The Journal of Finance

The Role of Acquisitions in Foreign Direct Investment: Evidence from the U.S. Stock Market

Published: 07/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb03767.x

ROBERT S. HARRIS, DAVID RAVENSCRAFT

This paper examines foreign direct investment by studying shareholder wealth gains for 1273 U.S. firms acquired during the period 1970‐1987. Three findings stand out. First, cross‐border takeovers are more frequent in research and development intensive industries than are domestic acquisitions; furthermore, in three‐fourths of cross‐border transactions the buyer and seller are in related industries. These industry patterns suggest that costs and imperfections in product markets play an important role in foreign direct investment. Second, targets of foreign buyers have significantly higher wealth gains than do targets of U.S. firms. This cross‐border effect is comparable in size to the wealth effects of all‐cash and multiple bids, two effects receiving substantial attention in the finance literature, and is robust to inclusion of these two variables. Third, while the cross‐border effect on wealth gains is not well explained by industry and tax variables, it is positively related to the weakness of the U.S. dollar, indicating a significant role for exchange rate movements in foreign direct investment.

A Simple and Numerically Efficient Valuation Method for American Puts Using a Modified Geske‐Johnson Approach

Published: 06/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04412.x

DAVID S. BUNCH, HERB JOHNSON

Geske and Johnson (1984) develop an equation for the American put price and obtain accurate prices using a method requiring quadrivariate normal integrals evaluated over an interval containing four equally spaced exercise points. We show that a modification of their method which uses optimal placement of exercise points yields in most cases accurate values using nothing more than bivariate normals. In the more difficult (deep‐in‐the‐money) cases, trivariate normals suffice.

Investor Psychology and Security Market Under‐ and Overreactions

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00077

Kent Daniel, David Hirshleifer, Avanidhar Subrahmanyam

We propose a theory of securities market under‐ and overreactions based on two well‐known psychological biases: investor overconfidence about the precision of private information; and biased self‐attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long‐lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public‐event‐based return predictability. Biased self‐attribution adds positive short‐lag autocorrelations (“momentum”), short‐run earnings “drift,” but negative correlation between future returns and long‐term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy.

Can Costs of Consumption Adjustment Explain Asset Pricing Puzzles?

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00119

David A. Marshall, Nayan G. Parekh

We investigate Grossman and Laroque's (1990) conjecture that costs of adjusting consumption can account, in part, for the empirical failure of the consumption‐based capital asset pricing model (CCAPM). We incorporate small fixed costs of consumption adjustment into a CCAPM with heterogeneous agents. We find that undetectably small consumption adjustment costs can account for much of the discrepancy between the observed variance of nondurable aggregate consumption growth and the predictions of the CCAPM, and can partially reconcile nondurable consumption data with the observed equity premium. We conclude that the CCAPM's implications are nonrobust to extremely small adjustment costs.

Is the Short Rate Drift Actually Nonlinear?

Published: 03/31/2007   |   DOI: 10.1111/0022-1082.00208

David A. Chapman, Neil D. Pearson

Aït‐Sahalia (1996) and Stanton (1997) use nonparametric estimators applied to short‐term interest rate data to conclude that the drift function contains important nonlinearities. We study the finite‐sample properties of their estimators by applying them to simulated sample paths of a square‐root diffusion. Although the drift function is linear, both estimators suggest nonlinearities of the type and magnitude reported in Aït‐Sahalia (1996) and Stanton (1997). Combined with the results of a weighted least squares estimator, this evidence implies that nonlinearity of the short rate drift is not a robust stylized fact.

Is Information Risk a Determinant of Asset Returns?

