In practice, there are substantial deviations from the doctrine of ‘absolute priority’, which governs the rights of the firm's claimholders in the event of bankruptcy. To determine whether or not the possibility of such deviations is reflected in the prices of the firm's securities, this study examines the risk and return characteristics of financial claims against firms in court-supervised bankruptcy proceedings. Debt claims against bankrupt firms are indeed ‘risky’, exhibiting levels of systematic risk similar to that of common stocks in general. While some of the findings are anomalous, the data are generally consistent with the view that the capital market ‘properly’ prices risky debt claims to reflect both their risk characteristics and the possibility of departures from the doctrine of absolute priority.

Jerold B. Warner, Bankruptcy Costs: Some Evidence, The Journal of Finance, Vol. 32, No. 2, Papers and Proceedings of the Thirty-Fifth Annual Meeting of the American Finance Association, Atlantic City, New Jersey, September 16-18, 1976 (May, 1977), pp. 337-347

This paper examines a sample of firms experiencing proxy contests for seats on their board of directors. Dissident shareholders usually fail to obtain a majority of board seats. Nevertheless, they capture some seats, via mechanisms such as cumulative voting, in over half of the sample contests. Regardless of proxy contest outcome, positive and statistically significant share price performance is associated with the contest. That finding is predicted by the standard economic analysis of proxy contests, in which the challenges benefit shareholders by improving corporate performance. The finding runs counter to the claim of Berle (1962) that the economists' view of proxy contests is ‘a wholly imaginary picture’. A portion of the positive share price changes taking place in the early stages of some proxy contests is not permanent, however, and as suggested by Manne (1962) is at least partially attributable to temporary increases in the market value of the vote attached to corporate shares.

We study the relation between market returns and aggregate flow into U.S. equity funds, using daily flow data. The concurrent daily relation is positive. Our tests show that this concurrent relation reflects flow and institutional trading affecting returns. This daily relation is similar in magnitude to the price impact reported for an individual institution's trades in a stock. Aggregate flow also follows market returns with a one-day lag. The lagged response of flow suggests either a common response of both returns and flow to new information, or positive feedback trading.

With risky debt outstanding, stockholder actions aimed at maximizing the value of their equity claim can result in a reduction in the value of both the firm and its outstanding bonds. We examine ways in which debt contracts are written to control the conflict between bondholders and stockholders. We find that extensive direct restrictions on production/investment policy would be expensive to employ and are not observed. However, dividend and financing policy restrictions are written to give stockholders incentives to follow a firm-value-maximizing production/investment policy. Taking into account how contracts control the bondholder- stockholder conflict leads to a number of testable propositions about the specific form of the debt contract that a firm will choose.

We study the stock market's reaction to aggregate earnings news. Prior research shows that, for individual firms, stock prices react positively to earnings news but require several quarters to fully reflect the information in earnings. We find a substantially different pattern in aggregate data. First, returns are unrelated to past earnings, suggesting that prices neither underreact nor overreact to aggregate earnings news. Second, aggregate returns correlate negatively with concurrent earnings; over the last 30 years, for example, stock prices increased 5.7% in quarters with negative earnings growth and only 2.1% otherwise. This finding suggests that earnings and discount rates move together over time and provides new evidence that discount-rate shocks explain a significant fraction of aggregate stock returns.

The market for passive ETFs and passive ETF benchmarks has exploded. Passive ETF sponsors get index benchmarks mainly from brand name index providers such as S&P and Russell. We show how benchmark and index provider characteristics are relevant for sponsors and different investor types. ETF benchmarks from large index providers attract more capital. Institutional flows exhibit a strong preference for brand name benchmarks, but do-it-yourself retail investor flows do not. ETFs that change benchmarks reduce their tracking error and have 7% higher flows in the subsequent three months, again driven by institutional flows.