Knowledge that Transforms

In this paper we examine the ex-dividend day returns of several taxable and non-taxable distributions. The ex-dividend day returns for the taxable common stocks are consistent with the hypothesis that dividends are taxed more heavily than capital gains. However, the ex-dividend day returns of preferred stocks suggest that preferred dividends are taxed at a lower rate than capital gains; non-taxable stock dividends and splits are priced on ex-dividend days as if they are fully taxable; and non-taxable cash distributions are priced as if investors receive a tax rebate with them. We also find that each of these distributions exhibits abnormal return behavior for several days surrounding the ex-dividend day. We investigate several possible explanations for this anomaly, but none is capable of explaining the phenomenon.

A firm's liquidation can impose costs on its customers, workers, and suppliers. An agency relationship between these individuals and the firm exists in that the liquidation decision controlled by the firm (as the agent) affects other individuals (the customers, workers, and suppliers as principals). The analysis in this paper suggests that capital structure can control the incentive/conflict problem of this relationship by serving as a pre-positioning or bonding mechanism. Appropriate selection of capital structure assures that incentives are aligned so that the firm implements the ex-ante value-maximizing liquidation policy.

This paper examines one of the few cases of seemingly redundant securities: sets of three government bonds with the same maturity date. Within the bounds on relative bond prices established by tax-exempt investors in a market with proportional transaction costs, the taxation of capital gains on the basis of realization has a significant impact on relative prices. The empirical evidence supports the tax option effect discussed by Constantinides and Ingersoll, but does not generally support the segmented tax-clientele equilibrium discussed by Schaefer.

This paper presents a regression approach to measuring the information in forward interest rates about time varying premiums and future spot interest rates. Like earlier work, the regressions identify variation in the expected premiums on longer-maturity Treasury bills. The more novel evidence concerns the forecasts of future spot rates in forward rates. The regressions provide evidence that the one-month forward rate has power to predict the spot rate one month ahead. During periods preceding 1974, forward rates have reliable forecast power for one-month spot rates up to five months in the future.

Arbitrage pricing theorems are derived for options on stocks with jumps as a well as local movements. The resulting valuation formulas depend on observable variables only. Closed-form valuation expressions are obtained in the case of large positive and negative jumps. These results translate into a simple algebra for characterizing the risk of arbitrage and investment portfolios. A continuous-time formulation of the infinite variance hypothesis leads to isomorphic pricing expressions.

Evidence of weekend effects on the distribution of security returns suggests that returns are generated by a process operating closer to trading time rather than calendar time. In contrast, accumulation of interest over the weekend follows a calendar-time process. Since both the variance of returns and the interest rate are important parameters of the Black-Scholes option pricing model, this paper suggests that the model be stated to account for this by utilizing a trading-time variance and a calendar-time interest rate. Empirical evidence indicates that this allows the model to better explain market option prices.

Open-ending a closed-end fund forces the price of the fund's shares to their net asset value. Open-ending behavior is shown to correspond in predictable ways to the incentive to open-end and to potential resistance to open-ending. Moreover, closed-end fund share prices begin to generate statistically significant positive abnormal returns well in advance of the formal announcement of the open-ending. Although a small part of the total abnormal return is not entirely exhausted until after the announcement, such market price performance is broadly consistent with a semi-strong form efficient market.

We examine a model of market equilibrium in which there is less information available about some of the securities in the market than about others. We consider the model as a potential explanation of the well-known small firm anomaly. Using period of listing as a proxy for quantity of information, we find an association between period of listing and security returns that cannot be accounted for by firm size and which is not diminished by an elimination of January returns data from our sample. Thus, we observe a new empirical regularity in the data and refer to the regularity as the ‘period of listing’ effect.

This paper examines the effects of Broad Tape news releases of earnings and dividend announcements on three aspects of intraday stock price behavior: mean returns, return variance, and serial correlation in consecutive price changes. The initial price reaction is evident in the first pair of price changes following the release (i.e., within a few minutes, at most). The returns earned by simple trading rules dissipate within five to ten minutes, although significant returns are detected in the overnight period and at the opening of trading on the next day. Disturbances in the variance and serial correlation persist for several hours and extend into the following trading day. As a class, dividend announcements induce much less activity than do earnings, although the response to dividend changes is comparable to the earnings announcement effect.

The tax law confers upon the investor a timing option - to realize capital losses and defer capital gains. With the tax rate on long term gains and losses being about half the short term rate, the law provides a second timing option - to realize losses short term and gains long term, if at all. Our theory and simulation over the 1962–1977 period establish that taxable investors should realize long term gains in high variance stocks and repurchase stock in order to realize potential future losses short term. Tax trading does not explain the small-firm anomaly but predicts a seasonal pattern in trading volume which maps into a seasonal pattern in stock prices, the January anomaly, only if investors are irrational or ignorant of the price seasonality.