Raymond M. Brooks, Tie Su, A Simple Cost Reduction Strategy for Small Liquidity Traders: Trade at the Opening, The Journal of Financial and Quantitative Analysis, Vol. 32, No. 4 (Dec., 1997), pp. 525-540

Three major motives have been suggested for takeovers: synergy, agency, and hubris. Existing empirical evidence is unable to clearly distinguish among these motives probably due to the simultaneous existence of all three in any sample of takeovers. This paper suggests a way of distinguishing among these competing hypotheses by looking at the correlation between target and total gains. It is argued that this correlation should be positive if synergy is the motive, negative if agency is the motive, and zero if hubris is the motive. The empirical results show that synergy is the primary motive in takeovers with positive total gains even though the evidence is consistent with the simultaneous existence of hubris in this sample. It is also found that agency is the primary motive in takeovers with negative total gains.

This study analyzes the effect of second-hand information on the behavior of security prices and volume using analysts' recommendations published in the monthly “Dartboard” column of the Wall Street Journal. For the two days following the publication of the recommendations, average positive abnormal returns of 4 percent—nearly twice the level of abnormal returns documented in previous research on analyst recommendations—and average volume double normal volume levels on the two days following publication of the recommendations are documented. The positive abnormal return on announcement is partially reversed within 25 trading days. The authors conclude that the positive abnormal return on announcement of the recommendations is a result of naive buying pressure as well as the information content of the analysts' recommendations.

Our paper extends prior work on abandonment and replacement policies by analyzing the effects of both the Darby and the Fisher interest rate hypotheses. In most of the new cases developed, the effect of increased inflation on economic life is ambiguous. In the abandonment problem, we find a greater tendency under the Fisher hypothesis than under the Darby hypothesis for increased inflation to result in an extension of economic life. In contrast, for the replacement problem, there is a greater tendency under the Fisher hypothesis (than under Darby) for inflation to shorten the asset holding period.

Two general methods of computing the rate of return on common stock are being discussed widely. These methods are the internal rate of return and the geometric mean of the annual rates of return. The Gordon-Shapiro formulation, , is the best known model of the former type.

Conservative financial policies are often criticized as serving the interests of managers rather than the interests of stockholders. We test this argument by examining the operating performance and other characteristics of firms that for a five-year period held more than one-fourth of their assets in cash and cash equivalents. Following the five-year period, operating performance of high cash firms is comparable to or greater than the performance of firms matched by size and industry or by a measure of proclivity to hold substantial cash. In addition, proxies for managerial incentive problems, such as ownership and board characteristics, are not unusual and do not explain differences in operating performance among high cash firms. We find that high cash holdings are accompanied by greater investment, particularly R&D expenditures, and by greater growth in assets. For firms that persistently hold large cash reserves, we conclude that such policies support investment without hindering corporate performance.

In this paper we investigate the claim that hedge funds offer investors a superior risk-return trade-off. We do so using a continuous time version of Dybvig's (1988a, 1988b) payoff distribution pricing model. The evaluation model, which does not require any assumptions with regard to the return distribution of the funds in question, is applied to the monthly returns of 77 hedge funds and 13 hedge fund indices over the period May 1990 - April 2000. The results show that as a stand-alone investment hedge funds do not offer a superior risk-return profile. We find 12 indices and 72 individual funds to be inefficient, with the average efficiency loss amounting to 2.76% per annum for indices and 6.42% for individual funds. Part of the inefficiency cost of individual funds can be diversified away. Funds of funds, however, are not the preferred vehicle for this as their performance appears to suffer badly from their double fee structure. Looking at hedge funds in a portfolio context results in a marked improvement in the evaluation outcomes. Seven of the 12 hedge fund indices and 58 of the 72 individual funds classified as inefficient on a stand-alone basis are capable of producing an efficient payoff profile when mixed with the S&P 500. The best results are obtained when 10-20% of the portfolio value is invested in hedge funds.

Lawrence M. Benveniste, Walid Y. Busaba, Bookbuilding vs. Fixed Price: An Analysis of Competing Strategies for Marketing IPOs, The Journal of Financial and Quantitative Analysis, Vol. 32, No. 4 (Dec., 1997), pp. 383-403

Financial studies examining stock price behavior have principally relied on end-of-day data. This paper illustrates a bias in closing prices by reexamining the when-issue pricing anomaly with intraday data. With intraday data, major portions of the pricing anomaly can be explained by: a nonsynchronous matching of trades; a difference in the settlement procedures (labeled time value of money in Choi and Strong (1983)); a mismatching of market purchases with market sales (first proposed by Lamoureux and Wansley (1989)); and a higher frequency of market purchases relative to market sales. In addition, the small remaining portion of the anomaly cannot be arbitraged. The remaining premium is attributed to a lower level of limit order competition and an order imbalance in the when-issued shares.

An algorithm is described that prices European average options. The algorithm is tested against Monte Carlo estimates and is shown to be accurate. The speed of the algorithm is comparable to the Black-Scholes algorithm. A closed-form solution is derived for European geometric average options.