The operation and characteristics of the American securities markets have long been major preoccupations of financial research, especially during the last decade. Particular attention has been devoted to the question of whether there exist investment strategies, or investing entities, capable of producing consistently superior investment performance. The general consensus to date is that few, if any, such success stories are observable. Examinations of the value of professional investment research and counsel ([7] [8] [9] [24]), of the payoff from technical trading rules ([11] [13] [18] [20] [26] [34]), and of the investment results of institutional money management ([15] [29] [25] [28]) have, in almost every instance, provided little indication of performance better than that attainable from a simple passive strategy of buying and holding a randomly selected, well-diversified portfolio of securities, after appropriate adjustments for portfolio risk levels are taken into account. The intensive competition in, and rapid information-digesting properties of, the capital market environment have been cited as explanations ([2] [5] [12]).

Previous studies have found that positive abnormal stock returns are associated with corporate spin-offs and divestitures. Using a simplified model of the process of investor tax trading, we show that an improvement in the value of the tax-timing option component of securities prices is a likely contributing factor to those abnormal returns. The analysis indicates that the same phenomenon also may be part of the explanation for the generally higher returns observed for spin-offs than for divestitures, both when leverage is and is not present in the restructuring transactions.

Wilbur Lewellen, Claudio Loderer, Ahron Rosenfeld, Mergers, Executive Risk Reduction, and Stockholder Wealth, The Journal of Financial and Quantitative Analysis, Vol. 24, No. 4 (Dec., 1989), pp. 459-472

Among the elements of value reflected in the prices of corporate securities are the taxtiming options associated with the opportunities for investors to tax manage their portfolios by deferring gains and taking losses. We show that the aggregate value of these taxtiming options for the securityholders of a firm will be enhanced when the firm has multiple classes of tradeable securities outstanding. For that reason, the inclusion of debt as well as equity in a firm's capital structure should raise the total market value of the firm. We further show that, under most likely circumstances, there will be an interior optimal degree of leverage that will maximize tax-timing option values.

Three alternative characterizations of corporate debt management policy, which have had wide currency in the literature, are examined. They are shown to give rise to substantial differences in their predictions of total-firm value. This study concludes that, of the three, the one that assumes that management periodically rebalances the firm's debt levels in response to evolving new information on expected future operating cash flows is the most logically consistent. On that basis, a reinterpretation of the available empirical evidence on the “tax effect” of debt is indicated.

Since Bowlin's [4] original article on the topic was published, a considerable literature on corporate bond refunding has developed. Most of that literature has concentrated on the question of how to measure the benefit to a company's shareholders of exercising the call provision associated with an outstanding debt issue (see [3], [12], [21], [26], [27], [29], and [31]). Among the related concerns have been the matters of whether there are valuation advantages to the deliberate issuance of discount—including “zero coupon”—bonds (see [9], [22], and [28]), and whether there can be profitable opportunities for refunding prior to maturity debt instruments that were issued at par but later trade at a discount (see [1], [2], [13], [15], [17], [18], and [23]).