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Abstract:
A model of optimal dividend payout is presented in which increased dividends lower agency costs but raise the transactions cost of external financing. The optimal dividend payout ratio minimizes the sum of these two costs. A cross-sectional test of the model relates dividend payout to the fraction of equity held by insiders, the past and expected future revenue growth of the firm, the firm's beta coefficient, and the number of common stockholders. The coefficients of all variables are significant in the predicted directions. The results indicate that investment policy influences dividend policy.

dividends, agency costs, dividend payout

Abstract:
The first part of this paper derives the Market Pricing Maxim (MPM): market transaction prices fully reflect available information. This is not the same as the efficient market hypothesis (EMH). The MPM holds whether prices are unbiased estimates of fundamental value, as the EMH hypothesizes, or whether prices depart from fundamental values, as behavioral and noise models suggest.

The MPM is put forward as a correct description of market pricing that can't be rejected, that is not an hypothesis, and that needs no testing to be known to be true. The EMH and behavioral models do not conflict over whether or not prices fully reflect available information. Prices have to and they do. They conflict over how prices reflect the information. The argument is over how close prices are to something called “fundamental value.”

The paper goes on to discuss how various concepts are interpreted in an MPM world. There is discussion of value, propagation and meaning of information, prices, fundamental value, speculative profits, buying and issuing securities, risk, and a framework for empirical research.

Next comes an extensive critique of the EMH (and to some extent behavioral models) in light of the MPM. A great deal of finance thinking that derives from EMH has to be substantially revised. For example, market prices are correct prices in the sense of reflecting all information, but this does not mean that prices are unbiased estimates of the true future prices. It is therefore dangerous to accept current prices at all times as the EMH suggests. Speculation is critical to markets, but the difficulty in making speculative profits arises not because prices are unbiased estimates of the true future prices or because properly discounted present values of assets vibrate randomly. It is because critical elements of the future that influence prices are mostly unknowable in changing ways that are unpredictable. The EMH notion that it is less than ideal (bad) if prices do not fully reflect all available information (that is, allow profits in the EMH view) is faulty. These judgments hinge on the notion that buyers and sellers can or should be able to allocate capital accurately in an efficient market without concern over whether prices are too high or too low. The sufficient conditions thought to produce market efficiency are all untenable, false, and highly misleading.

The paper closes with a brief contrast between a more helpful ideal for capital markets than efficient markets, namely, free capital markets.

Market pricing maxim, efficient market hypothesis, speculation, noise trading

Abstract:
This paper shows how to explain diversification using gain and loss. The gain-loss approach focuses on the cancellation of returns that occurs as stocks enter a portfolio. Simple algebra and arithmetic explain exactly how diversification acts to raise a portfolio's gain-loss ratio. The method requires no knowledge or use of variance or covariance. In addition, the paper shows how gain and loss are consistent with the capital asset pricing model (CAPM) and interprets the gain-loss reward-risk concepts of co-gain and co-loss in a CAPM context.
teaching, CAPM

gain-loss, gain, loss, diversification, portfolio,

Abstract:
This article presents evidence that dividend yields are directly related to and predict future stock returns: The higher the yield, the higher the stock return. The paper uses the constant dividend growth model and the subsidiary Golden Rule of Accumulation view that real long-term growth equals the real rate of interest in order to show that the dividend yield is directly related to the risk premium. A predictive test shows that dividend yields provide superior predictions of equity risk premiums in terms of lower bias, lower mean square error and lower mean absolute error as compared with the method of using historical realized returns.

dividend yield, stock returns, constant growth model, risk premium

Abstract:
We show the existence of a viable gain-loss portfolio theory, relevant for investors seeking high expected gain compared to expected loss. Diversification, in gain-loss theory, raises a portfolio's gain-loss ratio even when all component assets have identical gain-loss ratios, as long as some of the assets' gains occur when other assets lose, i.e., as long as there are unmatched gains and losses. We derive a gain-loss asset pricing model which implies that the market portfolio possesses the highest gain-loss ratio of all assets and which yields each asset's reward measure (co-gain) as proportional to its risk measure (co-loss). We show that the market equilibrium and/or the absence of arbitrage profits imply equality of prices of gain and loss of individual assets, portfolios, and assets in portfolios. Further analysis of gain and loss includes applications to leverage, net present value, and the decomposition of variance.

