This paper presented a stochastic discounted cash flow model with which mortgage companies can assess the value of a mortgage servicing contract. The model was illustrated with data provided by a group of eight MBC's. Simulation and sensitivity analysis showed the impact of different mortgage amounts, termination distributions, and expected rates of servicing cost increases on the value of a mortgage servicing portfolio. In general, because servicing contracts are long-term fixed revenue arrangements, high rates of servicing cost increases substantially reduce the value of an MBC's servicing portfolio. To the extent that mortgage prepayments are reduced by high inflation rates, the impact of high cost increases on the value of a servicing portfolio is compounded.

During the 1990s and beyond, countries around the world witnessed calls and/or mandates for more outside directors on publicly traded companies' boards even though extant studies find no significant correlation between outside directors and corporate performance. We examine the connection between changes in board composition and corporate performance in the U.K. over the interval 1989–1996, a period that surrounds publication of the Cadbury Report, which calls for at least three outside directors for publicly traded corporations. We find that companies that add directors to conform with this standard exhibit a significant improvement in operating performance both in absolute terms and relative to various peer group benchmarks. We also find a statistically significant increase in stock prices around announcements that outside directors were added in conformance with this recommendation. We do not endorse mandated board structures, but the evidence appears to be that such a mandate is associated with an improvement in performance in U.K. companies.

Prior studies have reported a positive correlation between insider trading and stock price changes implying that insider (i.e., informed) trades affect price discovery differently than non-insider (i.e., uninformed) trades. Based on these results, various scholars have argued for the legalization of insider trading to facilitate rapid price discovery. We analyze the trading activity of a confessed inside trader, Ivan Boesky, in Carnation's stock just prior to Nestle's 1984 acquisition of Carnation, and find that our tests are unable to distinguish the price effect of Boesky's (i.e., informed) purchases of Carnation's stock from the effect of non-insider (i.e., uninformed) purchases. Our conclusion survives extensive robustness tests and has methodological and public policy implications.

Gary C. Sanger, John J. McConnell, Stock Exchange Listings, Firm Value, and Security Market Efficiency: The Impact of NASDAQ, The Journal of Financial and Quantitative Analysis, Vol. 21, No. 1 (Mar., 1986), pp. 1-25

Elizabeth Tashijan Johnston, William A. Kracaw, John J. McConnell, Day-of-the-Week Effects in Financial Futures: An Analysis of GNMA, T-Bond, T-Note, and T-Bill Contracts, The Journal of Financial and Quantitative Analysis, Vol. 26, No. 1 (Mar., 1991), pp. 23-44

The literature on leasing has generally concentrated on providing management with a selection criterion for the lease-versus-purchase decision; over the years, a variety of recommendations have been advanced ([1], [3], [6], [8], [16], and [18]). More recent papers, however, have shown that the terms of leasing contracts in a transaction-costless competitive capital market will inevitably be such as to render the stockholders of value-maximizing firms indifferent to that decision ([11] and [12]). Simply put, competition among potential lessors-together with the mandates of securities-price-equilibrating trading activities of investors in lessee and lessor firms—will necessarily drive the present values of the cash flows associated with lease arrangements to parity with direct asset purchase prices.

Prior studies argue that investment by undervalued firms that require external equity is particularly sensitive to stock prices in irrational capital markets. We present a model in which investment can appear to be more sensitive to stock prices when capital markets are rational, but subject to imperfections such as debt overhang, information asymmetries, and financial distress costs. Our empirical tests support the rational (but imperfect) capital markets view. Specifically, investment–stock price sensitivity is related to firm leverage, financial slack, and probability of financial distress, but is not related to proxies for firm undervaluation. Because, in our model, stock prices reflect the net present values (NPVs) of investment opportunities, our results are consistent with rational capital markets improving the allocation of capital by channeling more funds to firms with positive NPV projects.

James M. Miller, John J. McConnell, Open-Market Share Repurchase Programs and Bid-Ask Spreads on the NYSE: Implications for Corporate Payout Policy, The Journal of Financial and Quantitative Analysis, Vol. 30, No. 3 (Sep., 1995), pp. 365-382

This paper evaluates the conjecture that excess stock returns that have been documented around the announcement of corporate spin-offs represent, at least in part, the re-creation of value destroyed at the time of an earlier acquisition. We evaluate this question with a sample of spin-offs that originated as earlier acquisitions. At the time of the original acquisition, on average, announcement period returns to the bidder and the combined bidder and target firm are negative and significant. Additionally, announcement period returns at the time of the spin-off are negatively and significantly correlated with acquisition announcement period returns.