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Volume 47: Issue 1 (March 1992)

Front Matter

Pages: i-vi  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb00473.x  |  Cited by: 0


Pages: vii-viii  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03974.x  |  Cited by: 0


Pages: ix-ix  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03975.x  |  Cited by: 0

Back Matter

Pages: x-xxxv  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb00474.x  |  Cited by: 0


Pages: 1-1  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03976.x  |  Cited by: 5

Industrial Structure and the Comparative Behavior of International Stock Market Indices

Pages: 3-41  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03977.x  |  Cited by: 243


Stock Price Indices are compared across countries in an attempt to explain why they exhibit such disparate behavior. Three separate explanatory influences are empirically documented. First, part of the behavior can be attributed to a technical aspect of index construction; some indices are more diversified than others. Second, each country's industrial structure plays a major role in explaining stock price behavior. Third, for the majority of countries, a portion of national equity index behavior can be ascribed to exchange rate behavior. Exchange rates explain a significant portion of common currency denominated national index returns, although the amount explained by exchange rates is less than the amount explained by industrial structure for most countries.

Predictable Stock Returns in the United States and Japan: A Study of Long-Term Capital Market Integration

Pages: 43-69  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03978.x  |  Cited by: 233


This paper uses the predictability of monthly excess returns on U.S. and Japanese equity portfolios over the U.S. Treasury bill rate to study the integration of long‐term capital markets in these two countries. During the period 1971–1990 similar variables, including the dividend‐price ratio and interest rate variables, help to forecast excess returns in each country. In addition, in the 1980's U.S. variables help to forecast excess Japanese stock returns. There is some evidence of common movement in expected excess returns across the two countries, which is suggestive of integration of long‐term capital markets.

Dutch Auction Repurchases: An Analysis of Shareholder Heterogeneity

Pages: 71-105  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03979.x  |  Cited by: 126


This paper documents that firms face upward‐sloping supply curves when they repurchase shares in a Dutch auction, and it analyzes the market reaction to these offers. The announcement price increase is highly correlated with the ultimate repurchase premium. Prices decline at expiration only for pro‐rated offers. The cumulative return is positive and highly correlated with the repurchase premium, excepting pro‐rated offers. Much of this price increase is consistent with movement along an upward‐sloping supply curve. Trading volume around the Dutch auction parallels fixed‐price repurchases. Supply elasticity is larger for firms with large trading volume, firms included in the S&P 500 Index, and takeover targets.

The Success of Acquisitions: Evidence from Divestitures

Pages: 107-138  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03980.x  |  Cited by: 334


This paper studies a sample of large acquisitions completed between 1971 and 1982. By the end of 1989, acquirers have divested almost 44% of the target companies. We characterize the ex post success of the divested acquisitions and consider 34% to 50% of classified divestitures as unsuccessful. Acquirer returns and total (acquirer and target) returns at the acquisition announcement are significantly lower for unsuccessful divestitures than for successful divestitures and acquisitions not divested. Although diversifying acquisitions are almost four times more likely to be divested than related acquisitions, we do not find strong evidence that diversifying acquisitions are less successful than related ones.

LBOs, Reversions and Implicit Contracts

Pages: 139-167  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03981.x  |  Cited by: 43


The conventional view of going‐private transactions is that they are designed to enhance the efficiency of the firm (for example, Jensen (1986)). A starkly different view is that these and other control transactions are motivated to effect transfers from other stakeholders in the firm to equity holders (Shleifer and Summers (1988)). This study exploits data describing pension terminations as a way to test these theories. We conclude that the efficiency theory can plausibly explain a substantial number of LBO‐related terminations, but not enough to undermine the transfer theory. More specific predictions from the efflciency theory are needed to structure more exacting tests.

Accounts Receivable Management Policy: Theory and Evidence

Pages: 169-200  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03982.x  |  Cited by: 233


This paper develops and tests hypotheses that explain the choice of accounts receivable management policies. The tests focus on both cross‐sectional explanations of policy‐choice determinants, as well as incentives to establish captives. We find size, concentration, and credit standing of the firm's traded debt and commercial paper are each important in explaining the use of factoring, accounts receivable secured debt, captive finance subsidiaries, and general corporate credit. We also offer evidence that captive formation allows more flexible financial contracting. However, we find no evidence that captive formation expropriates bondholder wealth.

Corporate Dividends and Seasoned Equity Issues: An Empirical Investigation

Pages: 201-225  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03983.x  |  Cited by: 46


This paper investigates whether managers rely on dividends to obtain a higher price in a stock offering and whether the stock price reaction to dividend and offering announcements justifies such a coordination. The evidence does not support either conjecture. Issuing firms are not more likely to pay or increase dividends than nonissuing forms. Moreover, there is little evidence that firms time stock offering announcements right after dividend declarations to benefit from the attendant information disclosure. The analysis of dividend and stock offering announcement effects suggests few if any benefits from linking dividend and stock offering announcements.

Is Fairly Priced Deposit Insurance Possible?

Pages: 227-245  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03984.x  |  Cited by: 151


We analyze risk‐sensitive, incentive‐compatible deposit insurance in the presence of private information and moral hazard. Without deposit‐linked subsidies it is impossible to implement risk‐sensitive, incentive‐compatible deposit insurance pricing in a competitive, deregulated environment, except when the deposit insurer is the least risk averse agent in the economy. We establish this formally in the context of an insurance scheme in which privately informed depository institutions are offered deposit insurance premia contingent on reported capital; the result holds for alternative sorting instruments as well. This suggests a contradiction between deregulation and fairly priced, risk‐sensitive deposit insurance.

