Knowledge that Transforms

Small firms experience large returns in January and exceptionally large returns during the first few trading days of January. The empirical tests indicate that the abnormally high returns witnessed at the very beginning of January appear to be consistent with tax-loss selling. However, tax-loss selling cannot explain the entire January seasonal effect. The small firms least likely to be sold for tax reasons (prior year ‘winners’) also exhibit large average January returns, although not unusually large returns during the first few days of January.

This paper examines a sample of firms experiencing proxy contests for seats on their board of directors. Dissident shareholders usually fail to obtain a majority of board seats. Nevertheless, they capture some seats, via mechanisms such as cumulative voting, in over half of the sample contests. Regardless of proxy contest outcome, positive and statistically significant share price performance is associated with the contest. That finding is predicted by the standard economic analysis of proxy contests, in which the challenges benefit shareholders by improving corporate performance. The finding runs counter to the claim of Berle (1962) that the economists' view of proxy contests is ‘a wholly imaginary picture’. A portion of the positive share price changes taking place in the early stages of some proxy contests is not permanent, however, and as suggested by Manne (1962) is at least partially attributable to temporary increases in the market value of the vote attached to corporate shares.

This paper presents tests of the hypothesis that the relief imposed in antimerger cases is costly for defendant firms' stockholders. Previous research on this subject suggests that defendants' case-related losses are due entirely to legal expenses and the disruption of productive activity. In this paper it is shown that two out of five portfolios of defendant firms earn abnormal losses when final decisions in antimerger cases are announced. These losses are consistent with the imposition of costly constraints on some defendants by government antitrust enforcers. The tests also show that when acquisitions are canceled following antimerger complaints, the losses to the target firms are substantial and completely offset the gains generated when the acquisitions are proposed.

The traditional analysis of the relative pricing of tax-exempt and taxable debt is a habitat theory of the term structure of interest rates. In the traditional analysis the preferences of investors for particular maturities of debt lead to unique pricing relations at every point on the yield curve which are indicative of investor marginal tax brackets. Recent work by Fama (1977) suggests that banks are potential arbitrageurs across tax-exempt and taxable bond markets which force a particular equilibrium on the pricing of short-term bonds. Miller (1977) suggests that the choice of debt or equity financing by firms in the aggregate forces a similar equilibrium on the pricing of all tax-exempt and taxable bonds. This paper exploits the institution of Regulation Q and its effects on the banking system to bring evidence to bear on the predictions of these three models.

Pre-emptive rights allow existing shareholders to purchase a new offering of shares before the general public. This paper investigates the effect on shareholder wealth of removing pre-emptive rights from corporate charters. Two hypotheses are constrasted: (1) Shareholder wealth maximization suggests that management uses this extra degree of freedom to pick the least cost method for raising new equity; hence, the amendment increases shareholder wealth. (2) Management welfare maximization holds that management will use the passage of the amendment to maximize their own welfare, sometimes to the detriment of shareholders; hence, the amendment decreases shareholder wealth. The evidence indicates that the amendment decreases shareholder wealth.

This paper describes the relation among a variety of asset leasing contracts, including: (1) cancellable operating leases; (2) leases which grant the lesse an option to extend the life of the lease; (3) leases that grant the lessee an option to purchase the leased asset at a fixed price at the maturity date of the lease; (4) leases that grant the lessee the right to purchase the leased asset at its ‘fair market value’ at the maturity date of the lease; (5) leases that grant an option to the lessee to purchase the leased asset at a prespecified price anytime during the life of the lease; (6) leases that require the lessee to purchase the leased asset at a fixed price at the maturity date of the lease; and (7) leases that contain non-cancellation provisions. The paper uses a compound option pricing framework to develop a general model for valuing (or evaluating) each of the types of leasing contracts. Numerical examples are presented to illustrate the effect of the various elements of a leasing contract — including cancellation risk and residual value risk — on equilibrium rental payments.

This paper examines common stock returns and dividend and earnings patterns surrounding specially designated dividends labeled by management as ‘extra’, ‘special’ or ‘year-end’ and compares them to those surrounding regular (unlabeled) dividend increases. The results support the notion that management uses the labeling of dividend increases to convey information to the market about the future potential of the firm. Unlabeled increases appear to contain the most positive information. Contrary to the sometimes suggested view, specially designated dividends appear to convey positive information about future dividends and earnings beyond that relating to the current period.

This paper investigates the effect of voluntary corporate spin-off announcements on shareholder wealth. A significant positive share price reaction is documented for 93 voluntary spin-off announcements between 1963 and 1981. These shareholder gains do not appear to come wholly at the expense of bondholders. Evidence suggests the gains to shareholders may arise from tax and regulatory advantages and/or improved managerial efficiency resulting from the spin-off.

Several studies of mergers and tender offers examine the changes in the value of ownership claims associated with corporate acquisitions and use the observed value changes to address the degree of competition in the market for corporate acquisitions. These studies conclude that the takeover market is competitive on the basis of the abnormal stock price changes of bidding firms, the time series behavior of the market value of target firms, and the proportion of gains that accrue to target and bidding firms. Unfortunately, none of these tests are sufficient to conclude that the takeover market is competitive. A competitive acquisition market implies that the potential gain to unsuccessful bidders at the successful offer price is nonpositive. This implication is tested using data on tender offers in which there are multiple bidders. The results appear to be consistent with competition in the market for corporate acquisitions.

This study examines, month-by-month, the empirical relation between abnormal returns and market value of NYSE and AMEX common stocks. Evidence is provided that daily abnormal return distributions in January have large means relative to the remaining eleven months, and that the relation between abnormal returns and size is always negative and more pronounced in January than in any other month — even in years when, on average, large firms earn larger risk-adjusted returns than small firms. In particular, nearly fifty percent of the average magnitude of the ‘size effect’ over the period 1963–1979 is due to January abnormal returns. Further, more than fifty percent of the January premium is attributable to large abnormal returns during the first week of trading in the year, particularly on the first trading day.