I examine whether monitoring-related contract costs are reflected in bank loan spreads and find evidence that cross-monitoring by senior and subordinate claimholders is associated with smaller spreads. I also find that loan spreads reflect financial contract costs of controlling borrower behavior toward the assets being financed. These results support the importance of contract costs in firms' financing decisions and provide evidence of the importance of monitoring in bank lending arrangements.

We investigate the relation between the Value Line enigma and post-earnings-announcement drift. The ability of Value Line's ‘timeliness’ ranks to predict future abnormal returns is well-documented. However, we show that most rank changes occur within eight trading days of an earnings announcement. Once we control for post-earnings-announcement drift, differences in abnormal returns across Value Line timeliness ranks are no longer significant. Moreover, we find that timeliness ranks have no predictive power for firms with small earnings ‘surprises’. We conclude that the Value Line enigma is a manifestation of post-earnings-announcement drift.

A highly controversial issue in financial economies is whether stocks overreact. In this paper we find an economically-important overreaction effect even after adjusting for size and beta. In portfolios formed on the basis of prior five-year returns, extreme prior losers outperform extreme prior winners by 5–10% per year during the subsequent five years. Although we find a pronounced January seasonal, our evidence suggests that the overreaction effect is distinct from tax-loss selling effects. Interestingly, the overreaction effect is substantially stronger for smaller firms than for larger firms. Returns consistent with the overeaction hypothesis are also observed for short windows around quarterly earnings announcements.

Most models of market volatility use either past returns or ex post volatility to forecast volatility. In this paper, the dynamic behavior of market volatility is assessed by forecasting the volatility implied in the transaction prices of Standard & Poor's 100 index options. We test and reject the hypothesis that volatility changes are unpredictable. However, while our statistical model delivers precise forecasts, abnormal returns are not possible in a trading strategy (based on daily out-of-sample volatility projections) which takes transaction costs into account, suggesting that predictable time-varying volatility is consistent with market efficiency.

Average common stock price responses to convertible preferred stock calls are significantly negative only when firms employ underwriters to assure conversion. Previous work reports similar results for convertible bond calls; we find that the stock price reaction does not depend upon the type of convertible security being called. The results support the idea that managers are more likely to have calls underwritten the more unfavorable their private information about firm value.