The Journal of Finance

PRICE DISTORTIONS INDUCED BY THE REVENUE STRUCTURE OF FEDERALLY‐SPONSORED MORTGAGE LOAN PROGRAMS*

Published: 09/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03320.x

John J. McConnell

MORTGAGE COMPANIES: A FINANCIAL MODEL AND EVALUATION OF THEIR RESIDENTIAL REAL ESTATE LENDING ACTIVITIES*

Published: 09/01/1975   |   DOI: 10.1111/j.1540-6261.1975.tb01040.x

John J. McConnell

DISCUSSION

Published: 05/01/1980   |   DOI: 10.1111/j.1540-6261.1980.tb02177.x

John J. McConnell

Rational Prepayments and the Valuation of Collateralized Mortgage Obligations

Published: 07/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb00082.x

JOHN J. MCCONNELL, MANOJ SINGH

This article presents a procedure for evaluating collateralized mortgage obligation (CMO) tranches. The solution procedure is in the spirit of a dynamic programming problem in which an individual mortgagor's decision to prepay is the feedback control variable―the mortgagor seeks to minimize the value of the mortgage subject to refinancing costs. We employ a two‐step procedure to solve this dynamic programming problem. The first step uses an implicit finite difference backward solution procedure to determine the “optimal” prepayment boundary for a class of mortgagors, each of whom confronts the same proportional refinancing cost. This step is repeated for several different classes of mortgagors that differ in the level of refinancing costs that they confront. The outcome of this first step is a series of prepayment boundaries―one set of boundaries for each level of refinancing costs (i.e., one set of boundaries for each refinancing cost category of mortgagors). In the second step, the prepayment boundaries determined in the first step are used in conjunction with Monte Carlo simulation to value the CMO tranches. The essence of the second step is that when the simulated interest rate hits the boundary for a particular class, it triggers a prepayment scenario for that class of mortgagors. We conduct extensive sensitivity analysis to determine the robustness of this approach (and our solution procedure) to alternative single‐factor models of the term structure of interest rates and to alternative specifications of the distribution of refinancing cost levels confronted by mortgagors. The sensitivity analysis indicates that CMO tranche valuation is not particularly sensitive to alternative models of the term structure so long as the models are consistent with the current yield curve, but, even when alternative specifications of the refinancing cost categories generate nearly identical values for the collateral underlying the CMO (i.e., the generic mortgage‐backed securities), the resulting tranche values can differ widely between the two specifications. The results point out the importance of accurate estimation of the distribution of refinancing costs when the rational valuation model is used for the analysis of CMO tranches.

THE WEIGHTED AVERAGE COST OF CAPITAL: SOME QUESTIONS ON ITS DEFINITION, INTERPRETATION, AND USE: COMMENT*

Published: 06/01/1975   |   DOI: 10.1111/j.1540-6261.1975.tb01860.x

John J. McConnell, Carl M. Sandberg

A Comparison of Alternative Models for Pricing GNMA Mortgage‐Backed Securities

Published: 05/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb00463.x

KENNETH B. DUNN, JOHN J. McCONNELL

The Puzzle in Post‐Listing Common Stock Returns

Published: 03/01/1987   |   DOI: 10.1111/j.1540-6261.1987.tb02554.x

JOHN J. McCONNELL, GARY C. SANGER

Prior studies indicate that common stocks tend to earn negative returns immediately following listing on the NYSE. The authors document the phenomenon in detail and investigate a number of possible explanations. No full explanation is discovered, although several are ruled out.

Corporate Performance, Corporate Takeovers, and Management Turnover

Published: 06/01/1991   |   DOI: 10.1111/j.1540-6261.1991.tb02679.x

KENNETH J. MARTIN, JOHN J. MCCONNELL

This paper examines the hypothesis that an important role of corporate takeovers is to discipline the top managers of poorly performing target firms. We document that the turnover rate for the top manager of target firms in tender offer‐takeovers significantly increases following completion of the takeover and that prior to the takeover these firms were significantly under‐performing other firms in their industry as well as other target firms which had no post‐takeover change in the top executive. We interpret the results to indicate that the takeover market plays an important role in controlling the nonvalue maximizing behavior of top corporate managers.

