Knowledge that Transforms

This study compares the dividend policies of independently owned and bank holding company-affiliated commercial banks. The hypothesis tested is that there exists a significant, positive relationship between the amount of cash dividends paid by a bank and its affiliation with a holding company. The issue is an important one because the distribution of earnings as dividends obviously reduces a bank's ability to generate capital internally, and retained earnings have been the chief source of growth in bank equity capital. For some time the bank supervisory authorities have been concerned over the relative decline in importance of capital in the balance sheet of the average bank, such funds permitting banks to absorb unexpected losses and weather periods of financial crises. Capital adequacy is thus a major consideration in the regulators' assessment of bank dividend policy. Prior research has shown that the banking subsidiaries of bank holding companies have maintained lower capital in relation to assets than have other banks despite achieving greater profitability. Since a bank's capital position is usually positively correlated with its earnings, this implies that affiliated banks have been more generous in paying dividends. Indeed, the statistical evidence of this study indicates that the banking subsidiaries of holding companies paid significantly higher dividends than other banks over the four–year period from 1973 through 1976. Whether or not this has resulted in these firms maintaining less than “adequate†capital is a question that goes far beyond the scope of this paper, but which ultimately must be considered.

Eric H. Sorensen, An Analysis of the Relationship Between Underwriter Spread and the Pricing of Municipal Bonds, The Journal of Financial and Quantitative Analysis, Vol. 15, No. 2 (Jun., 1980), pp. 435-447

The decomposition of a security risk into diversifiable (or unsystematic) and nondiversifiable (or systematic) risks has emerged from the portfolio approach of capital investment and has culminated in the well-known Capital Asset Pricing Model (CAPM), developed by Sharpe [4], Lintner [3] and others. In this framework, the diversifiable risk is the risk that can be “washed out” by diversification and the nondiversifiable risk is the risk which cannot be diversified away. It appears to us that the decomposition of risk into its components is in some cases vague and in most cases imprecise. We define the diversifiable and nondiversifiable risk measures as two complementary components of the standard deviation of a security's rate of return. Furthermore, we require thatthe nondiversifiable risk measure will completely determine its equilibrium market price. We shall see that the definition presented is appealing for all securities and particularly for those with negative Beta. To be more specific, recall that a security's β is given by the slope of the following time series regression:

Jerome B. Baesel, Nahum Biger, The Allocation of Risk: Some Implications of Fixed Versus Index-Linked Mortgages, The Journal of Financial and Quantitative Analysis, Vol. 15, No. 2 (Jun., 1980), pp. 457-468

Most of the recent empirical tests of the Black-Scholes option-pricing formula have been joint tests of three types of hypotheses:1) mathematical structure of the formula, 2) measurement of formula inputs and outputs, and3) the efficiency of the listed option market.

Studies which deal with portfolio efficiency analysis can be divided into two main categories: (a) those concerned with the development of normative decision rules; and (b) those that discuss the application of the normative rules to empirical data. Most of the research on portfolio efficiency analysis uses some set of empirical data, without considering the possible errors which may arise when a sample rather than the entire population is examined. The prevailing neglect of the sampling errors is a clear reflection of the complexity of the issue.

Bank regulators tend to disagree with the idea that markets can play a role in bank regulation. The markets for bank securities are viewed by regulators as inefficient and lacking the necessary information to demand sufficient risk premiums on bank obligations to affect bank management decisions. On the other hand, bankers who have an active market for their securities tend to place faith in market assessments to determine the cost of management policies; therefore, they tend to think that the market plays an important role in “regulating” bank management decisions. The regulators are perhaps correct about the markets for small and medium–sized banks, but for those banks which have an active market for their securities, do investors adjust rates of return for the presence of increased potential of bankruptcy? If so, when does the adjustment take place?

Russell J. Fuller, Sang-Hoon Kim, Inter-Temporal Correlation of Cash Flows and the Risk of Multi-Period Investment Projects, The Journal of Financial and Quantitative Analysis, Vol. 15, No. 5 (Dec., 1980), pp. 1149-1162

The purpose of this paper is to demonstrate mathematically that the skewness of securities' returns--the ratio of the third moment to the standard deviation cubed--is sensitive to the length of the differencing interval over which returns are measured. Empirical observations of this so-called intervaling effect on skewness have been reported in at least three articles in this Journal. There have been no attempts, however, to examine this effect analytically. The empirical evidence presented in the literature is often contradictory and remains unexplained because of a lack of an analytical insight into the causes of the intervaling effect.

This paper studies the relationship between real interest rates and housing using a microeconomic approach. The primary impact of interest rates is on the demand side. The partial equilibrium, comparative static model of demand behavior presented is based on intertemporal preference maximization subject to a multiperiod income constraint. The model is always in terms of real prices and interest rates and operates in discrete time. Consumer preferences are represente by a smooth utility function which depends on two kinds of goods, housing and other nondurables. This study is couched in a neoclassical framework with all markets assumed perfect unless otherwise specified. With this approach the theory of housing and interest rates becomes part of standard consumer theory, rather than being based on inappropriate present value considerations.