & L's) have experienced statistically significant declines in equity market values at the announcement of the removal of ceilings on certain consumer (small saver) certificate accounts and the introduction of short term variable rate money market certificates. We find the evidence to be consistent with the hypothesis that S & L's have earned economic rents from restrictions on interest rates paid to small saver accounts, and that relaxation of interest rate ceilings has reduced these rents.
The Predictive Content of Earnings Forecasts and Dividends
Authors: PENMAN STEPHEN H. 
Published: April 2012

ABSTRACTThis paper compares the properties of dividend announcements and management earnings forecasts as predictors of earnings and firm value. First, the two predictors are compared on the basis of their ability to predict earnings. Then the information they convey about firm value is assessed by comparison of the performance of investment strategies based on values of the two predictors. Finally, the effects of dividend announcements on stock prices are considered.
The Effect of Government Regulations on Personal Loan Markets: A Tobit Estimation of a Microeconomic Model
Authors: BARTH JAMES R. , GOTUR PADMA , MANAGE NEELA , YEZER ANTHONY M. J. 
Published: April 2012

ABSTRACTThe purpose of this paper is to analyze both theoretically and empirically the effect of selected government regulations on a high‐risk personal loan market. Unlike previous studies, which have generally relied on a loosely specified theory and then tested this theory with statewide aggregate data, our analysis is based on a more tightly specified model for individual loans which is then tested using statewide disaggregated data. The empirical results indicate that the regulatory effects are not only significant but consistent with our theoretical microeconomic model.
A New Approach to Testing Asset Pricing Models: The Bilinear Paradigm
Authors: BROWN STEPHEN J. , WEINSTEIN MARK I. 
Published: April 2012

ABSTRACTWe propose a new approach to estimating and testing asset pricing models in the context of a bilinear paradigm introduced by Kruskal [18]. This approach is both simple and at the same time quite general. As an illustration we apply it to the special case of the arbitrage pricing model where the number of factors is pre‐specified. The data appear to be generally in conflict with a five or seven factor representation of the model used by Roll and Ross [30]. When we consider the number of replications of our test and the large number of observations on which it is performed, the frequency with which we reject the three factor APM does not lead us to conclude that this model is unrepresentative of security returns. Further, the rejection of the five and seven factor versions is to be expected if the three factor version is correct. The paradigm gives insight into the appropriate specification of the model and suggests that there may be a small number of economy wide factors that affect security returns.
The Carry‐Forward Provision and Management of Bank Reserves
Authors: FRIEDMAN RICHARD M. , ROBERTS WILLIAM W. 
Published: April 2012

ABSTRACTThe 1968 amendment to Regulation D of the Federal Reserve Code permits banks to carry forward one sequential reserve excess or deficiency into the next reserve accounting period. This was intended to reduce the weekly pressure on individual banks to adjust their reserve position. We find, instead, that the carry‐forward provision gives individual banks an incentive to alternate weekly between reserve excesses and reserve deficiencies. Thus, the carry‐forward provision tends to induce reserve position adjustments even in the absence of changes in the level of deposits. In addition, the carry‐forward provision reduces the impact of interest‐rate changes on the desired level of excess reserves.
Valuation, Capital Structure, and Shareholder Unanimity for Depository Financial Intermediaries
Authors: SEALEY C. W. 
Published: April 2012

ABSTRACTThe theory of corporate finance is not directly applicable to financial intermediary decision‐making. The lack of applicability stems largely from the particular conditions that distinguish intermediary operations from those of the nonfinancial firm. First, when intermediaries accept deposit financing, they must produce services such as liquidity and convenience at considerable expense for real resources. Second, the introduction of intermediation is likely to be accompanied by incomplete markets so that shareholder unanimity is not in general valid. In this paper, a model with incomplete markets is developed and a shareholder approved rule for intermediary capital structure decisions is derived.