CORPORATE MERGERS AND THE CO‐INSURANCE OF CORPORATE DEBT

Published: 05/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb03275.x

E. Han Kim, John J. McConnell

A Model for the Determination of “Fair” Premiums on Lease Cancellation Insurance Policies

Published: 12/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb02393.x

JAMES S. SCHALLHEIM, JOHN J. McCONNELL

Lease cancellation insurance protects the lessor against early termination of a cancellable operating lease. This paper presents a contingent claims model for determining the “fair” premium for this type of insurance policy. Comparative statics are considered, and some numerical examples are presented to illustrate the model. Among other things, the insurance premium is sensitive to the expected rate of economic depreciation of the leased asset and to the leased asset's systematic and nonsystematic risk.

Corporate Combinations and Common Stock Returns: The Case of Joint Ventures

Published: 06/01/1985   |   DOI: 10.1111/j.1540-6261.1985.tb04970.x

JOHN J. McCONNELL, TIMOTHY J. NANTELL

The gain to stockholders from mergers is well documented. However, there is little evidence as to whether the source of the gain is due to synergy or management displacement. Merger is just one of an almost limitless variety of ways in which firms combine resources to accomplish some objective. A joint venture is another. In addition to being of interest as an independent phenomenon, because the original managements of the parent firms remain intact under a joint venture, investigation of wealth gains from joint ventures provides an opportunity to isolate the management displacement hypothesis from the synergy hypothesis as the source of gains in corporate combinations. Our results are 1) there are significant wealth gains from joint ventures, 2) the smaller partner earns a larger excess rate of return while the dollar gains are more equally divided, and 3) the gains, scaled by resources committed, yield “premiums” similar to those in mergers. We are inclined to interpret our results as supportive of the synergy hypothesis as the source of gain from corporate combinations.

The Effect of Market Segmentation and Illiquidity on Asset Prices: Evidence from Exchange Listings

Published: 06/01/1994   |   DOI: 10.1111/j.1540-6261.1994.tb05154.x

GREGORY B. KADLEC, JOHN J. MCCONNELL

This article documents the effect on share value of listing on the New York Stock Exchange and reports the results of a joint test of Merton's (1987) investor recognition factor and Amihud and Mendelson's (1986) liquidity factor as explanations of the change in share value. We find that during the 1980s stocks earned abnormal returns of 5 percent in response to the listing announcement and that listing is associated with an increase in the number of shareholders and a reduction in bid‐ask spreads. Cross‐sectional regressions provide support for both investor recognition and liquidity as sources of value from exchange listing.

Equity Carve‐Outs and Managerial Discretion

Published: 12/17/2002   |   DOI: 10.1111/0022-1082.65022

Jeffrey W. Allen, John J. McConnell

This study proposes a managerial discretion hypothesis of equity carve‐outs in which managers value control over assets and are reluctant to carve out subsidiaries. Thus, managers undertake carve‐outs only when the firm is capital constrained. Consistent with this hypothesis, firms that carve out subsidiaries exhibit poor operating performance and high leverage prior to carve‐outs. Also consistent with this hypothesis, in carve‐outs wherein funds raised are used to pay down debt, the average excess stock return of + 6.63 percent is significantly greater than the average excess stock return of −0.01 percent for carve‐outs wherein funds are retained for investment purposes.

Valuation of GNMA Mortgage‐Backed Securities

Published: 06/01/1981   |   DOI: 10.1111/j.1540-6261.1981.tb00647.x

KENNETH B. DUNN, JOHN J. McCONNELL

GNMA mortgage‐backed pass‐through securities are supported by pools of amortizing, callable loans. Additionally, mortgagors often prepay their loans when the market interest rate is above the coupon rate of their loans. This paper develops a model for pricing GNMA securities and uses it to examine the impact of the amortization, call, and prepayment features on the prices, risks and expected returns of GNMA's. The amortization and prepayment features each have a positive effect on price, while the call feature has a negative impact. All three features reduce a GNMA security's interest rate risk and, consequently, its expected return.

