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Volume 43: Issue 3 (July 1988)


Front Matter

Pages: i-vi  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb00144.x  |  Cited by: 0


ASSOCIATION MEETINGS

Pages: vii-viii  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04589.x  |  Cited by: 0


ANNOUNCEMENTS

Pages: ix-ix  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04590.x  |  Cited by: 0


R2

Pages: 541-566  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04591.x  |  Cited by: 376

RICHARD ROLL

Even with hindsight, the ability to explain stock price changes is modest. R2s were calculated for the returns of large stocks as explained by systematic economic influences, by the returns on other stocks in the same industry, and by public firm‐specific news events. The average adjusted R2 is only about .35 with monthly data and .20 with daily data. There is little relation between explanatory power and either the firm's size or its industry. There is little improvement in R2 from eliminating all dates surrounding news reports in the financial press. However, the sample kurtosis is quite different when such news events are eliminated, thereby revealing a mixture of return distributions. Non‐news dates also indicate the presence of a distributional mixture, perhaps due to traders acting on private information.


Corporate Finance and Corporate Governance

Pages: 567-591  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04592.x  |  Cited by: 691

OLIVER E. WILLIAMSON

A combined treatment of corporate finance and corporate governance is herein proposed. Debt and equity are treated not mainly as alternative financial instruments, but rather as alternative governance structures. Debt governance works mainly out of rules, while equity governance allows much greater discretion. A project‐financing approach is adopted. I argue that whether a project should be financed by debt or by equity depends principally on the characteristics of the assets. Transaction‐cost reasoning supports the use of debt (rules) to finance redeployable assets, while non‐redeployable assets are financed by equity (discretion). Experiences with leasing and leveraged buyouts are used to illustrate the argument. The article also compares and contrasts the transaction‐cost approach with the agency approach to the study of economic organization.


Compensation and Incentives: Practice vs. Theory

Pages: 593-616  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04593.x  |  Cited by: 749

GEORGE P. BAKER, MICHAEL C. JENSEN, KEVIN J. MURPHY

A thorough understanding of internal incentive structures is critical to developing a viable theory of the firm, since these incentives determine to a large extent how individuals inside an organization behave. Many common features of organizational incentive systems are not easily explained by traditional economic theory—including egalitarian pay systems in which compensation is largely independent of performance, the overwhelming use of promotion‐based incentive systems, the absence of up‐front fees for jobs and effective bonding contracts, and the general reluctance of employers to fire, penalize, or give poor performance evaluations to employees. Typical explanations for these practices offered by behaviorists and practitioners are distinctly uneconomic—focusing on notions such as fairness, equity, morale, trust, social responsibility, and culture. The challenge to economists is to provide viable economic explanations for these practices or to integrate these alternative notions into the traditional economic model.


Liquidity and Market Structure

Pages: 617-633  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04594.x  |  Cited by: 573

SANFORD J. GROSSMAN, MERTON H. MILLER

Market liquidity is modeled as being determined by the demand and supply of immediacy. Exogenous liquidity events coupled with the risk of delayed trade create a demand for immediacy. Market makers supply immediacy by their continuous presence and willingness to bear risk during the time period between the arrival of final buyers and sellers. In the long run the number of market makers adjusts to equate the supply and demand for immediacy. This determines the equilibrium level of liquidity in the market. The lower is the autocorrelation in rates of return, the higher is the equilibrium level of liquidity.


DISCUSSION

Pages: 634-637  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04595.x  |  Cited by: 1

DAVID K. WHITCOMB


Bubbles, Fads and Stock Price Volatility Tests: A Partial Evaluation

Pages: 639-656  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04596.x  |  Cited by: 93

KENNETH D. WEST

This is a summary and interpretation of some of the literature on stock price volatility that was stimulated by Leroy and Porter [28] and Shiller [40]. It appears that neither small‐sample bias, rational bubbles nor some standard models for expected returns adequately explain stock price volatility. This suggests a role for some nonstandard models for expected returns. One possibility is a “fads” model in which noise trading by naive investors is important. At present, however, there is little direct evidence that such fads play a significant role in stock price determination.


DISCUSSION

Pages: 656-660  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04597.x  |  Cited by: 1

ALLAN W. KLEIDON


Stock Prices, Earnings, and Expected Dividends

Pages: 661-676  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04598.x  |  Cited by: 903

JOHN Y. CAMPBELL, ROBERT J. SHILLER

Long historical averages of real earnings help forecast present values of future real dividends. With aggregate U.S. stock market data (1871–1986), a vector‐autoregressive forecast of the present value of future dividends is, for each year, roughly a weighted average of moving‐average earnings and current real price, with between two thirds and three fourths of the weight on the earnings measure. We develop the implications of this for the present‐value model of stock prices and for recent results that long‐horizon stock returns are highly forecastable.


