Showing papers in "The Financial Review in 1990"
TL;DR: In this paper, the authors examined the valuation and financial histories of 152 British firms that had two or more common share classes with differential voting rights outstanding at some time between 1955 and 1982.
Abstract: This paper examines the valuation and financial histories of 152 British firms that have two or more common share classes with differential voting rights outstanding at some time between 1955 and 1982. Over 16,000 monthly price pairs are examined, and on average, the superior voting (SV) shares market prices exceed those of the otherwise equivalent class of restricted voting (RV) shares by 13.3 percent. Liquidity factors, if anything, attenuate this result since RV shares trade much more frequently than SV shares. Forty-three of the sample companies are acquired while they have multiple share classes outstanding, and a higher price is paid for the SV share class than for the RV share class in 37 cases. The SV share price premium is found to be positively related to insider holdings of SV shares and negatively related to insider holding of RV shares. Copyright 1990 by MIT Press.
142 citations
TL;DR: This article measured the wealth effects of international joint ventures on the U.S. firms' shareholders and determined whether these effects are related to the economics status of the partner's home country.
Abstract: The purposes of this study are to measure the wealth effects of international joint ventures on the U.S. firms' shareholders and to determine whether these effects are related to the economics status of the partner's home country. The results indicate that overall investor reactions to joint ventures with foreign firms are negative and that only joint ventures with firms from lesser developed countries have nonnegative effects on shareholders' wealth. These findings are in contrast with previous reports of positive stock price reactions to both dimestic and international joint ventures.
103 citations
TL;DR: In this paper, a cross-spectral analysis of the price behavior of stock market indices in 23 countries was conducted to support or reject the hypothesis that world markets are becoming more integrated.
Abstract: The paper reports the results of a cross-spectral analysis of the price behavior of stock market indices in 23 countries. The primary goal of our study is to test for interdependence between the time series of stock market indices to support or reject the hypothesis that world markets are becoming more integrated. We reassess and extend findings of the late 1970s measuring the coherence and lead/lag relationships between stock markets worldwide, employing a time series of daily country index returns. In contrast to earlier results, we find a high and statistically significant level of interdependence between stock markets, and we also find that U.S. index prices lead almost every country index in the sample.
86 citations
TL;DR: In this article, the authors provide a comprehensive test of the profitability of technical trading systems on 30 futures markets for 11 years and find that all but two trading systems had significant gross returns.
Abstract: Whether or not trading with technical analysis is profitable is a controversial topic. This study seeks to add to our knowledge about this controversy by providing a comprehensive test of the profitability of technical trading systems. Trading is simulated for 23 trading systems on 30 futures markets for 11 years. All but two trading systems had significant gross returns. Thus, the results strongly reject the random walk model and suggest that disequilibrium models more appropriately describe daily futures prices. Although returns were less than expected by many users of these systems, several systems did generate returns significantly above transaction costs. The result for net returns are not conclusive, but they suggest there may be causes of disequilibrium beyond transaction costs. No conclusion is made about market efficiency since possible causes of disequilibrium beyond transaction costs exist.
69 citations
TL;DR: In this article, the authors explore the rating function in a certification framework and conclude that investors value a second rating more than a single rating in an environment where two ratings can never reduce yields, whereas two ratings, when split, can increase yields.
Abstract: Bond researchers have recently observed that issues with split ratings have yields more closely resembling the yields on bonds with the lower of the two ratings. This evidence could lead researchers to question why an issuer ever obtains more than one rating in an environment where two ratings, when split, can never reduce yields, whereas two ratings, when split, can increase yields. This paper explores the rating function in a certification framework and concludes that investors value a second rating. Bond issues with two identical ratings have yields significantly less than issues receiving that rating from only one rating agency.
54 citations
TL;DR: In this paper, Akaike's information criterion and Lachenbruch's U method are used to show how a probit model specified with economic base diversification, economic expansion, and fiscal management variables may be an improvement over the application of discriminant analysis to financial accounting variables in the determination of a triple A bond rating.
Abstract: Studies on the determinants of municipal bond ratings contain two conspicuous patterns: the use of financial accounting variables and the application of discriminant analysis to them. Over 70 different financial accounting variables have been specified, leading to different findings across the studies. In addition, discriminant analysis has been applied in these studies without correcting for violations of its underlying assumptions. Akaike's information criterion and Lachenbruch's U method are used to show how a probit model specified with economic base diversification, economic expansion, and fiscal management variables may be an improvement over the application of discriminant analysis to financial accounting variables in the determination of a triple A bond rating.
