Knowledge that Transforms

In this paper we provide a model of the underwritten offerings of new shares of seasoned securities. Our purpose is to explain why the offering price chosen by the underwriter is lower than the market price of the firm's shares. Our model recognizes the interdependence between the markets surrounding the announcement and sale of the new issue and recognizes as well the effect which asymmetric information regarding investor demands has upon the prices in these markets.

This paper measures the effects on stock proces of corporate investments in 5% or more of another company's equity securities. Such investments initiate a process that may end with a takeover, targeted repurchase, takeover by a third party, or sale of the shares. The total valuation effect of the investment for acquiring and target firms includes returns at disclosure of the investment position, the outcome announcement, and related intervening events. For example, the positive return for target firms at initial disclosure of the investment more than offsets the negative return at a targeted repurchase.

We investigate stock market rationality by examining the timeliness and unbiasedness of the market's response to dividend announcements. Our initial findings for market timeliness show a sluggish market reaction to dividend announcements; however, when the ex-dividend effect is controlled for, we find no evidence of a sluggish market reaction. We examine the unbiasedness of the market's response by testing whether the net announcement effect across a sample that is devoid of ex-post selection bias sums to zero. We observe a significant positive net announcement effect and examine several plausible conjectures for this puzzling phenomenon, but none provides a satisfactory explanation.