Knowledge that Transforms

The mean return for stocks is positive only for days immediately before and during the first half of calendar months, and indistinguishable from zero for days during the last half of the month. This ‘monthly effect’ is independent of other known calendar anomalies such as the January effect documented by others and appears to be caused by a shift in the mean of the distribution of returns from days in the first half of the month relative to days in the last half.

When testing portfolio efficiency, empiricists usually perform tests using subperiods and aggregate the results in some manner. Although the power of individual subperiod tests has been studied previously, little is known about the power of the aggregate test. Power is evaluated here through simulations using two different aggregation techniques. Aggregate power is substantially higher than that for a single subperiod. For example, in one scenario the aggregate power is 0.77 over a sixty-year period, but only 0.17 for each five-year subperiod. In addition, the level of power depends on the method of aggregation.

The essence of corporate control includes the hiring and firing of key managers. We examine changes in equity values when the Board of Directors appoints and dismisses top-level managers. The evidence suggests that management changes signal shifts in company policy and raise shareholder wealth, internal promotions confirm the soundness of investment by large companies in firm-specific human capital while external appointments do not, promotions occur more often than external appointments but decline in importance as firm size decreases, and dismissal is not a favored means to handle managerial underperformance but is associated with stock price increases when used.

We investigate the valuation consequences of voluntary proposals to sell part or all of a corporation's assets. For partial sell-offs, successful sellers and buyers reap statistically significant abnormal returns of 1.66% and 0.83%, respectively. Unsuccessful sellers realize gains at the bid announcement of 1.41% that are lost at the offer termination. In contrast, proposals to liquidate the firm are associated with significant average abnormal returns of 12.24%. We interpret these findings as evidence that asset sales are associated with the movement of resources to higher-valued uses rather than as evidence of market mispricing before the divestiture announcements.

Common stock with limited voting rights changes managerial incentives by allowing managers to separate ownership of equity from ownership of votes. This study compares managerial ownership before and after the creation of a class of limited voting common stock by 44 publicly traded firms between 1962 and 1984, and examines whether the event affects the wealth of current shareholders. There is no evidence that current shareholders are harmed by the creation of limited voting common stock.

This paper hypothesizes that the relation between stock returns and inflation is caused by the equilibrium process in the monetary sector. More importantly, these relations vary over time in a systematic manner depending on the influence of money demand and supply factors. Post-war evidence from the United States, Canada, the United Kingdom and Germany indicates that the negative stock return-inflation relations are caused by money demand and counter-cyclical money supply effects. On the other hand, pro-cyclical movements in money, inflation, and stock prices during the 1930's lead to relations which are either positive or insignificant.

Empirical tests of Euler equations relating security returns and consumption usually appear to reject the model. Using a common specification of aggregate preferences and instrumental variables, this paper examines some potential reasons for rejections. The evidence indicates that maintained stationarity assumptions of previous tests fail for post-war U.S. quarterly and monthly data. Shifts in model parameters are found across policy regimes (pre-1951 and post-1979) and across stages of the business cycle (recession versus non-recession). Controlling for some of these factors, less evidence is found against a simple consumption-based asset pricing model in non-recession periods.

This paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility. Statistical estimators for volatility process parameters are derived, and parameter estimates are calculated for several individual stocks and indices. The resulting estimated option values do not differ dramatically from Black-Scholes values in most cases, although there is some evidence that for longer-maturity index options, Black-Scholes overvalues out-of-the-money calls in relation to in-the-money calls.

In monthly U.S. data for 1959–1979 and 1979–1983, the state of the term structure of interest rates predicts excess stock returns, as well as excess returns on bills and bonds. This paper documents this fact and uses it to examine some simple asset pricing models. In 1959–1979, the data strongly reject a single-latent-variable specification of predictable excess returns. There is considerable evidence that conditional variances of excess returns change through time, but the relationship between conditional mean and conditional variance is reliably positive only at the short end of the term structure.

This paper models effects of short-sale constraints on the speed of adjustment (to private information) of security prices. Constraints eliminate some informative trades, but do not bias prices upward. Prohibiting traders from shorting reduces the adjustment speed of prices to private information, especially to bad news. Non-prohibitive costs can have the reverse effect, but this is unlikely. Implications are developed about return distributions on information announcement dates. Periods of inactive trade are shown to impart a downward bias to measured returns. An unexpected increase in the short-interest of a stock is shown to be bad news.