Knowledge that Transforms

In 1970, France introduced disclosure rules governing public tender offers without changing an existing four-week minimum offer period. We document a substantial increase in total offer premiums thereafter. Post-1970 premiums are also significantly higher in public than in private tender offers, where information disclosure is not required, and in all-cash than in all-stock offers. The impact of the payment method is evident in minority buyouts as well as in offers for voting control. The component of the total premium reflecting the value of the option to tender appears to be unaffected by either disclosure regulations or the payment method.

We provide an explanation of why convertibles are called long after the conversion value exceeds the call price. Delaying the call benefits the firm if enough investors are expected to delay their voluntary conversions. Consistent with this theory, we document that a substantial number of investors do not voluntarily convert when the common dividend exceeds the convertible's dividend plus its premium over conversion value. We find that firms would not have increased common stock returns by switching to the strategy of calling to force conversion as soon as possible. Surprisingly, we find that convertible preferreds frequently sell below conversion value.

This paper proposes tests of asset pricing models that allow for time variation in conditional covariances. The evidence indicates that the conditional covariances do change through time. Estimates of the expected excess return on the market divided by the variance of the market (reward-to-risk ratio) are presented for the Sharpe-Lintner CAPM, as well as a number of tests of the model specification. The patterns of the pricing errors through time suggest the model's inability to capture the dynamic behavior of assets returns.

This paper examines the effects of over 1,800 U.K. takeovers on shareholder wealth in the period 1955–1985. It shows that around the merger announcement date targets gain 25 to 30 percent and bidders earn zero or modest gains. The U.K. data allow independent tests of many issues addressed in studies of U.S. takeovers. Target gains are higher in the U.K. after 1968, suggesting that increases in U.S. target gains at the same time may not be attributable to the Williams Act. Postmerger share-price performance suggests that acquisitions follow favorable developments in bidder's equity prices.

We examine the rationality of investor exercise behavior by analyzing two years' tendered exercise notices for Treasury bond futures options. We conclude that exercise behavior is generally rational, but document numerous failures to exercise as well as some exercises that should not have occured, both at and prior to expiration. The most frequent type of error is failing to exercise, suggesting that traders do not monitor their positions with sufficient care. Finally, we show that investors use information arriving after trading closes, but before exchange-imposed exercise deadlines, in forming their exercise decisions.

Latent variable tests of asset pricing models make assumptions about the joint distribution of observable returns and unobservable benchmark returns. These tests can falsely accept models when a mean-variance efficient portfolio other than the benchmark satisfies the distributional assumptions imposed on the benchmark portfolio. Also, because the assumptions are untestable, there is no way to discover whether a model is being rejected because the assumptions are false. Without these assumptions, however, latent variable tests can be viewed only as tests of distributional hypotheses about mean-variance efficient portfolios of unknown composition.

I analyze the acquisition of Federated Department Stores by Campeau Corporation and find that after the purchase the value of Federated assets increased by more than 1.8 billion. Federated and Campeau defaulted on the debt used to finance the acquisition because Campeau paid a premium of 3.4 billion for Federated, an overpayment of $1.6 billion, financed 97% of the purchase with debt, and did not have enough other assets to make up the shortfall. The Federated purchase illustrates that a highly leveraged transaction can increase value, but still not be able to make its debt payments.

Returns computed with closing bid or ask prices that may not represent ‘true’ prices introduce measurement error into portfolio returns if investor buying and selling display systematic patterns. This paper finds systematic tendencies for closing prices to be recorded at the bid in December and at the ask in early January. After changing bid and ask prices are controlled for. this pattern results in large portfolio returns on the two trading days surrounding the end of the year, especially for low-price stocks. Other temporal return patterns (e.g. weekend and holiday effects) are also related to systematic trading patterns.

Recent evidence reveals significant negative serial correlation in aggregate (market-wide) stock returns. We extend this result to relative (market-adjusted) returns, demonstrating negative serial correlation in five-year returns. We then test two competing explanations: (1) market mispricing and (2) changing expected returns in an efficient market. The tests are conducted using the capital asset pricing model to estimate relative returns. The evidence suggests that negative serial correlation in relative returns is due almost entirely to variation in relative risks, and therefore expected relative returns, through time. We document substantial relative risk shifts, particularly for extreme-performing stocks.

Cash tender, cash merger, and stock merger takeover premiums for 1974–1985 are approximately bouble those for 1963–1973. Cash tender repurchase premiums also rose in 1974. Thse upward shifts remain after we control for the business cycle and a possible time trend in premiums. The shift in both takeover and repurchase premiums in 1973–1974 is consistent with some event not unique to the takeover market affecting the capital markets in 1973–1974. We also investigate the possible effect on takeover premiums of the 1986 Williams Act and conclude that it does not explain the premium increase.