48 citations
TL;DR: The proxy hypothesis states that the negative relationship between inflation and stock returns is spurious and really only proxies for the positive relationship between stock returns and real variables as discussed by the authors, which does not support the proxy hypothesis.
Abstract: The proxy hypothesis states that the negative relationship between inflation and stock returns is spurious and really only proxies for the positive relationship between stock returns and real variables. Previous testes of the proxy hypothesis have used actual values instead of forecasted values for the real activity variable. Using only forecasted variables, our results do not support the proxy hypothesis.
34 citations
TL;DR: The authors examined the pattern of stock price behavior for a sample of 71 firms that moved from NASDAQ and NASDAQ/NMS to the American Stock Exchange (AMEX) between 1982 and 1987.
Abstract: This study examines the pattern of stock price behavior for a sample of 71 firms that moved from NASDAQ and NASDAQ/NMS to the American Stock Exchange (AMEX) between 1982 and 1987. The study tests the liquidity gains hypothesis, which states that investors expect liquidity gains for the less liquid over-the-counter stocks but not for their more liquid counterparts after their listing on the AMEX. The results support the hypothesis by showing a significant difference between the two groups of stocks on the day the AMEX announced approval of the listing. Thus, companies with low liquidity are the largest beneficiaries of listing. The evidence provides little support for the anomalous negative pattern of returns during the post-listing period reported in previous studies.
32 citations
TL;DR: In this article, the authors examined the question of seasonality in corporate bond and commercial paper returns by testing specifically for a January effect and concluded that precise results depend primarily upon the time period chosen and the debt instrument examined.
Abstract: This paper examines the question of seasonality in corporate bond and commercial paper returns by testing specifically for a January effect. Complete data covering a 131-year period for both series, as well as term premiums, are analyzed using a procedure that provides consistent estimates of the variance-covariance matrix. The results suggest that a January effect does exist for both assets for the entire period; however, closer examination reveals a strong January effect for the pre-1915 period but a dampening thereafter. We conclude that precise results depend primarily upon the time period chosen and the debt instrument examined. Tests involving the inflation rate strengthen the case for a January seasonal.
30 citations
TL;DR: In this article, a survey of universities across the country, a comprehensive list of programs that allow students to manage portfolios of real dollars has been compiled, and it is hoped that sharing the results of this survey will encourage further cooperation in establishing new innovative programs in all areas of business.
Abstract: In this age of greater cooperation between academia and industry, it is surprising to find a general lack of awareness by both parties as to the progress being made to closely integrate financial theory with practice. This paper is intended to bring colleagues in universities and business up to date in an area where considerable success has been achieved, namely, investments and portfolio management. Through a survey of universities across the country, a comprehensive list of programs that allow students to manage portfolios of real dollars has been compiled. It is hoped that sharing the results of this survey will encourage further cooperation in establishing new innovative programs in all areas of business.
26 citations
TL;DR: The authors revisited the Citizens Utilities case, which was used by Long and Poterba, and concluded that the market for Citizens Utilities shares indicates that tax policy does influence value, while Miller and Scholes argue that tax treatment would favor low payout.
Abstract: One of the most controversial areas in finance concerns the relevance or irrelevance of dividend policy. Survey results reported by researchers indicate that corporate chief financial officers believe that dividend policy does affect stock prices. One factor that could cause dividend policy to matter is possible tax effects. However, although many maintain that tax treatment would favor low payout, Miller and Scholes argue that tax policy is irrelevant. The latest change in the tax code, which removed the lower capital gains tax rate, provides a unique opportunity to examine the relevance of tax policy alone. This study revisits the Citizens Utilities case, which was used by Long and Poterba. We conclude that the market for Citizens Utilities shares indicates that tax policy does influence value.
TL;DR: In this article, the authors examined the market reaction to three different events related to allegations of price-fixing: the initial charges, the firm's plea, and the resolution of the case.
Abstract: This paper examines the market reaction to three different events related to allegations of price-fixing: the initial charges, the firm's plea, and the resolution of the case. Negative, risk-adjusted shareholder returns are associated with the initial charge of price-fixing, while mixed results are observed during the two days immediately after the plea. The ultimate resolution of the case appears to be anticipated by the market. The overall decline in shareholder wealth from all three events combined is about 5 percent. These results suggest that shareholders are at least partial beneficiaries of price-fixing and that the presumption of an agency problem may be incorrect.
