Knowledge that Transforms

This paper examines transactions data regarding the market's reaction to 258 takeover announcements on the Toronto Stock Exchange (TSE) from 1977 to 1989. The study analyzes volatility and volume of target firm's stock during the first trading day following a takeover announcement. A cross-sectional analysis relates this intraday volatility and volume to various aspects of a takeover announcement that proxy for the certainty of payoff to shareholders. Post-announcement volatility is highest when takeover announcements involve share exchange bids which are contested. Trading volume is highest when bids are contested and involve a large initial price change.

Traditional theories of intermediation are based on transaction costs and asymmetric information. They are designed to account for institutions which take deposits or issue insurance policies and channel funds to firms. However, in recent decades there have been significant changes. Although transaction costs and asymmetric information have declined, intermediation has increased. New markets for financial futures and options are mainly markets for intermediaries rather than individuals or firms. These changes are difficult to reconcile with the traditional theories. We discuss the role of intermediation in this new context stressing risk trading and participation costs.

Recent occurrences of financial distress to some insurers have raised questions about whether the current guaranty system is adequate to protect policyholders. Four new systems have been proposed. Using the state preference model, it was found the Stewart's national system faring the best, if it adopts uniform regulation. Based on agency theory, the pre-assessment approach and the policyholder surcharge (or premium increase) recoupment method were found to be better than the current post-assessment approach and premium tax offset method. Furthermore, uniform policy limits and regulations are recommended.

This paper analyzes the value maximization of regulated banks within a moral-hazard framework. In the model, regulators monitor both the capital ratio and the asset portfolio, and banks simultaneously select the optimum capital ratio and asset portfolio. A key assumption is that a bank cannot expect a positive put option value once it is classified as risky by regulators. The optimum values of the two variables depend on investment opportunities and charter values, as well as regulatory parameters. The model that explicitly incorporates regulation can explain various phenomena that are seemingly inconsistent with the predictions of moral hazard models — for example, a positive relationship between the capital ratio and the riskiness of the asset portfolio. A particularly interesting result is that a larger charter value results in a higher-risk interior solution.

This paper examines the performance of the leading methods for setting capital requirements for securities firms' trading books. Tests are conducted on a large sample of UK equity market makers' books over a substantial number of periods of equity market stress from 1985 to 1995. The comprehensive and building-block approaches, favoured by US and European regulators, fail to provide effective cover. Only portfolio-based, value-at-risk (VaR) type models are efficient in providing appropriate levels of capital to cover the position risk of equity trading books.

This study empirically examines volatility in US and Japanese commodity futures markets. The US futures market, COMEX, is double auction with continuous trading, whereas the Japanese futures market, TOCOM, was Walrasian with discrete trading until April 1991. We find intraday volatility for gold futures contracts to be significantly higher on COMEX than TOCOM throughout the sample period and is attributable to differences in information flows and market micro-structures. Evidence is also provided that exchange volume conveys information both within and across markets, which is consistent with the French and Roll, 1986 (French, K.R., Roll, R., 1986. Stock return variances: The arrival of information and the reaction of traders. Journal of Financial Economics 17, 5–26) private-information based rational trading model. Finally, daily variance and autocorrelation estimates within COMEX are consistent with the extant literature on equity markets.

Measured with intraday data in a 1987–1991 sample period, the mark/dollar exchange rate was affected by unanticipated information about the trade deficit and the consumer price index. The exchange rate showed no significant response to news about money supply, industrial production, the producer price index, or unemployment. Trade deficit surprises were negatively correlated with the value of the dollar as expected. CPI surprises showed a positive correlation, as would be predicted by sticky price models of exchange rates. The market's reaction to the 8:30am trade deficit announcement was complete by 9am, but the market's response to the CPI announcement was not as immediate. No significant reaction had occurred by 9am, and the spot price did not fully digest the information until 1pm. Significant responses were present in the 9am, 11am, and noon hours. Alternate measures of currency returns failed to explain this delayed response.

This short comment reinterprets some of the results found by Linda Allen and Anoop Rai in their paper, ‘Operational efficiency in banking: An international perspective’ (Journal of Banking and Finance 20, 1996, 655–672).

In this paper earnings, dividends and stock prices are modelled within a plausible economic framework. The first stage in the analysis involves characterization of the dynamic behavior of earnings, evidence was found for mean reverting behavior in the long term, and weaker evidence for mean reversion in the short term. The relationship between dividends and earnings is then examined using a modified form of the Lintner model. The empirical results suggest the modified formulation performs as effectively as the original Lintner approach. Using these findings, we then develop the functional form of the corresponding share price relationship. As a consequence of using a generalized model for earnings we are able to examine theoretically, the effect of different earnings processes on share price behavior. The empirical results imply that changes in earnings per share and earnings per share are important in explaining returns.

To avoid problems associated with Jensen's inequality, we use a corrected inefficiency measure to compare the estimate of inefficiency obtained using the distribution free (DF) method with the estimate obtained using the stochastic cost frontier (SCF). The results of the paper are unchanged. The DF method yields measures of inefficiency that are significantly higher than measures obtained using the SCF.