Abstract:
This article provides an accessible account of why dividend policy matters and how companies may set dividend payout ratios. Important variables include rates of growth of revenues and/or internal investment, financial and operating leverage, and ownership structure.

dividend policy, agency costs, ownership structure

Abstract:
We provide a rigorous and comprehensive set of derivations of earnings response coefficient models in levels and changes forms. Reverse return coefficient models are also derived. The models all are variants on the present value of dividends model of stock prices. Most of these models do not appear in the literature or appear only implicitly. We start with the simplest 100 percent payout model and work up to IMA (1,1) processes for earnings. We also model the case in which the information set is more than earnings. The approach introduced in this article provides a firm basis for further extensions.

Earnings response coefficient, present value of dividends model

Abstract:
It is not surprising that corporate insiders earn profits from trading their stocks, but it is surprising that outsiders can earn abnormal returns by mimicking the insider trades using publically available information. We suggest that these anomalous returns are explained by the size and price/earnings ratio effects. Controlling for these factors reduces outsider profits by one-half. The additional assumption of 2 percent transactions costs makes outsider profits zero or negative. Measured insider profits are also greatly reduced by controlling for size and price/earnings effects. Insider profits are a modest 3 percent per annum after deducting a 2 perecnt transactions costs fee.

insider trading, market efficiency, size and price/earnings effects

Abstract:
Studies of size and earnings/price ratio effects together have produced contradictory results. Does one effect subsume the other or are there two separate effects? This paper demonstrates that equity returns are related to both size and earnings/price ratio as well as the month of January. Reinganum [20] and Basu [4] are reexamined to find the reasons for their contradictory results. Reinganum's finding that size subsumes earnings/price ratio is caused by a fortuitous choice of methods. Basu's finding that earnings/price ratio subsumes size appears to be sample-specific.

anomalies, size effect, earnings/price ratio effect, January effect

Abstract:
This paper presents evidence concerning industry influences on the dividend decision after controlling for other firm-specific determinants known from prior research to affect payouts. Two sharply contrasting economic periods are examined: 1974 to 1980 and 1981 to 1987. Industry affiliation is found to possess significant explanatory power when modeling payout behavior at the individual firm level. The specific industries found to be significant are relatively few in number, however, and they do not exhibit persistence in their effect over time, for the most part. Consequently, only modest support is found for the industry-related dividend leadership effect posited by Lintner (1956).

dividend policy, industry effect

Abstract:
The Singapore Stock Exchange automated fully in 1989. We discuss the reasons why automation could influence aspects of trading such as volume, volatility, liquidity, market efficiency, and bid-ask spreads. Examination of 28 securities suggests that automation is associated with increases in volumes traded, return volatility and liquidity as defined by the ratio of volume to volatility. Improvements in market efficiency appear in reduced serial correlations of returns. Bid-ask spreads and their variability widen somewhat.

automated exchange, electronic trading, volume, bid-ask spread, liquidity, volatility

Abstract:
Industry classification is known to be related to the dividend payouts of firms. This occurs because industry variables proxy for underlying factors (such as investment opportunities) that affect firms' payout policies and vary systematically across industries. Hence, a well-specified dividend payout model at the firm level should pre-empt any role for industry effects. This paper shows that industry effects can be reduced nearly to zero by employing a set of firm-specific variables to explain dividend payouts across firms.

Dividend policy, payout, industry influence

Abstract:
This paper examines the economic reasons for the observed negative abnormal common stock performance of firms whose reported earnings and stockholders' equity were negatively affected by the proposed elimination of full cost accounting in the oil and gas industry. Four explanations of the market effects of this mandatory accounting change are examined: (1) naive investor theory, (2) modified naive investor theory, (3) contracting cost theory, and (4) estimation risk theory. These hypotheses are developed in detail and used to generate variables for a cross-sectional model which explains observed return behavior. The effect of the accounting change on total stockholders' equity, the existence of financial contracts denominated in terms of accounting numbers and, to a lesser extent, firm size are shown to be important explanatory variables. The importance of these variables is consistent with both the contracting cost and estimation risk theories.

contracting cost, full cost accounting, oil and gas industry, mandatory accounting change

Abstract:
This article examines several stock market trading rules that use publicly available money supply data. None of the rules predicts the future stock market behavior and none provides returns in excess of a comparison buy-and-hold rule. Stock returns are related to current and future money supply changes, however. That is, the stock market anticipates upcoming changes in money supply. Linear regression models that allow foresight of future money supply are able to beat the market. This shows that regression models are powerful enough to produce abnormal returns - if they have non-publicly available information.

