Pages: i-vii | Published: 12/1999 | DOI: 10.1111/j.1540-6261.1999.tb00623.x | Cited by: 0
Pages: viii-xxxix | Published: 12/1999 | DOI: 10.1111/j.1540-6261.1999.tb00624.x | Cited by: 0
Pages: 1939-1967 | Published: 12/1999 | DOI: 10.1111/0022-1082.00178 | Cited by: 99
Eugene F. Fama, Kenneth R. French
We estimate the internal rates of return earned by nonfinancial firms on (i) the initial market values of their securities and (ii) the cost of their investments. The return on value is an estimate of the overall corporate cost of capital. The estimate of the real cost of capital for 1950â96 is 5.95 percent. The real return on cost is larger, 7.38 percent, so on average corporate investment seems to be profitable. A byâproduct of calculating these returns is information about the history of corporate earnings, investment, and financing decisions that is perhaps more interesting than the returns.
Pages: 1969-1997 | Published: 12/1999 | DOI: 10.1111/0022-1082.00179 | Cited by: 939
Cashârich firms are more likely than other firms to attempt acquisitions. Stock return evidence shows that acquisitions by cashârich firms are value decreasing. Cashârich bidders destroy seven cents in value for every excess dollar of cash reserves held. Cashârich firms are more likely to make diversifying acquisitions and their targets are less likely to attract other bidders. Consistent with the stock return evidence, mergers in which the bidder is cashârich are followed by abnormal declines in operating performance. Overall, the evidence supports the agency costs of free cash flow explanation for acquisitions by cashârich firms.
Pages: 1999-2043 | Published: 12/1999 | DOI: 10.1111/0022-1082.00180 | Cited by: 375
Rajesh K. Aggarwal, Andrew A. Samwick
We examine compensation contracts for managers in imperfectly competitive product markets. We show that strategic interactions among firms can explain the lack of relative performanceâbased incentives in which compensation decreases with rival firm performance. The need to soften product market competition generates an optimal compensation contract that places a positive weight on both own and rival performance. Firms in more competitive industries place greater weight on rival firm performance relative to own firm performance. We find empirical evidence of a positive sensitivity of compensation to rival firm performance that is increasing in the degree of competition in the industry.
Pages: 2045-2073 | Published: 12/1999 | DOI: 10.1111/0022-1082.00181 | Cited by: 1435
Joshua D. Coval, Tobias J. Moskowitz
The strong bias in favor of domestic securities is a wellâdocumented characteristic of international investment portfolios, yet we show that the preference for investing close to home also applies to portfolios of domestic stocks. Specifically, U.S. investment managers exhibit a strong preference for locally headquartered firms, particularly small, highly levered firms that produce nontraded goods. These results suggest that asymmetric information between local and nonlocal investors may drive the preference for geographically proximate investments, and the relation between investment proximity and firm size and leverage may shed light on several wellâdocumented asset pricing anomalies.
Pages: 2075-2107 | Published: 12/1999 | DOI: 10.1111/0022-1082.00182 | Cited by: 208
Vihang Errunza, Ked Hogan, Mao-Wei Hung
We examine whether portfolios of domestically traded securities can mimic foreign indices so that investment in assets that trade only abroad is not necessary to exhaust the gains from international diversification. We use monthly data from 1976 to 1993 for seven developed and nine emerging markets. Return correlations, meanâvariance spanning, and Sharpe ratio test results provide strong evidence that gains beyond those attainable through homeâmade diversification have become statistically and economically insignificant. Finally, we show that the incremental gains from international diversification beyond homeâmade diversification portfolios have diminished over time in a way consistent with changes in investment barriers.
Pages: 2109-2142 | Published: 12/1999 | DOI: 10.1111/0022-1082.00183 | Cited by: 103
This paper presents an empirical microstructure model of bid and ask quotes that features discreteness, random costs of market making, and ARCH volatility effects. Applied to intraday quotes at 15âminute intervals for Alcoa (a randomly chosen Dow stock), the results show that quote exposure costs contain stochastic components that are persistent and large relative to the deterministic intraday âUâ components. Analysis of the filtered estimates of the system suggest that bid and ask costs contain common components, and that these costs reflect risk as proxied by ARCH variance forecasts.
Pages: 2143-2184 | Published: 12/1999 | DOI: 10.1111/0022-1082.00184 | Cited by: 2101
Harrison Hong, Jeremy C. Stein
We model a market populated by two groups of boundedly rational agents: ânewswatchersâ and âmomentum traders.â Each newswatcher observes some private information, but fails to extract other newswatchers' information from prices. If information diffuses gradually across the population, prices underreact in the short run. The underreaction means that the momentum traders can profit by trendâchasing. However, if they can only implement simple (i.e., univariate) strategies, their attempts at arbitrage must inevitably lead to overreaction at long horizons. In addition to providing a unified account of underâ and overreactions, the model generates several other distinctive implications.
Pages: 2185-2214 | Published: 12/1999 | DOI: 10.1111/0022-1082.00185 | Cited by: 73
Charles Kahn, George Pennacchi, Ben Sopranzetti
Like security prices, retail deposit interest rates cluster around integers and âevenâ fractions. However, explanations for security price clustering are incompatible with deposit rate clustering. A theory based on the limited recall of retail depositors is proposed. It predicts that banks tend to set rates at integers and that rates are âstickyâ at these levels. The propensity for integer rates increases with the level of wholesale interest rates and deposit market concentration. When banks set noninteger rates, rates are more likely to be just above, rather than just below, integers. The paper finds substantial empirical support for the theory's implications.
