A Simple Model of Capital Market Equilibrium with Incomplete Information
Pages: 483-510 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04565.x | Cited by: 2605
ROBERT C. MERTON
Potential Competition And Actual Competition In Equity Options
Pages: 511-531 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04566.x | Cited by: 36
ROBERT NEAL
Trading Mechanisms and Stock Returns: An Empirical Investigation
Pages: 533-553 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04567.x | Cited by: 378
YAKOV AMIHUD, HAIM MENDELSON
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.
Pages: 554-555 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04568.x | Cited by: 0
MAUREEN O'HARA
Further Evidence On Investor Overreaction and Stock Market Seasonality
Pages: 557-581 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04569.x | Cited by: 1066
WERNER F. M. De BONDT, RICHARD H. THALER
In a previous paper, we found systematic price reversals for stocks that experience extreme long‐term gains or losses: Past losers significantly outperform past winners. We interpreted this finding as consistent with the behavioral hypothesis of investor overreaction. In this follow‐up paper, additional evidence is reported that supports the overreaction hypothesis and that is inconsistent with two alternative hypotheses based on firm size and differences in risk, as measured by CAPM‐betas. The seasonal pattern of returns is also examined. Excess returns in January are related to both short‐term and long‐term past performance, as well as to the previous year market return.
Growth Opportunities and Risk‐Taking by Financial Intermediaries
Pages: 583-599 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04570.x | Cited by: 28
RICHARD J. HERRING, PRASHANT VANKUDRE
We show that growth opportunities which cannot be converted to cash under conditions of financial distress (Gz) are a critical determinant of an intermediary's choice of risk. Financial institutions in which Gz 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.
Orthogonal Frontiers and Alternative Mean‐Variance Efficiency Tests
Pages: 601-619 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04571.x | Cited by: 3
BRUCE N. LEHMANN
This paper catalogues properties of minimum norm orthogonal portfolios: portfolios which minimize a quadratic objective function and have returns uncorrelated with those of a candidate portfolio that is not mean‐variance efficient. The analysis shows that the dollar versions of these portfolios correspond to estimators of zero beta rates based on alternative statistical criteria and grouping procedures while costless orthogonal portfolios represent candidate mean‐variance efficiency tests. It also develops inference procedures for zero and unit net investment portfolios of individual securities (instead of grouped portfolios) that have zero expected betas. The resulting mean‐variance efficiency tests are reasonably insensitive to the underlying statistical assumptions.
Pages: 620-622 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04572.x | Cited by: 0
SHMUEL KANDEL
Risk‐Shifting Incentives and Signalling Through Corporate Capital Structure
Pages: 623-641 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04573.x | Cited by: 37
KOSE JOHN
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.
Asset Writedowns: Managerial Incentives and Security Returns
Pages: 643-661 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04574.x | Cited by: 145
JOHN S. STRONG, JOHN R. MEYER
Pages: 661-663 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04575.x | Cited by: 6
ANJAN V. THAKOR
Credit Granting: A Comparative Analysis of Classification Procedures
Pages: 665-681 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04576.x | Cited by: 43
VENKAT SRINIVASAN, YONG H. KIM
Financial classification issues, and particularly the financial distress problem, continue to be subject to vigorous investigation. The corporate credit granting process has not received as much attention in the literature. This paper examines the relative effectiveness of parametric, nonparametric and judgemental classification procedures on a sample of corporate credit data. The judgemental model is based on the Analytic Hierarchy Process. Evidence indicates that (nonparametric) recursive partitioning methods provide greater information than simultaneous partitioning procedures. The judgemental model is found to perform as well as statistical models. A complementary relationship is proposed between the statistical and the judgemental models as an effective paradigm for granting credit.
Pages: 681-683 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04577.x | Cited by: 2
ROBERT A. EISENBEIS
Death and Taxes: The Market for Flower Bonds
Pages: 685-698 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04578.x | Cited by: 4
DAVID MAYERS, CLIFFORD W. SMITH
Certain U.S. Government securities, known as flower bonds, can be redeemed at par plus accrued interest for the purpose of paying estate taxes, if held at the time of death. Thus, a flower bond, selling at a discount, is like a straight bond plus a life insurance policy. An equilibrium derived from a rational flower bond pricing model implies the existence of clienteles: individuals with the highest death probabilities hold the deepest discount flower bonds. The empirical implication, that bonds with the deepest discount should be redeemed at the fastest rate, is tested and the results support the proposition.
Pages: 698-702 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04579.x | Cited by: 0
ROBERT C. WITT
Pages: 703-720 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04580.x | Cited by: 21
RICHARD L. SMITH
Previous research suggests that firms choose negotiated issuance over competitive despite its apparently higher net interest cost. This result is shown to arise partly from failure to correct for a selectivity bias in the choice of issuance procedures. Two stage analysis is used in a model that includes qualitative and limited dependent variables to re‐estimate the net interest cost difference between competitive and negotiated issues. Results support the hypothesis that the choice of issuance procedure is consistent with shareholder wealth maximization. Examination of debt issues subject to Rule 50 of the Public Utility Holding Company Act indicates that the regulation, as applied, is not effective.
Gains from International Diversification: 1968–85 Returns on Portfolios of Stocks and Bonds
Pages: 721-739 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04581.x | Cited by: 104
ROBERT R. GRAUER, NILS H. HAKANSSON
This paper applies the multi‐period investment model to a universe of international securities on the basis of the simple probability assessment approach. Our principal findings are: 1) the gains from including non‐U.S. asset categories in the universe were remarkably large (in some cases statistically significant), especially for the highly risk‐averse strategies, 2) the gains from removing the no leverage constraint were more substantial than they were in the absence of non‐U.S. securities, and 3) there is strong evidence of market segmentation in that the optimal levels of investment in U.S. securities were mostly zero in the presence of the non‐U.S. asset categories.
Pages: 739-741 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04582.x | Cited by: 0
MICHEL CROUHY
Effects of Capital Gains Taxation on Life‐Cycle Investment and Portfolio Management
Pages: 743-758 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04583.x | Cited by: 15
YVES BALCER, KENNETH L. JUDD
We examine the impact of capital income taxation, both accrual forms of taxation and taxation of realized capital gains, on total savings and the demand for corporate financial instruments. We find that investors may hold both debt and equity in the face of effective collection of capital gains taxation even in a flat tax system. We also find that the two taxes will have substantially different effects on saving and consumption behavior, making it unlikely that the tax structure can be summarized by any single equivalent accrual tax rate.
Pages: 758-761 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04584.x | Cited by: 0
CHESTER S. SPATT
The Effect of Sequential Information Arrival on Asset Prices: An Experimental Study
Pages: 763-797 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04585.x | Cited by: 68
THOMAS E. COPELAND, DANIEL FRIEDMAN
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.
Minutes of the Annual Membership Meeting December 29, 1986
Pages: 799-800 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04586.x | Cited by: 0
Michael Keenan
Report of the Executive Secretary and Treasurer: for the Year Ending September 30, 1986
Pages: 801-803 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04587.x | Cited by: 0
Michael Keenan
Report of the Managing Editors of the Journal of Finance for 1986
Pages: 805-808 | Published: 7/1987 | DOI: 10.1111/j.1540-6261.1987.tb04588.x | Cited by: 2
EDWIN J. ELTON, MARTIN J. GRUBER