Efficient market, money supply, trading rules

Abstract:
In this article, we compare several candidate time-series models for the time-series of quarterly accounting earnings per share. One Box-Jenkins model dominates in terms of forecast accuracy. This model is a Box-Jenkins (1,0,0) x (0,1,1) model.

quarterly earnings per share model, accounting earnings model, time-series earnings model

Abstract:
The process by which analysts revise quarterly earnings forecasts is analyzed and compared to the way in which several time-series models of quarterly earnings revise forecasts. A significant portion of the analyst's forecast revision is explained by the most recent one-quarter-ahead forecast error. Analyst revisions are adaptive in the same manner that single-period ahead model forecasts are adaptive. At longer horizons, the evidence is that analysts revise forecasts in the same way that autoregressive models of quarterly earnings revise and not as moving average models do.

analyst forecasts, earnings, adaptive expectations, earnings forecast errors

Abstract:
The ROPE model is a three-phase model that generates estimates of future dividends by incorporating estimates of return on equity and payout ratios rather than assuming that dividend growth rates decline linearly as in the second stage of the three-phase model. Growth firms often experience an increase in dividends as they move toward maturity because rising payout rates counteract declines in return on equity. Although tests are difficult to carry out, they indicate that the ROPE model provides estimates that are closer to market prices than those of the standard three-phase model.

dividend discount model, three-phase model, stock valuation, return on equity, payout

Abstract:
This papers derives four-five year predictions of growth rates of accounting earnings per share implicit in four expected return models commonly used in financial research. A comparison of such growth rates with those produced and reported by Value Line analysts and those generated by a submartingale model revealed the following: two expected return models - the Sharpe-Lintner-Mossin model and the Black model - were significantly more accurate than the submartingale model, though not significantly more accurate than the other return models. However, the growth rate forecasts provided by Value Line significantly outperformed all the other models tested - none of which relied on the direct input of a security analyst.

Earnings forecast, Value Line, Sharpe model

Abstract:
This paper examines stock market efficiency with respect to money supply data by testing (1) regression models of stock returns on monetary variables and (2) trading rules based on money supply data. The evidence indicates no meaningful lag in the effect of monetary policy on the stock market and that no profitable trading rules using past values of the money supply exist. Therefore this evidence is consistent with the efficient market model. Current security returns incorporate all information contained in past money supply data and, in addition, appear to anticipate future changes in the money supply. A number of previous studies have concluded that lags exist and can be used in profitable trading rules. Analysis of these studies demonstrates that for a variety of reasons the evidence in these past studies does not sustain such conclusions.

efficient market, money supply, trading rules

Abstract:
Insider transactions are not random across growth and value stocks. We find that insider buying climbs as stocks change from growth to value categories. Insider buying is also greater after lower stock returns, and lower after high stock returns. These findings are consistent with a version of overreaction which says that prices of value stocks tend to lie below fundamental values, and prices of growth stocks tend to lie above fundamental values.

Overreaction, growth, value, insider trading

Abstract:
This article presents a series of transparent arguments in favor of using gain and loss as return and risk concepts. Gain and loss are widely used in markets where returns are asymmetric, such as betting markets, bond markets, option markets, and insurance. When properly (and intuitively) defined with respect to risk-free rates, a number of remarkably simple and beautiful propositions follow: (1)The value of gain equals the value of loss. (2) An asset's risk premium equals its expected gain minus its expected loss. (3) An asset's beta coefficient equals its ratio of expected co-loss with the market to expected market loss, and also its expected co-gain with the market to expected market gain. (4) In CAPM, an asset's co-gain is directly proportional to its co-loss. Closed-form formulas show how a portfolio's gain-loss ratio rises with diversification. In this paper, the empirical benefits of diversification are demonstrated using stock return data.

