This study documents one effect of the theory of implicit taxes, providing evidence that a change in the tax rate results in a change in pre-tax returns. Yield spreads of pairs of Treasury bills maturing in the last week of December and the first week of January are examined. Year-ends not affected by rate changes show a significant positive yield spread between these pairs of bills, reflecting an upward-sloping yield curve. However, for year-ends coinciding with the tax rate reductions of 1981 and 1986 there is a significant negative yield spread between these pairs of bills.

According to conventional theory, insurance premiums should be informationally efficient predictors of the present value of policy claims and expenses. This paper develops an alternative theory of insurance market dynamics based on two assumptions. First, insured risks are dependent. Under this assumption, insurers′ net worth determines the market capacity since it is necessary to back the contractual promises to pay claims. Second, in raising net worth, external equity is more costly than internal equity. The theory explains the variation in premiums and insurance contracts over the "insurance cycle" and is supported by tests on postwar data. Journal of Economic Literature Classification Numbers: G1, G22.

A valuation approach is used to examine the effect of the LIFO inventory method on the relation between the market value of a firm's stock and the book value of equity. The paper develops three competing hypotheses that have different predictions regarding the relation between the LIFO reserve and the market value of equity. Results indicate a significant negative relation between the LIFO reserve and the value of equity, inconsistent with the pricing of LIFO reserves as unbooked assets, but consistent with a model that views the LIFO reserve as a measure of the effect of increases in factor input prices on firm value. Résumé. Les auteurs ont recours à une évaluation pour examiner l'incidence de la méthode DEPS de détermination du coût des stocks sur la relation entre le cours de l'action d'une société et sa valeur comptable. Ils élaborent trois hypothèses concurrentes qui débouchent sur des prédictions différentes en ce qui a trait à la relation entre la réserve résultant de l'utilisation de la méthode DEPS et la valeur marchande de l'entreprise. Les résultats indiquent une relation négative significative entre cette réserve et la valeur comptable de l'entreprise, relation qui ne concorde pas avec le prix de ladite réserve que l'on voudrait assimiler à un actif non comptabilisé, mais qui cadre avec un modèle selon lequel la réserve résultant de l'utilisation de la méthode DEPS est considérée comme une mesure de l'incidence des hausses du prix des intrants sur la valeur de l'entreprise.

Value relevance, Equity investment, Predictive ability, Future earnings

Differences between SIC codes assigned to companies by COMPUSTAT and CRSP are examined. Large differences are observed at two-, three-, and four-digit levels. Correlations of intra-industry monthly stock returns are larger, and variances of intra-industry financial ratios are smaller for industries based on COMPUSTAT codes. Replication of a portion of Freeman and Tse (1992) produces significant results using COMPUSTAT codes, consistent with the original research, but insignificant results for CRSP codes.

A two-date rational expectations model is analyzed. At the first date, traders can privately acquire a costly signal that provides imperfect information about a public report that will be issued at the second date. Equilibrium characterizations are provided for the fraction of traders that become informed and the informativeness of the first-date price, as well as the price change variance and the expected trading volume at the second date. Comparative statics identify how the above variables are influenced by changes in the information content of the public report, and in particular how market phenomena at the public release date are influenced by endogenous prior information acquisition and trading in response to the forthcoming public release.

This study develops and tests the proposition that corporate merger transactions give rise to changes in the association between firm accounting earnings and security returns. A model of the effect of merger transactions on stock price responses to information releases suggests that the earnings response coefficient of a postmerger entity is a weighted average of the earnings response coefficients of the combining firms, with the weights depending on relative earnings variability of the combining firms. Empirical results, based on a sample of 90 mergers completed over a 12‐year period, are consistent with the model. Résumé. L'auteur élabore et vérifie une proposition selon laquelle les opérations de fusion donnent lieu à des changements dans la relation entre les bénéfices comptables de l'entreprise et le rendement de ses titres. Selon le modèle de l'incidence des opérations de fusion sur la réaction du cours des valeurs mobilières à la communication d'information, le coefficient de réaction des bénéfices d'une entité résultant d'une fusion est la moyenne pondérée des coefficients de réaction des bénéfices des entreprises qui fusionnent, les pondérations dépendant de la variabilité relative des bénéfices des entreprises constituantes. Les résultats empiriques, fondés sur un échantillon de 90 fusions s'échelonnant sur une période de plus de 12 ans, confirment la validité du modèle.

The purpose of this study is to examine the information content of the components of the annual change in the quantity of proved reserves reported by U.S oil and gas (O&G) producers. In particular, it investigates the contemporaneous association between the unexpected portions of discoveries, production, net purchases, and revisions of prior quantity estimates and unexpected security returns during the release week of the 1984 to 1988 annual reports or forms 10‐K of these firms. The empirical results suggest that (1) disaggregating the net change in the quantity of proved reserves into its components conveys additional information beyond that contained in the net change in total proved reserves itself, (2) discoveries are highly associated with security returns even after controlling for production, and (3) revisions, net purchases, and production have a modest influence on security returns. The findings of this study are interpreted within the context of the economic environment of the O&G industry during the test period. Résumé. L'auteur examine le contenu en information des éléments du changement annuel de la quantité de réserves prouvées dont font état les producteurs pétroliers et gaziers des États‐Unis. Il s'intéresse en particulier, pour la période 1984–1988, à l'association que l'on établit maintenant entre, d'une part, la portion inattendue des découvertes, la production, les achats nets et la révision des estimations antérieures de quantité et, d'autre part, les rendements imprévus des titres au cours de la semaine de publication des rapports annuels ou des formulaires 10‐K des entreprises. Les résultats empiriques donnent à penser que (1) la décomposition en ses différents éléments du changement net dans la quantité des réserves prouvées livre davantage d'information que le changement net global lui‐même, (2) les découvertes sont associées de très près aux rendements des titres, même une fois contrôlée la variable production, et (3) les révisions, les achats nets et la production ont une modeste influence sur les rendements des titres. Les résultats de cette étude sont interprétés dans le contexte économique du secteur pétrolier et gazier au cours de la période d'analyse.

We examine the lead–lag relation between intraday spot and futures prices for a stock index where the component stocks are floor traded while the futures contract is screen traded. We find that futures prices lead spot prices by nearly 20 min. This is much longer than in markets where both the index and index futures are floor traded. We show that this lead–lag relation is unlikely to be an artifact of differences in liquidity between the spot and futures markets. These results are consistent with the hypothesis that screen trading accelerates the price discovery process. Journal of Economic Literature Classification Numbers: F33, G15, G20, O31.

When financial markets are imperfect or financial distress is costly, firms may choose to reduce their risk by lowering financial or operating leverage. This paper examinines the role of operating leverage in the firm's pension choice. Contributions to defined contribution plans are more flexible than contributions to defined benefit plans. Firms may therefore reduce their operating leverage by selecting a defined contribution plan. I find empirical support for this hypothesis which is robust to controls for labor market factors and the continuing trend toward defined contribution pension plans.