Pages: 2215-2239 | Published: 12/1999 | DOI: 10.1111/0022-1082.00186 | Cited by: 269
Karl Lins, Henri Servaes
The valuation effect of diversification is examined for large samples of firms in Germany, Japan, and the United Kingdom for 1992 and 1994. We find no significant diversification discount in Germany, but a significant diversification discount of 10 percent in Japan and 15 percent in the U.K. Concentrated ownership in the hands of insiders enhances the valuation effect of diversification in Germany, but not in Japan or the U.K. For Japan, only firms with strong links to an industrial group have a diversification discount. These findings suggest that international differences in corporate governance affect the impact of diversification on shareholder wealth.
Pages: 2241-2262 | Published: 12/1999 | DOI: 10.1111/0022-1082.00187 | Cited by: 247
John R. Graham, Clifford W. Smith
For corporations facing taxâfunction convexity, hedging lowers expected tax liabilities, thereby providing an incentive to hedge. We use simulation methods to investigate convexity induced by taxâcode provisions. On average, the tax function is convex (although in approximately 25 percent of cases it is concave). Carrybacks and carryforwards increase the range of income with incentives to hedge; other taxâcode provisions have minor impacts. Among firms facing convex tax functions, average tax savings from a five percent reduction in the volatility of taxable income are about 5.4 percent of expected tax liabilities; in extreme cases, these savings exceed 40 percent.
Pages: 2263-2295 | Published: 12/1999 | DOI: 10.1111/0022-1082.00188 | Cited by: 845
John R. Nofsinger, Richard W. Sias
We document strong positive correlation between changes in institutional ownership and returns measured over the same period. The result suggests that either institutional investors positiveâfeedback trade more than individual investors or institutional herding impacts prices more than herding by individual investors. We find evidence that both factors play a role in explaining the relation. We find no evidence, however, of return meanâreversion in the year following large changes in institutional ownershipâstocks institutional investors purchase subsequently outperform those they sell. Moreover, institutional herding is positively correlated with lag returns and appears to be related to stock return momentum.
Pages: 2297-2316 | Published: 12/1999 | DOI: 10.1111/0022-1082.00189 | Cited by: 167
Robert T. Daigler, Marilyn K. Wiley
We examine the volatilityâvolume relation in futures markets using volume data categorized by type of trader. We find that the positive volatilityâvolume relation is driven by the general public, a group of traders who are distant from the trading floor and therefore without precise information on order flow. Clearing members and floor traders who observe order flow often decrease volatility. Our findings are consistent with Shalen's (1993) hypothesis that uninformed traders who cannot differentiate liquidity demand from fundamental value change increase volatility.
Pages: 2317-2337 | Published: 12/1999 | DOI: 10.1111/0022-1082.00190 | Cited by: 12
Kenneth B. Dunn, Chester S. Spatt
We analyze the impact of a contract's length, callability, amortization, and original discount by arbitrage methods. Among instruments that are callable without penalty, longer instruments command a higher interest rate because the borrower possesses the option of repaying relatively more slowly. However, the rate on longer selfâamortizing loans cannot be substantially larger than for shorter ones because the payments decrease with contract length. Bounds on the tradeâoff between points and rate for callable debt are characterized using the tradeâoff for noncallable debt and the property that the value of the prepayment option increases with the loan's interest rate.
Pages: 2339-2359 | Published: 12/1999 | DOI: 10.1111/0022-1082.00191 | Cited by: 93
Clifford A. Ball, Walter N. Torous
This paper estimates a stochastic volatility model of shortâterm riskless interest rate dynamics. Estimated interest rate dynamics are broadly similar across a number of countries and reliable evidence of stochastic volatility is found throughout. In contrast to stock returns, interest rate volatility exhibits faster meanâreverting behavior and innovations in interest rate volatility are negligibly correlated with innovations in interest rates. The less persistent behavior of interest rate volatility reflects the fact that interest rate dynamics are impacted by transient economic shocks such as central bank announcements and other macroeconomic news.
Pages: 2361-2379 | Published: 12/1999 | DOI: 10.1111/0022-1082.00192 | Cited by: 323
Tyler Shumway, Vincent A. Warther
We investigate the bias in CRSP's Nasdaq data due to missing returns for delisted stocks. We find that the missing returns are large and negative on average, and that delisted stocks experience a substantial decrease in liquidity. We estimate that using a corrected return of â55 percent for missing performanceârelated delisting returns corrects the bias. We revisit previous work which finds a size effect among Nasdaq stocks. After correcting for the delisting bias, there is no evidence that there ever was a size effect on Nasdaq. Our results are inconsistent with most riskâbased explanations of the size effect.
Pages: 2381-2389 | Published: 12/1999 | DOI: 10.1111/1540-6261.00193 | Cited by: 0
Pages: 2381-2389 | Published: 12/1999 | DOI: 10.1111/1540-6261.t01-1-00193 | Cited by: 0
Pages: 2391-2392 | Published: 12/1999 | DOI: 10.1111/0022-1082.00194 | Cited by: 0
Pages: 2393-2395 | Published: 12/1999 | DOI: 10.1111/1540-6261.00196 | Cited by: 0
Pages: 2397-2398 | Published: 12/1999 | DOI: 10.1111/1540-6261.00197 | Cited by: 0
Pages: 2399-2406 | Published: 12/1999 | DOI: 10.1111/0022-1082.00195 | Cited by: 0