Abstract The paper derives closed-form formulas for the futures price in the presence of a multi-asset quality option. This is done for two cases: In the first one the underlying assets are zero coupon bonds with different maturities in the single-factor Vasicek model. In the second one these are commodities in a multi-factor setting, again with Vasicek interest rate uncertainty.
Abstract We show in any economy trading options, with investors having mean-variance preferences, that there are arbitrage opportunities resulting from negative prices for out of the money call options. The theoretical implication of this inconsistency is that mean-variance analysis is vacuous. The practical implications of this inconsistency are investigated by developing an option pricing model for a CAPM type economy. It is observed that negative call prices begin to appear at strikes that are two standard deviations out of the money. Such out-of-the money options often trade. For near money options, the CAPM option pricing model is shown to permit estimation of the mean return on the underlying asset, its volatility and the length of the planning horizon. The model is estimated on S&P 500 futures options data covering the period January 1992–September 1994. It is found that the mean rate of return though positive, is poorly identified. The estimates for the volatility are stable and average 11%, while those for the planning horizon average 0.95. The hypothesis that the planning horizon is a year can not be rejected. The one parameter Black–Scholes model also marginally outperforms the three parameter CAPM model with average percentage errors being respectively, 3.74% and 4.5%. This out performance of the Black–Scholes model is taken as evidence consistent with the mean-variance analysis being vacuous in a practical sense as well.
Comment on ‘Matching Organizational Structure with Firm Attributes: A study of Master Limited Partnerships’ Claudio Loderer Claudio Loderer Search for other works by this author on: Oxford Academic Google Scholar Review of Finance, Volume 1, Issue 2, 1997, Pages 193–196, https://doi.org/10.1023/A:1009792007996 Published: 01 August 1997
Abstract Firms in performance decline may choose a variety of restructuring strategies for recovery with conflicting welfare implications for different stakeholders such as shareholders, lenders and managers. Choice of recovery strategies is therefore determined by the complex interplay of ownership structure, corporate governance and lender monitoring of such firms. For a sample of 297 U.K. firms experiencing relative stock return decline during 1987–93, we examine the impact of these factors as well as other control factors on their turnaround strategies. Strategy choices during the decline year and two post-decline years are modelled with logit regressions. Our results show that turnaround strategy choices are significantly influenced by both agency and control variables. While there is agreement among stakeholders on certain strategies there is also evidence of conflict of interests among them. Thereis further evidence of shifting coalitions of stakeholders for or against certain strategies.
Abstract This study of warrants on the London Stock Exchange examines whether they display particular pricing biases and whether investors understand how to value them at the time of issue. In a sample of 72 warrants on closed-end funds (investment trusts) over the 1985–94 period, more than one third of the 12,673 prices are anomalously low. The other two thirds behave like stock options, with lower volatility when they are in-the-money or have a long time until maturity. Despite their frequent undervaluation, it is rational to add warrants to a new equity issue: an examination of 127 new equity issues (95 with warrants) reveals that attaching warrants significantly increases market value. The reason for this appears to be investor confusion: they do not seem to understand that the more the warrants are worth, the less the value of the ordinary shares.
While intercorporate shareownership is common among publicly traded firms, systematic empirical evidence on this particular aspect of corporate ownership structure is sparse. Based largely on aggregated ownership data provided by various stock exchanges, we know that intercorporate holdings represent a relatively large proportion (above 40%) of the total equity value of exchange- listed firms in Japan and Germany, and a relatively low proportion (less than 10%) in the U.S. and the U.K. Thus, the Anglo-American corporate governance system appears to produce substantially lower levels of intercorporate shareholdings than does the German– Japanese governance model. While financial institutions in Germany and Japan play an integral role in the governance structures of those countries, securities laws inspired by early populist sentiments in the U.S. have prevented American financial institutions from playing a similar active role.1 Much like the Anglo-American system, securities laws in Norway, the empirical laboratory of Bøhren and Norli (1997), also restrict the equity ownership and direct corporate governance participation of financial institutions. Perhaps as a result the level of intercorporate
Abstract This paper empirically investigates whether illegal insider trading increases the premium a bidder pays for a target. Illegal insider trading is trading by traditional corporate insiders, as well as others in a position of trust and confidence (e.g. investment bankers, lawyers), based on material, non-public information (‘inside information’). The paper examines the premia of takeovers with known illegal insider trading and compares them to a control sample of takeovers matched by industry, time period, and size that do not have detected illegal insider trading. After controlling for differences in merger characteristics, such as number of bidders, type of offer, form of payment, etc., we find that takeovers with detected illegal insider trading have takeover premia which are approximately 10 percentage points, or almost one-third, higher than the control sample. We conduct additional tests in an attempt to determine the direction of causality between illegal insider trading and takeover premia size and explore the effect of potential detection bias. The results suggest both that illegal inside traders base their trades on factors other than premia size, and that illegal insider trading in takeovers with large premia is not necessarily more likely to be detected. Our findings are consistent with the hypothesis that the illegal insider trading itself tends to create larger takeover premia.
Abstract We examine the relationship between top management compensation and the structure of the board of directors for a sample of commercial banks. We find that boards with more reputable outside directors compensate managers more heavily with long-term incentives (stock and stock options) than with cash (salary and bonus). We also find a significant positive correlation between the future performance of our sample banks and the proportion of their managers’ compensation in the form of long-term incentives. Taken together, these results suggest that boards with highly reputed outside directors are more effective in providing managers with the appropriate incentives and thus ensuring better future firm performance. Another indication of the effectiveness of these boards is our finding that they compensate managers more heavily with long-term incentives (instead of cash) when these managers are more entrenched. We also find very little evidence of mutually beneficial back-scratching or collusion between outside directors and senior managers when setting management compensation. But boards with long-serving outside directors are less effective in creating appropriate management incentives.