TL;DR: In this article, a factor demand equation augmented system of equations in estimated using the iterative Zellner technique was used to provide evidence on scope economies in banking using the Box-Cox hybrid functional form.
Abstract: This paper provides evidence on scope economies in banking using the Box-Cox hybrid functional form on five products and two inputs. A factor demand equation augmented system of equations in estimated using the iterative Zellner technique. Strict Willig-type scope estimates indicate that there are scope diseconomies in the sample of banks in the Functional Cost Analysis (FCA) Program data for 1983.
TL;DR: The excess returns associated with repurchase announcements are viewed largely as a reaction to management's statement that the firm's shares are underpriced; management's signal provides new information that enhances the stock market value.
Abstract: The excess returns associated with repurchase announcements are viewed largely as a reaction to management's statement that the firm's shares are underpriced; management's signal provides new information that enhances the firm's market value. Although earlier studies have found the excess return to be closely related to the premium set by managment, other factors play a part in determining both the market reaction and the premium level set by management. Among these factors ar relative market capitalization, holdings by institutions, immediate alternative uses for cash, level of insider control, recent stock price performance, relative size of the tender offer, and the resultant change in the firm's capital structure.
TL;DR: In this article, the authors developed a model that allows as many growth stages as desired and is directly applicable to most common stocks in that quarterly dividends are assumed and you need not be on a dividen payment date.
Abstract: This paper develops a dividend discount model that will allow as many growth stages as desired. The model is directly applicable to most common stocks in that quarterly dividends are assumed and you need not be on a dividen payment date. The equation is easily programmed into a computer and is computationally very fast. The Newton-Rhapson algorithm is suggested as a means for estimating the required rate of return.
TL;DR: This paper examined the announcement effects of CreditWatch placement and reratings upon a sample of preferred stock issues that were placed on CreditWatch and later rerated or affirmed by Standard & Poor's.
Abstract: This paper examines the announcement effects of CreditWatch placement and reratings upon a sample of preferred stock issues that were placed on CreditWatch and later rerated or affirmed by Standard & Poor's. Results indicate that CreditWatch provides information to market participants and may have reduced the surprise associated with subsequent reratings. CreditWatch placement may be an erroneous signal, however, since nearly 50 percent of the issues placed for negative reasons were not downgraded, but affirmed, upon removal from Credit Watch.
TL;DR: In this paper, the authors used the discrete-time option pricing model for the evaluation of the firm's inventory decision under demand uncertainty, and established the following optimal inventory decision implications: the optimal order quantity is positively related to the product selling price, product salvage value, interest rate, and the size of the outstanding orders; and negatively related to product cost.
Abstract: This study uses the discrete-time option pricing model for the evaluation of the firm's inventory decision under demand uncertainty. The paper establishes the following optimal inventory decision implications: the optimal order quantity is positively related to the product selling price, product salvage value, interest rate, and the size of the outstanding orders; and negatively related to the product cost. The effect of demand uncertainty on the optimal order quantity is shown to be ambiguous. This study also shows that the maximum present value of profit from the contingent claims approach can be substantially different from that of the modified standard newsboy problem.
TL;DR: The authors showed that neither utilities nor non-utilities exhibit the correlation between yield and ex-dividend day price drop predicted by the tax-clientele hypothesis, which is consistent with some sort of dividend clientele effect but inconsistent with tax clienteles.
Abstract: Studies of ex-dividend day behavior have detected dividend-clientele effects. The ratio of the ex-day price drop to the dividend is typically less than unity and correlated with dividend yield. The tax-clientele hypothesis attributes these effects to personal taxation. This study shows that, when studied separately, neither utilities nor nonutilities exhibit the correlation between yield and ex-dividend day price drop predicted by the tax-clientele hypothesis. Only by combining utility and nonutility data are the traditional correlations observed. Results are consistent with some sort of dividend-clientele effect but are inconsistent with tax clienteles.
TL;DR: This article examined the relation between bank holding company (BHC) risk and the composition of nonbank assets and found that risk is negatively associated with the mix of BHC assets in permissible nonbank subsidiaries.
Abstract: Risk exposure is a central issue in the continuing debate over the wisdom of allowing bank holding comapanies to expand into nonbank activities. This paper examines the relation between bank holding company (BHC) risk and the composition of nonbank assets. The empirical evidence indicates that risk is negatively associated with the mix of BHC assets in permissible nonbank subsidiaries. The negative association between BHC risk and the mix of permissible nonbank activities appears to have positive implications for future deregulation.
