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.