Knowledge that Transforms

This paper develops and tests hypotheses that explain the choice of accounts receivable management policies. The tests focus on both cross-sectional explanations of policy-choice determinants, as well as incentives to establish captives. The authors find size, concentration, and credit standing of the firm's traded debt and commercial paper are each important in explaining the use of factoring, accounts receivable secured debt, captive finance subsidiaries, and general corporate credit. They also offer evidence that captive formation allows more flexible financial contracting. However, the authors find no evidence that captive formation expropriates bondholder wealth.

This paper offers an explanation for the underpricing of best efforts new issues and demonstrates that best efforts contracts allow issuers to use information from the market. If investors obtain information that indicates that a project will not be profitable, their demand will be low and the offering will be withdrawn. If this information is costly, investors will have to be compensated for its purchase through a lower offering price, which means that issuers will have to underprice. The result is consistent with the empirical observation that underpricing is considerably greater for best efforts than for firm commitment contracts.

The authors adapt a contingent claims model of the firm to reflect the incentive effects of the capital structure and, thereby, to measure the agency costs of debt. An underlying model of the firm and the stochastic features of its product market are analyzed and an optimal operating policy is chosen. The authors identify the change in operating policy created by leverage and value this change. The model determines the value of the firm and its associated liabilities incorporating the agency consequences of debt.

This paper uses both an ARIMA transfer-function intervention model and a panel data analysis to examine the effect of the Ohio deposit insurance crisis in 1985 on the pricing of six-month retail certificates of deposit (CDs) for federally-insured Ohio banks and savings and loans. Adjusting for pricing reactions due to changes in market rates, the authors find a significant, unanticipated rise in CD-rate premiums on the initial event week of the crisis that continued for approximately seven weeks. Consistent with a contingent insurance guarantee hypothesis, rate premiums are found to be risk based.

Postwar U.S. data are characterized by negative correlations between real equity returns and inflation and by positive correlations between real equity returns and money growth. These patterns are closely matched quantitatively by an equilibrium monetary asset pricing model. The model also implies negative correlations between expected.asset returns and expected inflation, and it predicts that the inflation-asset return correlation will be more strongly negative when inflation is generated by fluctuations in real economic activity than when it is generated by monetary fluctuations.

The authors analyze personal open market trades by managers around stock repurchases by tender offer. With the exception of Dutch auction offers, managers trade their firm's shares prior to repurchase announcements as though repurchases convey favorable inside information to outsiders. Prior to fixed price repurchase offers that do not follow takeover-related events, managers increase their buying and reduce their selling of their firm's shares. Prior to repurchases that follow takeover-related events, only a decrease in selling is found. No abnormal trading precedes Dutch auction repurchase offers.

Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market "beta", size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in "beta" that is unrelated to size, t he relation between market "beta" and average return is flat, even when "beta" is the only explanatory variable.

This paper describes the firm's decision to borrow short- term versus long-term and shows how the introduction of interest rate swaps affects this choice. The model shows that in the absence of a swap market, interest rate uncertainty can lead firms to substitute long-term for short-term financing. However, when swaps exist, there is a tendency for firms that expect their credit quality to improve to borrow short-term and use swaps to hedge interest rate risk. The model suggests that, while the demand for fixed for floating swaps is enhanced, the demand for floating for fixed swaps is reduced by the presence of asymmetric information.

Stock Price Indices are compared across countries in an attempt to explain why they exhibit such disparate behavior. Three separate explanatory influences are empirically documented. First, part of the behavior can be attributed to a technical aspect of index construction; some indices are more diversified than others. Second, each country's industrial structure plays a major role in explaining stock price behavior. Third, for the majority of countries, a portion of national equity index behavior can be ascribed to exchange rate behavior. Exchange rates explain a significant portion of common currency denominated.national index returns, although the amount explained by exchange rates is less than the amount explained by industrial structure for most countries.

Over the two-year period prior to the bankruptcy announcement, insider trading is significantly greater for over-the-counter bankrupt firms, but not for exchange-listed firms, than for an industry-size matched sample of nonbankrupt firms. In addition, the level of insider selling increases over the final five months leading to the first public announcement of over-the-counter firms. Finally, firms displaying the most negative price reaction over the announcement period are found to have a significantly larger proportion of insider selling than other firms.