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Volume 37: Issue 4 (September 1982)

The Pricing of Tax‐Exempt Bonds and the Miller Hypothesis

Pages: 907-923  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03588.x  |  Cited by: 63


This paper reports a new test of two competing theories of the relation between tax‐exempt and taxable interest rates. The Miller hypothesis predicts that the tax‐exempt rate is 52 percent of the taxable rate, while the institutional demand hypothesis predicts a volatile relationship. The tests in this paper employ a random intercept model to control for the risk of average interest rates. The results favor the Miller hypothesis. Marginal tax rates are found to be close to Miller's predicted 48 percent. The relationship is not influenced by relative demand or supply and the marginal tax rate appears stable over time.

Bank Forward Lending in Alternative Funding Environments

Pages: 925-940  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03589.x  |  Cited by: 10


This paper examines the effects of loan commitments on bank lending behavior in both deposit‐funding and liability management environments. Assuming that the bank lends exclusively under commitments and that the number of commitments exercised is uncertain, the bank must choose its supply of commitments. Given this choice, the bank becomes a passive lender to commitment holders. Our focus on forward credit markets sheds new light on the private bankers' assertion that they do not directly determine their level of lending, but merely “accommodate” the credit needs of their customers. Similarly, the central banker's claimed inability to control monetary aggregates in the short‐run becomes understandable in a new context. It is shown that the advent of liability management will reduce the volume of loan commitments and the expected size of the bank and of the banking system. It is also shown that increased uncertainty regarding borrower takedown behavior diminishes the volume of commitments, expected bank and banking system size.

An Analysis of the Impact of Interest Rate Ceilings

Pages: 941-954  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03590.x  |  Cited by: 12


The first aim of this study is to estimate the interest rates paid for motor vehicle loans. The second aim is to identify those potential borrowers most likely to be rationed out of the market by the imposition of rate ceilings. Rate ceilings constrain the rates paid by successful loan applicants to be no greater than the applicable ceiling level. These constraints are dealt with by treating the interest rate paid as a variable truncated at the ceiling level. Assuming the dependent variable is truncated normal, consistent estimates are obtained by employing the maximum likelihood method of Hausman and Wise.

A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues

Pages: 955-976  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03591.x  |  Cited by: 456


This paper presents a theory of the demand for investment banking advising and distribution services for the case in which the investment banker is better informed about the capital market than is the issuer, and the issuer cannot observe the distribution effort expended by the banker. The optimal contract under which the offer price decision is delegated to the better‐informed banker in order to deal with the adverse selection and moral hazard problems resulting from the informational asymmetry and the observability problem is characterized. The model demonstrates a positive demand for investment banking advising and distribution services and provides an explanation of the underpricing of new issues.

Changes in the Financial Market: Welfare and Price Effects and the Basic Theorems of Value Conservation

Pages: 977-1004  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03592.x  |  Cited by: 69


This paper analyzes the impact, on both welfare and equilibrium prices, of changes in the financial market in a general equilibrium, two‐period context. Previous papers have focussed on the “securities effect,” tending to essentially ignore the equally important “endowment effect” that arises when market structure changes are implemented. Two forms of endowment neutrality and market structure changes which either preserve, expand, or shift allocational feasibility differentiate the main theorems, which are based on arbitrary preferences and beliefs and substantially extend and modify extant results; in particular, earlier statements identified with value conservation are sharply moderated. Very roughly, the paper yields the following implications for some of the more common changes in the market: nonsynergistic corporate spinoffs and the opening of option markets have, on balance, strongly positive welfare effects; nonsynergistic mergers tend to have strong negative welfare effects, while the welfare effects of alternative risky debt structures tend to be ambiguous. All of the preceding, however, may under plausible conditions be redistributive.

Sufficient Conditions for Public Information to Have Social Value in a Production and Exchange Economy

Pages: 1005-1013  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03593.x  |  Cited by: 18


Conditions are derived under which all consumers in a production and exchange economy will prefer (at least weakly) disclosure of public information to no such disclosure. The conditions involve consumer endowments, the allocative efficiency of the financial market, and value maximizing behavior by firms. Cases exist where consumers will prefer disclosure of public information in a production and exchange economy, although they would be indifferent to such disclosure in an otherwise similar pure exchange economy. The difference in results is due purely to the fact that in production and exchange economies, information may be used to reallocate resources across time and firms, thus highlighting the fundamental difference between the role of information in pure exchange and in production and exchange economies.