Predicting Contemporary Volume with Historic Volume at Differential Price Levels: Evidence Supporting the Disposition Effect

Pages: 677-697  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04599.x  |  Cited by: 90

STEPHEN P. FERRIS, ROBERT A. HAUGEN, ANIL K. MAKHIJA

This paper presents empirical evidence comparing two models of trading in equities—the well‐known tax‐loss‐selling hypothesis and “the disposition effect.” According to the disposition effect, investors are reluctant to realize losses but are eager to realize gains. This paper distinguishes between the two models with a new methodology that examines the relationship between volume at a given point in time and volume that took place in the past at different stock prices. The evidence overwhelmingly supports the disposition effect not only as a determinant of year‐end volume, but also as a determinant of volume levels throughout the year.


DISCUSSION

Pages: 698-699  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04600.x  |  Cited by: 1

LAWRENCE HARRIS


The Buying and Selling Behavior of Individual Investors at the Turn of the Year

Pages: 701-717  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04601.x  |  Cited by: 155

JAY R. RITTER

The average returns on low‐capitalization stocks are unusually high relative to those on large‐capitalization stocks in early January, a phenomenon known as the turn‐of‐the‐year effect. This paper finds that the ratio of stock purchases to sales by individual investors displays a seasonal pattern, with individuals having a below‐normal buy/sell ratio in late December and an above‐normal ratio in early January. Year‐to‐year variation in the early January buy/sell ratio explains forty‐six percent of the year‐to‐year variation in the turn‐of‐the‐year effect during 1971–1985.


DISCUSSION

Pages: 717-719  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04602.x  |  Cited by: 1

WILLIAM T. ZIEMBA


Joint Estimation of Factor Sensitivities and Risk Premia for the Arbitrage Pricing Theory

Pages: 721-733  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04603.x  |  Cited by: 69

EDWIN BURMEISTER, MARJORIE B. McELROY

The APT is represented as a multivariate regression model with across‐equations restrictions. Both observed and unobserved (latent) macroeconomic factors are included, thus generalizing and unifying two previous strands of literature. Large portfolios representing unobserved factors are treated as endogenous, and nonlinear 3SLS estimates are shown to differ sharply from estimates that ignore this endogeneity. Using monthly stock returns and six factors, we cannot reject January effects. The following results are invariant with respect to the inclusion of January effects: we reject the CAPM in favor of the APT; however, we cannot reject the APT restrictions on the linear factor model.


DISCUSSION

Pages: 734-735  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04604.x  |  Cited by: 0

STEPHEN J. BROWN


Efficient Signalling with Dividends, Investment, and Stock Repurchases

Pages: 737-747  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04605.x  |  Cited by: 55

JOSEPH WILLIAMS

The efficient mix of dissipative dividends, investments in real and financial assets, and repurchases of stock is computed for a continuum of firms with inside information about the return on risky real assets. In the efficient signalling equilibrium, the representative firm optimally distributes dividends, invests in risky real assets to maximize net present value, holds no financial securities, and sells new stock in the market. This firm finances its value‐maximizing investment first from internal funds and second from stock sold to new investors.


Banking Panics, Information, and Rational Expectations Equilibrium

Pages: 749-761  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04606.x  |  Cited by: 219

V. V. CHARI, RAVI JAGANNATHAN

This paper shows that bank runs can be modeled as an equilibrium phenomenon. We demonstrate that some aspects of the intuitive “story” that bank runs start with fears of insolvency of banks can be rigorously modeled. If individuals observe long “lines” at the bank, they correctly infer that there is a possibility that the bank is about to fail and precipitate a bank run. However, bank runs occur even when no one has any adverse information. Extra market constraints such as suspension of convertibility can prevent bank runs and result in superior allocations.


DISCUSSION

Pages: 761-763  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04607.x  |  Cited by: 0

JOSEPH WILLIAMS


Minutes of the Annual Membership Meeting

Pages: 765-766  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04608.x  |  Cited by: 0

Michael Keenan


Report on the 1987 Membership Survey

Pages: 767-777  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04609.x  |  Cited by: 0

Michael Keenan


Report of the Executive Secretary and Treasurer for the Year Ending September 30, 1987

Pages: 779-779  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04610.x  |  Cited by: 0

Michael Keenan


Consolidated Revenues and Expenses Reports

Pages: 780-781  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04611.x  |  Cited by: 0


Report of the Managing Editors of theJournal of Financefor 1987

Pages: 783-788  |  Published: 7/1988  |  DOI: 10.1111/j.1540-6261.1988.tb04612.x  |  Cited by: 0

EDWIN J. ELTON, MARTIN J. GRUBER