Knowledge that Transforms

This paper investigates the rationale behind interfirm tender offers by examining the returns realized by the stockholders of firms that were the targets of unsuccessful tender offers and firms that have made unsuccessful offers. Our results suggest that the permanent positive revaluation of the unsuccessful target shares [documented by Dodd and Ruback (1977) and Bradley (1980)] is due primarily to the emergence of and/or the anticipation of another bid that would ultimately result in the transfer of control of the target resources. We also find that the rejection of a tender offer has differential effects on the share prices of the unsuccessful bidding firms depending upon whether the tender offer process results in a change in the control of target resources. On the basis of these results we conclude that acquisitions via tender offers are attempts by bidding firms to exploit potential synergies, not simply superior information regarding the ‘true’ value of the target resources.

In a recent paper Lee et al. derive a pricing formula which is significantly different from that of Black and Scholes. Their derivation is inconsistent due to their failure to recognize that the rate of return of an option written on an asset whose rate of return is lognormally distributed will not be lognormally distributed.

Prior theoretical derivations of the Arbitrage Pricing Theory (APT) bound an aggregate measure of the deviation of mean asset returns from that predicted by a linear pricing equation. It is conceivable, given this bound, that some assets might be badly mispriced by the model. In this paper, a more intuitive derivation of the factor pricing equation is presented which describes the deviation on an asset by asset basis. The deviation is shown to be small for assets in a realistic finite economy and is arbitrarily close to zero for those assets with arbitrarily small size relative to aggregate wealth. It follows that the linear pricing equation provides a good approximation for the mean returns of all traded assets.

A ‘tax-loss selling’ hypothesis has frequently been advanced to explain the ‘January effect’ reported in this issue by Keim. This paper concludes that U.S. tax laws do not unambiguously predict such an effect. Since Australia has similar tax laws but a July–June tax year, the hypothesis predicts a small-firm July premium. Australian returns show pronounced December–January and July–August seasonals, and a premium for the smallest-firm decile of about four percent per month across all months. This contrasts with the U.S. data in which the small-firm premium is concentrated in January. We conclude that the relation between the U.S. tax year and the January seasonal may be more correlation than causation.

This paper performs lower boundary condition tests based on rational pricing of call options and an implied standard deviation test based on the bid/ask prices of options. These efficiency tests attempt to closely approximate conditions in the option markets to avoid the pitfalls indicated by Phillips and Smith (1980). The tests use transactions data and account for the effects of stock and option bid/ask prices, simultaneity of stock and option prices, depth of market, execution lag and transaction costs. The small and relatively infrequent profits due to market mispricing disappear in the lower boundary tests when transaction costs are taken into account. Frequent violations of the tighter boundary conditions in the implied standard deviation test are reported, but the estimated profits cannot be unambiguously attributed to option market inefficiency.

Ross's Arbitrage Pricing Theory (APT) is a tractible and reasonable alternative to the mean-variance model. Nonetheless, understanding of the theory has been obscured by the complexity of the sequence economy models used for motivation. By contrast, we give a simple and direct derivation of the APT in a finite economy. Using an explicit bound on the deviations from APT prices across assets, a coarse calculation shows that theoretical deviations from APT pricing are negligible in our economy.

This paper is concerned with the size-related anomalies in stock returns reported by Banz (1981) and Reinganum (1981). They showed that small firms have tended to yield returns greater than those predicted by the traditional CAPM. We find that the size effect is linear in the logarithm of size, but reject the hypothesis that the ex ante excess return attributable to size is stable through time. We briefly analyze the Seemingly Unrelated Regression Model (SURM) and a two-step procedure as two alternative estimators of the size effect. Due to the instability of the effect, we find that the estimates are sensitive to the time period studied.

This study examines the effect of mergers on the wealth of bidding firms' shareholders. Bidding firms gain significantly during the twenty-one days leading to the announcement of each of their first four merger bids. These results fail to support the capitalization hypothesis that bidders' gains are captured at the beginning of merger programs. Bidders' abnormal returns are positively related to the relative size of the merger partners, and the gains during the announcement period are larger for mergers which are successful. Though the gains are larger prior to 1969, merger bids after 1969 also significantly increase the wealth of bidding firms' shareholders. The results suggest that the inconclusive findings of the earlier studies may be due to methodological deficiencies. The findings of this study are consistent with value-maximizing behavior by the management of bidding firms.

This study examines empirically stock market seasonality in major industrialized countries. Evidence is provided that there are strong seasonalities in the stock market return distributions in most of the capital markets around the world. The seasonality, when it exists, appears to be caused by the disproportionately large January returns in most countries and April returns in the U.K. With the exception of australia, these months also coincide with the turn of the tax year.

When securities are thinly traded OLS techniques yield biased beta estimates. Procedures for calculating consistent estimates are proposed by Scholes and Williams (1977) and by Dimson (1979). This comment examines both procedures and concludes that the Dimson procedure is incorrect and cannot generally be expected to yield consistent beta estimates. However, a variant of this procedure can yield results which are identical to Scholes and Williams' and is, therefore, correct.