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Volume 43: Issue 5 (December 1988)

Business Cycles and the Behavior of Metals Prices

Pages: 1075-1093  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03957.x  |  Cited by: 255


The theory of storage says that the marginal convenience yield on inventory falls at a decreasing rate as inventory increases. The authors test this hypothesis by examining the relative variation of spot and futures prices for metals. As the hypothesis implies, futures prices are less variable than spot prices when inventory is low, but spot and futures prices have similar variability when inventory is high. The theory of storage also explains inversions of “normal” futures‐spot price relations around business‐cycle peaks. Positive demand shocks around peaks reduce metal inventories and, as the theory predicts, generate large convenience yields and price inversions.

Is the Real Interest Rate Stable?

Pages: 1095-1112  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03958.x  |  Cited by: 187


Univariate time‐series models for consumption, nominal interest rates, and prices each appear to have a single unit root before 1979. If nominal interest rates have a unit root but inflation and inflation forecast errors do not, then ex ante real interest rates have a unit root and are therefore nonstationary. This deduction does not depend on the properties of the unobservable ex post observed real return, which combines the ex ante real interest rate and inflation‐forecasting errors. The unit‐root characteristic of real interest rates is puzzling from at least two perspectives: many models imply that the growth rate of consumption and the real interest rate should have similar time‐series characteristics; also, nominal returns for other assets (e.g., stocks and bonds) appear to have different times‐series properties from those of treasury bills.

The Purchasing Power of Money and Nominal Interest Rates: A Re‐Examination

Pages: 1113-1125  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03959.x  |  Cited by: 11


While it has been known for some time that, under uncertainty, the original version of the Fisher hypothesis is not precisely correct, empirical researchers have largely ignored this fact. Such an omission has possibly resulted in erroneous conclusions concerning other hypotheses; most notably the impact of prices on the real economy. This paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates. Empirical tests based on both the Livingston survey data and data from time‐series forecasting models provide support for the Fisher effect and the hypothesis that only covariance risk is priced in the Treasury bill market.

Vendor Financing

Pages: 1127-1141  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03960.x  |  Cited by: 331


This paper shows that, even in the presence of a perfectly competitive banking industry, it is optimal for firms with market power to engage in vendor financing if credit customers have lower reservation prices than cash customers or if adverse selection makes it infeasible to write credit contracts that separate customers according to their credit risk. We analyze how the advantage of vendor financing depends on the relative size of the cash and credit markets, the heterogeneity of credit customers, and the number of firms in the industry.

Canada's Dual Class Shares: Further Evidence on the Market Value of Cash Dividends

Pages: 1143-1160  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03961.x  |  Cited by: 10


The Canada Income Tax Act of 1971 permitted Canadian corporations to create two classes of equity, one paying ordinary cash income and the other paying capital gains income. Cash‐paying shares have often sold at a premium. Empirical results indicate that the premium is largely explained by the relative value of the dividends paid and by costs imposed on investors by stock dividend payment and share conversion procedures. Premiums for a few firms also reflect the relative liquidity of the two classes of shares. No evidence exists that investors prefer cash income to equal amounts of capital gains.

The Effect of Corporate Multinationalism on Shareholders' Wealth: Evidence from International Acquisitions

Pages: 1161-1175  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03962.x  |  Cited by: 281


This study presents direct evidence on the effect of international acquisitions on stock prices of U.S. bidding firms. Shareholders of MNCs not operating in the target firm's country experience significant positive abnormal returns at the announcement of international acquisitions. Shareholders of U.S. firms expanding internationally for the first time experience insignificant positive abnormal returns, while shareholders of MNCs operating already in the target firm's country experience insignificant negative abnormal returns. The abnormal returns are larger when firms expand into new industry and geographic markets—especially those less developed than the U.S. economy. The evidence is consistent with the theory of corporate multinationalism, predicting an increase in the firm's market value from the expansion of its existing multinational network.

Underpricing of Newly Issued Bonds: Evidence from the Swiss Capital Market

Pages: 1177-1191  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03963.x  |  Cited by: 18


The pricing of newly issued bonds on the Swiss capital market is investigated over the years 1980–1982. The results reveal a slight underpricing of new bonds at the issue date that is roughly equal to the difference in transactions costs between the markets for new and seasoned bonds. Underpricing is no longer observed when the new bonds start to be traded on the stock exchange, that is, after about two days. Tests of several hypotheses show that unexpected changes in interest rates over the offering period explain part of the underpricing.