gain, loss, diversification, capm

Abstract:
This article raises (but mostly does not answer) several questions concerning insider trading. How important is it? How can it be prosecuted when it has no clear definition? Is anyone harmed by insider trading? If so, who and how? Should insider trading be deregulated? Are there property rights in information? Who benefits most by restricting insider trading? How do insider trading restrictions harm investors?

insider trading, securities regulation

Abstract:
This study investigates the corporate spin-off. It provides the institutional details of the spin-off, an analysis of alternative hypotheses to explain spin-offs, and an event study. In addition, it contains a detailed analysis of the motives for spin-offs as provided by the companies. Anergy is the opposite of synergy, a diseconomy present in a company that can be removed by spinning off a portion of the company. The evidence suggests that anergies are present in many spin-offs and help account for their occurrence.

spin-off, diseconomy, anergy, event study

Abstract:
This article examines six topics in insider trading: (1) How significant is insider trading? (2) What are the profits earned by insider trading? (3) Why is insider trading of concern to the SEC and others? (4) How is insider trading related to the takeover of a company? (5) What are the major ethical arguments against insider trading and how valid are they? (6) Who is or is not harmed (or helped) by insider trading? I argue that the amount of insider trading is not significant compared to the total value of all trading. I argue that profits to insider trading can't be measured, but what we do know of them suggests they are trivial compared to, for example, bank fraud losses or consumer losses due to steel subsidies. Since Congress has traditionally been unconcerned with insider trading but the SEC has, I argue that the SEC's zeal benefits investment bankers and others. I argue that the takeover industry has incentives to maintain secrecy, and that the SEC and others have smeared takeovers by associating them with inside information. I argue that none of the ethical arguments against insider trading hold up under scrutiny. Finally, I argue that only in certain cases where information is owned and protected can one make a case for either theft or breaking a contract.

insider trading, SEC, insider profits

Abstract:
Bond betas are estimated and shown to be related to bond ratings. Bond betas tend to rise as rating class falls. Bond betas are stable over long time periods. Examination of the CAPM model using both bonds and stocks shows no market segmentation, with both bonds and stocks lying along the same line. The inclusion of bonds in the estimation gives a zero-beta estimate that is closer to the risk-free rate than when bonds are excluded.

capm estimation, bond betas, zero-beta return

Abstract:
This paper reviews and analyzes five areas relating to closed-end funds. (1) Issues relating to the existence of closed-funds and why rational investors subscribe to new issues of them. A detailed set of model assumptions is examined in order to understand the basis for closed-end funds coming into existence. (2) The time-series properties of discounts. (3) The cross-sectional variation in closed-end fund discounts. (4) Issues of weak and semi-strong form efficiency. (5) Issues relating to the open-ending of closed-end funds.

closed-end funds, discounts, market efficiency, open-ending

Abstract:
This article reviews a variety of financial economic hypotheses that may explain the sale of corporate assets and discusses the relevant empirical evidence regarding corporate divestitures. Two explanations are stressed: diseconomies to the seller and economies to the buyer. The article also examines several phenomena related to sell-offs, such as their relation to prior mergers, the presence or absence of reported sales prices, differences between voluntary and involuntary sell-offs, and the announcement effects.

sell-offs, divestitures, synergy, mergers

Abstract:
If both producers and consumers demand forecasts based solely on their forecasting ability, then the equilibrium employment of analysts, a higher cost factor than time series models, implies that analysts must produce better forecasts than time series models. Past studies of comparative earnings forecast accuracy have concluded otherwise. Using nonparametric statistics that provide proper yet powerful tests, we find that Box-Jenkins time series models consistently produce better forecasts than martingale and submartingale earnings models; but Value Line Investment Survey consistently makes significantly better earnings forecasts than the Box-Jenkins models.

earnings forecasts, security analyst forecasts, Box-Jenkins models

Abstract:
The essence of corporate control includes the hiring and firing of key managers. We examine changes in equity values when the Board of Directors appoints and dismisses top-level managers. The evidence suggests that management changes signal shifts in company policy and raise shareholder wealth, internal promotions confirm the soundness of investment by large companies in firm-specific human capital while external appointments do not, promotions occur more often than external appointments but decline in importance as firm size decreases, and dismissal is not a favored means to handle managerial underperformance but is associated with stock price increases when used.

management changes, promotions, appointments, managerial labor market

Abstract:
We present the first evidence that initial ratings of commercial paper influence common stock returns. Highly-rated industrial issues of commercial paper, unaccompanied by bank letters of credit, are associated with significantly positive abnormal returns; lower-rated issues are not. The stock price effects of changes in commercial paper ratings also demonstrate the relevance of ratings to the financing of firms. Rating downgrades, especially those that imply an exit from the commercial paper market, produce significantly negative abnormal returns; upgrades have no effects. Initial commercial paper ratings and subsequent re-ratings appear to help investors sort firms by their future prospects.

