Knowledge that Transforms

In this paper, the authors examine the market valuation effects of corporate saleleasebacks. Specifically, they test whether such transactions offer a net benefit to lessees or lessors by evaluating the impact on share prices from announcements of saleleasebacks of major corporate assets. Their evidence indicates that the announcements are associated with positive abnormal returns to lessees. They conclude that this positive market reaction results from an overall reduction in the present value of expected taxes occasioned by the transactions. The evidence also suggests that the gains from saleleasebacks accrue solely to lessee firms.

Empirical studies of the modern theories of bond pricing typically choose proxies for the state variables in a rather arbitrary fashion. This paper empirically analyzes the question of the optimal spot rates to use as state variables. The authors' findings indicate that the four-year spot rate serves as the best proxy in the one-state-variable model. In the case of the two-state-variables model, the six-year rate and eight-month rate are identified as best. Tests of the out-of-sample prediction ability indicate that their model is superior to F. R. Macaulay's duration model and alternative proxies for state variables.

Claims ultimately awarded to shareholders of firms in reorganization were examined for a sample of thirty filings under the 1978 Bankruptcy Reform Act. The authors measured the amount paid to shareholders in excess of that which they would have received under the absolute priority rule and found that this amount represents, on average, 7.6 percent of the total awarded to all claimants. Evidence is also reported that common share values reflect a significant proportion of value ultimately received in violation of absolute priority, suggesting that deviations from the rule were expected by the equity markets.

In a dual-currency, flexible exchange rate model, both nominal and real foreign exchange premia depend on investor risk attitudes, consumption parameters, and the stochastic structure of currency and commodity supplies. When supplies are random, their joint correlation structure determines the sign of the premia. If the money supplies are identically distributed, then all foreign exchange premia, regardless of the currency of denomination, are zero. A positive correlation between the value of a country's currency and its nominal interest rate need not indicate real interest rate movements. Relative bond prices can be negatively correlated with the terms of trade.

This paper provides a theory of capital structure based on the effect of debt on investors' information about the firm and on their ability to oversee management. The authors postulate that managers are reluctant to relinquish control and unwilling to provide information that could result in such an outcome. Debt is a disciplining device because default allows creditors the option to force the firm into liquidation and generates information useful to investors. The authors characterize the time path of the debt level and obtain comparative statics results on the debt level, bond yield, probability of default, probability of reorganization, etc.

This paper examines the variance of hourly market returns during 1964-89. Results indicate that return volatility falls from the opening hour until early afternoon and rises thereafter, and is significantly greater for intraday versus overnight periods. Market variance is also shown to change significantly over time, rising after NASDAQ began in 1971, rising after trading in stock options began in 1973, falling after fixed commissions were eliminated in 1975, rising after trading in stock index futures was introduced in 1982, and falling after margin requirements for stock index futures became larger in 1988.

This paper applies a contingent claims approach to examine the duration of a zero coupon bond subject to default risk. One replicating portfolio for a default-prone zero coupon bond contains a long position in the default-free asset plus a short position in a put option on the underlying assets. The duration of the bond is shown to be a weighted combination of the duration of the default-free bond and the put option. The duration is less than maturity and is not an immunizing duration. The technique is then extended to subordinated debt.

In this paper, the authors investigate the effects of relative price variability on output and the stock market, and gauge the extent to which inflation proxies for relative price variability in stock-return-inflation regressions. The evidence shows that the negative stock-return-inflation relations proxy for the adverse effects of relative price variability on economic activity, particularly during the 1970s, when the United States experienced oil supply shocks. Hence, it appears that inflation spuriously affects the stock market in two ways: the aggregate output link of E. F. Fama (1981) and the supply shocks reflected in relative price variability.

In many countries, settlements take place a fixed number of business days after the transaction (United States, Japan). In other countries, settlements take place periodically on a fixed date when all transactions performed before this date are settled (United Kingdom, France, Italy). In both cases, settlement procedures should cause returns not to be identically distributed over all days. The effect is likely to be the largest on markets where all trades are settled only once a month. An empirical investigation of the largest of those markets, the Paris Bourse, demonstrates the importance of the settlement procedure on the distribution of daily returns.