Knowledge that Transforms

This paper analyzes the effect of unexpected dividend changes on the values of common stock, preferred stock, and bonds. Two potential effects are identified: a wealth transfer effect and a signalling effect. Previous studies have shown that positive (negative) dividend change announcements produce positive (negative) common stock price changes. Whereas these findings have been attributed to the signalling aspect of dividends, they are also consistent with the wealth transfer hypothesis. Based on the announcement day returns of common and preferred stock and bond holders, it is demonstrated that the primary factor influencing security returns in response to dividend changes is market signalling. A wealth transfer effect is not necessarily ruled out, but if it exists it is dominated by the signalling effect.

The recommendations of a Canadian brokerage house are evaluated by a number of techniques. The results reveal that an investor following the recommendations would have achieved significantly positive abnormal returns, even after allowing for transactions cost.

This paper compares the properties of dividend announcements and management earnings forecasts as predictors of earnings and firm value. First, the two predictors are compared on the basis of their ability to predict earnings. Then the information they convey about firm value is assessed by comparison of the performance of investment strategies based on values of the two predictors. Finally, the effects of dividend announcements on stock prices are considered.

Stock index futures prices are generally below the level predicted by simple arbitrage models. This paper suggests that the discrepancy between the actual and predicted prices is caused by taxes. Capital gains and losses are not taxed until they are realized. As Constantinides demonstrates in a recent paper, this gives stockholders a valuable timing option. If the stock price drops, the investor can pass part of the loss on to the government by selling the stock. On the other hand, if the stock price rises, the investor can postpone the tax by not realizing the gain. Since this option is not available to stock index futures traders, the futures prices will be lower than standard no‐tax models predict.

In this paper we examine the factors affecting the structure of executives' compensation packages. We focus particularly on the role of various types of delayed compensation as means of “bonding” executives to their firms. The basic problem is to design a compensation package that rewards actions that are in the long‐run interest of the stockholders. Firms must take into account their ability to discern unfortunate circumstances from mismanagement, the extent to which a compensation package forces the executive to face risks beyond his control, and the willingness of a given executive to bear this risk. We use our theory to interpret some executive compensation data from the early 1970s.

This paper presents an economic evaluation of common stock voting rights. An index of relative voting rights inequality for different classes of stock of the same corporation is constructed and the empirical relationship between the market premium on a superior‐voting stock and the voting inequality index is examined. In only three out of the 25 cases could investors have arbitraged between the two classes of stock, although in one case the arbitrage opportunity persisted for several months.

This paper examines the problems of estimating risk measures and their stability in thin markets. It shows analytically that conventional approaches used in previous studies can lead to serious overestimates of the stability of risk measures when shares are subject to thin trading. It then demonstrates, using UK data, that this is, in fact, a serious practical problem, and that the resultant biases are of precisely the form predicted. Finally, the paper presents reliable evidence on the stability of UK risk measures by using an estimation method designed to avoid thin trading bias. Using this approach, risk measures are found to be as stable in the UK as they are in the USA.