The Journal of Finance

The Information Value of Bond Ratings

Published: 12/2000,  Volume: 55,  Issue: 6  |  DOI: 10.1111/0022-1082.00311  |  Cited by: 297

Doron Kliger, Oded Sarig

We test whether bond ratings contain pricing‐relevant information by examining security price reactions to Moody's refinement of its rating system, which was not accompanied by any fundamental change in issuers' risks, was not preceded by any announcement, and was carried simultaneously for all bonds. We find that rating information does not affect firm value, but that debt value increases (decreases) and equity value falls (rises) when Moody's announces better‐ (worse‐) than‐expected ratings. We also find that when Moody's announces better‐ (worse‐) than‐expected ratings, the volatilities implied by prices of options on the fine‐rated issuers' shares decline (rise).

Some Empirical Estimates of the Risk Structure of Interest Rates

Published: 12/1989,  Volume: 44,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1989.tb02657.x  |  Cited by: 141

ODED SARIG, ARTHUR WARGA

This paper investigates the risk structure of interest rates using pure discount bonds. The most striking feature of our estimates of default‐risk premia is the resemblance of their time profile to the theoretical time profile obtained by Merton (1974).

The Puzzle of Financial Leverage Clienteles

Published: 12/1985,  Volume: 40,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1985.tb02394.x  |  Cited by: 1

ODED SARIG, JAMES SCOTT

Empirically, it appears that common stock of publicly traded corporations with high‐debt ratios tends to be held by investors with relatively low marginal taxes while the stock in companies with little debt is held by investors in high‐tax brackets. A number of authors have argued that in an equilibrium similar to the one described by Miller [8], these clienteles should exist. We argue that standard portfolio theory does not imply financial leverage clienteles for publicly traded firms. We explain the empirical relationship between investor tax rates and leverage ratios by the existence of dividend clienteles and a positive relationship between dividend yield and leverage ratios.

Dividend Surprises Inferred from Option and Stock Prices

Published: 9/1992,  Volume: 47,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1992.tb04675.x  |  Cited by: 7

SASSON BAE‐YOSEF, ODED H. SARIG

This paper introduces a new method to measure the unexpected component of dividend announcements. While measures used previously were based on various arbitrary models of dividend expectations, our suggested method compares the reaction of stock and option prices to dividend announcements. Our measure is compared to commonly used model‐based measures, to a Box‐Jenkins time‐series‐based measure, and to a Value‐Line Investor Survey‐based measure of dividend surprises. The new measure is more highly correlated with the market's reaction to the announcements than are alternative measures of dividend surprises. The new measure is also shown to be insensitive to the extent to which the options used to identify unexpected dividend announcements are in‐ or out‐of‐the‐money.

Real Interest Rates and Inflation: An Ex‐Ante Empirical Analysis

Published: 3/1996,  Volume: 51,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1996.tb05207.x  |  Cited by: 49

SHMUEL KANDEL, AHARON R. OFER, ODED SARIG

We develop a method of measuring ex‐ante real interest rates using prices of index and nominal bonds. Employing this method and newly available data, we directly test the Fisher hypothesis that the real rate of interest is independent of inflation expectations. We find a negative correlation between ex‐ante real interest rates and expected inflation. This contradicts the Fisher hypothesis but is consistent with the theories of Mundell and Tobin, Darby and Feldstein, and Stulz. We also find that nominal interest rates include an inflation risk premium that is positively related to a proxy for inflation uncertainty.

The Irrelevance of Capital Structure for the Impact of Inflation on Investment

Published: 6/1983,  Volume: 38,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1983.tb02501.x  |  Cited by: 7

SHALOM HOCHMAN, ODED PALMON

Studies concerning the effect of inflation on firms' investment decisions suggest that the form of financing is relevant in assessing the effect of inflation on investment. This paper demonstrates that when the equilibrium relationship between market rates of return on bonds and stocks is considered, the effect of inflation on investment is independent of the capital structure. The paper also shows that when the ‘Fisher effect’ is assumed to hold, the cut‐off rate of return on investment declines with anticipated inflation independently of the financing. However, if the real interest rate rises with inflation, inflation may increase the cut‐off rate.

The Impact of Inflation on the Aggregate Debt‐Asset Ratio

Published: 9/1985,  Volume: 40,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1985.tb02366.x  |  Cited by: 12

SHALOM HOCHMAN, ODED PALMON

This paper demonstrates that, contrary to the results of previous studies, the impact of inflation on the aggregate debt‐asset ratio cannot be determined theoretically. However, it is shown that inflation is likely to increase this ratio when personal income tax schedules are indexed to the price level and/or when leverage‐related costs are relatively high and the personal tax rate on income from holding common stocks is relatively low.

A Tax‐Induced Clientele for Index‐Linked Corporate Bonds

Published: 12/1988,  Volume: 43,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1988.tb03968.x  |  Cited by: 3

SHALOM HOCHMAN, ODED PALMON

This paper analyzes the circumstances under which tax considerations favor or disfavor the use of index‐linked corporate bonds. Using a model similar to Miller's, investors' choices of assets depend on their tax preferences for interest income versus capital gains and their preferences for the timing of returns. It is concluded that the absence of index‐linked bonds in the U.S. cannot be attributed solely to tax reasons. However, following the 1986 Tax Reform Act, the tax code is expected to disfavor the use of index‐linked bonds.

Tax‐Induced Intra‐Year Patterns in Bonds Yields

Published: 3/1993,  Volume: 48,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1993.tb04713.x  |  Cited by: 3

SHALOM J. HOCHMAN, ODED PALMON, ALEX P. TANG

The ratio of the yields on short‐term tax‐exempt and taxable bonds exhibits a sawtooth pattern that is consistent with the impacts of tax deferments from dates on which interest payments are received to dates on which the resulting tax payments are paid. The effect of the tax deferment at turns of calendar years does not differ appreciably from the effect at the turn of any other tax quarter. Investors with tax payment schedules that differ from that of the investor that is indifferent between investing in taxable and tax‐exempt bonds may benefit from tax‐related timing strategies for investing in these bonds. Issuers may benefit from tax‐related timing strategies for scheduling interest payments.