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Volume 50: Issue 1 (March 1995)


Front Matter

Pages: i-vi  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb00152.x  |  Cited by: 0


Smith Breeden Prizes for 1994

Pages: 1-1  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05164.x  |  Cited by: 2


Postbankruptcy Performance and Management Turnover

Pages: 3-21  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05165.x  |  Cited by: 208

EDITH SHWALB HOTCHKISS

This article examines the performance of 197 public companies that emerged from Chapter 11. Over 40 percent of the sample firms continue to experience operating losses in the three years following bankruptcy; 32 percent reenter bankruptcy or privately restructure their debt. The continued involvement of prebankruptcy management in the restructuring process is strongly associated with poor post‐bankruptcy performance. The substantial number of firms emerging from Chapter 11 that are not viable or need further restructuring provides little evidence that the process effectively rehabilitates distressed firms and is consistent with the view that there are economically important biases toward continuation of unprofitable firms.


The New Issues Puzzle

Pages: 23-51  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05166.x  |  Cited by: 1400

TIM LOUGHRAN, JAY R. RITTER

Companies issuing stock during 1970 to 1990, whether an initial public offering or a seasoned equity offering, have been poor long‐run investments for investors. During the five years after the issue, investors have received average returns of only 5 percent per year for companies going public and only 7 percent per year for companies conducting a seasoned equity offer. Book‐to‐market effects account for only a modest portion of the low returns. An investor would have had to invest 44 percent more money in the issuers than in nonissuers of the same size to have the same wealth five years after the offering date.


Pricing Derivatives on Financial Securities Subject to Credit Risk

Pages: 53-85  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05167.x  |  Cited by: 820

ROBERT A. JARROW, STUART M. TURNBULL

This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may default. We apply the foreign currency analogy of Jarrow and Turnbull (1991) to decompose the dollar payoff from a risky security into a certain payoff and a “spot exchange rate.” Arbitrage‐free valuation techniques are then employed. This methodology can be applied to corporate debt and over the counter derivatives, such as swaps and caps.


Implementing Option Pricing Models When Asset Returns Are Predictable

Pages: 87-129  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05168.x  |  Cited by: 86

ANDREW W. LO, JIANG WANG

The predictability of an asset's returns will affect the prices of options on that asset, even though predictability is typically induced by the drift, which does not enter the option pricing formula. For discretely‐sampled data, predictability is linked to the parameters that do enter the option pricing formula. We construct an adjustment for predictability to the Black‐Scholes formula and show that this adjustment can be important even for small levels of predictability, especially for longer maturity options. We propose several continuous‐time linear diffusion processes that can capture broader forms of predictability, and provide numerical examples that illustrate their importance for pricing options.


Size and Book-to-Market Factors in Earnings and Returns

Pages: 131-155  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05169.x  |  Cited by: 1076

EUGENE F. FAMA, KENNETH R. FRENCH

We study whether the behavior of stock prices, in relation to size and book‐to‐market‐equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns.


Portfolio Inefficiency and the Cross-section of Expected Returns

Pages: 157-184  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05170.x  |  Cited by: 95

SHMUEL KANDEL, ROBERT F. STAMBAUGH

The Capital Asset Pricing Model implies that (i) the market portfolio is efficient and (ii) expected returns are linearly related to betas. Many do not view these implications as separate, since either implies the other, but we demonstrate that either can hold nearly perfectly while the other fails grossly. If the index portfolio is inefficient, then the coefficients and R2 from an ordinary least squares regression of expected returns on betas can equal essentially any values and bear no relation to the index portfolio's mean‐variance location. That location does determine the outcome of a mean‐beta regression fitted by generalized least squares.


Another Look at the Cross-section of Expected Stock Returns

Pages: 185-224  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05171.x  |  Cited by: 341

S. P. KOTHARI, JAY SHANKEN, RICHARD G. SLOAN

Our examination of the cross‐section of expected returns reveals economically and statistically significant compensation (about 6 to 9 percent per annum) for beta risk when betas are estimated from time‐series regressions of annual portfolio returns on the annual return on the equally weighted market index. The relation between book‐to‐market equity and returns is weaker and less consistent than that in Fama and French (1992). We conjecture that past book‐to‐market results using COMPUS‐TAT data are affected by a selection bias and provide indirect evidence.


Do Expected Shifts in Inflation Affect Estimates of the Long-Run Fisher Relation?

