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Volume 37: Issue 3 (June 1982)

Direct Equity Financing: A Resolution of a Paradox

Pages: 651-665  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02215.x  |  Cited by: 59


When 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

Pages: 667-677  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02216.x  |  Cited by: 8


Conventional 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

Pages: 679-691  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02217.x  |  Cited by: 19


Increasing 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.

The Distribution of Foreign Exchange Price Changes: Trading Day Effects and Risk Measurement

Pages: 693-715  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02218.x  |  Cited by: 144


This study investigates the nature of price changes in a variety of major and minor foreign exchange markets. The results suggest that the log of price changes over one (trading) day intervals seems to follow a non‐normal stable distribution function. Different measures of location (and to lesser extent scale) are present for different days of the week. Dollar denominated price changes are high on Mondays and Wednesdays and low on Thursdays and Fridays for all currencies. The Wednesday‐Thursday result is consistent with the settlement procedures used in foreign exchange transactions in the dollar. The Friday‐Monday result is consistent with an increase in demand for the dollar prior to the weekend.

An Exploration of Competitive Signalling Equilibria with “Third Party” Information Production: The Case of Debt Insurance

Pages: 717-739  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02219.x  |  Cited by: 15


In 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.

Investment Risk, Bankruptcy Risk, and Pension Reform in Canada

Pages: 741-749  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02220.x  |  Cited by: 5


The wealth redistributive effects of retroactive termination insurance together with the difficulty of determining insurance premiums suggest that an alternative response, such as improved disclosure of worker benefits in the event of plan wind‐up, may be preferred if the government remains concerned about the security of benefits in underfunded plans. Members of money purchase plans may well be less subject to investment risk than members of defined benefit plans, contrary to the claim of many. In Canada, defined benefit plans appear to have been transformed into defined benefit/money purchase hybrids, and this has several important implications.

Debt Financing, Corporate Financial Intermediaries and Firm Valuation

Pages: 751-761  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02221.x  |  Cited by: 1


In 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.

Optimal Sequential Investment When Capital is Not Readily Reversible

Pages: 763-782  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02222.x  |  Cited by: 45


When investment opportunities arrive one at a time and are reviewed sequentially, a corporation's optimal policy differs from a standard net present value rule if the corporation exercises control over an industry state variable and control is costly. The first condition presupposes a degree of market power for the firm; the second occurs if corporate investment decisions are imperfectly reversible.

On the Effectiveness of the Federal Reserve's Margin Requirement

Pages: 783-795  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02223.x  |  Cited by: 21


A portfolio‐theoretic model of the optimal margin account is developed. It is argued that the Federal Reserve's goal in setting the margin requirement is to influence investor equity ratios. Using the average equity ratio as the dependent variable and the arguments of the model as independent variables, an empirical model is estimated. It is concluded that the margin requirement is an effective regulatory tool.

Inflation, Taxation, and Interest Rates

Pages: 797-807  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02224.x  |  Cited by: 10


This paper demonstrates that the response of nominal interest rates to changes in inflationary expectations should lie between that predicted by the “Fisher” and “Darby” effects. The exact nature of the response will depend on the relative size of the income and capital gains tax rates, and the relative size of the derivatives of investment and savings to their respective after‐tax real rates. The other major conclusion of this paper is that capital gains taxation offsets the negative effect on investment produced by treating depreciation on a historic rather than a replacement cost basis.

An Analysis of Bank Loan Rate Indexation

Pages: 809-825  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02225.x  |  Cited by: 12


This 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.

The Effects of Anticipated Inflation on Housing Market Equilibrium

Pages: 827-842  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02226.x  |  Cited by: 25


An increase in the anticipated rate of inflation causes distortions in the housing market due to a nonindexed tax system. Since nominal rather than real interest payments are tax deductible, an increase in inflation decreases the aftertax cost of capital for homeowners, which in turn increases the demand for housing and increases its real price. This tax gain is shown to be larger for rental housing than for owner‐occupied housing. In a competitive market, this implies that although the real price of housing increases with a rise in anticipated inflation, real rental rates fall.

Variance and Lower Partial Moment Measures of Systematic Risk: Some Analytical and Empirical Results

Pages: 843-855  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02227.x  |  Cited by: 92


As a measure of systematic risk, the lower partial moment measure requires fewer restrictive assumptions than does the variance measure. However, the latter enjoys far wider usage than the former, perhaps because of its familiarity and the fact that two measures of systematic risk are equivalent when return distributions are normal. This paper shows analytically that there are systematic differences in the two risk measures when return distributions are lognormal. Results of empirical tests show that there are indeed systematic differences in measured values of the two risk measures for securities with above average and with below average systematic risk.

The Time‐Variance Relationship of Security Returns: Implications for the Return‐Generating Stochastic Process

Pages: 857-870  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02228.x  |  Cited by: 23


Using a test statistic which specifically allows for parameter shifts over time, we investigate the time‐variance relationship of security returns. The null hypothesis of stationary and independent increments is rejected, and the existence of a complex short‐term reversal phenomenon is reported.

Stochastic Dominance: A Note

Pages: 871-875  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02229.x  |  Cited by: 5


The Relative Price Volatility of Taxable and Non‐Taxable Bonds: A Note

Pages: 877-881  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02230.x  |  Cited by: 5


Weekend Effects on Stock Returns: A Note

Pages: 883-889  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02231.x  |  Cited by: 206


Book Reviews

Pages: 891-904  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02232.x  |  Cited by: 0

Book reviewed in this article:


Pages: 905-905  |  Published: 6/1982  |  DOI: 10.1111/j.1540-6261.1982.tb02233.x  |  Cited by: 0