Commercial paper, ratings, abnormal returns, letters of credit

Abstract:
This article shows that if the market has an expected positive risk premium, then lump-sum investing is mean-variance superior to dollar-averaging. In showing this, it is critical to hold constant the risks of the two policies. When this is done over a 12-month horizon, lump-sum investing provides a higher return by 1 to 4 percent as the stock size declines. Lump-sum investing provides a higher return using the S&P 500 in 40 of 65 years. Risk-averse investors who prefer dollar-averaging can accomplish the aim of risk reduction more effectively by lowering the fraction of funds invested in the risky asset and investing them all at once.

dollar-averaging, mean-variance efficiency

Abstract:
Large outside shareholders, outside boards, and management entrenchment influence the choice of inside or outside CEOs. In a sample of 385 CEO changes from 1979 to 1986, the probability of selecting an outside CEO rises with the level of stock ownership of large outside shareholders and the fraction of the board seats held by outsiders. It falls as management entrenchment increases, as firm size increases, and as firm performance improves. Shareholder value increases more with outside than inside CEO selection. Also, more shareholder value is lost the higher the level of ownership by the new CEO relative to the level of ownership by the outgoing CEO, unless the firm has a large outside shareholder. The results are consistent with the view that large outside shareholders play an active role in controlling manager-shareholder conflicts.

Outside shareholders, management entrenchment, CEO selection

Abstract:
The coskewness and dividend yield effects on capital asset prices have been established in two separate literatures. Neither literature controls for the variable in the other, nor for other potentially confounding factors such as size of the firm and the January effect on returns. Using stock return data for 1969-1978, this study provides evidence of coskewness, size, yield and January effects on stock returns. Coskewness appears to be a surrogate variable for dividend yield. When yield is controlled for, the coskewness effect cannot be detected. Hence, the significance of coskewness seems to result from the presence of the uncontrolled factor, dividend yield.

Asset Pricing, Skewness, Dividend Yield

Abstract:
This article provides the basic theory of double leverage used in utility rate regulation. It derives the double leverage adjustment for finding the cost of capital of a wholly-owned subsidiary from fundamental cost of capital propositions. The standard estimates of capital costs using this approach are shown to be misestimated. The article then provides a modified double leverage method that provides the correct cost of capital.

Rate regulation, cost of capital, double leverage

Abstract:
The Hong Kong Stock Exchange closed for four days after the October, 1987 crash. This paper examines prices, liquidity, volatility, and trading volume on the HKSE after the exchange reopened in comparison with other Asian exchanges that did not close. The closing had negative effects on the trading characteristics of the Hong Kong market. Prices dropped more than expected, volatility increased, liquidity decreased, and postponed trading created a surge in volume.

Crash of 1987, Hong Kong market closing, liquidity, volatility, volume

Abstract:
Estimates of future quarterly earnings are of prime importance to capital market participants for formulating their investment decisions. Superior ability to forecast future earnings may enable investors to reap extraordinary returns by trading in the affected securities. The extant forecast accuracy literature has presented convincing evidence that interim accounting data contain predictive value for improving forecasts of annual earnings. But by concentrating upon forecasts of annual earnings, past research has presented no evidence regarding the predictive value of interim data for improving forecasts of future quarterly earnings. Improved annual forecasts are not synonymous with improved forecasts of future quarterly earnings. As the year progresses, the annual earnings forecast generally can be significantly improved by substituting known interim data for their earlier predicted values, leaving intact previous forecasts of future quarterly earnings. By introducing an alternative methodology, evidence is presented that interim data have predictive value for improving forecasts of future quarterly earnings.