Long-Lived Private Information and Imperfect Competition

Pages: 247-270  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03985.x  |  Cited by: 431


We develop a multi‐period auction model in which multiple privately informed agents strategically exploit their long‐lived information. We show that such traders compete aggressively and cause most of their common private information to be revealed very rapidly. In the limit as the interval between auctions approaches zero, market depth becomes infinite and all private information is revealed immediately. These results are in contrast to those of Kyle (1985) in which the monopolistic informed trader causes his information to be incorporated into prices gradually, and, when the interval between auctions is vanishingly small, market depth is constant over time.

Option Replication in Discrete Time with Transaction Costs

Pages: 271-293  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03986.x  |  Cited by: 152


Option replication is discussed in a discrete‐time framework with transaction costs. The model represents an extension of the Cox‐Ross‐Rubinstein binomial option pricing model to cover the case of proportional transaction costs. The method proceeds by constructing the appropriate replicating portfolio at each trading interval. Numerical values of these prices are presented for a range of parameter values. The paper derives a simple Black‐Scholes type approximation for the option prices with transaction costs and demonstrates numerically that it is quite accurate for plausible parameter values.

Publish or Perish: What the Competition isReallyDoing

Pages: 295-329  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03987.x  |  Cited by: 49


This study provides comprehensive publications performance data over a 25‐year period for finance doctorates. These data indicate that publishing one article per year in any finance journal (or finance, accounting, economics, or business journal) over any prolonged period of time is a truly remarkable feat, met by only 5% of the graduates. Tenure screens combining various quantity and quality requirements are examined to assess their ability to predict future publication productivity. Faculty and administrators seeking defensible benchmarks for evaluating faculty research productivity in finance will find that these data and results are particularly useful.

An Option-Theoretic Approach to the Valuation of Dividend Reinvestment and Voluntary Purchase Plans

Pages: 331-347  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03988.x  |  Cited by: 12


Many firms with dividend reinvestment plans also allow their shareholders to voluntarily invest supplemental funds to purchase additional shares. The purchase price for newly‐issued shares often is determined by the average stock price over a prespecified time period preceding the investment date. This gives the firm's shareholders an option to invest in additional shares only when the stock price exceeds the computed average. This paper uses both theoretical and numerical methods to analyze the value of these voluntary purchase options in theory and practice.

Bankruptcy and Insider Trading: Differences Between Exchange-Listed and OTC Firms

Pages: 349-362  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03989.x  |  Cited by: 40


Over the two‐year period prior to the bankruptcy announcement, insider trading is significantly greater for OTC bankrupt firms, but not for exchange‐listed firms, than for an industry‐size matched sample of nonbankrupt firms. In addition, the level of insider selling increases over the final five months leading to the first public announcement of OTC firms. Finally, firms displaying the most negative price reaction over the announcement period are found to have a significantly larger proportion of insider selling than other firms.

Intra-Day Arbitrage Opportunities in Foreign Exchange and Eurocurrency Markets

Pages: 363-379  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03990.x  |  Cited by: 27


We have two primary objectives in this study. First, we examine the frequency of attaining simultaneous equilibrium on spot and forward foreign exchange markets and on domestic and foreign securities markets. Second, we measure the profitability of covered interest arbitrage and one‐way arbitrage. Our empirical analysis has been conducted using real‐time quotations. The empirical results indicate that: (a) the markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage are rarely available; and (b) the frequency of attaining simultaneous market equilibrium is surprisingly low, thus opening the door for one‐way arbitrage.

A Comparison of Forward and Futures Prices of an Interest Rate-Sensitive Financial Asset

Pages: 381-396  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03991.x  |  Cited by: 19


This paper focuses on contractual distinctions as an explanation for the price divergence between futures and forward contracts. Specifically, it investigates the effect of marking‐to‐market on the observed price differences using the pricing model described in Cox, Ingersoll, and Ross (CIR) (1981, Journal of Financial Economics 9, 321–346). Using previously unavailable data, this paper employs Eurodollars, an interest rate‐sensitive financial asset, to test the CIR model. Unlike prior empirical studies, test results support both the weak prediction concerning the sign of the average price difference and the stronger prediction that specific covariances explain the variation in the price differences.

Transformed Securities and Alternative Factor Structures

Pages: 397-405  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03992.x  |  Cited by: 2


Grinblatt and Titman (1985) reformulate a result of Chamberlain and Rothschild (1983) to show that the approximate factor structure of Chamberlain and Rothschild is asymptotically equivalent to the strict factor structure of Ross (1976) as long as investors can always repackage securities into an equal number of arbitrary portfolios. This paper uses a Procrustes rotation methodology that is compatible with the repackaging interpretation of Grinblatt and Titman to show that the empirical structure of stock prices is consistent with the convergency hypothesis.

Book Reviews

Pages: 407-420  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03993.x  |  Cited by: 0

Book reviewed in this article:


Pages: 421-422  |  Published: 3/1992  |  DOI: 10.1111/j.1540-6261.1992.tb03994.x  |  Cited by: 0