View All Issues

Volume 52: Issue 5 (December 1997)

Do Long‐Term Shareholders Benefit From Corporate Acquisitions?

Pages: 1765-1790  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02741.x  |  Cited by: 511


Using 947 acquisitions during 1970–1989, this article finds a relationship between the postacquisition returns and the mode of acquisition and form of payment. During a five‐year period following the acquisition, on average, firms that complete stock mergers earn significantly negative excess returns of −25.0 percent whereas firms that complete cash tender offers earn significantly positive excess returns of 61.7 percent. Over the combined preacquisition and postacquisition period, target shareholders who hold on to the acquirer stock received as payment in stock mergers do not earn significantly positive excess returns. In the top quartile of target to acquirer size ratio, they earn negative excess returns.

Myth or Reality? The Long‐Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital‐Backed Companies

Pages: 1791-1821  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02742.x  |  Cited by: 687


The Operating Performance of Firms Conducting Seasoned Equity Offerings

Pages: 1823-1850  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02743.x  |  Cited by: 595


Recent studies have documented that firms conducting seasoned equity offerings have inordinately low stock returns during the five years after the offering, following a sharp run‐up in the year prior to the offering. This article documents that the operating performance of issuing firms shows substantial improvement prior to the offering, but then deteriorates. The multiples at the time of the offering, however, do not reflect an expectation of deteriorating performance. Issuing firms are disproportionately high‐growth firms, but issuers have much lower subsequent stock returns than nonissuers with the same growth rate.

International Portfolio Investment Flows

Pages: 1851-1880  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02744.x  |  Cited by: 752


This article develops a model of international equity portfolio investment flows based on differences in informational endowments between foreign and domestic investors. It is shown that when domestic investors possess a cumulative information advantage over foreign investors about their domestic market, investors tend to purchase foreign assets in periods when the return on foreign assets is high and to sell when the return is low. The implications of the model are tested using data on United States (U.S.) equity portfolio flows.

International Asset Pricing and Portfolio Diversification with Time‐Varying Risk

Pages: 1881-1912  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02745.x  |  Cited by: 346


We test the conditional capital asset pricing model (CAPM) for the world's eight largest equity markets using a parsimonious generalized autoregressive conditional heteroskedasticity (GARCH) parameterization. Our methodology can be applied simultaneously to many assets and, at the same time, accommodate general dynamics of the conditional moments. The evidence supports most of the pricing restrictions of the model, but some of the variation in risk‐adjusted excess returns remains predictable during periods of high interest rates. Our estimates indicate that, although severe market declines are contagious, the expected gains from international diversification for a U.S. investor average 2.11 percent per year and have not significantly declined over the last two decades.

Risk Premia and Variance Bounds

Pages: 1913-1949  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02746.x  |  Cited by: 21


If a pricing kernel assigns a premium to a risk variable that differs from the one assigned by the minimum‐variance admissible kernel, then the pricing kernel must exhibit more variability than the minimum‐variance kernel. Based on this intuition, we derive a variance bound that is more stringent than that of Hansen and Jagannathan (1991). When we apply our bound to the kernel of a representative consumer with power utility, we find that the consumption risk premium increases the severity of the “equity‐premium puzzle” of Mehra and Prescott (1985).

Stock Return Predictability and The Role of Monetary Policy

Pages: 1951-1972  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02747.x  |  Cited by: 297


This article examines whether shifts in the stance of monetary policy can account for the observed predictability in excess stock returns. Using long‐horizon regressions and short‐horizon vector autoregressions, the article concludes that monetary policy variables are significant predictors of future returns, although they cannot fully account for observed stock return predictability. I undertake variance decompositions to investigate how monetary policy affects the individual components of excess returns (risk‐free discount rates, risk premia, or cash flows).

A Nonparametric Model of Term Structure Dynamics and the Market Price of Interest Rate Risk

Pages: 1973-2002  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02748.x  |  Cited by: 270


This article presents a technique for nonparametrically estimating continuous‐time diffusion processes that are observed at discrete intervals. We illustrate the methodology by using daily three and six month Treasury Bill data, from January 1965 to July 1995, to estimate the drift and diffusion of the short rate, and the market price of interest rate risk. While the estimated diffusion is similar to that estimated by Chan, Karolyi, Longstaff, and Sanders (1992), there is evidence of substantial nonlinearity in the drift. This is close to zero for low and medium interest rates, but mean reversion increases sharply at higher interest rates.

Empirical Performance of Alternative Option Pricing Models

Pages: 2003-2049  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02749.x  |  Cited by: 1101

Gurdip Bakshi, Charles Cao, Zhiwu Chen

Substantial progress has been made in developing more realistic option pricing models. Empirically, however, it is not known whether and by how much each generalization improves option pricing and hedging. We fill this gap by first deriving an option model that allows volatility, interest rates and jumps to be stochastic. Using S&P 500 options, we examine several alternative models from three perspectives: (1) internal consistency of implied parameters/volatility with relevant time‐series data, (2) out‐of‐sample pricing, and (3) hedging. Overall, incorporating stochastic volatility and jumps is important for pricing and internal consistency. But for hedging, modeling stochastic volatility alone yields the best performance.

