Knowledge that Transforms

We postulate that the announcement effect of dividend reductions should be more severe for banks than for nondashfinancial firms because bank customers may avoid financially weak institutions and discontinue the relationship when negative information is released. To test our hypothesis we investigate a total of 81 dividend reductions by 56 commercial banks listed on the NYSE, AMEX and NASDAQ for the period 1974–1991. We find significant abnormal returns of −8.02% for the two-day event window and − 11.46% for a two-week period. These negative valuation effects are stronger than those reported in studies for dividend reductions of nondashfinancial firms and for other negative bank announcements. We also explore the relationship between abnormal returns and specific bank characteristics cross-sectionally and find a stronger reaction for larger banks.

This study re-examines the 1990 credit slowdown by investigating the loan pricing behavior of commercial banks. We find strong evidence that large, undercapitalized banks contributed to the credit slowdown by charging consumers a higher-than-average loan rate relative to better-capitalized institutions. This disparity in lending exists even after accounting for bank funding costs. Thus, we argue that there was a lending slowdown that occurred among large, undercapitalized banks. The reluctance to lend among undercapitalized banks is at least suggestive of behavior that is consistent with a credit crunch.

Brock et al. (1992) found technical trading rules to have predictive ability with regards to the Dow Jones Index. The current paper considers whether this result can be replicated on UK data. The paper also considers whether investors could earn excess returns from technical analysis in a costly trading environment. The paper concludes that although the technical trading rules examined do have predictive ability in terms of UK data, their use would not allow investors to make excess returns in the presence of costly trading.

We analyse both initial underpricing and post-listing returns for Australian IPOs. Our results are consistent with the view that unique institutional characteristics may have overwhelmed previous Australian tests of equilibrium models of IPO underpricing. The results also show that Australian IPOs significantly underperform market movements in the three-year period subsequent to listing. Further investigation of these anomalous post-listing returns lead us to reject various ‘speculative bubble’ explanations. Rather, the evidence suggests a curvilinear relationship between initial and subsequent returns, although the economic significance of the relationship is low.

This paper analyzes the riskiness of credit enhancements offered on securitized pools of commercial and industrial loans. It develops a technique for allocating capital to such credit enhancements, based on setting the expected value of the credit losses in excess of allocated capital equal to the expected value of losses beyond required capital on the original loan pool. The resulting capital allocations are compared with those derived from a more general, bank-wide capital decision-rule, as well as newly published agency proposals regarding capital for credit enhancements.

MATIF is the only major exchange offering a 24-hour non-interrupted trading cycle accommodating two distinct non-overlapping trading mechanisms. We find that trading volume on the floor is significantly higher than that on GLOBEX around the switch of trading mechanism. GLOBEX is mainly used by institutions to hedge their cash positions. The higher trading volume on the floor may be attributed to several factors: trade immediacy vs. transaction cost, liquidity trading by locals, inertia to trade under a new mechanism, and transparency vs. anonymity. In addition, the floor's open is unique with large interday return volatility.

This is the first study to examine the valuation effects of any antitakeover amendment on both bondholders and stockholders. We present new evidence documenting that, on average, there is a significant wealth loss experienced by bondholders at poison pill adoption announcement, while stockholders are unaffected. Our finding of significant bondholder losses is consistent with the proposed negative signal hypothesis. We document results which indicate that bondholders correctly anticipate the degree of leverage increase at the time of the announcement. We also show that the proportion of insider ownership is negatively related to bondholder wealth effect at announcement. This supports the notion that higher insider (manager) ownership leads to a greater alignment of manager-stockholder interests while increasing the stockholder-bondholder agency costs. Long-run analysis of leverage and performance measures reveal that pill adopting firms are not under-leveraged as compared to their industry rivals. However, supporting the negative signal hypothesis, the leverage of sample firms rises significantly after the pill adoption. Performance measures reveal that sample firms significantly underperform their industry cohorts. This result suggests that poison pill adoptions are motivated by poor managers attempting to immunize themselves from the disciplinary actions of the corporate control market.

In this paper, we test the synergy and internalization hypotheses for international acquisitions using a sample of foreign acquisitions of U.S. firms during the period 1979–1990. The major findings include: First, shareholders of our paired sample of U.S. targets and foreign acquirers experienced significantly positive combined wealth gains, $68 million on average, indicating that cross-border takeovers are generally synergy-creating activities. Second, shareholders of the U.S. targets realized significant wealth gains, regardless of the nationality of acquirers. Third, the Japanese acquisitions in our sample generated the largest net wealth gains, $398 million on average, which was shared by both target shareholders (43%) and acquirer shareholders (57%). Fourth, foreign acquirers benefitted from the targets' R&D capabilities, supporting the ‘reverse-internalization’ hypothesis.

This paper examines the impact of the risk-based capital (RBC) requirements on bank cost efficiencies. We take into consideration both on- and off-balance sheet (OBS) products and allow product mixes to differ across banks and to vary over time. Our empirical results suggest that the cost structures of large banks are significantly different during the pre-RBC and post-RBC periods. That is, the RBC change seemed to reduce the optimal bank size that achieves maximum scale and scope economies, so that some of the large banks that previously were efficient became too large and inefficient. The results suggest that regulations that encourage large banks to expand their production and product mixes any further will likely result in a less efficient banking industry.

This paper examines the impact on the liquidity of NYSE/AMEX listed stocks when they were subsequently listed on the London or the Tokyo Stock Exchanges. It can be argued that the increased competition from foreign market makers will reduce the monopoly rents that specialists can earn, thereby improving their quotes. We find, however, that spreads do not decrease following a dual listing, though the depth of the quotes increases as predicted. The apparent increase in depth disappears once we account for changes in price, volume and return variance. We also find that the level of informed trading increases, which increases the cost to the specialist of providing liquidity, and explains why spreads do not decline in spite of increased competition. Consistent with an increase in informed trading, we also document an increase in trading activity.