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00493

David Easley, Soeren Hvidkjaer, Maureen O'Hara

We investigate the role of information‐based trading in affecting asset returns. We show in a rational expectation example how private information affects equilibrium asset returns. Using a market microstructure model, we derive a measure of the probability of information‐based trading, and we estimate this measure using data for individual NYSE‐listed stocks for 1983 to 1998. We then incorporate our estimates into a Fama and French (1992) asset‐pricing framework. Our main result is that information does affect asset prices. A difference of 10 percentage points in the probability of information‐based trading between two stocks leads to a difference in their expected returns of 2.5 percent per year.

AN ALTERNATE ESTIMATION OF THE “NEUTRALIZED MONEY STOCK”

Published: 03/01/1972   |   DOI: 10.1111/j.1540-6261.1972.tb00619.x

David A. Bowers, Lorraine E. Duro

Trading and Liquidity on the Tokyo Stock Exchange: A Bird's Eye View

Published: 07/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb00084.x

BRUCE N. LEHMANN, DAVID M. MODEST

The trading mechanism for equities on the Tokyo Stock Exchange (TSE) stands in sharp contrast to the primary mechanisms used to trade stocks in the United States. In the United States, exchange‐designated specialists have affirmative obligations to provide continuous liquidity to the market. Specialists offer simultaneous and tight quotes to both buy and sell and supply sufficient liquidity to limit the magnitude of price changes between consecutive transactions. In contradistinction, the TSE has no exchange‐designated liquidity suppliers. Instead, liquidity is provided through a public limit order book, and liquidity is organized through restrictions on maximum price changes between trades that serve to slow down trading. In this article, we examine the efficacy of the TSE's trading mechanisms at providing liquidity. Our analysis is based on a complete record of transactions and best‐bid and best‐offer quotes for most stocks in the First Section of the TSE over a period of 26 months. We study the size of the bid‐ask spread and its cross‐sectional and intertemporal stability; intertemporal patterns in returns, volatility, volume, trade size, and the frequency of trades; and market depth based on the response of quotes to trades and the frequency of trading halts and warning quotes.

Market Structure, Internal Capital Markets, and the Boundaries of the Firm

Published: 11/11/2008   |   DOI: 10.1111/j.1540-6261.2008.01395.x

RICHMOND D. MATHEWS, DAVID T. ROBINSON

We study how the creation of an internal capital market (ICM) can invite strategic responses in product markets that, in turn, shape firm boundaries. ICMs provide ex post resource flexibility, but come with ex ante commitment costs. Alternatively, stand‐alones possess commitment ability but lack flexibility. By creating flexibility, integration can sometimes deter a rival's entry, but commitment problems can also invite predatory capital raising. These forces drive different organizational equilibria depending on the integrator's relation to the product market. Hybrid organizational forms like strategic alliances can sometimes dominate integration by offering some of its benefits with fewer strategic costs.

A Theory of Corporate Scope and Financial Structure

Published: 06/01/1996   |   DOI: 10.1111/j.1540-6261.1996.tb02699.x

DAVID D. LI, SHAN LI

We simultaneously address three basic issues regarding the corporation: the optimal scope of operation, the optimal financial structure, and the relationship between these two. The starting point is that financial structure serves as a bonding device on the managers' self‐interest behavior. The effectiveness of this bonding depends on the distribution of the firm's future cash flow, which in turn depends on the firm's scope. Our theory also links the firm's investment decisions to its operation scope. As empirical implications, the theory reconciles the failure of the 1960s U.S. conglomerates with the success of the Japanese Keiretsu.

DISCUSSION

Published: 05/01/1967   |   DOI: 10.1111/j.1540-6261.1967.tb00017.x

John M. Culbertson, David Durand

Signaling and the Valuation of Unseasoned New Issues

Published: 03/01/1982   |   DOI: 10.1111/j.1540-6261.1982.tb01091.x

DAVID H. DOWNES, ROBERT HEINKEL

This paper is an empirical examination of the relation between firm value and two potential actions by entrepreneurs attempting to signal to investors information about otherwise unobservable firm features. The signals investigated are the proportion of equity ownership retained by entrepreneurs and the dividend policy of the firm; both signals are hypothesized to be positively related to firm value. Using a sample of unseasoned new equity issues, the empirical results are consistent with the entrepreneurial ownership retention hypothesis, but the dividend signaling hypothesis is rejected.

