The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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How Markets Process Information: News Releases and Volatility
Published: 09/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb04750.x
LOUIS H. EDERINGTON, JAE HA LEE
We examine the impact of scheduled macroeconomic news announcements on interest rate and foreign exchange futures markets. We find these announcements are responsible for most of the observed time‐of‐day and day‐of‐the‐week volatility patterns in these markets. While the bulk of the price adjustment to a major announcement occurs within the first minute, volatility remains substantially higher than normal for roughly fifteen minutes and slightly elevated for several hours. Nonetheless, these subsequent price adjustments are basically independent of the first minute's return. We identify those announcements with the greatest impact on these markets.
Is a Bond Rating Downgrade Bad News, Good News, or No News for Stockholders?
Published: 12/01/1993 | DOI: 10.1111/j.1540-6261.1993.tb05139.x
JEREMY C. GOH, LOUIS H. EDERINGTON
We examine the reaction of common stock returns to bond rating changes. While recent studies find a significant negative stock response to downgrades, we argue that this reaction should not be expected for all downgrades because: (1) some rating changes are anticipated by market participants and (2) downgrades because of an anticipated move to transfer wealth from bondholders to stockholders should be good news for stockholders. We find that downgrades associated with deteriorating financial prospects convey new negative information to the capital market, but that downgrades due to changes in firms' leverage do not.
Tax Shields, Sample‐Selection Bias, and the Information Content of Conversion‐Forcing Bond Calls
Published: 09/01/1991 | DOI: 10.1111/j.1540-6261.1991.tb04619.x
CYNTHIA J. CAMPBELL, LOUIS H. EDERINGTON, PRASHANT VANKUDRE
The information content of conversion‐forcing bond calls depends on the after‐tax cash flow to bondholders. If the dividend after conversion exceeds the after‐tax coupon but is less than the before‐tax coupon, the call reveals unanticipated decreases in dividends and/or earnings that reduce the tax shield from interest payments. In contrast, a call when the dividend is less than the after‐tax coupon reveals the timing of an anticipated shift from exceptional firm‐specific positive growth to the industry norm. Efforts to document properties of convertible calls are subject to sample‐selection bias because calls are disproportionately associated with positive pre‐call firm‐specific growth.
Taxes, Default Risk, and Yield Spreads
Published: 09/01/1985 | DOI: 10.1111/j.1540-6261.1985.tb02367.x
JESS B. YAWITZ, KEVIN J. MALONEY, LOUIS H. EDERINGTON
This paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities. The tax loss consequences of default are recognized. Traditionally, tax‐free (municipal) bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk. While our model supports the linearity assumption, it implies that the slope and intercept are both functions of both the break‐even tax rate and the default probability(ies). Clientele effects among both municipal and taxable bonds are demonstrated. Finally, the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds.