Robert A. Haugen, A. James Heins, Risk and the Rate of Return on Financial Assets: Some Old Wine in New Bottles, The Journal of Financial and Quantitative Analysis, Vol. 10, No. 5 (Dec., 1975), pp. 775-784

The “burden of the debt” still appears to be a matter of concern to the United States public, economic teaching notwithstanding. In the debates preceding the 1964 tax cut, such matters as the existing budgetary deficit and the swelling public debt evoked as much passion as confusion. In this paper we intend to focus on one question: will a tax cut designed to generate a full employment equilibrium necessarily increase the debt burden, as defined by Domar. In particular, we are interested in the impact of a tax reduction on the debt burden, given that a budgetary deficit exists; and under the condition that the monetary authorities have decided to tighten credit conditions. We shall assume throughout that interest rates are determined by the monetary authorities, and that their policy is dictated by balance of payments rather than aggregate demand considerations. it will also be assumed that the tax reduction takes into account any planned increase in the rate of interest. Finally, we assume that budgetary deficits are financed by borrowing from the nonbank public and not by new money.

This paper provides a theoretical rebalancing benchmark for trading volume that delivers a connection between trading activity in individual stocks and market-wide volume. This model supports the empirical use of an adjustment for market-wide trading activity when filtering out normal trading volume. Data on a sample of large NYSE/AMEX firms support the usefulness of the benchmark. While 20% of the sample firms exhibit trading behavior that is consistent with the cross-sectional prediction of the rebalancing bench? mark, systematic deviations exist. An analysis of deviations from the benchmark allows a characterization of anomalous trading activity. I find that average excess turnover vs. the benchmark is positively related to option availability and institutional ownership and negatively related to firm size. The data do not yield a uniform conclusion on the effect of S&P 500 inclusion. S&P 500 inclusion does not significantly increase the trading of firms that are already trading above benchmark levels, but does result in additional trading for firms that undertrade the benchmark prior to inclusion. An investigation of individual firm market model regressions indicates that this is a useful methodology for filtering out the anomalous trading documented here.

Recent empirical studies have indicated that spin-offs are value enhancing, yet the theoretical aspects of spin-off gains have not been as well explored. This paper presents a theoretical analysis of spin-offs. In the model of the firm presented, outstanding risky debt gives rise to agency costs of underinvestment, which are offset by the benefit of debt-related tax shields. The trade-off specifies the optimal leverage for a firm. Within this framework, the paper considers whether and under what circumstances firm value could be enhanced by a spin-off. It is shown that a spin-off in which parent company debt is optimally allocated between the post-spin-off firms increases value by reducing agency costs and increasing the value of tax shields when the component firm cash flows are positively correlated. The optimal allocation is characterized in terms of the parameters of the technologies of the component firms. When the component cash flows are negatively correlated, under the sufficient conditions developed, a combined firm operation dominates spin-offs. Here, the coinsurance effect on investment incentives dominates the effect of a flexible allocation of debt across technologies in a spin-off.

This paper provides a simple method to account for heteroskedasticity and cross-sectional dependence in samples with large cross sections and relatively few time-series observations. The method is motivated by cross-sectional regression studies in finance and accounting. Simulation evidence suggests that these estimators are dependable in small samples and may be useful when generalized least squares is infeasible, unreliable, or computationally too burdensome. We also consider efficiency issues and show that, in principle, asymptotic efficiency can be improved using a technique due to Cragg (1983).

This paper presents a test of the theory of rational option exercise. Exercise data from the market for options on Treasury bond futures are used to test the model of rational early exercise developed by Barone-Adesi and Whaley (1987) (BAW). The results show that the BAW model underestimates the futures price that will trigger exercise for calls and overestimates this price for puts. The exercise bias is observed to change across option maturities and the direction of the bias is consistent with the direction of the model-pricing bias observed by Whaley (1986).

James A. Brickley, Interpreting Common Stock Returns around Proxy Statement Disclosures and Annual Shareholder Meetings, The Journal of Financial and Quantitative Analysis, Vol. 21, No. 3 (Sep., 1986), pp. 343-349

Portfolios of stocks issued by small firms are well known to earn rates of return in excess of those commensurate with their market sensitivities. One common explanation for this phenomenon is that small firm stocks are riskier than large firm stocks because less information is available about the former than about the latter. A necessary condition for such an explanation to be valid is that the information effect not be eliminated by combining the individual stocks into portfolios. This paper uses jump-diffusion return models to gauge the impact of information by firm size. The results show that portfolios of small firm stocks are no more prone to information surprises than are portfolios of large firm stocks. However, portfolios of small firm stocks are found to react more severely than portfolios of large firm stocks when surprises do occur.

This paper explores the effects of mergers on the investment incentives of the levered firm and on levered firm value. Under a fairly broad set of assumptions, it is shown that most firm combinations “improve” investment incentives, bringing about a reduction in the agency costs of underinvestment associated with risky debt. The effect of the merger on debt and equity claim values is also explored. If not properly anticipated, the merger may create a wealth transfer from equity holders to bondholders. Such a wealth transfer includes, but is not limited to, the “coinsurance effect.”

This research develops and tests a model for the prediction of tender offer outcomes. Variables that increase the supply of “obtainable shares” (such as increased bid premiums or the payment of solicitation fees) are shown to increase the probability of success. Increased ownership of target firm shares by the bidder also increases the probability of success. Variables that impede the tendering of shares (such as target management opposition or a competing bid) decrease the probability of success. Tests of the model utilizing both linear and logistic analysis support the theoretical constructs and help resolve the paradoxical findings of previous research.