Rex Thompson, Conditioning the Return-Generating Process on Firm-Specific Events: A Discussion of Event Study Methods, The Journal of Financial and Quantitative Analysis, Vol. 20, No. 2 (Jun., 1985), pp. 151-168

This paper investigates the extent to which discounts and premiums provide information about future expected rates of return on closed-end investment company shares. It is found that discounted fund shares, adjusted for risk, tended to outperform the market in the period 1940 to 1975. Funds selling at a premium appear to have been bad investments over the same time period. On the basis of these results it is argued that the two-parameter capital asset pricing model does not describe the return generating process of closed-end funds. Other potential areas to search for breakdowns in two-parameter pricing are suggested.

Rex Thompson, The Tax Effects of Investment in Marketable Securities on Firm Valuation: Discussion, The Journal of Finance, Vol. 34, No. 2, Papers and Proceedings, Thirty-Seventh Annual Meeting, American Finance Association, Chicago, Illinois, August 29-31, 1978 (May, 1979), pp. 339-342

[We develop a model wherein the choice between adjustable- and fixed-rate debt can serve as a signal of firm quality. The nature of the signal depends on expected inflation volatility relative to other risk parameters. Evidence from a matched sample of debt announcements over the period 1978 to 1986 shows a difference of -2.05 percent between stock price reactions to adjustable rate and fixed rate announcements when expected inflation volatility is above an estimated threshold. Below this threshold, the difference is +0.98 percent. The evidence supports the hypothesis that the riskier debt choice serves as a favorable signal of firm quality.]

This paper adopts a rational market structure to examine the link between the cash flow effects of management policy decisions and the resulting stock price reactions. The focus is on testing cross-sectional associations between cash flow effects and the underlying characteristics of affected firms. We find that it is not possible to infer the sign of association between the stock price reaction and any characteristics of the firm that are observable before management announces its decision. Our methodological suggestions involve exploiting either a priori assumptions or sample information about the probability distribution of unobservable decision variables underlying the management decision process.

In this paper, we examine the effect of implicit seller reserves on the estimation of value-at-risk based on historical asset sales data. We direct our examination toward how and whether fine art might prove an appropriate form of loan collateral for banks and other financial institutions. Using a data set of French Impressionist paintings brought to auction from 1985 to 2001, we control for the effect of works that are bought in-house to construct a distribution of potential sale values that corrects for sample selection bias. It turns out that the downside risk surrounding deviations of auction prices from expert presale estimates depends critically on how buy-ins are incorporated. If downside risk is assessed solely on historical experience with successful auction sales, the data appear to support loan-to-value ratios between 50% and a 100% larger than loan-to-value ratios that countenance the existence of seller reserves. The auction process, however, is quantifiable and can reveal the necessary risk information required for loan consideration.

Stephan E. Sefcik, Rex Thompson, An Approach to Statistical Inference in Cross-Sectional Models with Security Abnormal Returns As Dependent Variable, Journal of Accounting Research, Vol. 24, No. 2 (Autumn, 1986), pp. 316-334