earnings forecasts, quarterly earnings

Abstract:
We report three new findings that rely upon the high-low price range as an estimate of stock return variance. The predictability of variance is associated with persistence in high prices and with correlated shocks to high and low prices. Excess stock returns are positively related to anticipated variance and inversely related to unanticipated variance. Lagged squared residuals in GARCH (1,1) models have no incremental explanatory power in the presence of forecasts of conditional volatility generated from high-low price spread models.

variance, high-low spread, garch, volatility, stock returns

Abstract:
Odd-lot data over 1904-1972 provide a unique way to examine market efficiency because the data were private before 1936 and public thereafter. They also have intuitive appeal because they seem to pit the untutored small investor against the professional. Several commentators on the odd-lot data provide guidance to the construction of trading rules that go against the public trading tendencies. There is good evidence that some of these rules are well-conceived to secure profits over the time periods used to construct them. Prior to 1920 the stock market shows some slight evidence of being strong-form inefficient with respect to these data. However, after 1941 there is no evidence of a profitable strategy. The verdict is that the market is efficient with respect to odd-lot data and that coppering the public with these data does not pay.

odd-lot data, market efficiency, trading rules

Abstract:
This article develops a variety of new evidence on tax-loss selling and the January effect. Individual stocks are divided into categories depending on a tax-loss measure. By November, a given year can be categorized as a high tax loss or a low tax loss year. I find that December returns are significantly lower in high tax loss years than in low tax loss years. The subsequent January returns are higher in high tax loss than in low tax loss years. These effects hold across stocks of all sizes but grow in amount as stocks become smaller. The January increases are roughly the size of the December decreases. Tax-loss selling explains about one-half the January effect. Even following low tax loss years, the January effect is present. The size and tax loss effects across individual stocks depend on whether the year is a high tax loss or a low tax loss year. In low tax loss years, there is no size effect and no tax loss selling effect. I hypothesize that these effects occur because the public shifts shares to dealers in December, the tax-loss selling season. Data on Exchange member and nonmember transactions support this hypothesis. Over 60 percent of the temporal variation in the small firm January returns is explained by variation in end-of-year share shifts.

tax-loss selling, January effect, December effect, small firm effect

Abstract:
Two essentially opposite accounting policy decisions were the FASB proposal to eliminate full cost (FC) accounting and the SEC proposal 13 months later to allow FC accounting while reserve recognition accounting was developed. The SEC's reversal of the FASB decision provides an opportunity to develop additional evidence concerning the market consequences of accounting policy decisions. The authors test whether the SEC proposal had a significant effect on the valuation of FC firms and whether its pricing effect was opposite to that observed at the time of the FASB proposal. A generalized least-squares procedure that takes account of contemporaneous correlation in abnormal return data is employed. The procedure and tests are completely general and appropriate for investigating the market effects of a wide variety of accounting policy decisions in which cross-sectional correlation of the data is a problem. Evidence is presented that the FC firms had significantly higher returns in the SEC period than the successful efforts firms. Furthermore, within the FC sample, a negative relationship is found between the abnormal returns of individual firms at the times of the FASB and SEC proposals.

full cost accounting, SFAS 19, oil and gas accounting

Abstract:
We estimate speeds of adjustment of individual stock prices to private information using daily data. We use a model in which private information gives rise to return variance and private information decays linearly over time. We find that, on average about 85 to 88 percent of private information is incorporated into prices within one trading day, with variation depending upon the stock's trading volume and whether the stock is listed on an exchange. The findings support strong form market efficiency.

strong form efficiency, private information, speed of adjustment

Abstract:
This paper surveys some of the prevalent theories of stock market regulation (market failure and public choice.) The validity of generalizing U.S. regulatory experience to the markets of other nations depends on which, if any, of these popular theories holds. No convincing evidence exists to support market failure. Hence, the scientific basis for generalizing U.S. experience to other markets is limited. The negative lesson is that imitation of U.S. regulation does not necessarily improve the general welfare. Observed regulation depends on interest groups. Not only is there no ideal model to follow, but no such ideal exists. The paper reviews important phenomena that any positive theory of regulation is confronted with. It provides detailed criticisms of the SEC and reviews Benston's strong critique of mandatory disclosure.

stock market regulation, SEC, mandatory disclosure, market failure, public choice theory

