Knowledge that Transforms

Analysis of 60 proxy contests for seats on the boards of exchange-listed firms during 1978–1985 shows that three years after the contest less than one-fifth of the sample firms remain independent, publicly held corporations run by the same management team. Proxy contests are typically followed by managerial resignations, even when dissidents fail to obtain a majority of board seats, and are often followed by sale or liquidation of the firm. The average stockholder wealth gains associated with proxy contests are largely attributable to gains by companies in which dissident activity leads to sale or liquidation.

Researchers investigating the possibility of mean reversion in stock prices with statistics based on multiyear returns have noted difficulties in drawing inferences from these statistics because the approximating asymptotic distributions perform poorly. We develop an alternative asymptotic distribution theory for statistics involving multiyear returns. These distributions differ markedly from those implied by the conventional theory. The alternative theory provides substantially better approximations to the relevant finite-sample distributions. It also leads to empirical inferences much less at odds with the hypothesis of no mean reversion.

We demonstrate that analysts revise their forecasts of net operating income downward following the announcement of an equity-for-debt swap. Their revisions are positively correlated with the size of the stock-price reaction to the swap announcement. This evidence supports the hypothesis that announcements of equity-for-debt swaps convey information about the expected level of cash flows of the firm. We also provide evidence that this information is about transitory changes in the expected cash flows.

Unique data availability and institutional arrangements for new issues in Singapore allow a direct test of the empirical implications of Rock's model of pricing unseasoned new issues. Our empirical results are consistent with the model. Specifically we find that the unseasoned new issues' anomaly disappears when the rationing associated with new issues is incorporated into the analysis. The winner's curse is evident in allocation patterns used in Singapore.

We examine a variety of models in which the variance of a portfolio's excess return depends on a state variable generated by a first-order Markov process. A model in which the state is known to economic agents is estimated. It suggests that the mean excess return moves inversely with the level of risk. We then estimate a model in which agents are uncertain of the state. The estimates indicate that agents are consistently surprised by high-variance periods, so there is a negative correlation between movements in volatility and in excess returns.

We investigate the relationship between management ownership and market valuation of the firm, as measured by Tobin's Q. In a 1980 cross-section of 371 Fortune 500 firms, we find evidence of a significant nonmonotonic relationship. Tobin's Q first increases, then declines, and finally rises slightly as ownership by the board of directors rises. For older firms, there is evidence that Q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder.

This paper introduces an event-study method that incorporates the possibility of a random event date. Consistent with empirical evidence, we assume an event may affect not only the conditional mean of a security's return, but also its conditional variance. We compare the statistical power and efficiency of our maximum-likelihood method with the standard application of traditional event-study methods to multiday security returns. Assuming a two-day event period, our empirical results provide evidence that the multiday approach is robust. We use our maximum-likelihood method to investigate the valuation effects of stock splits and stock dividends.

Dual-class exchange offers give stockholders the oppurtunity to exchange common stock for shares with limited voting rights but higher dividends. This paper develops a model to analyze the exchange decision. It shows that exchange offers can induce outside shareholders to exchange their shares for limited voting shares even though the same shareholders, in the same circumstances but acting collectively, would choose not to exchange.

We develop a model of stock-split behavior in which the split serves as a costly signal of managers' private information because stock trading costs depend on stock prices. We present empirical evidence confirming the relation between stock trading costs and stock prices. The signaling model is estimated using a large sample of splits and explains a substantial fraction of the split-announcement returns.

The mean return for stocks is positive only for days immediately before and during the first half of calendar months, and indistinguishable from zero for days during the last half of the month. This ‘monthly effect’ is independent of other known calendar anomalies such as the January effect documented by others and appears to be caused by a shift in the mean of the distribution of returns from days in the first half of the month relative to days in the last half.