TL;DR: In this paper, the authors derived pricing models of interest rate options and interest rate futures options using the arbitrage-free interest rate movements model of Ho and Lee and empirically examined the pricing of Eurodollar futures options.
Abstract: This paper derives pricing models of interest rate options and interest rate futures options. The models utilize the arbitrage-free interest rate movements model of Ho and Lee. In their model, they take the initial term structure as given, and for the subsequent periods, they only require that the bond prices move relative to each other in an arbitrage-free manner. Viewing the interest rate options as contingent claims to the underlying bonds, we derive the closed-form solutions to the options. Since these models are sufficiently simple, they can be used to investigate empirically the pricing of bond options. We also empirically examine the pricing of Eurodollar futures options. The results show that the model has significant explanatory power and, on average, has smaller estimation errors than Black's model. The results suggest that the model can be used to price options relative to each other, even though they may have different expiration dates and strike prices.
TL;DR: In this paper, the authors examined the effects of the Argentinean debt rescheduling announcement on the equity return levels of several large U.S. commercial banks and found that the equity prices of sample banks immediately reflected the relevant information associated with the announcement.
Abstract: This study examines the effects of the Argentinean debt rescheduling announcement on the equity return levels of several large U.S. commercial banks. The empirical evidence suggests that the equity prices of sample banks immediately reflected the relevant information associated with the announcement. However, the market was unable to discriminate among banks on the basis of exposure to Argentinean loans.
TL;DR: In this article, the authors used three methods to estimate the price volatility of two stock market indexes and their corresponding futures contracts and found that the stock market volatilities of the S&P 500 and New York Stock Exchange (NYSE) indexes were significantly lower than their respective futures price volativities.
Abstract: This paper uses three methods to estimate the price volatility of two stock market indexes and their corresponding futures contracts. The classic variance measure of volatility is supplemented with two newer measures, derived from the Garman-Klass and Ball-Torous estimators. A likelihood ratio test is used to compare the classic variance measure of price volatilities of two stock market indexes and their corresponding futures contracts during the bull market of the 1980s. The stock market volatilities of the Standard & Poor's 500 (S&P 500) and New York Stock Exchange (NYSE) indexes were found to be significantly lower than their respective futures price volatilities. Since information may flow faster in the futures markets than in the corresponding stock market, our results support Ross's information-volatility hypothesis. It was also noted that the NYSE spot volatility was lower than the S&P 500 spot volatility. If the rate of information flow and firm size are positively related, then the lower NYSE spot volatility is explained by the size effect. The futures price volatilities for the two indexes were insignificantly different from each other. With stock index spot-futures price correlations approaching unity, one implication of our results for index futures activity is that smaller positions in futures contracts may suffice to achieve hedging or arbitrage goals.
TL;DR: In this paper, the authors compare the performance of the alternative arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) for public utility stocks and show that the former is superior for simulating returns while the latter is inferior for forecasting them.
Abstract: Just when the capital asset pricing model (CAPM) has become accepted by public utility regulators as a method for estimating a utility's screening rate, academic criticism of the model's theoretical and empirical shortcomings has led to empirical testing of the alternative arbitrage pricing theory (APT). This paper expands on recent APT-CAPM performance comparisons by simulating returns of public utility stocks using versions of both models, as was done by Bower, Bower, and Logue in a 1984 paper. In addition, the models are used for ex-post forecasting of returns in a subsequent time period. The Litzenberger-Ramaswamy method is used to correct for errors-in-variables in the CAPM cross-sectional equation. This allows for estimating the security market line using firm betas. The same methodology is used in the APT stages. Three different criteria—the Theil inequality, the sources of mean square error, and Chen's estimated weights of expected return-are used to compare CAPM and APT simulation and forecasting of the equity screening rates. Tested on a sample of 128 public utility companies, results show that neither model is clearly dominant. There is a tendency for reversal of performance. The model that is superior for simulating returns tends to be inferior for forecasting them, and vice-versa.
TL;DR: In this article, the optimal gap of a depository institution is derived using a market value optimization model using portfolios of returns on rate-sensitive assets and liabilities and is found to be not significantly different from zero.
Abstract: The optimal gap of a depository institution is derived using a market value optimization model. The gap is estimated using portfolios of returns on rate-sensitive assets and liabilities and is found to be not significantly different from zero. The estimate is compared to the average gap position of a sample of banks. It is found that the average gap position of a sample of banks is “too positive.” This suggests that banks are not showing risk minimization behavior in the positioning of the gap.
