Knowledge that Transforms

This paper tests the hypothesis that the football betting market is efficient. Our statistical tests are stronger than those in previous studies, and we examine both NFL and college data over a sample period of fifteen years. Our statistical tests detect two specific biases in the NFL market and an unspecified bias in the college market. We examine the year-to-year consistency and magnitudes of the biases and find that the NFL bias against home teams has been nearly eliminated, while the bias against underdogs has increased. Profitable exploitation of the biases depends upon transaction costs.

In this paper, we present a simple model which relates security returns to three components: an expected return, a bid-ask error, and white noise. The relative importance of the various components is empirically assessed, and the model's ability to explain the various time-series properties of individual security and portfolio returns is tested. Time-varying expected returns and bid-ask errors are found to explain substantial proportions (up to 24%) of the variance of security returns. We also reconcile the typically negative autocorrelation in security returns with the strong positive autocorrelation in portfolio returns.

We develop a measure of free cash flow using Tobin's q to distinguish between firms that have good investment opportunities and those that do not. In a sample of successful tender offers, bidder returns are significantly negatively related to cash flow for low q bidders but not for high q bidders; further, the relation between cash flow and bidder returns differs significantly for low q and high q bidders. This result holds for several cash flow measures suggested in the literature and also in multivariate regressions controlling for bidder and contest-specific characteristics.

This paper analyzes the SEC's proxy regulations and assesses their effects on corporate governance. The proxy rules began in 1935 as a minimal series of disclosure requirements and a prohibition against fraud. By 1956, they imposed extensive and wide-ranging disclosure requirements on anyone wishing to communicate about voting issues and required that all such communications be cleared in advance — in essence, censored — by the SEC. I present evidence that since that time, the rules have significantly increased the costs of communication and coordinated action among shareholders. They have thus deterred shareholder initiatives and inhibited the development of a private market for information about voting issues.

Many authors have identified the hazards of ignoring event-induced variance in event studies. To determine the practical extent of the problem, we simulate an event with stochastic effects. We find that when an event causes even minor increases in variance, the most commonly-used methods reject the null hypothesis of zero average abnormal return too frequently when it is true, although they are reasonably powerful when it is false. We demonstrate that a simple adjustment to the cross-sectional techniques produces appropriate rejection rates when the null is true and equally powerful tests when it is false.