Cost allocation, Sharpley value, Preferences, Risk

One of the interesting anomalies of asset trading in secondary markets is that it is not usually possible to observe actual market clearing prices. Rather, we can only observe transactions as bid and ask price? and infer that the market equilibrium price lies between them. Professor Smidt analyzes continuous transactions data for individual NYSE listed securities during 1977. From it he deduces (1) the behavior of transaction prices, (2) the average size of bid-ask spreads, and (3) the movement of market prices. Given that neither the bid-ask spread nor the actual equilibrium price is observable from the available data, this is an ambitious undertaking. The problem is further complicated by the fact that the transactions data contain three distinct types of trading activity: matching trades at the opening or reopening of the auction market, auction trades (the bulk of activity by number of transactions), and block trades (the second largest activity by dollar volume).

The relationship between the rate of inflation and the interest rate has been a topic of research for quite some time. A breakthrough in the analysis occurred years ago with Irving Fisher's hypothesis that the nominal interest rate fully reflects the available information concerning the possible future values of the rate of inflation. Others have extended Fisher's original insight to explain further the interaction between the rate of interest and inflation. For example, Mundell [26] uses the Pigou real-balance effect to hypothesize that the real rate of interest is inversely related to the rate of inflation.

The concept of a relationship between assumed risk and realized return is intuitively pleasing and has become widely accepted in the field of finance. Until recently this acceptance was anchored largely in what Hirschleifer [11] has called the “notorious fact” that stocks yield more in the long run than bonds and Hickman's finding [10] (since challenged by Fraine [7]) that over the years 1900–1943 the average ex post yield on publicly issued corporate debt was higher the lower the initial quality rating. However, with the advent of the capital asset pricing model of Sharpe [21], Lintner [16], and Mossin [19] the risk-return tradeoff concept has grown in importance and scope. The capital asset pricing model itself has weathered the years well, but has been theoretically and empirically revised, extended, and otherwise altered. Little remains of the original formulation except the proposition that in equilibrium more risk leads to more return--where “risk” for common stocks now means the nondiversified component as measured by the “Beta” coefficient of return volatility vis-à-vis the general market. As Modigliani and Pogue [18] observe after a review of the “more important” empirical tests of the capital asset pricing model: “Obviously, we cannot claim that the CAPM is absolutely right. On the other hand, the empirical tests do support the view that beta is a useful risk measure and that high beta stocks tend to be priced so as to yield correspondingly high rates of return.”

The phenomenal growth in corporate merger activity of the 1960s revived interest in the motives and effects relating to corporate mergers. In recent years, many theories for explaining mergers have been discussed and tested in the literature of finance, law, and economics. Various authors have argued that motives for merger include increased market power [15, 21, 23], achievement of operating or managerial scale economies [2, 8], diversification [6], tax reduction [19], growth maximization [14, 16], and bankruptcy avoidance [7, 10, 12, 13]. The bankruptcy avoidance motive is perhaps the most recently articulated of all merger motives, and perhaps the only one for which no systematic attempts at empirical validation have been forthcoming.

Barry E. Cushing, D. Gerald Searfoss, Reed H. Randall, Materiality Allocation in Audit Planning: A Feasibility Study, Journal of Accounting Research, Vol. 17, Studies on Auditing-Selections from the "Research Opportunities in Auditing" Program (1979), pp. 172-216