Knowledge that Transforms

In this paper, we test the hypothesis that the probability of the target's board of directors resisting a takeover bid can be explained by two factors, transaction-specific variables and distribution of voting rights. Our study is conducted in Canada where the distribution of ownership and especially voting rights is more concentrated than in the United States. We find first that some transaction-specific variables are relevant. The past performance of the target, the premium and prior negotiations are negatively associated with the probability of resistance by the managers. Competing bids cause it to increase, but their effect is felt through their interaction with the premium. Given our specific information on prior negotiations, we interpret their effect as unambiguous evidence of risk-reducing behavior on the part of the board. The distribution of voting rights is also relevant: blocks of shares held by the directors are associated with an increase in the probability of resistance. This may be seen as evidence of managerial entrenchment. We document the degree to which these findings differ from those in the United States and seek to explain these differences. Our proxies for board composition are not statistically significant.

The basis in stock index futures markets is analytically and empirically studied in this paper within a no-arbitrage/cost of carry framework. Explanatory power improved when the implications of the U.K. Stock Exchange settlement system were introduced into the modelling process and, until recently, with the maturity of the market. Evidence indicating the presence of non-synchronicities between the cash and futures markets was found. strong evidence for tax effects upon the basis was not found to be present in the data analysed. Statistically significant relationships between basis mispricing and volume and volatility were found.

We examine the relationship between U.S. thrift institution ownership structure and risk taking along with the impact of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) on this relationship. Our results, based on various indicators of risk, suggest that insider controlled thrifts were more likely to engage in risk taking prior to 1989 than were diversely held institutions. FIRREA seems to have curtailed much of this risk taking. We find inverse relationships between risk-taking and levels of institutional shareholdings. This along with other evidence suggests that the motive for risk-taking was not maximization of the ‘option’ value of shares as has been reported elsewhere. We also find evidence that entrenched managers may have generated significant private benefits.

This paper compares an international two-index model to an International Arbitrage Pricing Theory (IAPT) two-factor model to evaluate the performance of 37 U.S.-based international mutual funds over the 1985–1993 period. Results from the index model confirm prior research that international funds perform as well as the market proxy. In contrast, the IAPT model implies superior investment performance by the international funds. Moreover, the two models produce different relative performance rankings. Intertemporal comparisons of the models indicate that the multifactor IAPT model better reflects the international equity return-generating process.

We study the implied volatility behavior of call options around scheduled news announcement days. Implied volatilities increase significantly during the pre-event period and reach a maximum on the eve of the news announcement. After the news release, implied volatility drops sharply and gradually moves back to its long-run level. Only on the event date are movements in the price of the underlying significantly larger than expected. These results confirm the theoretical results of Merton (1973).

We postulate that the announcement effect of dividend reductions should be more severe for banks than for nondashfinancial firms because bank customers may avoid financially weak institutions and discontinue the relationship when negative information is released. To test our hypothesis we investigate a total of 81 dividend reductions by 56 commercial banks listed on the NYSE, AMEX and NASDAQ for the period 1974–1991. We find significant abnormal returns of −8.02% for the two-day event window and − 11.46% for a two-week period. These negative valuation effects are stronger than those reported in studies for dividend reductions of nondashfinancial firms and for other negative bank announcements. We also explore the relationship between abnormal returns and specific bank characteristics cross-sectionally and find a stronger reaction for larger banks.

This study re-examines the 1990 credit slowdown by investigating the loan pricing behavior of commercial banks. We find strong evidence that large, undercapitalized banks contributed to the credit slowdown by charging consumers a higher-than-average loan rate relative to better-capitalized institutions. This disparity in lending exists even after accounting for bank funding costs. Thus, we argue that there was a lending slowdown that occurred among large, undercapitalized banks. The reluctance to lend among undercapitalized banks is at least suggestive of behavior that is consistent with a credit crunch.

Brock et al. (1992) found technical trading rules to have predictive ability with regards to the Dow Jones Index. The current paper considers whether this result can be replicated on UK data. The paper also considers whether investors could earn excess returns from technical analysis in a costly trading environment. The paper concludes that although the technical trading rules examined do have predictive ability in terms of UK data, their use would not allow investors to make excess returns in the presence of costly trading.

We analyse both initial underpricing and post-listing returns for Australian IPOs. Our results are consistent with the view that unique institutional characteristics may have overwhelmed previous Australian tests of equilibrium models of IPO underpricing. The results also show that Australian IPOs significantly underperform market movements in the three-year period subsequent to listing. Further investigation of these anomalous post-listing returns lead us to reject various ‘speculative bubble’ explanations. Rather, the evidence suggests a curvilinear relationship between initial and subsequent returns, although the economic significance of the relationship is low.

This paper analyzes the riskiness of credit enhancements offered on securitized pools of commercial and industrial loans. It develops a technique for allocating capital to such credit enhancements, based on setting the expected value of the credit losses in excess of allocated capital equal to the expected value of losses beyond required capital on the original loan pool. The resulting capital allocations are compared with those derived from a more general, bank-wide capital decision-rule, as well as newly published agency proposals regarding capital for credit enhancements.