Knowledge that Transforms

[The existence of backwardation in futures markets has remained an intriguing and controversial issue since Keynes first argued that it was the "normal" state of affairs. Most theoretical explanations for the existence of backwardation are quite restrictive. Among the assumptions are pure forward as opposed to true futures trading, differences in probability beliefs, degrees of risk aversion, or the level of commodity commitments among long and short hedgers. In a simple model of short and long commodity hedgers, we show that a backwardation equilibrium can occur in a true futures (as opposed to forward) market even when hedgers are identical in these respects and speculators hold the same probability beliefs as hedgers. This result is driven by Houthakker's completely neglected intuitive notion that one possible explanation for backwardation is the high correlation between cash and futures prices when inventories of a commodity are large. While the simple existence of such an "inventory effect" does not necessarily imply backwardation, we prove that backwardation will occur under an appropriately specified inventory effect.]

This paper derives three empirical implications of a well-specified model of consumer behavior, a model that nests both Ricardian equivalence and an alternative, non-Ricardian theory. Ricardian equivalence is then tested against this alternative. The tests reveal that Ricardian equivalence cannot be rejected.

One of the important determinants of the response of saving and consumption to the real interest rate is the elasticity of intertemporal substitution. That elasticity can be measured by the response of the rate of change of consumption to changes in the expected real interest rated. A detailed study of data for the twentieth-century United States shows no strong evidence that the elasticity of intertemporal substitution is positive. Earlier findings of substantially positive elasticities are reversed when appropriate estimation methods are used.

This paper investigates transitory components in stock prices. After showing that statistical tests have little power to detect persistent deviations between market prices and fundamental values, we consider whether prices are mean-reverting, using data from the United States and 17 other countries. Our point estimates imply positive autocorrelation in returns over short horizons and negative autocorrelation over longer horizons, although random-walk price behavior cannot be rejected at conventional statistical levels. Substantial movements in required returns are needed to account for these correlation patterns. Persistent, but transitory, disparities between prices and fundamental values could also explain our findings.

This paper analyzes the optimality of the one share-one vote rule. We focus on takeover bids as a mechanism for allocating control. We assume two types of control benefits — benefits to security holders and private benefits to the controlling party. One share-one vote maximizes the importance of benefits to securityholders relative to benefits to the controlling party and hence encourages the selection of an efficient management team. However, one share-one vote does not always maximize the reward to securityholders in a corporate control contest. Sufficient conditions are given for one share-one vote to be optimal overall. The paper also includes a discussion of the empirical evidence.

We examine the cost differences between public sales and private placements of debt for a sample of public utility issues. The lowest cost method depends on a firm's transaction costs which comprise flotation costs, agency costs, and the costs of searching the market. Our findings suggest that firms minimize the cost of issuing securities by selecting the market providing the lowest transaction costs.

Generally, utilities issue straight fixed-rate preferreds, industrials issue convertible fixed-rate preferreds, and financials issue adjustable-rate preferreds. The corresponding announcement-period common stock abnormal returns are economically insignificant for utilities, negative and significant at the 0.05 level for industrials, and positive and significant at the 0.10 level for financials. Information effects explain the cross-sectional results for industrial firms, but tax benefits and/or regulatory conditions are more likely explanations of the results documented for financial corporations and utilities. Returns to preferred stockholders support neither the wealth redistribution- hypothesis nor the price-pressure hypothesis.

This paper tests whether takeover bids and takeover resistance by target management convey information to the market about the stand-alone value of target firms. When initial bids are made, analysts' consensus forecasts of stand-alone earnings do not change significantly for any group of takeover targets. This is consistent with the synergy view of mergers and inconsistent with the undervaluation theory. Consensus forecasts fall significantly when managers resist takeover. The decline is about 10% of the level of previously forecast earnings and is approximately equal whether the target is ultimately acquired or remains independent.

This paper tests hypotheses about the wealth effects of poison pill securities and hypotheses about the characteristics of firms that adopt them. Our estimates indicate that poison pill defenses reduce stockholder wealth by a statistically significant amount. We also find that firms that adopt poison pill defenses are significantly less profitable than the average firm in their industries during the year prior to adoption. Moreover, the managers of these firms hold statistically significantly smaller fractions of their own firms' stock than the average fraction held by managers of other firms in the same industries.