Knowledge that Transforms

Hendrik Bessembinder, Herbert M. Kaufman, A Comparison of Trade Execution Costs for NYSE and NASDAQ-Listed Stocks, The Journal of Financial and Quantitative Analysis, Vol. 32, No. 3 (Sep., 1997), pp. 287-310

Fama and French (1992) report that size and the book-to-market ratio capture the cross-sectional variation of average stock returns for the universe of NYSE, Amex, and Nasdaq securities. This paper, in providing an exhaustive exploration of book-to-market across the dimensions of firm size, exchange listing, and calendar seasonally, reports that Fama and French's empirical findings are driven by two features of the data: a January seasonal in the book-to-market effect, and exceptionally low returns on small, young, growth stocks. In the largest size quintile of all firms (accounting for 73% of the total market value of all publicly traded firms), book-to-market has no significant explanatory power on the cross-section of realized returns during the 1963–1995 period. Thus, book-to-market as such would have less importance to money managers than the literature would have led us to believe.

William R. Melick, Charles P. Thomas, Recovering an Asset's Implied PDF from Option Prices: An Application to Crude Oil during the Gulf Crisis, The Journal of Financial and Quantitative Analysis, Vol. 32, No. 1 (Mar., 1997), pp. 91-115

I examine the relation between corporate debt ownership structure and several firm characteristics suggested by recent theory. The results demonstrate the importance of monitoring and information costs, the likelihood and costs of inefficient liquidation, and borrowers' incentives in affecting firms' debt source preferences. Several theoretical predictions receive support, while others do not. The results also suggest important differences between bank and private non-bank debt, which contrasts with most theoretical models. Additionally, I find evidence of systematic use of bank debt by firms with access to public debt, suggesting the benefits attributed to bank debt in theoretical models remain important after firms gain access to public debt markets. Although different lenders appear to have different maturity preferences, the results also suggest debt maturity and debt ownership decisions may be separable.

Is executive compensation influenced by the composition of the board of directors?About 8% of chief executive officers (CEOs) are reciprocally interlocked with another CEO-the current CEO of firm A serves as a director of firm B and the current CEO of firm B serves as a director of firm A. Roughly 20% of firms have at least one current or retired employee sitting on the board of another firm and vice versa.I investigate how these and other features of board composition affect CEO pay by using a sample of 9,804 director positions in America's largest companies.CEOs who lead interlocked firms earn significantly higher compensation.Also, interlocked CEOs tend to head larger firms.After controlling for firm and CEO characteristics, the pay gap is reduced dramatically.However, when firms that are interlocked due to documented business relationships are considered not interlocked, the measured return to interlock is as high as 17%.There also is evidence that the return to interlock was higher in the 1970s than in the early 1990s.

Christopher Neely, Paul Weller, Rob Dittmar, Is Technical Analysis in the Foreign Exchange Market Profitable? A Genetic Programming Approach, The Journal of Financial and Quantitative Analysis, Vol. 32, No. 4 (Dec., 1997), pp. 405-426