This study examines the effect of mergers on the wealth of bidding firms' shareholders. Bidding firms gain significantly during the twenty-one days leading to the announcement of each of their first four merger bids. These results fail to support the capitalization hypothesis that bidders' gains are captured at the beginning of merger programs. Bidders' abnormal returns are positively related to the relative size of the merger partners, and the gains during the announcement period are larger for mergers which are successful. Though the gains are larger prior to 1969, merger bids after 1969 also significantly increase the wealth of bidding firms' shareholders. The results suggest that the inconclusive findings of the earlier studies may be due to methodological deficiencies. The findings of this study are consistent with value-maximizing behavior by the management of bidding firms.

This paper is concerned with the size-related anomalies in stock returns reported by Banz (1981) and Reinganum (1981). They showed that small firms have tended to yield returns greater than those predicted by the traditional CAPM. We find that the size effect is linear in the logarithm of size, but reject the hypothesis that the ex ante excess return attributable to size is stable through time. We briefly analyze the Seemingly Unrelated Regression Model (SURM) and a two-step procedure as two alternative estimators of the size effect. Due to the instability of the effect, we find that the estimates are sensitive to the time period studied.

A ‘tax-loss selling’ hypothesis has frequently been advanced to explain the ‘January effect’ reported in this issue by Keim. This paper concludes that U.S. tax laws do not unambiguously predict such an effect. Since Australia has similar tax laws but a July–June tax year, the hypothesis predicts a small-firm July premium. Australian returns show pronounced December–January and July–August seasonals, and a premium for the smallest-firm decile of about four percent per month across all months. This contrasts with the U.S. data in which the small-firm premium is concentrated in January. We conclude that the relation between the U.S. tax year and the January seasonal may be more correlation than causation.