Recent work by Richard Roll has challenged the worth of portfolio performance measures based on the capital asset pricing model. This paper demonstrates that Roll's conclusions are due to his focusing on a ‘truly’ ex-ante efficient index. Using a choice and information theoretic framework, we show that an appropriate index is efficient relative to the probabilities assessed by the ‘market’. Residual analyses and portfolio performance tests, using such an index, yield meaningful results for a wide class of information structures. Roll's primary criticisms, however, relate to tests of the asset pricing model itself. We argue that these criticisms are vastly overstated.

J. Fred Weston, Edward M. Rice, Session Topic: Finance and Industrial Organization: Discussion, The Journal of Finance, Vol. 31, No. 2, Papers and Proceedings of the Thirty-Fourth Annual Meeting of the American Finance Association Dallas, Texas December 28-30, 1975 (May, 1976), pp. 743-747

Many large corporations have recently adopted antitakeover charter amendments which make the transfer of corporate control more difficult. This paper develops and tests competing theoretical explanations for the passage of these amendments. In one view, antitakeover provisions are adopted because incumbent management seeks job protection at stockholders' expense. The alternative hypothesis is that antitakeover provisions benefit stockholders, perhaps by extracting greater payment in exchange for corporate control. Although inconclusive, the evidence provides weak preliminary support for the hypothesis that antitakeover amendments are best explained as a device for managerial entrenchment.

The Alaska Native Claims Settlement Act of 1971 (ANCSA) established thirteen diffusely held profit-seeking corporations that were saddled with unusual organization restrictions, the most important of which is that stock cannot be traded. We find that these firms are characterized by poor financial performance, a high incidence of control contests, and high turnover among directors and managers. These and other findings about ANCSA firms are consistent, overall, with the theory of the firm. The results illustrate the importance of organizational form in accomplishing productive activities, and particularly the importance of freely transferrable shares for organizational efficiency in diffusely held corporations.

Do merger bonuses to target CEOs facilitate a wealth transfer from target to acquirer shareholders? We test this hypothesis against an alternative that bonuses enable a useful contractual revision in compensation contracts when takeovers generate small synergies. When target CEOs get a merger bonus, acquirers pay lower premiums, but they also typically get less in the form of low synergies. Moreover, both stock and accounting returns to the acquirers are lower on average in deals with target CEO bonuses. These results support the contractual revision alternative. Nevertheless, wealth transfer occurs when merger bonuses are present in deals where targets exhibit high pre-takeover abnormal accruals or are subject to SEC enforcement actions.

We study the impact of the Domestic Production Activities Deduction (DPAD) on mergers and acquisitions. DPAD reduces corporate tax rates on income from work or goods made in the U.S. Results indicate that the quantity and quality of acquisition bids by DPAD-advantaged firms conform to the predictions of the neoclassical theory of the firm and the theory of financial constraints. Specifically, bids, particularly those cash-financed, increase substantially in industries with large DPAD-related tax cuts and for firms with financial constraints. Moreover, DPAD improves acquisition quality where acquirers and targets are likely to generate incremental DPAD tax benefits through their merger.