Knowledge that Transforms

This paper develops and tests a model of intraday security price movements which incorporates the effects of both trading volume and unanticipated information. We estimate our model using transaction data from a NYSE specialist and find strong evidence of information asymmetry, although the inventory effect appears weak. The parameter estimates are used to compute the costs of trading, and we find that implicit bid-ask spreads were significantly higher in October 1987 than in the rest of that year. We also examine large-block versus smaller trades and buyer-initiated versus seller-initiated trades.

The likelihood that a firm will enact a management-sponsored antitakeover charter amendment depends on ownership structure. This implies that the adoption of antitakeover amendments may be anticipated. Then announcement returns provide a biased estimate of wealth effects. An estimator that corrects for the bias induced by anticipation indicates that the enactment of an antitakeover amendment is associated with a statistically significant decrease in shareholder wealth. The voting power of employee stock ownership plans and the chief executive officer plays a prominent role in determining whether a firm will adopt this type of takeover defense.

Habit persistence in preferences and durability of consumption goods both imply time-nonseparability in the derived utility for consumption expenditures. We study a simple model with both effects. Lagged consumption expenditures enter the Euler equation, where habit persistence implies that their coefficients are negative and durability implies positive coefficients. Estimating the sign of the coefficients addresses the question of which effect is dominant. Earlier empirical work on monthly data supports the durability of consumption expenditures. We find evidence in monthly, quarterly, and annual data that habit persistence dominates the effect of durability.

This paper documents the organizational status over time of 183 large leveraged buyouts completed between 1979 and 1986. By August 1990, 62% of the LBOs are privately owned, 14% are independent public companies, and 24% are owned by other public companies. The percentage of LBOs returning to public ownership increases over time, with LBOs remaining private for a median time of 6.82 years. The majority of LBOs, therefore, are neither short-lived nor permanent. The moderate fraction of LBO assets owned by other companies implies that asset sales play a role, but are not the primary motivating force in LBO transactions.

We test whether airline consolidations generate monopoly profits by examining returns to listed carriers around horizontal airline-acquisition bids and evaluating effects of industry concentration on share-price reactions. Under Civil Aeronautics Board (CAB) regulation, returns to targets, bidders, and rival carriers are positive functions of changes in concentration implied by bids. Changes in concentration after deregulation have no positive effect on carrier returns. These results support Jordan's (1970, 1972) hypothesis that CAB activities fostered carrier collusion. There is no evidence of monopoly gains from carrier consolidations after deregulation.

This paper analyzes the sale of Conrail (Consolidated Rail Corporation) and finds three problems: first, a contingent claim gave the seller (the U.S. Government) conflicting objectives; second, bidders in the auction valued Conrail differently and thus did not compete effectively; and third, Conrail's management had an information advantage over the seller and outside bidders. These three factors can be present in any corporate divestiture and will tend to decrease the seller's revenue. We discuss how different methods of sale (e.g., two-stage auctions and parallel secret negotiations) will counteract these problems to varying degrees, although we find no single ‘best’ method.

This paper presents an eigenvalue test of the efficiency of a portfolio when there is no riskless asset, complementing the test of Gibbons, Ross, and Shanken (1989). Besides optimal upper and lower bounds, an easily-implented numerical method is provided for computing the exact P-value. Our approach makes it possible to draw statistical inferences on the efficiency of a given portfolio both in the context of the zero-beta CAPM and with respect to other linear pricing models. As an application, using monthly data for every consecutive five-year period from 1926 to 1986, we reject the efficiency of the CRSP value-weighted index for most periods.

This paper presents a unified method for closed-form pricing of European options on assets with diffusion prices. The method uses linear and nonlinear time and scale changes to reduce complex diffusion processes to known processes, thereby generating option pricing formulas for new diffusion processes and unifying existing results. Applications include: systematically modelling the effects on option prices of time-dependent variability in the underlying asset price, valuing futures options and options on assets showing maturity-related or seasonal volatility, valuing options on new nonconstant elasticity-of-variance diffusion processes, and pricing generalized options.

Examination of 1,600 seasoned equity offerings reveals little evidence that underwriters systematically set offer prices below the market price on the major exchanges, though they may do so for NASDAQ issues. Quick round-trip transactions in seasoned offerings are not profitable, but subscribing to an offering and holding the stock for 30 days seems to be very profitable, especially in the NASDAQ market. In addition to seasoned offerings, we analyze 250 issues of new classes of preferred stock. These issues are not underpriced.

This study uses Treasury bond triplets, which consist of three different Treasury issues with a common maturity date, to investigate the theoretical and empirical influence of tax strategies on Treasury prices. The tax-option effect, which arises from the right to optimally realize gains and losses for tax purposes, is found to induce convexity in the relation among triplet bond prices, but the effect is too small to create an arbitrage opportunity. A previous study [Litzenberger and Rolfo (1984)] is shown to incorrectly isolate the tax-option effect and hence misstate some key result; a correction is provided.