Knowledge that Transforms

This paper documents that a successful tender offer increases the combined value of the target and acquiring firms by an average of 7.4%. We also provide a theoretical analysis of the process of competition for control of the target and empirical evidence that competition among bidding firms increases the returns to targets and decreases the returns to acquirers, that the supply of target shares is positively sloped, and that changes in the legal/institutional environment of tender offers have had no impact on the total (percentage) synergistic gains created but have significantly affected their division between the stockholders of the target and acquiring firms.

We document a seasonal pattern in stock returns around quarterly earnings announcement dates: small firms show large positive abnormal returns and a sizable increase in the variability of returns around these dates. Only part of the large abnormal returns can be accounted for by the tendency of firms with good news to announce early. Large firms show no abnormal returns around announcement dates and a much smaller increase in variability.

This paper specifies the single-beta capital asset pricing model for the pricing of forward foreign exchange contracts from the point of view of a U.S. investor. Parametric specification of the betas as ARCH-like processes explicitly allows for time variation as well as sign variation of the risk premium in the forward foreign exchange market. I estimate the model jointly for four currencies, using a generalized method of moments procedure. The results show significant time variation for the betas and tests of the overidentifying restrictions are generally favorable to the model.

This paper examines the intraday market response to announcements of new equity issues. For fifteen minutes following the announcement, there is abnormally high volume and a -1.3% average return. There is also a small, but significant, negative average return in the hour before the announcement. Issue size, intended use of proceeds, and estimated profitability of new investment are uncorrelated with the announcement effect. After the issuance of new shares, there is a significant price recovery of 1.5%. This evidence is inconsistent with many theoretical rationales for the negative market reaction to new equity issue announcements.

The power of dividend yields to forecast stock returns, measured by regression R2, increases with the return horizon. We offer a two-part explanation. (1) High autocorrelation causes the variance of expected returns to grow faster than the return horizon. (2) The growth of the variance of unexpected returns with the return horizon is attenuated by a discount-rate effect - shocks to expected returns generate opposite shocks to current prices. We estimate that, on average, the future price increases implied by higher expected returns are just offset by the decline in the current price. Thus, time-varying expected returns generate ‘temporary’ components of prices.

Dual-class exchange offers give stockholders the oppurtunity to exchange common stock for shares with limited voting rights but higher dividends. This paper develops a model to analyze the exchange decision. It shows that exchange offers can induce outside shareholders to exchange their shares for limited voting shares even though the same shareholders, in the same circumstances but acting collectively, would choose not to exchange.

This paper develops and tests the uncertain information hypothesis as a means of explaining the response of rational, risk-averse investors to the arrival of unanticipated information. The theory predicts that following news of a dramatic financial event, both the risk and expected return of the affected companies increase systematically, and that prices react more strongly to bad news than good. An empirical investigation of over 9000 marketwide and firm-specific events produces results consistent with these predictions. We conclude that the market reacts to uncertain information in an efficient, if not instantaneous, manner.

We develop a model of stock-split behavior in which the split serves as a costly signal of managers' private information because stock trading costs depend on stock prices. We present empirical evidence confirming the relation between stock trading costs and stock prices. The signaling model is estimated using a large sample of splits and explains a substantial fraction of the split-announcement returns.

One version of the consumption-based asset pricing model implies a linear relation between expected returns and expected consumption growth. This paper provides evidence that the expected real term structure contains information that can be used to forecast consumption growth. The evidence is strongest for the 1970s and 1980s. The real term structure contains more information than two alternative measures: lagged consumption growth and lagged stock returns. Further, the real term structure appears to have slightly more forecasting power than the leading commercial econemetric models.

Theories of corporate payout policy do not explain the observed form of distributions to shareholders. Although open-market repurchases appear to have tax advantages, cash dividends are overwhelmingly chosen. We argue that there are costs associated with open-market-repurchase programs, since they provide managers with opportunities to use inside information to benefit themselves at stockholders' expense. We offer evidence suggesting that bid-ask spreads widen around repurchase announcements, as predicted by our analysis. Since these costs of repurchases do not arise with cash dividends, our analysis implies that repurchases do not dominate cash dividends for making distributions to shareholders.