Eli Talmor, Asymmetric Information, Signaling, and Optimal Corporate Financial Decisions, The Journal of Financial and Quantitative Analysis, Vol. 16, No. 4, Proceedings of 16th Annual Conference of the Western Finance Association, June 18-20, 1981, Jackson Hole, Wyoming (Nov., 1981), pp. 413-435

Eli Talmor, A Normative Approach to Bank Capital Adequacy, The Journal of Financial and Quantitative Analysis, Vol. 15, No. 4, Proceedings of 15th Annual Conference of the Western Finance Association, June 19-21, 1980, San Diego, California (Nov., 1980), pp. 785-811

This paper explores the advantage of private equity in fixing turnaround situations. Meaningful corporate value creation may require addressing operational problems, replacing management, or changing the incentive structure. Change may be implemented under either without change of ownership or through a buyout. The paper derives scenarios under which transferring ownership to private equity prior to implementing a turnaround can emerge as an optimal solution, even when current ownership can conceivably implement the same operational changes as private equity. Also considered is the possibility of investment syndication in which the private equity buyer shares the transaction with other private equity firms. Various alternatives are considered for implementing turnarounds; in particular, ones that allow for management replacement and others that are effectively management buyouts.

We examine how measures that defend incumbent managers against replacement by rival managers affect the information generated in control contests and how this information is used in subsequent investment decisions. We show that commonly used defensive measures allow shareholders to make better investment decisions than they can make absent these measures. Consequently, the adoption of defensive measures can increase shareholders' wealth. We find that good managers are less defended than poor managers and that managers whose interests are closely aligned with those of shareholders (e.g., via options or bonus plans) are less defended and have more control over firm decisions than managers whose interests are not so well aligned with those of shareholders. We also show that the informational role of defensive measures depends on the relative uncertainty about the quality of both parties to a control contest, and relate the predictions to the empirical evidence in the literature.

This paper estimates volatility changes in daily returns to the Dow Jones Industrial Average over the sample period 1897 through 1988. This allow a direct investigation of the reaction of the level of stock prices and subsequent expected returns to these estimated changes in volatility. The authors provide empirical evidence consistent with relatively large and systematic revisions in stock prices and subsequent expected returns to volatility changes. However, there appears to be an asymmetry in the market's reaction to volatility increases as opposed to volatility decreases. A majority of their volatility changes cannot be associated with the release of significant economic information.

ABSTRACT This paper describes situations in which tax liabilities assume the form of a negative position in a call option. This structure motivates an examination of the investment decisions of taxed corporations in the presence of risk. It is shown that the structure of the tax liability creates an incentive to underinvest in more risky projects and an incentive for conglomerate merger. These effects are then evaluated in the presence of conflicts of interest between stockholders and bondholders, and under alternative assumptions about the tax code, and about the timing of investment and financing decisions.

This paper describes situations in which tax liabilities assume the form of a negative position in a call option. This structure motivates an examination of the investment decisions of taxed corporations in the presence of risk. It is shown that the structure of the tax liability creates an incentive to underinvest in more risky projects and an incentive for conglomerate merger. These effects are then evaluated in the presence of conflicts of interest between stockholders and bondholders, and under alternative assumptions about the tax code, and about the timing of investment and financing decisions.