Avner Kalay, 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. 855-869

Avner Kalay, Comment: Haugen and Senbet Paper, The Journal of Financial and Quantitative Analysis, Vol. 14, No. 4, Proceedings of 14th Annual Conference of the Western Finance Association, June 21-23, 1979 (Nov., 1979), pp. 711-714

This paper examines a large, randomly chosen, sample of bond indentures focusing on the constraints they set on dividend payments that have the potential to transfer wealth from the bondholders (i.e., payments which are financed by a new debt issue or reduced investment). The nature of these restrictions support the hypothesis that bond convenants are structured to control the conflict of interest between stockholders and bondholders. Further, the empirical evidence suggests that these constraints are not binding — i.e., stockholders do not pay themselves as much dividends as they are allowed to. Explanations of this puzzling empirical regularity are suggested.

In this paper we have shown that output effects can have a significant impact on estimated import price elasticities for aggregate classifications. Our results indicate that output effects could reduce estimated import price elasticities for Canada by as much as 10% to 15% for some aggregate classifications. These r&sults tend to understate the importance of output effects for estimated elasticities to the extent that they do not include any output effects of changes in exports and they tend to overstate the importance of these effects to the extent that supply curves for domestic production are less than perfectly elastic. However, they provide order-of-magnitude estimates of the bias caused by output effects when import price elasticities estimated for aggregate classifications are applied to disaggregate classifications of imports. These results also indicate the degree to which a general equilibrium approach may understate the impact on trade of an exogenous change in relative prices by doublecounting within-class output effects. Similarly, they indicate the degree to which import price elasticities estimated for very disaggregate classifications may overstate the case against elasticity pessimism because these disaggregate estimates account for fewer output effects. REFERENCES

Past studies have documented an ex‐dividend day price drop which is less than the dividend per share and positively correlated with the corresponding dividend yield. In contrast to prior work, we show that, without additional information, the marginal tax rates cannot be inferred from this phenomenon which is, therefore, not necessarily the result of a tax induced clientele effect. Despite adjustments for potential biases in earlier work, however, the correlation between the ex‐dividend relative price drop and the dividend yield is still positive which is consistent with a tax effect and a tax induced clientele effect.

Past studies have documented an ex-dividend day price drop which is less than the dividend per share and positively correlated with the corresponding dividend yield. In contrast to prior work, we show that, without additional information, the marginal tax rates cannot be inferred from this phenomenon which is, therefore, not necessarily the result of a tax induced clientele effect. Despite adjustments for potential biases in earlier work, however, the correlation between the ex-dividend relative price drop and the dividend yield is still positive which is consistent with a tax effect and a tax induced clientele effect.

In their seminal paper, Modigliani and Miller [11], [12] demonstrate that if capital markets are perfect and investment policy is held constant, the market value of the firm is independent of its financial decisions. Furthermore, if capital markets are perfect, stockholders have incentive to choose the investment policy which maximizes the market value of the firm (see [6]). Motivated by this assumption, the firm has been viewed as a “black box;” namely, as one homogeneous unit whose clear objective is to maximize its market value. However, in a growing body of recent literature (see [1], [2], [7], [9], [13], and [14]), researchers recognize that the firm in an “imperfect” capital market is a collection of groups whose interests can, and do, conflict. Jensen and Meckling [9] study the roles of three important groups—the owner-manager, the stockholders, and the bondholders—focusing on the potential costs resulting from divergence of interests among them. They provide a theory of optimal capital structure in terms of reducing the costs of these conflicts.