TL;DR: The authors empirically tested rational pricing conditions applicable to American gold spot and futures options and found that a substantial number of violations of a condition applicable to call options are found, and most of these violations are sufficient in magnitude to cover the relevant transaction costs of arbitrage.
Abstract: This study empirically tests rational pricing conditions applicable to American gold spot and futures options. A number of ancillary pricing relations also are tested. Transactions data supplied by the Montreal Stock Exchange and the New York Commodity Exchange are used in these tests. Arbitrage trading strategies designed to exploit violations of these conditions also are provided. The results indicate potential intermarket inefficiency: a substantial number of violations of a condition applicable to call options are found, and most of these violations are sufficient in magnitude to cover the relevant transaction costs of arbitrage.
TL;DR: In this paper, the economic order quantity model is reformulated within an explicit wealth maximization framework, and the reformulated model is then utilized to analyze inventory decisions when volume discounts are available.
Abstract: This study challenges the generally accepted managerial decision to accept a quantity discount if total, perperiod inventory and acquisition costs are reduced. In this paper, the economic order quantity model is reformulated within an explicit wealth maximization framework, and the reformulated model is then utilized to analyze inventory decisions when volume discounts are available. The results of the study indicate that the traditional method of analyszing volume discount opportunities may invoke wealth decreasing decisions.
TL;DR: In this paper, the causes of changes in payables are investigated and a present value approach to monitor payables is presented. But the authors do not consider the relationship between accounts receivable and accounts payable.
Abstract: In creating shareholder value, one objective of management is to increase the speed of cash inflows and reduce the speed of cash outflows. To accomplish this task, management must understand the relationships that cause accounts receivable and accounts payable to change. The paper expands a receivable monitoring model by Gentry and De La Garza to incorporate the causes of changes in payables. Several examples are developed to show the operation of the model. The three primary contributions of the paper are (a) developing algorithms that measure the causes of changes in payables, plus an interpretation for each set of conditions; (b) showing that a present value approach to monitoring payables is superior to a recommended accounting approach based on variance analysis; (c) finally, presenting an approach for ranking the performance of payable and receivable strategies.
TL;DR: In this article, the impact of issue costs on firm investment and dividend policies is analyzed in the context of the two-period Fisher model, and the authors suggest that the firm, when increasing its dividend payout, must weigh the marginal loss in firm value against the offsetting benefits, which may take the form of reduced monitoring costs.
Abstract: This paper analyzes the impact of issue costs on firm investment and dividend policies within the context of the two-period Fisher model. Consistent with its pedagogical tone, the paper illustrates graphically the loss in value stemming from a high dividend payout by a firm subject to issue costs in its external financing. Two components compose the overall loss in value. The “substitution effect” results from a shift in the investment opportunity set, while the “wealth effect” stems from the loss in value owing to issue costs. The paper suggests that the firm, when increasing its dividend payout, must weigh the marginal loss in firm value against the offsetting benefits, which may take the form of reduced monitoring costs.
TL;DR: In this article, the authors integrated research on the accuracy of alternative long-term earnings forecasts, the gain in accuracy achievable from combining various forecasts, and the power of different longterm earnings forecast to explain stock prices.
Abstract: This paper integrates research on the accuracy of alternative long-term earnings forecasts, the gain in accuracy achievable from combining various forecasts, and the power of different long-term earnings forecasts to explain stock prices. The tests are performed on 82 electric utility firms because of the relative homogeneity of accounting data in that industry and because of the importance of the findings for the determination of the cost of capital in a regulatory proceeding. The results are consistent with earlier research findings that analyst forecasts of long-term earnings growth are more accurate than forecasts from extrapolative models. Combined forecasts applied to out-of-sample data, however, did not result in markedly improved forecasting accuracy. Finally, valuation tests of alternative forecasting techniques offered strong evidence that investors place the greatest weight on forecasts from Value Line.
TL;DR: This article examined whether a firm's sinking fund decision is affected by agency costs and found that firms with certain characteristics related to agency problems tend to adopt a sinking fund provision in the bond indenture.
Abstract: This paper examines whether a firm's sinking fund decision is affected by agency costs. The paper argues that sinking funds can be an effective device to resolve the problems of information asymmetry, risk incentives, and suboptimal investments. Empirical tests are provided. Results show that firms with certain characteristics related to agency problems tend to adopt a sinking fund provision in the bond indenture.