Knowledge that Transforms

The author examines the structure of corporate ownership in a sample of Japanese firms in the mid 1980s. Ownership is highly concentrated in Japan, with financial institutions by far the most important large shareholders. Ownership concentration in independent Japanese firms is positively related to the returns from exerting greater control over management. This is not the case in firms that are members of corporate groups (keiretsu). Ownership concentration and the accounting profit rate in both independent and keiretsu firms are unrelated. The results are consistent with the notion that there exist two distinct corporate governance systems in Japan–one among independent firms and the other among firms that are members of keiretsu.

Periodic antitrust attacks on corporations may have influenced stock prices. For the period 1904 to 1944, each antitrust case filed is associated with a 0.5 to 1.9 percent drop of the Dow and each unexpected case with even larger drops. Other aspects of antitrust besides actual filings may help account for other movements, in particular the 1929 Crash. Historical evidence bears on the question of whether antitrust is exogenous and also links antitrust and the "corporation problem." These results illustrate the sorts of real factors, aside from changes in concurrent output, that may account for stock price volatility.

This study investigates the extent to which information inferred by investors from initial announcements of corporate security offerings affects share prices in the capital markets. The empirical tests measure the response in the common stock prices of both firms announcing a security offering and nonannouncing firms operating in the same industry. Small but significantly negative abnormal returns are shown by industry shares upon initial announcements of common stock, convertible debt, and straight public offerings. Such an industry response indicates that share prices incorporate an inside assessment of factors relevant to the valuation of an industry subset of firms.

This study tests the joint prediction of the substitution effect and the tax exhaustion hypothesis that an increase in nondebt tax shields leads to a decrease in leverage. Controls are introduced for the debt securability effect, the pecking order theory of financing, and the probability of losing tax shields. Using the relationship between changes in investment tax shields and changes in debt tax shields of firms in response to the Economic Recovery Tax Act of 1981, strong empirical support is found for predictions based on the substitution effect and the tax exhaustion hypothesis.

This paper examines the revisions of analysts' forecasts of future earnings around announcements of common stock offerings. The forecasts of the correct year earnings are, on average, decreased when firms announce plans to issue additional common stock. The size of the decrease is significantly related to announcement period abnormal stock returns. In contrast, forecasts of the five-year growth rate of earnings are, on average, unchanged. The authors interpret these results as being consistent with the claim that equity offering announcements convey unfavorable information regarding the firm's short-term, but not its long-term, earnings prospects.

Optimal-tax theory forecasts that small open economies should not tax capital income. Yet, countries do tax capital income. Why the inconsistency? This paper shows that use of the double-taxation convention, whereby governments credit taxes paid abroad against domestic taxes, helps explain this inconsistency. In particular, capital income will be taxed if a dominant capital exporter acts as a Stackelberg leader when setting its tax policy. Due to the convention, other countries will then tax capital imports, making it attractive for the dominant capital exporter to tax capital income. Without a dominant capital exporter, however, the model still forecasts no capital-income taxes.

When IPO shares are sold sequentially, later potential investors can learn from the purchasing decisions of earlier investors. This can lead rapidly to "cascades" in which subsequent investors optimally ignore their private information and imitate earlier investors. Although rationing in this situation gives rise to a winner's curse, it is irrelevant. The model predicts that: (1) Offerings succeed or fail rapidly. (2) Demand can be so elastic that even risk-neutral issuers underprice to completely avoid failure. (3) Issues with good inside information can price their shares so high that they sometimes fail. (4) An underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market.

This study provides comprehensive publications performance data over a twenty-five-year period for finance doctorates. These data indicate that publishing one article per year in any finance journal (or finance, accounting, economics, or business journal) over any prolonged period of time is a truly remarkable feat, met by only 5 percent of the graduates. Tenure screens combining various quantity and quality requirements are examined to assess their ability to predict future publication productivity. Faculty and administrators seeking defensible benchmarks for evaluating faculty research productivity in finance will find that these data and results are particularly useful.

This study shows the extent to which deviations from the absolute priority rule increase or decrease the bankruptcy emergence payoff to traded (i.e., usually junior claimants) bondholders. The data indicate that, on average, bondholders benefit, albeit slightly, from absolute priority rule violations. This paper also examines the degree to which the bond market, in the bankruptcy filing month, anticipates departures from the absolute priority rule and other influences on the payoff to bondholders. In other words, the authors investigate the informational efficiency of the market for bankrupt bonds. Overall, despite the complex and lengthy nature of bankruptcy proceedings, the results support efficiency.

The authors have two primary objectives in this study. First, they examine the frequency of attaining simultaneous equilibrium on spot and forward foreign exchange markets and on domestic and foreign securities markets. Second, they measure the profitability of covered interest arbitrage and one-way arbitrage. The authors' empirical analysis has been conducted using real-time quotations. The empirical results indicate that the markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage are rarely available and the frequency of attaining simultaneous market equilibrium is surprisingly low, thus opening the door for one-way arbitrage.