Knowledge that Transforms

Ex-dividend day returns vary over time. The ex-day returns of high-yield stocks are persistently positive for some time periods and negative for others; in contrast, ex-day returns of low-yield stocks are always positive and less variable. The authors are unable to explain the variation with changes in the tax code but they do find a strong effect for the introduction of negotiated commissions. The authors find evidence that corporate dividend capturing is affecting ex-day returns and confirm the findings of R. H. Gordon and D. F. Bradford (1980) that the price of dividends is countercyclical.

The authors derive a role for inside investors, such as venture capitalists, in resolving various agency problems that arise in a multistage financial contracting problem. Absent an inside investor, the choice of securities is unlikely to reveal all private information and overinvestment may occur. An inside investor, however, always makes optimal investment decisions if and only if he holds a fixed-fraction contract, where he always receives a fixed fraction of the project's payoff and finances that same fraction of future investments. This contract also eliminates any incentives of the venture capitalist to misprice securities issued in later financing rounds.

This article investigates the change in operating performance of firms as they make the transition from private to public ownership. A significant decline in operating performance subsequent to the initial public offering (IPO) is found. Additionally, there is a significant positive relation between post-IPO operating performance and equity retention by the original entrepreneurs but no relation between post-IPO operating performance and the level of initial underpricing. Postissue declines in the market-to-book ratio, price/earnings ratio, and earnings per share are also documented.

This study finds that highly leveraged firms lose substantial market share to their more conservatively financed competitors in industry downturns. Specifically, firms in the top leverage decile in industries that experience output contractions see their sales decline by 26 percent more than do firms in the bottom leverage decile. A similar decline takes place in the market value of equity. These findings are consistent with the view that the indirect costs of financial distress are significant and positive. Consistent with the theory that firms with specialized products are especially vulnerable to financial distress, we find that highly leveraged firms that engage in research and development suffer the most in economically distressed periods. We also find that the adverse consequences of leverage are more pronounced in concentrated industries.

We study the relation between the number of news announcements reported daily by Dow Jones & Company and aggregate measures of securities market activity including trading volume and market returns. We find that the number of Dow Jones announcements and market activity are directly related and that the results are robust to the addition of factors previously found to influence financial markets such as day-of-the-week dummy variables, news importance as proxies by large 'New York Times' headlines and major macroeconomic announcements, and non-information sources of market activity as measured by dividend capture and triple switching rating. However, the observed relation between news and market activity is not particularly strong and the patterns in news announcements do not explain the day-of-the-week seasonalities in market activity. Our analysis of the Dow Jones database confirms the difficulty of linking volume and volatility to observed measures of information.

Mean reversion in stock index basis changes has been presumed to be driven by the trading activity of stock index arbitragers. The authors propose here instead that the observed negative autocorrelation in basis changes is mainly a statistical illusion, arising because many stocks in the index portfolio trade infrequently. Even without formal arbitrage, reported basis changes would appear negatively autocorrelated as lagging stocks eventually trade and get updated. The implications of this study go beyond index arbitrage, however. The authors' analysis suggests that spurious elements may creep in whenever the price-change or return series of two securities or portfolios of securities are differenced.

This paper examines the efficiency of the legal gambling market for major league baseball. Weak-form tests of market efficiency within and across odds lines are performed. Surprisingly, the consistently observed favorite-longshot bias in racetrack betting is shown to exist in reverse for baseball bettors. However, these and other deviations from efficiency are shown to be insufficient to allow for profitable betting strategies when commissions are considered.

This article uses a sample of 120 unsuccessful management buyouts to test whether operational improvements following successful management buyouts are a result of organizational changes or private information. The findings are consistent with the organizational changes hypothesis. Firms with an unsuccessful management buyout had no increase in operating performance following the buyout attempt. In addition, the cumulative abnormal stock return from before the attempted buyout until two years after the attempt is insignificantly different from 0 percent. The author also finds that management turnover following an unsuccessful management buyout is significantly higher than normal.

The authors propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds. The method is applied to an extension of a two-factor model due to J. C. Cox, J. E. Ingersoll, and S. A. Ross (1985). The authors' results show that estimates based on only bills imply unreasonably large price errors for longer maturities. They reject the original Cox, Ingersoll, and Ross model using a likelihood ratio test and conclude that the extended Cox, Ingersoll, and Ross model also fails to provide a good description of the Treasury market.

The authors document abnormal trading profits in Dutch auction self-tenders. Tender period profits–buying after announcement and selling just before expiration–are 1.74 percent. Buying just before expiration and tendering yields abnormal profits of 1.36 percent. Total profits from buying just after announcement and tendering remain positive after adjusting for bid-ask spreads. Trading profits are higher for smaller firms and positively correlated with tender period unsystematic risk, suggesting that they arise due to the pricing of event risk.