Pages: 225-253  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05172.x  |  Cited by: 96

MARTIN D. D. EVANS, KAREN K. LEWIS

Recent empirical studies suggest that nominal interest rates and expected inflation do not move together one‐for‐one in the long run, a finding at odds with many theoretical models. This article shows that these results can be deceptive when the process followed by inflation shifts infrequently. We characterize the shifts in inflation by a Markov switching model. Based upon this model's forecasts, we reexamine the long‐run relationship between nominal interest rates and inflation. Interestingly, we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one‐for‐one.


Trading Behavior and the Unbiasedness of the Market Reaction to Dividend Announcements

Pages: 255-279  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05173.x  |  Cited by: 29

MUKESH BAJAJ, ANAND M. VIJH

This article examines the price formation process during dividend announcement day, using daily closing prices and transactions data. We find that the unconditional positive excess returns, first documented by Kalay and Loewenstein (1985), are higher for small‐firm and low‐priced stocks. Price volatility and trading volume also increase during this period. Examination of trade prices relative to the bid‐ask spread and volume of trades at bid and asked prices shows that the excess returns cannot be attributed to measurement errors or to spillover effects of tax‐related ex‐day trading. Rather, the price behavior is related to the absorption of dividend information.


Stock Volatility and the Levels of the Basis and Open Interest in Futures Contracts

Pages: 281-300  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05174.x  |  Cited by: 38

NAI-FU CHEN, CHARLES J. CUNY, ROBERT A. HAUGEN

This article tests a theoretical model of the basis and open interest of stock index futures. The model is based on the differences between stock and futures in terms of investors' ability to customize stock portfolios and liquidity. Empirical evidence confirms the model's prediction that increased volatility decreases the basis and increases open interest.


Venture Capitalists and the Oversight of Private Firms

Pages: 301-318  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05175.x  |  Cited by: 538

JOSH LERNER

This article examines the representation of venture capitalists on the boards of private firms in their portfolios. If venture capitalists are intensive monitors of managers, their involvement as directors should be more intense when the need for oversight is greater. I show that venture capitalists' representation on the board increases around the time of chief executive officer turnover, while the number of other outsiders remains constant. I also show that distance to the firm is an important determinant of the board membership of venture capitalists, as might be anticipated if the oversight of local firms is less costly than more distant businesses.


On Intraday Risk Premia

Pages: 319-339  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05176.x  |  Cited by: 39

MATTHEW SPIEGEL, AVANIDHAR SUBRAHMANYAM

This article presents a framework for analyzing the dynamic effects of anticipated large demand pressures on asset risk premia. We show that large institutions who can time their entry into the market will trade either at the open, or during periods of unusual demand pressures. We show that if these institutions do enter later in the day, they trade in the same direction as institutions which provide liquidity continuously; institutions therefore appear to exhibit “herding” behavior. We also explore how changing the uncertainty of demand pressures late in the day affects trading costs throughout the day.


Information Quality, Performance Measurement, and Security Demand in Rational Expectations Economies

Pages: 341-359  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05177.x  |  Cited by: 1

THOMAS H. NOE, BUDDHAVARAPU SAILESH RAMAMURTIE

The relationship between asset demand and information quality in rational expectations economies is analyzed. First we derive a number of new summary descriptive statistics that measure four basic characteristics of investment style: asset selection, market timing, aggressiveness, and specialization. Then we relate these statistics to the divergence between a given investor's information structure and the market average information structure. Finally, we demonstrate that informational differentials can be identified, and consistently estimated, using ordinary least squares, from the time‐series of observed asset demand.


Mean Reversion in Equilibrium Asset Prices: Evidence from the Futures Term Structure

Pages: 361-375  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05178.x  |  Cited by: 152

HENDRIK BESSEMBINDER, JAY F. COUGHENOUR, PAUL J. SEGUIN, MARGARET MONROE SMOLLER

We use the term structure of futures prices to test whether investors anticipate mean reversion in spot asset prices. The empirical results indicate mean reversion in each market we examine. For agricultural commodities and crude oil the magnitude of the estimated mean reversion is large; for example, point estimates indicate that 44 percent of a typical spot oil price shock is expected to be reversed over the subsequent eight months. For metals, the degree of mean reversion is substantially less, but still statistically significant. We detect only weak evidence of mean reversion in financial asset prices.


Book Reviews

Pages: 377-400  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05179.x  |  Cited by: 0

Book reviewed in this article:


Miscellanea

Pages: 401-402  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb05180.x  |  Cited by: 0


Association Meetings

Pages: 403-405  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb00153.x  |  Cited by: 1


Announcements

Pages: 406-406  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb00154.x  |  Cited by: 0


Back Matter

Pages: 407-429  |  Published: 3/1995  |  DOI: 10.1111/j.1540-6261.1995.tb00155.x  |  Cited by: 0