Special Repo Rates: An Empirical Analysis

Pages: 2051-2072  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02750.x  |  Cited by: 107


Duffie (1996) examines the theoretical impact of repo “specials” on the prices of Treasury securities and concludes that, all else the same, an issue on special will carry a higher price than an otherwise identical issue. We examine this hypothesis and find strong evidence in support of it. We also examine whether the liquidity premium associated with “on‐the‐run” issues is due to repo specialness and find evidence of a distinct effect. Finally, we investigate whether auction tightness and percentage awarded to dealers are related to subsequent specialness and find that both variables àre generally significant.

Speculation Duopoly with Agreement to Disagree: Can Overconfidence Survive the Market Test?

Pages: 2073-2090  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02751.x  |  Cited by: 314


In a duopoly model of informed speculation, we show that overconfidence may strictly dominate rationality since an overconfident trader may not only generate higher expected profit and utility than his rational opponent, but also higher than if he were also rational. This occurs because overconfidence acts like a commitment device in a standard Cournot duopoly. As a result, for some parameter values the Nash equilibrium of a two‐fund game is a Prisoner's Dilemma in which both funds hire overconfident managers. Thus, overconfidence can persist and survive in the long run.

Journal Influence on the Design of Finance Doctoral Education

Pages: 2091-2102  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02752.x  |  Cited by: 16


This article surveys the influence of research journals on finance doctoral education. Influence is measured by citations from syllabi of finance seminars. A sample of 101 distinct syllabi submitted by 33 finance doctoral programs yields a list of 1,031 articles cited by at least two schools. These 1,031 articles generate 3,273 citations referencing 17 finance, economics, and accounting journals, where multiple citations from a single school are counted as a single citation. The most notable findings are the wide variety of seminar content across finance doctoral programs and the dominance of five finance journals in providing this diverse content.

Trading Costs and Exchange Delisting: The Case of Firms that Voluntarily Move from the American Stock Exchange to the Nasdaq

Pages: 2103-2112  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02753.x  |  Cited by: 23


Cost of Transacting and Expected Returns in the Nasdaq Market

Pages: 2113-2127  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02754.x  |  Cited by: 77


This article empirically examines the liquidity premium predicted by the Amihud and Mendelson (1986) model using Nasdaq data over the 1973–1990 period. The results support the model and are much stronger than for the New York Stock Exchange (NYSE), as reported by Chen and Kan (1989) and Eleswarapu and Reinganum (1993). I conjecture that the stronger evidence on the Nasdaq is due to the dealers' inside spreads on the Nasdaq being a better proxy for the actual cost of transacting than the quoted spreads on the NYSE, since the Nasdaq dealers do not face competition from limit orders or floor traders.

Winner‐Loser Reversals in National Stock Market Indices: Can They be Explained?

Pages: 2129-2144  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02755.x  |  Cited by: 150


This article examines possible explanations for “winner‐loser reversals” in the national stock market indices of 16 countries. There is no evidence that loser countries are riskier than winner countries either in terms of standard deviations, covariance with the world market or other risk factors, or performance in adverse economic states of the world. While there is evidence that small markets are subject to larger reversals than large markets, perhaps due to some form of market imperfection, the reversals are not only a small‐market phenomenon. The apparent anomaly of winner‐loser reversals in national market indices therefore remains unresolved.

An Examination of Uncovered Interest Rate Parity in Segmented International Commodity Markets

Pages: 2145-2170  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02756.x  |  Cited by: 35


We examine the effect of segmented commodity markets on the relation between forward and future spot exchange rates in a dynamic economy. We calculate the slope coefficient in our theoretical economy from regressing exchange rate changes on forward premia. With reasonable parameter values, the slope coefficient is less than unity. However, even for extreme parameters the slope is not less than zero, as found in the data. A negative slope coefficient in a nominal version of the model requires the covariance between monetary shocks and relative output shocks to be significantly negative, in contrast to the covariance in the data.

A New Look at the Monday Effect

Pages: 2171-2186  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02757.x  |  Cited by: 93


It is well documented that expected stock returns vary with the day‐of‐the‐week (the Monday or weekend effect). In this article we show that the well‐known Monday effect occurs primarily in the last two weeks (fourth and fifth weeks) of the month. In addition, the mean Monday return of the first three weeks of the month is not significantly different from zero. This result holds for most of the subperiods during the 1962–1993 sampling period and for various stock return indexes. The monthly effect reported by Ariel (1987) and Lakonishok and Smidt (1988) cannot fully explain this phenomenon.

Endogenous Borrowing Constraints With Incomplete Markets

Pages: 2187-2209  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02758.x  |  Cited by: 55


This article develops ways to endogenize the borrowing constraints used in a class of computable incomplete markets models. We allow the constraints to depend on an investor's characteristics such as time preference, risk aversion, and income streams. The proposed constraint can be interpreted as a borrowing limit within which an investor has no incentive to default. Using a numerical algorithm, we find that for an array of structural parameters, the endogenous borrowing constraints can be much less stringent than the ad hoc borrowing constraints adopted by the existing studies.

Book Reviews

Pages: 2211-2214  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02759.x  |  Cited by: 0

Book reviewed in this article:


Pages: 2215-2216  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb02760.x  |  Cited by: 0

Volume Information

Pages: 2217-2223  |  Published: 12/1997  |  DOI: 10.1111/j.1540-6261.1997.tb00313.x  |  Cited by: 0