Knowledge that Transforms

The size effect is sensitive to the length of the return interval used in estimating betas. Beta changes with the return interval because an asset's covariance with the market and the market's variance do not change proportionately as the return interval is changed. We document beta sensitivity to the return interval. Evidence from cross-sectional regressions of returns on monthly and annual betas is inconsistent with beta changes stemming only from the higher standard errors of the longer-interval betas. We provide evidence that the size effect becomes statistically insignificant when risk is measured by betas estimated using annual returns.

This paper presents evidence on changes in operating results for a sample of 76 large management buyouts of public companies completed between 1980 and 1986. In the three years after the buyout, these companies experience increases in operating income (before depreciation), decreases in capital expenditures, and increases in net cash flow. Consistent with the operating changes, the mean and median increases in market value (adjusted for market returns) are 96% and 77% from two months before the buyout announcement to the post-buyout sale. The evidence suggests the operating changes are due to improved incentives rather than layoffs or managerial exploitation of shareholders through inside information.

Using weekly call option prices on twenty-five stocks over a ten-year period (1975–1985) and calls on the S&P 500 stock-index futures, we find that ex ante market volatility follows a mixed mean-reverting diffusion with noise process. Changes in volatility are correlated across stocks and a marketwide volatility effect is found. Strong forces pull the volatility back to its long-term value. The findings suggest the development of new option pricing models.

In contrast to the negative average abnormal returns accompanying the announcement of a public offering of securities, the announcement of a private sale of equity is accompanied by a 4.5% average abnormal return. Cross-sectional analysis indicates that the change in firm value at the announcement of a private sale is strongly correlated with the resulting change in ownership concentration. This relation depends on the level ownership concentration after the sale and the purchaser's current or anticipated future relationship with the firm.

Analysis of 60 proxy contests for seats on the boards of exchange-listed firms during 1978–1985 shows that three years after the contest less than one-fifth of the sample firms remain independent, publicly held corporations run by the same management team. Proxy contests are typically followed by managerial resignations, even when dissidents fail to obtain a majority of board seats, and are often followed by sale or liquidation of the firm. The average stockholder wealth gains associated with proxy contests are largely attributable to gains by companies in which dissident activity leads to sale or liquidation.

The study documents a relation between the expected holding-period premiums on Treasury bills and the ex ante conditional volatilities of consumption, spot (one-month) interest rate, and industrial production. A model portraying the relation as a risk and return phenomenon is presented and tested. Consistent with the model, the coefficients of the relation appear to depend on the sensitivity of the realized premium to the ex post shocks in consumption, industrial production, and the spot rate. The model fits the data better than the traditional term premium models.

We examine the stock-price effects of all second-generation state takeover laws introduced from 1982 through 1987 for which we find press announcements. On average, the announcements are associated with a small but statistically significant decrease in the stock prices of firms incorporated in the state and of large firms headquartered in the state. The stock-price effects are concentrated in firms without preexisting firm-level takeover defenses. Firms with prior defenses have no significant stock-price reactions.

We describe how managers can entrench themselves by making manager-specific investments that make it costly for shareholders to replace them. By making manager-specific investments, managers can reduce the probability of being replaced extract higher wages and larger perquisites from shareholders, and obtain more latitude in determining corporate strategy. Our model of entrenchment has empirical implications that are consistent with the evidence on managerial behavior.