LYON Taming

Published: 07/01/1986   |   DOI: 10.1111/j.1540-6261.1986.tb04516.x

JOHN J. McCONNELL, EDUARDO S. SCHWARTZ

A Liquid Yield Option Note (LYON) is a zero coupon, convertible, callable, puttable bond. This paper presents a simple contingent claims pricing model for valuing LYONS and uses the model to analyze a specific LYON issue.

The Cadbury Committee, Corporate Performance, and Top Management Turnover

Published: 12/17/2002   |   DOI: 10.1111/1540-6261.00428

Jay Dahya, John J. McConnell, Nickolaos G. Travlos

In 1992, the Cadbury Committee issued the Code of Best Practice which recommends that boards of U.K. corporations include at least three outside directors and that the positions of chairman and CEO be held by different individuals. The underlying presumption was that these recommendations would lead to improved board oversight. We empirically analyze the relationship between CEO turnover and corporate performance. CEO turnover increased following issuance of the Code; the negative relationship between CEO turnover and performance became stronger following the Code's issuance; and the increase in sensitivity of turnover to performance was concentrated among firms that adopted the Code.

Political Connections and Corporate Bailouts

Published: 01/11/2007   |   DOI: 10.1111/j.1540-6261.2006.01000.x

MARA FACCIO, RONALD W. MASULIS, JOHN J. McCONNELL

We analyze the likelihood of government bailouts of 450 politically connected firms from 35 countries during 1997–2002. Politically connected firms are significantly more likely to be bailed out than similar nonconnected firms. Additionally, politically connected firms are disproportionately more likely to be bailed out when the International Monetary Fund or the World Bank provides financial assistance to the firm's home government. Further, among bailed‐out firms, those that are politically connected exhibit significantly worse financial performance than their nonconnected peers at the time of and following the bailout. This evidence suggests that, at least in some countries, political connections influence the allocation of capital through the mechanism of financial assistance when connected companies confront economic distress.

The Turn‐of‐the‐Year in Canada

Published: 03/01/1984   |   DOI: 10.1111/j.1540-6261.1984.tb03867.x

ANGEL BERGES, JOHN J. McCONNELL, GARY G. SCHLARBAUM

A number of investigators have reported that January stock returns in the U.S. exceed returns for other months of the year. This paper documents a similar finding for Canadian stocks over the period 1951–1980. However, Canada did not introduce a capital gains tax until 1973 and the paper reports that January returns in Canada exceed returns for other months of the year before and after this date. Thus, these data do not support the tax‐loss‐selling‐pressure hypothesis as the entire explanation for the turn‐of‐the‐year effect in stock returns, nor, by implication, do they support the tax‐loss‐selling‐pressure hypothesis as the complete explanation for the “small firm” effect in U.S. stocks returns.

Seasonalities in NYSE Bid‐Ask Spreads and Stock Returns in January

Published: 12/01/1992   |   DOI: 10.1111/j.1540-6261.1992.tb04694.x

ROBERT A. CLARK, JOHN J. McCONNELL, MANOJ SINGH

Using end‐of‐month bid‐ask spreads for 540 NYSE stocks over the period 1982–1987, we document a seasonal pattern in which both relative and absolute spreads decline from the end of December to the end of the following January. Cross‐sectional regressions do not, however, provide evidence of a significant correlation between changes in spreads at the turn of the year and January stock returns. Either there is no cause and effect relation between the coincidental seasonals in bid‐ask spreads and January returns for NYSE stocks or the data are too “noisy” to reveal any relation.

CAPITAL STRUCTURE REARRANGEMENTS AND ME‐FIRST RULES IN AN EFFICIENT CAPITAL MARKET

Published: 06/01/1977   |   DOI: 10.1111/j.1540-6261.1977.tb01989.x

E. Han Kim, John J. McConnell, Paul R. Greenwood