Knowledge that Transforms

Risk premiums on dollar-denominated forward and futures contracts depend on risk attitudes, consumption parameters, and the stochastic structure of money and outputs. Pure monetary uncertainty leads to forward market backwardation; pure output uncertainty leads to contango under high risk aversion. Similar conclusions hold for futures contracts if neither money nor output show negative serial correlation. The conflicting effects of money and output shocks can imply that each contract switches between contango and backwardation, that one contract shows contango when the other shows backwardation, and that capital losses are expected on one contract when capital gains are expected on the other.

This paper evaluates a new nonparametric rank test for abnormal security-price performance in event studies. Simulations with daily security-return data show that the rank test is better specified under the null hypothesis and more powerful under the alternative hypothesis than the parametric t-test. Unlike previous nonparametric tests, this rank test does not require symmetry in cross-sectional excess returns distributions for correct specification.

We examine the relation between the prices of Japanese stocks traded on the Tokyo Stock Exchange (TSE) as reflected in the Nikkei Stock Average (NSA) stock index and the prices of the NSA futures contract traded on the Singapore International Monetary Exchange (SIMEX). Since the inception of trading in September 1986, the NSA futures contract has generally sold at a discount relative to its theoretical value. Trading restrictions and transaction costs may explain some of this mispricing, which has been declining over time, as in the U.S. markets.

This paper uses a database of 58 financial innovations from 1974–1986 to examine how investment banks are compensated for their investments in developing new products. Investment banks that create new products do not charge higher prices in the brief period of ‘monopoly’ before imitative products appear, and in the long-run charge prices below, not above, those charged by rivals offering imitative products. However, banks capture a larger share of underwritings with innovations than with imitative products. One interpretation of the price and quantity evidence is that innovators become inframarginal rivals that enjoy lower costs of trading, underwriting, and marketing.

We present evidence that a tax bill containing antitakeover provisions proposed by the U.S. House Ways and Means Committee on October 13, 1987 and approved by the Committee on October 15 was the fundamental economic event causing the greater than 10% decline in the stock market on October 14–16, which arguably triggered the October 19 crash. The bill, which eventually passed without most of the antitakeover provisions, would have limited the deductibility of interest on debt incurred to finance corporate takeovers, leveraged buyouts and recapitalizations, and imposed other restrictions on hostile takeovers.

This study investigates senior management turnover in financially distressed firms. In any given year, 52% of sampled firms experience turnover if they are either in default on their debt, bankrupt, or privately restructuring their debt to avoid bankruptcy. A significant number of changes are initiated by firms' bank lenders. Following their resignation from these firms, managers are not subsequently employed by another exchange-listed firm for at least three years. Results are consistent with managers experiencing large personal costs when their firms default.

This paper investigates the determinants of security design. We consider the assignment of both cash flows and voting rights, focusing on corporate control. We postulate that a conflict of interest exists between contestants for control and outside investors. The conflict arises because private benefits of control give contestants an incentive to acquire control even when this reduces firm value. Security design is a tool for resolving these conflicts and maximizing firm value. Our main result is that a single voting security is optimal.

This study documents the organizational changes that took place at the O.M. Scott & Sons Company in response to its leveraged buyout. Our findings confirm that both the pressure of servicing a heavy debt load and management equity ownership lead to improved performance. Equally important at Scott, however, and undocumented in large-sample studies, are debt covenants restricting how the cash required for debt payments can be generated, the adoption of a strong incentive compensation plan, a reorganization and decentralization of decision making, and the relationship between managers, the leveraged buyout sponsors, and the board of directors.

This paper investigates the effect of share repurchase through transferable put rights (TPRs) on shareholder wealth and corporate control. Transferable put rights make the put option, which is implicit in a tender offer, marketable. Shareholders who do not tender their shares increase their proportional ownership of the firm and extract some of the gains of the tender offer from exiting shareholders. Finally, TPRs improve tax efficiency by ensuring that only shareholders who have the highest tax bases will tender.

Equity valuation effects of decisions by corporations to shift assets to master limited partnerships (MLPs) are examined for the period 1982–1987. Positive average abnormal returns are found for (1) total conversions of corporations to MLPs (5.89%), (2) rollouts of subsets of assets by distribution of MLP equity claims to parent-firm shareholders (6.41%), and (3) rollouts of subsets of assets by public sale of MLP equity claims (2.41%). The positive effects are consistent with tax advantages, reduction in free cash flow, and information signaling. The positive effects for rollouts of subsets of assets are also consistent with reductions in information asymmetry and improvements in asset management.