Knowledge that Transforms

This paper argues that corporations may use convertible bonds as an indirect way to get equity into their capital structures when adverse-selection problems make a conventional stock issue unattractive. Unlike other theories of convertible bond issuance, the model here highlights: 1) the importance of call provisions on convertibles and 2) the significance of costs of financial distress to the information content of a convertible issue.

We examine explanations for corporate financing-, dividend-, and compensation-policy choices. We document robust empirical relations among corporate policy decisions and various firm characteristics. Our evidence suggests contracting theories are more important in explaining cross-sectional variation in observed financial, dividend, and compensation policies than either tax-based or signaling theories.

Exchange members claim that the professional relationships that evolve on exchange floors yield benefits not easily duplicated by an anonymous exchange mechanism. We show that longstanding relationships between brokers and specialists can mitigate the effects of asymmetric information. Moreover, a specialist who actively attempts to differentiate between informed and uninformed traders can achieve equilibria that Pareto-dominate an equilibrium in which the two types of trades are pooled. Our model also elucidates the role of block trading houses in mitigating information problems in the block market.

This paper examines the post-acquisition performance of large bank mergers between 1982 and 1987. On the whole, the merged banks outperform the banking industry. Their better performance appears to result from improvements in the ability to attract loans and deposits, in employee productivity, and in profitable asset growth. Further, we find a significant correlation between announcement-period abnormal stock returns and the various performance measures, showing that market participants are able to identify in advance the improved performance associated with bank acquisitions.

Average common stock price responses to convertible preferred stock calls are significantly negative only when firms employ underwriters to assure conversion. Previous work reports similar results for convertible bond calls; we find that the stock price reaction does not depend upon the type of convertible security being called. The results support the idea that managers are more likely to have calls underwritten the more unfavorable their private information about firm value.

This paper uses new data on the holdings of 769 tax-exempt (predominantly pension) funds, to evaluate the potential effect of their trading on stock prices. We address two aspects of trading by these money managers: herding, which refers to buying (selling) simultaneously the same stocks as other managers buy (sell), and positive-feedback trading, which refers to buying past winners and selling past losers. These two aspects of trading are commonly a part of the argument that institutions destabilize stock prices. The evidence suggests that pension managers do not strongly pursue these potentially destabilizing practices.

This study investigates the returns to acquiring-firm stockholders in federally assisted mergers in the savings and loan industry. It is unique in that (a) these mergers are arranged and subsidized by government regulators and (b) they occur in a single industry, one plagued by well-publicized financial difficulties. The contribution of resources by the federal government creates the possibility of wealth transfers from the government to owners of the acquiring firms. We find, consistent with the oversubsidization hypothesis, that shareholders of acquiring firms earn significant positive returns.

We examine post-acquisition performance for the 50 largest U.S. mergers between 1979 and mid-1984. Merged firms show significant improvements in asset productivity relative to their industries, leading to higher operating cash flow returns. This performance improvement is particularly strong for firms with highly overlapping businesses. Mergers do not lead to cuts in long-term capital and R&D investments. There is a strong positive relation between postmerger increases in operating cash flows and abnormal stock returns at merger announcements, indicating that expectations of economic improvements underlie the equity revaluations of the merging firms.

This paper reexamines existing evidence regarding the monotonicity of the term premium. Using a recently developed approach for testing inequality constraints, we propose and conduct tests for whether the term premium is monotonic and reach different conclusions from those implied by individual t-statistics on term premiums (even under a Bonferroni-type adjustment). Our results generally support McCulloch's (1987) view that the liquidity preference hypothesis remains unrefuted.

Examining 128 tender offer bids made from 1980 through 1987, we categorize outside directors as either independent of or having some affiliation with managers, and find that bidding firms on which independent outside directors hold at least 50% of the seats have significantly higher announcement-date abnormal returns than other bidders. However, the relationship between bidding firms' abnormal stock returns and the proportion of board seats held by independent outside directors is nonlinear, suggesting it is possible to have too many independent outside directors. All results are lost if the traditional inside-outside board classification method is used.