Knowledge that Transforms

This paper is a report on 72 firms which went public since 1983 but previously underwent a full or divisional LBO. Accounting measures of performance reveal significant improvements in profitability which resulted mainly from these firms' ability to reduce costs. Firms experience dramatic increases in leverage at the LBO, but the leverage ratios are gradually reduced. The evidence is consistent with the hypothesis that the change in the governance structure of these firms towards more concentrated residual claims created a new organizational structure which is more efficient than its predecessor.

This study investigates intraday relations between price changes and trading volume of options and stocks for a sample of firms whose options traded on the CBOE during the first quarter of 1986. After purging the price change series of the effects of bid/ask spreads, multivariate time‐series analysis is used to estimate the lead/lag relation between the price changes in the option and stock markets. The results indicate that price changes in the stock market lead the option market by as much as fifteen minutes. The analysis of trading volume indicates that the stock market lead may be even longer.

In this paper, we document regularities in trading patterns of individual and institutional investors related to the day of the week. We find a relative increase in trading activity by individuals on Mondays. In addition, there is a tendency for individuals to increase the number of sell transactions relative to buy transactions, which might explain at least part of the weekend effect.

Executive stock option plans have asymmetric payoffs that could induce managers to take on more risk. Evidence from traded call options and stock return data supports this notion. Implicit share price variance, computed from the Black‐Scholes option pricing model, and stock return variance increase after the approval of an executive stock option plan. The event is accompanied by a significant positive stock and a negative bond market reaction. This evidence is consistent with the notion that executive stock options may induce a wealth transfer from bondholders to stockholders.

This paper documents for a sample of 327 US acquisitions between 1975 and 1987 three forces that systematically reduce the announcement day return of bidding firms. The returns to bidding shareholders are lower when their firm diversifies, when it buys a rapidly growing target , and when the performance of its managers has been poor before the acquisition. These results are consistent with the proposition that managerial rather than shareholders' objectives drive bad acquisitions.

This paper investigates the effect on bank equity values of the Comptroller of the Currency's announcement that some banks were “too big to fail” and that for those banks total deposit insurance would be provided. Using an event study methodology, we find positive wealth effects accruing to TBTF banks, with corresponding negative effects accruing to non‐included banks. We demonstrate that the magnitude of these effects differed with bank solvency and size. We also show that the policy to which the market reacted was that suggested by the Wall Street Journal and not that actually intended by the Comptroller.

J. Bradford de Long, Andrei Shleifer, Lawrence H. Summers, Robert J. Waldmann, Positive Feedback Investment Strategies and Destabilizing Rational Speculation, The Journal of Finance, Vol. 45, No. 2 (Jun., 1990), pp. 379-395

This paper presents an information‐theoretic, infinite horizon model of the equity issue decision. The model predicts that (a) equity issues on average are preceded by an abnormal positive return on the stock, although for some firms the issue is preceded by a loss; (b) equity issues on average are preceded by an abnormal rise in the market; and (c) the stock price drops at the announcement of an issue. The model provides a measure of the welfare cost of asymmetric information; the welfare loss may be small even if the price drop at issue announcement is large.

This paper analyzes the relation between real stock returns and real activity from 1889–1988. It replicates Fama's (1990) results for the 1953–1987 period using an additional 65 years of data. It also compares two measures of industrial production in the tests: (1) the series produced by Babson for 1889–1918, spliced with the Federal Reserve Board index of industrial production for 1919–1988, and (2) the new Miron and Romer (1989) index spliced with the Federal Reserve Board index in 1941. Fama's findings are robust for a much longer period—future production growth rates explain a large fraction of the variation in stock returns. The new Miron‐Romer measure of industrial production is less closely related to stock price movements than the older Babson and Federal Reserve Board measures.

This paper re‐examines the evidence on Purchasing Power Parity (PPP) in the long run. Previous studies have generally been unable to reject the hypothesis that the real exchange rate follows a random walk. If true, this implies that PPP does not hold. In contrast, this paper casts serious doubt on this random walk hypothesis. The results follow from more powerful estimation techniques, applied in a multilateral framework. Deviations from PPP, while substantial in the short run, appear to take about three years to be reduced in half.