Bertrand N. Horwitz, Richard Kolodny, [Discussion of The Economic Effects of Involuntary Uniformity in the Financial Reporting of R&D Expenditures and Accounting for Research and Development Costs: The Impact on Research and Development Expenditures]: A Reply, Journal of Accounting Research, Vol. 18, Studies on Economic Consequences of Financial and Managerial Accounting: Effects on Corporate Incentives and Decisions (1980), pp. 96-107

Bertrand N. Horwitz, Richard Kolodny, The Economic Effects of Involuntary Uniformity in the Financial Reporting of R&D Expenditures, Journal of Accounting Research, Vol. 18, Studies on Economic Consequences of Financial and Managerial Accounting: Effects on Corporate Incentives and Decisions (1980), pp. 38-74

Bar-Yosef, Sasson, and Richard Kolodny, Policy and Capital Market Theory, this REVIEW 58 (May 1976), 181-190. Black, Fischer, Michael C. Jensen, and Myron Scholes, The Capital Asset Pricing Model: Some Empirical Tests, in Michael C. Jensen (ed), Studies in the Theory of Capital Markets (New York: Praeger Publishers, Inc., 1972), 79-121. Black, Fischer, and Myron Scholes, The Effects of Dividend Yield and Dividend Policy on Common Stock Prices and Returns, Journal of Financial Economics 1 (Jan. 1974), 1-22. Fama, Eugene F., and Harvey Babiak, Policy: An Empirical Analysis, Journal of the American Statistical Association 63 (Dec. 1968), 1132-1161. Fama, Eugene F., and James D. MacBeth, Return, and Equilibrium: Empirical Tests, Journal of Political Economy 81 (May-June 1973), 607-636. Lintner, John, Distribution of Incomes of Corporations among Dividends, Retained Earnings and Taxes, American Economic Review 46 (May 1956), 97-113. Miller, Merton H., and Franco Modigliani, Policy, Growth, and the Valuation of Shares, Journal of Business 34 (Oct. 1961), 411-433. Miller, Merton H., and Myron Scholes, Rates of Return in Relation to Risk: Re-examination of Some Recent Findings, in Michael C. Jensen (ed), Studies in the Theory of Capital Markets (New York: Praeger Publishers, Inc., 1972), 47-78. Pettit, R. Richardson, and Randolph Westerfield, A Model of Capital Asset Risk, Journal of Financial and Quantitative Analysis 7 (Mar. 1972), 1649-1668.

THE reaction of investors to the dividend policy of the firm has received considerable attention during the last two decades. During this period two principal schools of thought emerged. The first, led by Myron Gordon (1959, 1962), suggested that dividend policy is relevant to security valuation; the second, led by Modigliani and Miller (1961), suggested that it is not. Although the lines between these two positions were drawn more than ten years ago, the issue concerning dividend relevance remains unresolved today.' The reason for the long duration of the controversy is the lack of unambiguous empirical evidence which strongly supports either of the two schools.2 During the last decade the research on capital markets conducted by Sharpe (1964), Lintner (1965), and Mossin (1966) brought to the field of finance the Capital Asset Pricing Model (hereafter, CAPM). This valuation model has provided the basis for a significant number of empirical studies ranging from the value of added disclosure requirements to the benefits of corporate mergers.3 Although it is customary in these studies to state the assumptions under which the CAPM was developed, the use of the model itself assumes implicitly that the degree to which the assumptions abstract from reality does not impair the model's usefulness as a testing device. One of the inherent assumptions in the use of CAPM concerns dividend policy. In this regard, using the CAPM implicitly assumes the irrelevance hypothesis indicating a strong tendency among scholars to accept the irrelevance position. The argument for this position initially spelled out by Modigliani and Miller (1958) is demonstrated through an analysis of (1) the rationality of the behavior of stockholders, and (2) market forces. It suggests that, as long as a firm's investment decisions are known, the capital market will evaluate the firm's shares according to its potential profitability. If certain shareholders prefer more cash income than dividends paid, they can obtain such by liquidating part of their stock holdings. Doing this, these investors would realize the same return as those who maintain their original stock holdings regardless of the firm's dividend policy.4 Contrary to this, the relevance school suggests that a payment of cash dividends by the firm to its shareholders has a significant impact on the valuation of its securities.5 The arguments set forth in support of this position vary from the informational content of dividends to the clientele effect and return prospects on retained earnings.6 The purpose of this paper is to present the results of a theoretical and empirical investigation of the dividend issue and to examine the implications of the findings in light of recent developments in capital market theory. The results of this study indicate, contrary to other recent studies,7 that investors do in fact have a net preference for dividends and, consequently, the practical use of the capital asset pricing model, which implicitly assumes investor indifference between returns in the form

The focus of this study is the role of default risk in capital market theory. The impact of default risk on the value of securities has been a major concern of investors and academics alike. Several authors have examined the relationship between bond ratings, the probability of default, and security value [5, 12]. In this context, the ability to avoid or reduce expected bankruptcy costs and thereby increase value has been suggested as a reason for mergers and consolidations [16, 18]. In other studies, models have been developed for predicting ratings [17, 20, 21, 28], for predicting bankruptcy using accounting and other financial variables [1, 6, 7], and for approximating default premiums in the credit markets [22]. Finally a question which has received considerable attention is the effect of bankruptcy on a company's cost of capital. When bankruptcy is possible and there exists a positive bankruptcy transaction cost, it has been argued that there is an optimal capital structure [24, 26].

Richard Kolodny, Peter Seeley, Murray E. Polakoff, The Effect of Compensating Balance Requirements on the Profitability of Borrowers and Lenders, The Journal of Financial and Quantitative Analysis, Vol. 12, No. 5 (Dec., 1977), pp. 801-815