W. W. Higgins, B. J. Moore, Market Structure Versus Information Costs as Determinants of Underwriters' Spreads on Municipal Bonds, The Journal of Financial and Quantitative Analysis, Vol. 15, No. 1 (Mar., 1980), pp. 85-97

Lemma W. Senbet, Discussion: Signaling, Information Content, and the Reluctance to Cut Dividends, The Journal of Financial and Quantitative Analysis, Vol. 15, No. 4, Proceedings of 15th Annual Conference of the Western Finance Association, June 19-21, 1980, San Diego, California (Nov., 1980), pp. 871-873

Modern contingent pricing theory (CPT) dates its genesis from the pioneering work of Arrow [1] and Debreu [9] in the context of complete markets. Beja [2, 3] demonstrated the application of contingent pricing concepts to incomplete markets. The approach has been applied to the valuation of options (Cox and Ross [7]; Rubinstein [30]) and a variety of other financial instruments (e.g., Ross [28])- Tne fundamental insight of CPT is that in arbitrage-free markets complex securities may always be viewed as additive combinations of simple “state-claims” having positive value which, in effect, pay off one unit if and only if a given state is attained at a given date. Concurrently, the continuoustime viewpoint pioneered by Black and Scholes [4] and Merton [22] has grown in significance. The basic simplification of the continuous-time approach is that relevant valuation quantities may all be expressed in terms of the first two moments, i.e., mean and variance, of the state variable distributions employed. When CPT adopts a continuous-time format, it has been shown (Garman [13]) that a basic differential equation holds for all securities; that differential equation involves, of course, the state-claim values, the distributional parameters of state variable evolution, and the prices and dividends of securities. Alternatively, somewhat stronger assumptions which lead to the existence of a rational consensus investor allow thedifferential equation to be expressed in terms of marginal utilities (Cox, Ingersoll, and Ross [8]). This paper applies the techniques of continuous-time CPT to the foreign exchange market. Since we wish to substantively treat inflationary and productive sources of risk in two countries, four state variables are necessarily involved. In a sense, therefore, this is an ambitious attempt since the mostcomplex continuous-time models to date (e.g.. Brennan and Schwartz [5]), have substantively treated only two state variables. Such complexity is simplified through the use of some compact notation, but not by the use of ad hoc modeling. Indeed, it should be emphasized that the present treatment is a full-equilibrium approach, and that while the compact quality of the notation might be made to incorporate a significant amount of possible additional structure, nothing here is inconsistent with a complete equilibrium.

In the late 1930s, Macaulay [7] and Hicks [6] independently introduced the concept of duration as a measure of the length of a stream of cash flows and a measure of the elasticity of the present value of the stream with respect to a change in the rate of discount, respectively. Approximately 15 years later, Reddington [8] and Heynes and Kirton [5] used the concept to develop interest rate immunization rules for the portfolio management of insurance companies. More recently, Fisher and Weil [1] have developed duration based rules to help investors find investments that will insure them of having some fixed amount of money available at a specific future point in time. In [2], Grove uses duration to link the investor's decision to speculate or immunize with his subjective forecast of future interest rate movements. Finally, Haugen and Wichern [3, 4] show the relationship between duration and the characteristics of bonds and stocks. Also, in analyzing the effect of financial leverage on interest rate risk, they demonstrate how the financial manager can manipulate the capital structure of his firm, so as to render the present value of the common stock insensitive to changes in the rate of interest.

In the theoretical literature of finance, it has been assumed for some time that capital markets are efficient, with security prices reflecting all available information [10]. One purpose of this paper is to consider market efficiency in the context of rights offerings. It has recently been suggested, for example, that rights offerings afford positive abnormal returns [17, 18]. This view was immediately countered by the comment that the number of rights issued, and inversely the issue price, cannot affect the market value of the total exrights equity market [21, p. 44]. No empirical evidence was offered on either side, however.

In a world characterized by perfect and complete capital markets, the success (or failure) of a merger is judged by the merger's impact on stockholder wealth. With completeness, the merger's impact on the probability distribution generating stockholder returns is unimportant. The perfect market assumption guarantees that the stockholder not satisfied with the consolidated firm's return distribution can frictionlessly sell his shares and reorder his portfolio; hence his only concern is the merger's impact on wealth. However, if we acknowledge the existence of commissions, taxes, and other frictions, or if markets are not complete, the merger's impact on the stockholder return distribution becomes relevant. In this study we will analyze 149 mergers involving large N.Y.S.E. firms. We will examine four different hypotheses related to the impact of merger on attributes of the stockholder return distribution. We focus our analysis on risk-related attributes including beta, total variance, residual variance, and several other risk-related attributes. In a companion paper, merger's impact on wealth is calculated for the same sample but will not be reported here.

Several people have attempted to evaluate the performance of mutual funds. Treynor [17] and Sharpe [15] have developed performance measures which make it possible to establish relative rankings for such funds. Treynor and Mazuy [18] have devised a statistical test for determining whether mutual funds successfully anticipate major fluctuations in the stock market. Jensen [7] has provided an absolute measure of performance which can be used to determine whether mutual funds earn higher or lower returns than those expected for the level of risk associated with their portfolios. McDonald [11] has employed the measures of performance developed by Sharpe, Treynor, and Jensen to evaluate the objectives, risk, and return of mutual funds in the period 1960–1969. Although these studies have examined mutual fund performance, none has employed an analytical framework for dealing explicitly with the nonstationarity which is likely to exist in the risk-return relationships for such funds [13].

The implications for portfolio behavior and asset prices of transaction costs are central to the analysis of numerous issues in economics. For example, questions involving the demand for the financial contracts issued by financial intermediaries are intimately tied to the existence of transaction costs. Thus the analysis of questions involving the nature of the demand for mutual fund shares, insurance contracts, mortgage loans, etc., and the form those contracts take require the explicit inclusion of transaction costs.