Knowledge that Transforms

This study examines the effect of mergers on the wealth of bidding firms' shareholders. Bidding firms gain significantly during the twenty-one days leading to the announcement of each of their first four merger bids. These results fail to support the capitalization hypothesis that bidders' gains are captured at the beginning of merger programs. Bidders' abnormal returns are positively related to the relative size of the merger partners, and the gains during the announcement period are larger for mergers which are successful. Though the gains are larger prior to 1969, merger bids after 1969 also significantly increase the wealth of bidding firms' shareholders. The results suggest that the inconclusive findings of the earlier studies may be due to methodological deficiencies. The findings of this study are consistent with value-maximizing behavior by the management of bidding firms.

This study examines empirically stock market seasonality in major industrialized countries. Evidence is provided that there are strong seasonalities in the stock market return distributions in most of the capital markets around the world. The seasonality, when it exists, appears to be caused by the disproportionately large January returns in most countries and April returns in the U.K. With the exception of australia, these months also coincide with the turn of the tax year.

When securities are thinly traded OLS techniques yield biased beta estimates. Procedures for calculating consistent estimates are proposed by Scholes and Williams (1977) and by Dimson (1979). This comment examines both procedures and concludes that the Dimson procedure is incorrect and cannot generally be expected to yield consistent beta estimates. However, a variant of this procedure can yield results which are identical to Scholes and Williams' and is, therefore, correct.

A horizontal merger must result in higher product prizes to consumers to be anticompetitive or socially inefficient. Higher product prices, however, imply increased profits for rivals to the merging firms. Therefore, if a horizontal merger is to reduce consumer welfare, rival firms must rise in value at the time of events increasing the probability of the merger and fall in value when the probability of the merger declines. this paper uses daily stock return data from a sample of rivals to 11 horizontal mergers attempted between 1964 and 1972 that were challenged by the antitrust enforcement agencies. The paper tests the hypothesis that, but for the government's action, these mergers would have resulted in higher product prices. On balance, the data favor the null hypothesis of no anticompetitive effect.

Previous estimates of a ‘size effect’ based on daily returns data are biased. The use of quoted closing prices in computing returns on individual stocks imparts an upward bias. Returns computed for buy-and-hold portfolios largely avoid the bias induced by closing prices. Based on such buy-and-hold returns, the full-year size effect is half as large as previously reported, and all of the full-year effect is, on average, due to the month of January.

This paper examines the wealth impact of share repurchases that restrict participation to a particular sub-set of a firm's stockholders. Repurchases at a premium from insiders and small shareholders increase the wealth of non-participating stockholders and are therefore consistent with the shareholders' interest hypothesis. However, privately negotiated repurchases of single blocks from stockholders unaffiliated with the firm reduce the wealth of non-participating stockholders. In contrast to the evidence for general repurchases, no positive wealth effect offsets the significant repurchase premium paid to the selling stockholder. Indeed, the wealth loss to non-participating stockholders is significantly greater than the premium paid. This evidence is inconsistent with the shareholders' interest hypothesis and supports the hypothesis that managers in their self-interest use single block repurchases to eliminate threats to their control over the firm's resources.

This paper uses the pricing models of Cox, Ingersoll and Ross (1981), Richard and Sundaresan (1981), and French (1982) to examine the relation between futures and forward prices for copper and silver. There are significant differences between these prices. The average differences are generally consistent with the predictions of the futures and forward price models. However, these models are not helpful in describing intra-sample variations in the futures-forward price differences. This failure is apparently caused by measurement errors in both the price differences and in the explanatory variables.

This paper tests the hypothesis that horizontal mergers generate positive abnormal returns to stockholders of the bidder and target firms because they increase the probability of successful collusion among rival producers. Under the collusion hypothesis, rivals of the merging firms benefit from the merger since successful collusion limits output and raises product prices and/or lower factor prices. This proposition is tested on a large sample of horizontal mergers in mining and manufacturing industries, including mergers challenged by the government with violating antitrust laws, and a ‘control’ sample of vertical mergers taking place in the same industries. While we find that the antitrust law enforcement agencies systematically select relatively profitable mergers for prosecution, there is little evidence indicating that the mergers would have had collusive, anticompetitive effects.

Recent empirical work by Banz (1981) and Reinganum (1981) documents abnormally large risk-adjusted returns for small firms listed on the NYSE and the AMEX. The strength and persistence with which the returns appear lead both authors to conclude the single-period, two-parameter capital asset pricing model is misspecified. This study (1) confirms that total market value of common stock equity varies inversely with risk-adjusted returns, (2) demonstrates that price per share does also, and (3) finds that transaction costs at least partially account for the abnormality.

‘Antitakeover’ amendments are amendments to a corporation's charter that impede the ability of an ‘outsider’ to gain control of the firm. A number of individuals and institutions have onjected to such amendments on the grounds that they are not in the best interests of the shareholders of the firms that adopt them. This paper employs event-time methodology to investigate the impact of antitakeover amendments on the common stock prices of firms that adopt them. The results indicate that the announcement of such amendments is associated with a positive revaluation of stock price. Contrary to the concerns of their critics, we conclude that antitakeover amendments are proposed by managers who seek to increase the value of the firm and are approved by stockholders who share that objective.