Knowledge that Transforms

This paper provides evidence that all-equity firms exhibit greater levels of managerial stockholdings, more extensive family relationships among top management, and higher liquidity positions than a matched sample of levered firms. Further, top managers of all-equity firms with family involvement in corporate operations have greater control of corporate voting rights than managers of all-equity firms without family involvement. These findings are consistent with the interpretation that managerial control of voting rights and family relationships among senior managers are important factors in the decision to eliminate leverage.

Multibeta asset pricing models are examined using proxies for economic state variables in a framework that exploits time-varying expected returns to estimate conditional betas. Examples include multiple consumption-beta models and models where asset returns proxy for the state variables. When the state variables are not specified, the tests indicate two or three time-varying expected risk premiums in the sample of quarterly asset returns. Conditional betas relative to consumption generate less striking evidence against the model than betas relative to asset returns, but both the consumption and the market variables fail to proxy for the state variables.

In a sample of 326 U.S. acquisitions between 1975 and 1987, three types of acquisitions have systematically lower and predominantly negative announcement period returns to bidding firms. The returns to bidding shareholders are lower when their firm diversifies, when it buys a rapidly growing target, and when its managers performed poorly before the acquisition. These results suggest that managerial objectives may drive acquisitions that reduce bidding firms' values.

Using daily and monthly stock returns, the authors find no convincing evidence that Federal Reserve margin requirements have served to dampen stock market volatility. The contrary conclusion, expressed in recent papers by Gikas Hardouvelis (1988), is traced to flows in his test design. The authors do detect the expected negative relation between margin requirements and the amount of margin credit outstanding. They also confirm the recent finding by William Schwert (1988) that changes in margin requirements by the Fed have tended to follow, rather than lead, changes in market volatility.

This paper presents and tests a hypothesis that the standardization of payments in the United States at the turn of each calendar month generally induces a surge in stock returns at the turn of each calendar month. The hypothesis also asserts that returns generally will be greater following the month of December and will vary inversely with the stringency of monetary policy. Empirical results using stock index returns for 1969-86 support the hypothesis. This analysis provides an explanation for the previously documented monthly effect in stock returns and a partial explanation for the January effect.

This paper examines defensive payouts announced in response to hostile corporate control activity. The evidence indicates that the announcement of defensive share repurchases is associated with an average negative impact on the share price of the target firm. In contrast, special dividend payments generally increase the wealth of target-firm shareholders. Regardless of payout type, those firms remaining independent after the outcome of the corporate control contest experience an abnormal share price increase over the duration of the contest. Among these firms there are substantial postcontest changes in capital, asset, and ownership structure and abnormally high rates of top management turnover.

The authors examine the cross-sectional pricing equation of the arbitrage pricing theory using the elements of eigenvectors and the maximum likelihood factor loadings of the covariance matrix of returns as measures of risk. The results indicate that, for data assumed stationary over twenty years, the first vector is a surprisingly good measure of risk when compared with either a one-factor or a five-factor model or a five-vector model. The authors conclude that principal components analysis may be preferred to factor analysis in some circumstances.

The authors' study uses a multinomial logit model to analyze the concurrent termination experience of adjustable-rate and fixed-rate mortgages. A new set of adjustable-rate-mortgage-specific interactive determinants expands the conventional fixed-rate-mortgage specification to isolate the unique termination behavior of adjustable-rate mortgages. The authors find that expected rate adjustments and large lifetime caps are positively related to adjustable-rate-mortgage termination probabilities, while long adjustment frequencies are inversely related. Caps, both periodic and lifetime, have a secondary, inverse effect on termination probabilities when interest-rate movements exceed cap limits. The model also shows that interest-rate expectations affect fixed-rate-mortgage terminations more strongly than adjustable-rate-mortgage terminations.

Exact small sample population moments of the standard serial covariance and variance estimators are derived under the assumptions of the Roll bid/ask spread models. Noise explains why serial covariance estimates are often positive in annual samples of daily and weekly returns. Small sample estimator bias partially explains why weekly estimates are more negative than daily estimates. Noise causes the Roll spread estimator to be severely biased by Jensen's inequality. The French-Roll adjusted variance estimator is unbiased but noisy. Empirical tests confirm the major implications.

This paper develops an approach for valuing flexible production systems using contingent claims pricing. Demand curves for the authors' model's underlying assets (output products) may be downward sloping, in contrast with the standard option pricing assumption. Also, their marginal production (exercise) costs may be increasing. In addition, they allow for multiple products and a productions capacity constraint. These elements of the model result in complex exercise decisions for the contingent claims that comprise the production system's value. The authors illustrate their approach by valuing a flexible system that produces two products that have profit margin functions with stochastic parameters.