Knowledge that Transforms

Richard Ashley, Douglas Patterson, A Nonparametric Distribution-Free Test for Serial Independence in Stock Returns: A Comment, The Journal of Financial and Quantitative Analysis, Vol. 25, No. 3 (Sep., 1990), pp. 417-418

Previous studies have found that positive abnormal stock returns are associated with corporate spin-offs and divestitures. Using a simplified model of the process of investor tax trading, we show that an improvement in the value of the tax-timing option component of securities prices is a likely contributing factor to those abnormal returns. The analysis indicates that the same phenomenon also may be part of the explanation for the generally higher returns observed for spin-offs than for divestitures, both when leverage is and is not present in the restructuring transactions.

Charles J. Corrado, John Schatzberg, A Nonparametric Distribution-Free Test for Serial Independence in Stock Returns: A Correction, The Journal of Financial and Quantitative Analysis, Vol. 25, No. 3 (Sep., 1990), pp. 411-415

Eliezer Z. Prisman, A Unified Approach to Term Structure Estimation: A Methodology for Estimating the Term Structure in a Market with Frictions, The Journal of Financial and Quantitative Analysis, Vol. 25, No. 1 (Mar., 1990), pp. 127-142

Theodore M. Barnhill, Quality Option Profits, Switching Option Profits, and Variation Margin Costs: An Evaluation of Their Size and Impact on Treasury Bond Futures Prices, The Journal of Financial and Quantitative Analysis, Vol. 25, No. 1 (Mar., 1990), pp. 65-86

Greenmail payments are widely viewed as actions designed by managers to perpetuate their tenure in office. This view, which suggests that greenmail prohibitions would enhance shareholder wealth, receives mixed empirical support in this paper. The average market reaction to charter amendments prohibiting greenmail payments is weakly negative, suggesting there is a value to maintaining managerial flexibility. Nonlinear maximum likelihood estimation, however, reveals a strong positive correlation between the market reaction and the firm's abnormal stock price runup over the three months just prior to the proxy mailing date. For the subsample of firms with a relatively large prior runup, the precommitment not to pay greenmail is value enhancing. If the prior runup reflects takeover rumors, then this evidence is consistent with the proposition that greenmail payments amidst takeover speculations are value decreasing.

This paper demonstrates that Black-Scholes option pricing model hedge positions that are risk free when rebalanced continuously will frequently exhibit substantial systematic risk when rebalanced at finite intervals. This systematic risk may have biased important empirical tests of the option pricing model. Moreover, this systematic risk means that the Black-Scholes option pricing model is inherently inconsistent with the discrete time version of the Capital Asset Pricing Model (CAPM).

This paper considers the capital structure and debt maturity choice for a value-maximizing corporation. In the model, interest expense is tax deductible, bankruptcy is costly, and debt is fairly priced at issue. In contrast to the results of Kane, Marcus, and McDonald (1985), optimal debt maturity does not always approach zero in the absence of transaction costs, and is increasing in the volatility of the assets of the firm. The model predicts a positive association between the value of leverage and total risk in some circumstances.

Despite nonstationarities in the factor betas and factor prices of the Chen, Roll, Ross (1986) multifactor model, investors are rewarded for bearing risks associated with the change in expected inflation and industrial production in non-January months; however, variations in these factors have opposite influences on stock prices. These findings may partially explain why several recent studies fail to detect a significant non-January risk premium in the stock market, but this evidence is only suggestive since theoretical and statistical difficulties prevent precise interpretations of specific pricing relations in the Chen, Roll, Ross model.

This paper examines the pricing of exchange-traded long-term corporate bond portfolios. Observable instruments measuring the term structure of interest rates, levels of bond and stock prices, and a January dummy are found to predict excess returns on corporate bonds. An intertemporal asset pricing model with changing expectations and unobservable factors is then estimated for the predictable excess returns using Hansen's Generalized Method of Moments. The results show that a multibeta linear time-varying model of con? ditional expected returns with constant betas can successfully value corporate bonds. Spe? cifically, the tests indicate the presence of two time-varying hedge portfolios. The data, however, support a single latent variable specification when all January observations are excluded. This result suggests the existence of a strong January seasonal in one of the latent variables.