This paper examines a large, randomly chosen, sample of bond indentures focusing on the constraints they set on dividend payments that have the potential to transfer wealth from the bondholders (i.e., payments which are financed by a new debt issue or reduced investment). The nature of these restrictions support the hypothesis that bond convenants are structured to control the conflict of interest between stockholders and bondholders. Further, the empirical evidence suggests that these constraints are not binding — i.e., stockholders do not pay themselves as much dividends as they are allowed to. Explanations of this puzzling empirical regularity are suggested.

Announcements of new equity issues have been seen to have a negative effect on stock prices. Potential explanations of this negative effect - the price-pressure, wealth-redistribution, and information-release hypotheses - imply different bond-price reactions to the announcements. By investigating bond-price behavior around the announcement of new equity issues this paper distinguishes the relative importance of these hypotheses. The evidence presented of a significant drop in bond prices is consistent with the information-release hypotheses.

This paper contains a test of a new aspect of the informational content of dividend; namely, is there information in the timing of the announcements? The empirical evidence indicates that the market expects ‘bad news’ to be delivered late and that these expectations are confirmed. Mean excess returns of stock prices around late announcements are, depending on the assumed returns generating process, either significantly negative or insignificant while significantly positive around the entire population of announcements. Moreover, the proportion and magnitude of dividend reductions associated with late announcements are significantly larger than in the complete universe of announcements.

Past studies indicate that stock prices are affected by announcements of unexpected dividend changes, i.e., unexpectedly large dividends are associated with positive stock price response. Two explanations of this empirical regularity, ‘the information content hypothesis’ and the ‘wealth redistribution hypothesis’, imply different bond price behavior around dividend announcements. The information content hypothesis predicts a positive bond price response to unexpectedly large dividends, while the wealth redistribution hypothesis predicts the opposite. This paper distinguishes between the relative importance of the two hypotheses by empirically investigating bond price behavior around dividend announcements. The evidence presented is consistent with the information content hypothesis. However, the gains associated with positive information are captured by the stockholders, while the losses are shared with the bondholders.

The Myers and Majluf (1984) model predicts a nonpositive price reaction to an announcement of a new issue of equity. This paper shows that the Myers and Majluf result is a direct outcome of their assumption that all potential projects facing the firm have a nonnegative net present value. Refining the Myers and Majluf model, by allowing for the realistic possibility of potential projects having negative net present values, leads to different predictions. The refined model predicts positive as well as negative stock price responses, consistent with recent empirical evidence concerning the stock price effects of new stock issues.

We show that estimating demand and supply elasticities at the opening stage of trading at the Tel Aviv Stock Exchange is highly sensitive to which of several reasonable measures is used. We find that the demand curve is more elastic than the supply curve and that both are much more elastic in their “executable” areas. The empirical evidence indicates that elasticity is increasing during the continuous stage of trading. We discuss methods of estimation of price impact and document that the actual measure of price impact in call auctions is larger and more permanent for buys than for sells.