Knowledge that Transforms

This paper tests the relation between capital structure and a firm's response to short-term financial distress. In a sample of 358 firms that perform poorly for a year, higher predistress leverage increases the probability of operational actions, particularly asset restructuring and employee layoffs. Higher predistress leverage also increases the probability of financial actions such as dividend cuts. These results are consistent with Jensen's (1989) argument that higher predistress leverage increases the speed with which a firm reacts to poor performance. Interestingly, higher managerial holdings reduce the probability of operational actions, especially those that do not generate cash.

We evaluate the performance of alternative test statistics in event studies which include NASDAQ daily security returns. We document varying degrees of test statistic misspecification in NASDAQ samples. In particular, we find that the commonly used standardized test statistic is misspecified in most settings. Although less pervasive, misspecification is also evident in the portfolio test statistic estimated using the time series of portfolio mean abnormal returns. The nonparametric rank statistic [introduced in Corrado (1989)] performs the best overall in NASDAQ samples; we recommend its use with market model abnormal returns based on an equal-weighted NASDAQ market index.

Data for the 516 papers published in volumes 1–30 of the Journal of Financial Economics in the period 1974–91 are analyzed. 477 authors from 136 institutions contributed papers, and these papers received 16,231 citations according to the Social Science Citation Index. Lists of authors and institutions who have contributed the most papers to the JFE and a list of the mostly highly-cited JFE papers show why the Journal has been successful in influencing the finance and economics literature during its first 18 years.

This paper documents that the relation of the final offer price to the range of anticipated offer prices disclosed in the preliminary prospectus is a good predictor of initial returns. Issues that have final offer prices which exceed the limits of the offer range have greater underpricing than all other initial public offerings, and are also more likely to increase the number of shares issued. These results are consistent with the pricing and allocation schedule proposed by Benveniste and Spindt (1989), in which shares in an offering are rationed and prices only partially adjust to new information.

Rationing data for initial public offerings (IPOs) in the Finnish market make possible a test of Rock's (1986) winner's curse hypothesis. The evidence from 80 IPOs issued between 1984 and 1989 confirms the presence of the winner's curse: average returns adjusted for the bias in allocation are lower than average unadjusted returns. But the initial returns of these IPOs appear unrelated to lawsuit avoidance, as the sample firms seem unlikely to incur legal liabilities. In the long run, consistent with the evidence in the United States, the IPO firms substantially underperform the Helsinki Stock Exchange value-weighted index.

This paper analyzes a proxy solicitation and subsequent restructuring at Honeywell Inc. in 1989. The solicitation was financed and led by noninstitutional investors and co-sponsored by two public pension funds. The solicitation and restructuring both appear to increase firm value, though the effects of the restructuring are much larger. The voting records of Honeywell's 72 largest institutional shareholders reveal that banks and insurance companies are significantly more supportive of two management-sponsored antitakeover proposals than public pension funds add independent investment managers. Existing business ties between Honeywell and its institutional investors, however, do not appear to explain these voting differences.

Japanese mergers and acquisitions in the U.S. create statistically significant wealth gains for both Japanese bidders and U.S. targets. Consistent with the literature on foreign direct investment and the market for corporate control, bidder-specific characteristics and exchange-rate movements are useful in explaining the cross-sectional variation in bidder returns: returns to Japanese bidders and to the portfolio of Japanese bidders and U.S. targets increase with the bidder's leverage, the bidder's ties to financial institutions through borrowings, and the depreciation of the dollar in relation to the Japanese yen.

We investigate the value created through spinoffs over the 1965–1988 period by measuring the stock returns of spinoffs, their parent firms, and parent-spinoff combinations for periods of up to three years following the spinoffs. We find significantly positive abnormal returns for spinoffs, their parents, and the spinoff-parent combinations. Both the spinoffs and parents experience an unusually high incidence of takeovers and the abnormal performance is limited to firms involved in takeover activity. These findings suggest that spinoffs provide a low-cost method of transferring control of corporate assets to bidders who will create greater value.

The seemingly unrelated problems of stock market liquidity and manager-stockholder contracting are closely intertwined. Active stockholders who reduce agency costs by providing internal monitoring also reduce stock liquidity by creating information asymmetry problems. Conversely, stock liquidity discourages internal monitoring by reducing the costs of ‘exit’ of unhappy stockholders. The U.S. has exceptionally many actively-traded firms with widely-diffused stockholding because public policy has favored stock market liquidity over active investing. And, the benefits of stock market liquidity must be weighed against the costs of impaired corporate governance.

This paper empirically investigates the seasonal behavior of the liquidity premium in asset pricing. The evidence suggests a strong seasonal component. In the 1961–1990 period, the liquidity premium is reliably positive only during the month of January. For the non-January months, one cannot detect a positive liquidity premium. The impact of the relative bid-ask spreads on asset pricing in non-January months cannot be reliably distinguished from zero. In contrast to Amihud and Mendelson (1986), however, our evidence suggests that the size effect is significant, even after controlling for spreads.