Knowledge that Transforms

In this paper, we develop sufficient conditions on probability distributions for a three moment (mean, variance, and skewness) consumption‐oriented capital asset pricing model (CAPM) to price correctly a subset of assets. The assumptions that individuals in an allocationally efficient capital market have identical probability beliefs and monotone increasing strictly concave utility functions displaying nonincreasing absolute risk aversion imply an aggregate preference function that exhibits preference for expected return, aversion to variance of return, and preference for positive skewness. For otherwise arbitrary preferences, we show that quadratic characteristic lines are sufficient for a subset of assets to be priced according to a three moment consumption‐oriented CAPM.

BANKRUPTCY COSTS are the deadweight economic costs of firms going bankrupt. They include both ex post bankruptcy costs incurred after a firm's bankruptcy filing, such as transactions costs, and ex ante bankruptcy costs incurred before the filing, such as those resulting from creditors' attempts to reduce their losses if bankruptcy occurs and/or managers' attempts to raise the expected return to equity by increasing the firm's risk.1 This paper has two purposes. First it proposes a model of bankruptcy costs which focuses on the costs of inefficient decision making before the firm's actual bankruptcy filing. The model implies upper bound expressions for total bankruptcy costs. Second, the new U.S. Bankruptcy Code2 went into effect late in 1979 and made important changes in bankruptcy reorganization procedures. The paper poses the question of whether the changes made under the new Code tend to raise or lower aggregate U.S. bankruptcy costs. We approach this question by calculating the upper bound expressions suggested by the model, using parameter values from both before and after the new Code took effect.

In empirical studies of differences between firms which are acquired and those which are not, researchers typically divide firms into two groups‐acquired and nonacquired. In this paper, we argue that cash takeovers may be sufficiently different from noncash acquisitionst hat failure to distinguish between them may lead to inappropriateg eneralizations. We provide evidence from the mid 1970s that three categories of firms can be distinguished:n onacquireda, cquiredi n a cash takeover, and acquired in an exchange of securities.

The paper relates two phenomena in the stock market: the high return during the month of January and the apparent existence of widespread sales of stocks for tax purposes towards the end of the fiscal year. The findings suggest that, due to the tax‐induced sales, the price of many stocks over the last 35 years was temporarily depressed in December but recovered in the following January. This price recovery is a major contributor to the high returns observed in January. The tax effect is present in firms of all sizes but much more pronounced for small firms. The analysis also indicates that a more precise identification of the tax‐switch candidates may prove that the tax‐induced sales are, in fact, the sole contributor to the high January's returns.

This paper investigates the effect of a major Canadian tax reform on the ex‐dividend day behavior of companies on the Toronto Stock Exchange. The results are inconsistent with the hypothesis that price changes on ex‐dividend days reflect the relative taxation of dividends and capital gains for the “representative” investor, but are consistent with the hypothesis that ex‐dividend day price behavior reflects short‐term trading activities.