Investing in Bankrupt Firms

Pages: 1193-1206  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03964.x  |  Cited by: 51


We examine the investment characteristics of firms electing to enter bankruptcy, between 1973 and 1982. Comparisons are made before and after the Bankruptcy Reform Act of 1978. Our results indicate that the 1978 Act had no significant impact on bankruptcy decisions or resolutions for actively traded firms. Trading in bankrupt firms' securities is becoming more common, but no abnormal returns appear to be available. Systematic risk does not change significantly with the filing of bankruptcy, but there is a significant increase in return variance. The financial markets also react to various announcements of stages in the reorganization process.

The Domino Effect and the Supervision of the Banking System

Pages: 1207-1218  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03965.x  |  Cited by: 4


The paper models the domino effect and defines a measurement for the necessity of banking supervision. The effect of several factors, such as the desired stability of the banking system, its size, the amount of negative externalities that are considered by banks, and supervisory costs, on the necessity of supervision are studied. For instance, it was found that, under certain circumstances, supervision becomes less essential if the number of banks increases. The paper has also emphasized that objective difficulties in the supervision of banks, by simply imposing restrictions on their activities, are intrinsic to the operation of the banks themselves. The paper provides some insight into the current debate as to the necessity or redundancy of supervision and regulation.

Risk in Banking and Capital Regulation

Pages: 1219-1233  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03966.x  |  Cited by: 524


This paper investigates the role of bank capital regulation in risk control. It is known that banks choose portfolios of higher risk because of inefficiently priced deposit insurance. Bank capital regulation is a way to redress this bias toward risk. Utilizing the mean‐variance model, the following results are shown: (a) the use of simple capital ratios in regulation is an ineffective means to bound the insolvency risk of banks; (b) as a solution to problems of the capital ratio regulation, the “theoretically correct” risk weights under the risk‐based capital plan are explicitly derived; and (c) the “theoretically correct” risk weights are restrictions on asset composition, which alters the optimal portfolio choice of banking firms.

The Valuation of Sequential Exchange Opportunities

Pages: 1235-1256  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03967.x  |  Cited by: 125


Sequential exchange opportunities are valued using the techniques of modern option‐pricing theory. The vehicle for analysis is the concept of a compound exchange option. This security is shown to exist implicitly in several contractual settings. A valuation formula for this option is derived. The formula is shown to generalize much previous work in option pricing. Several applications of the formula are presented.

A Tax‐Induced Clientele for Index‐Linked Corporate Bonds

Pages: 1257-1263  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03968.x  |  Cited by: 3


This paper analyzes the circumstances under which tax considerations favor or disfavor the use of index‐linked corporate bonds. Using a model similar to Miller's, investors' choices of assets depend on their tax preferences for interest income versus capital gains and their preferences for the timing of returns. It is concluded that the absence of index‐linked bonds in the U.S. cannot be attributed solely to tax reasons. However, following the 1986 Tax Reform Act, the tax code is expected to disfavor the use of index‐linked bonds.

Market Serial Correlation on a Small Security Market: A Note

Pages: 1265-1274  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03969.x  |  Cited by: 14


A Note on Unsuccessful Tender Offers and Stockholder Returns

Pages: 1275-1283  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03970.x  |  Cited by: 10


Recent research shows that unsuccessful tender offers may affect target share returns for two years past the offer's announcement. This note examines target returns in the interim between the announcement and one year after the offer's withdrawal. Analyzing a recent sample of targets that did not get another bid in the year following a failed tender offer, this study reaches two conclusions. First, all of an offer's premium disappears by the time failure becomes public. Second, excess returns are zero in the post‐failure year. An explanation that is based on the causes of the tender offers' failures is presented.

The Anomaly That Isn't There: A Comment on Friday the Thirteenth

Pages: 1285-1286  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03971.x  |  Cited by: 36


Book Reviews

Pages: 1287-1294  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03972.x  |  Cited by: 0

Book reviewed in this article:


Pages: 1295-1295  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb03973.x  |  Cited by: 0

Index to Volume XLIII

Pages: 1297-1302  |  Published: 12/1988  |  DOI: 10.1111/j.1540-6261.1988.tb00324.x  |  Cited by: 0