Empirical research indicates that small firms earn higher average rates of return than large firms, even after accounting for beta risk. Roll conjectured that the small firm effect might be attributed to improper estimation of security betas. The evidence shows that while the direction of the bias in beta estimation is consistent with Roll's conjecture, the magnitude of the bias appears to be too small to explain the firm size effect.
This paper challenges the view that the Arbitrage Pricing Theory (APT) is inherently more susceptible to empirical verification than the Capital Asset Pricing Model (CAPM). The usual formulation of the testable implications of the APT is shown to be inadequate, as it precludes the very expected return differentials which the theory attempts to explain. A recent competitive‐equilibrium extension of the APT may be testable in principle. In order to implement such a test, however, observation of the return on the true market portfolio appears to be necessary.
This study investigates the nature of price changes in a variety of major and minor foreign exchange markets. The results suggest that the log of price changes over one (trading) day intervals seems to follow a non‐normal stable distribution function. Different measures of location (and to lesser extent scale) are present for different days of the week. Dollar denominated price changes are high on Mondays and Wednesdays and low on Thursdays and Fridays for all currencies. The Wednesday‐Thursday result is consistent with the settlement procedures used in foreign exchange transactions in the dollar. The Friday‐Monday result is consistent with an increase in demand for the dollar prior to the weekend.
Tests are conducted for the presence of unit roots in the autoregressive representations of the logarithms of spot and forward exchange rates. The results from these tests provide one explanation for some of the conflicting conclusions which emerge from recent empirical papers on the foreign exchange market.
This paper analyzes the impact, on both welfare and equilibrium prices, of changes in the financial market in a general equilibrium, two‐period context. Previous papers have focussed on the “securities effect,” tending to essentially ignore the equally important “endowment effect” that arises when market structure changes are implemented. Two forms of endowment neutrality and market structure changes which either preserve, expand, or shift allocational feasibility differentiate the main theorems, which are based on arbitrary preferences and beliefs and substantially extend and modify extant results; in particular, earlier statements identified with value conservation are sharply moderated. Very roughly, the paper yields the following implications for some of the more common changes in the market: nonsynergistic corporate spinoffs and the opening of option markets have, on balance, strongly positive welfare effects; nonsynergistic mergers tend to have strong negative welfare effects, while the welfare effects of alternative risky debt structures tend to be ambiguous. All of the preceding, however, may under plausible conditions be redistributive.
As a measure of systematic risk, the lower partial moment measure requires fewer restrictive assumptions than does the variance measure. However, the latter enjoys far wider usage than the former, perhaps because of its familiarity and the fact that two measures of systematic risk are equivalent when return distributions are normal. This paper shows analytically that there are systematic differences in the two risk measures when return distributions are lognormal. Results of empirical tests show that there are indeed systematic differences in measured values of the two risk measures for securities with above average and with below average systematic risk.
Develops a theory for the demand for the advising and distribution services of investment banks when there is information asymmetry between an issuer of new securities and the investment bankers. The advising services of the investment banker are valuable when the banker has better information about the capital market, while the distribution services are useful when the banker is able to create demand for the issue. This analysis considers the delegation contract between the issuer and the banker in a negotiated, fixed price offering. The delegation contract exists when the issuer enlists the banker to both advise on the offering price and distribute the securities. In this case, the banker's decision as to whether the contract should be accepted is based on the banker's private information. Given these conditions, a model is presented, and an example is provided to illustrate the optimal delegation contract. Also examined are the situation in which the issuer only utilizes the distribution services of the banker and the situation in which the investment banker is not engaged at all. Results show that when the banker is better informed than the issuer, the new issues are underpriced. Further, those issuers of unseasoned securities who are less informed about the capital market than the issuers of seasoned securities are more likely to seek the advice of investment bankers. (SRD)
This paper examines the adjustments in a firm's common stock price during the eleven months before and during the month of announcement of a bond rating change. Based on several different measures of abnormal security return, the findings are consistent with the proposition that bond downgradings convey information to common stockholders. For bond upgradings, the price adjustments were statistically insignificant in the month of announcement, although in the eleven preceding months, upgraded firms exhibited positive abnormal returns. While the results do not fully support earlier research, we stress that the main contribution of this article lies in the scrutiny it gives to issues of methodology in assessing the possible price effects of bond reclassifications.