The Determination of Fair Profits for the Property‐Liability Insurance Firm

Pages: 1015-1028  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03594.x  |  Cited by: 43


Single period and dynamic valuation models in continuous time, under certainty and uncertainty, are developed for a property‐liability insurance contract to determine the “fair” (competitive) premium and underwriting profit. The intertemporal stochastic model assumes that the claim frequency and the price index of claim settlements are functions of a set of underlying state variables which follow a multivariate Wiener process. The competitive premium is shown to be proportional to the claim frequency and the price index for claim settlements at the time the policy is issued. The factor of proportionality varies directly with the claim settlement rate and the length of coverage, and inversely with the risk‐adjusted real interest rate on the dollar‐valued claim rate.

On Unit Roots and the Empirical Modeling of Exchange Rates

Pages: 1029-1035  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03595.x  |  Cited by: 124


Tests are conducted for the presence of unit roots in the autoregressive representations of the logarithms of spot and forward exchange rates. The results from these tests provide one explanation for some of the conflicting conclusions which emerge from recent empirical papers on the foreign exchange market.

A Multivariate Linear Regression Test for the Arbitrage Pricing Theory

Pages: 1037-1042  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03596.x  |  Cited by: 20


A test for the arbitrage pricing theory which employs a multivariate linear regression model is developed. Given a sample of return premiums for a set of N assets which includes a subset of k linearly independent portfolios, the k factor APT hypothesis is accepted if the intercept term is zero in the multivariate regression of the (N−k) returns on the k portfolios. The test may be carried out simply, by using univariate multiple regression software. The relation of this test to the concept of performance potential and Sharpe's measure of performance is also discussed. If the performance potential of the k portfolios is not significantly less than the performance potential of the complete set of N assets, then the k factor APT hypothesis is accepted.

Option Prices as Predictors of Equilibrium Stock Prices

Pages: 1043-1057  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03597.x  |  Cited by: 198


The Black‐Scholes option pricing model, modified for dividend payments, is used to calculate jointly implied stock prices and implied standard deviations. A comparison of the implied stock prices with observed stock prices reveals that the implied prices contain information regarding equilibrium stock prices that is not fully reflected in observed stock prices. The implications of this finding are discussed.

The Ex‐Dividend Day Behavior of Stock Prices: A Re‐Examination of the Clientele Effect

Pages: 1059-1070  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03598.x  |  Cited by: 212


Past studies have documented an ex‐dividend day price drop which is less than the dividend per share and positively correlated with the corresponding dividend yield. In contrast to prior work, we show that, without additional information, the marginal tax rates cannot be inferred from this phenomenon which is, therefore, not necessarily the result of a tax induced clientele effect. Despite adjustments for potential biases in earlier work, however, the correlation between the ex‐dividend relative price drop and the dividend yield is still positive which is consistent with a tax effect and a tax induced clientele effect.

Dividends and Capital Asset Prices

Pages: 1071-1086  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03599.x  |  Cited by: 24


Tax based dividend models of capital asset pricing assume that dividends are known at the time prices are set. Dividends which are announced and paid in the same month, and dividends which were expected but cancelled in the month constitute surprises which interfere with many empirical tests of the effects of expected dividend yield on returns. This paper avoids these problems by relating returns to forecasts of dividend yield obtained from past data.

Determinants of Brokerage Commission Rates for Institutional Investors: A Note

Pages: 1087-1093  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03600.x  |  Cited by: 8


Information Production, Market Signalling, and the Theory of Financial Intermediation: A Comment

Pages: 1095-1096  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03601.x  |  Cited by: 2


Information Production, Market Signalling, and the Theory of Financial Intermediation: A Reply

Pages: 1097-1099  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03602.x  |  Cited by: 3


On Diversification given Asymmetry in Returns: Erratum

Pages: 1101-1101  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03603.x  |  Cited by: 1


Book Reviews

Pages: 1103-1117  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03604.x  |  Cited by: 0

Book reviewed in this article:


Pages: 1119-1119  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03605.x  |  Cited by: 0


Pages: 1121-1127  |  Published: 9/1982  |  DOI: 10.1111/j.1540-6261.1982.tb03606.x  |  Cited by: 0