Discussion

Published: 05/01/1957   |   DOI: 10.1111/j.1540-6261.1957.tb04134.x

David Eastburn, Donald W. O'onnell

The Business Cycle, Investor Sentiment, and Costly External Finance

Published: 03/19/2013   |   DOI: 10.1111/jofi.12047

R. DAVID MCLEAN, MENGXIN ZHAO

The recent financial crisis shows that financial markets can impact the real economy. We investigate whether access to finance typically time‐varies and, if so, what are the real effects. Consistent with time‐varying external finance costs, both investment and employment are less sensitive to Tobin's q and more sensitive to cash flow during recessions and low investor sentiment periods. Share issuance plays a bigger role than debt issuance in causing these effects. Alternative tests that do not rely on q and cash flow sensitivities suggest that recessions and low sentiment increase external finance costs, thereby limiting investment and employment.

Mutual Fund Flows and Cross‐Fund Learning within Families

Published: 03/05/2015   |   DOI: 10.1111/jofi.12263

DAVID P. BROWN, YOUCHANG WU

We develop a model of performance evaluation and fund flows for mutual funds in a family. Family performance has two effects on a member fund's estimated skill and inflows: a positive common‐skill effect, and a negative correlated‐noise effect. The overall spillover can be either positive or negative, depending on the weight of common skill and correlation of noise in returns. Its absolute value increases with family size, and declines over time. The sensitivity of flows to a fund's own performance is affected accordingly. Empirical estimates of fund flow sensitivities show patterns consistent with rational cross‐fund learning within families.

The Performance of Hedge Funds: Risk, Return, and Incentives

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.00129

Carl Ackermann, Richard McEnally, David Ravenscraft

Hedge funds display several interesting characteristics that may influence performance, including: flexible investment strategies, strong managerial incentives, substantial managerial investment, sophisticated investors, and limited government oversight. Using a large sample of hedge fund data from 1988–1995, we find that hedge funds consistently outperform mutual funds, but not standard market indices. Hedge funds, however, are more volatile than both mutual funds and market indices. Incentive fees explain some of the higher performance, but not the increased total risk. The impact of six data‐conditioning biases is explored. We find evidence that positive and negative survival‐related biases offset each other.

A NOTE ON BANK EARNINGS AND SAVINGS DEPOSIT RATE POLICY

Published: 09/01/1959   |   DOI: 10.1111/j.1540-6261.1959.tb00126.x

David A. Alhadeff, Charlotte P. Alhadeff

THE PERFORMANCE OF CONGLOMERATE FIRMS: RECENT RISK AND RETURN EXPERIENCE

Published: 05/01/1973   |   DOI: 10.1111/j.1540-6261.1973.tb01781.x

Ronald W. Melicher, David F. Rush

The Risk Structure of Interest Rates and the Penn‐Central Crisis

Published: 06/01/1979   |   DOI: 10.1111/j.1540-6261.1979.tb02140.x

DAVID S. KIDWELL, CHARLES A. TRZCINKA

Margin Regulation and Stock Market Volatility

Published: 03/01/1990   |   DOI: 10.1111/j.1540-6261.1990.tb05078.x

DAVID A. HSIEH, MERTON H. MILLER

Using daily and monthly stock returns we find no convincing evidence that Federal Reserve margin requirements have served to dampen stock market volatility. The contrary conclusion, expressed in recent papers by Hardouvelis (1988a, b), is traced to flaws in his test design. We do detect the expected negative relation between margin requirements and the amount of margin credit outstanding. We also confirm the recent finding by Schwert (1988) that changes in margin requirements by the Fed have tended to follow rather than lead changes in market volatility.