Abstract:
This paper shows that large efficiency gains in estimating portfolio betas can be achieved by using time-stratified estimates which explicitly incorporate seasonality in stock returns. Several types of estimates are examined: combined, separate, two strata and twelve strata. Not only do these estimates greatly reduce standard errors, but also time-stratified beta estimates raise the intercept and lower the slope in estimates of the capital market line.

seasonality, beta estimation, capm, stratified samples

Abstract:
Price adjustment delays occur between in-the-money convertible preferred stock prices and common stock prices. Convertible preferred prices systematically deviate from the prices predicted from their conversion relations with common stocks. The price predictability stems from price changes in the underlying common stocks leading the price changes in the convertible preferred stocks by up to nine hours. Cross-sectionally, about 70 percent of the variation in the unsigned size of the price deviations is explained by proxies for costs of arbitrage.

arbitrage costs, price delays, convertible preferred

Abstract:
This article examines the relation between stock returns and a set of operating decisions: layoffs, operation closings, and pay cuts. We find evidence that cost-cutting measures occur after significant stock price declines. Announcements of layoffs and temporary operation closings are associated with negative returns, while permanent operation closings do not have significant announcement effects.

operation closings, cost-cutting, layoffs, pay cuts, stock returns

Abstract:
This paper provides evidence of a market inefficiency. Between 1942 and 1984, the specialists' short sales ratio has foretold periods of higher and lower returns on the New York Stock Exchange. Average stock returns have been significantly higher after low values of the ratio (marking low short sales by specialists) and significantly lower after high values of the ratio. Not only has the market been strong-form inefficient but these data have been publicly available with a slight lag, indicating semi-strong form inefficiency.

market inefficiency, abnormal returns, specialist short sales

Abstract:
The October 1987 crash of stock prices is a largely unexplainable event, much like any other setting of prices in the stock market, only larger. If anything the market operated efficiently in moving prices to a new level that tended to persist for many months thereafter, thus indicating that the crash was not an overreaction. Statements by the SEC chairman concerning a possible trading halt and the halt in index arbitrage trading probably added to the volatility. Attempts to limit volatility by regulation are misguided and will prove damaging.

crash of 1987, volatility, market efficiency

Abstract:
Gain and loss, calculated from the upside and downside portions of return distributions, play a pivotal role in the two-state model. A two-state economy possesses a universal gain-loss ratio (G/L) for all assets that is related to the ratio of state prices and to the familiar risk-neutral probabilities. This paper derives many asset pricing properties in a two-state context and shows the role of gain and loss. Applied to bonds, for example, the debt yields depend directly on both G/L and a bond's potential loss. Using S&P 500 data over a 72-year period, the market has priced an Arrow-Debreu security in the gain state at approximately $0.36, while the Arrow-Debreu security in the loss state has been priced at $0.61. Historically, the S&P 500's expected gain is about three times its expected loss.

gain, loss, state prices, asset pricing

Abstract:
Box-Jenkins models are subject to errors of identification, which makes caution advisable when interpreting articles that rely heavily on estimates from these models. This article provides a case study of one such instance, the modeling of consumer installment credit. The paper provides some guidance in identifying multiplicative seasonal Box-Jenkins models.

Box-Jenkins models, consumer installment credit, identification

Abstract:
This article describes in some detail the properties of free market money and banking so as to contrast state-controlled central bank money and banking. It examines seven steps that government takes to replace the free market with central banking as it creates a banking system cartel. A number of myths surrounding central banking are spelled out and criticized, leading to an answer to the question of why central banks really exist. The article strongly opposes the conventional wisdom surrounding both central banks and the role of economists in government actions.

Free market banking, central banking, medium of account, money, gold

Abstract:
Wealth transfers to and from firms occur during unanticipated inflations, depending on the net monetary position of the firms. Debtor firms gain and creditor firms lose. The observed abnormal returns of the firms depend on whether the beta coefficient impounds the sensitivity to the inflation factor and the extent to which the net monetary position is related to other risk factors associated with beta such as operating and financial leverage. This paper provides two derivations that indicate that the extent of the net debtor position is directly related to operating and financial leverage. This implies that the beta coefficient impounds the risk effects of net monetary position. The evidence of existing studies is shown to be consistent with the modeling implications.

beta coefficient, inflation, net debtor, operating leverage, financial leverage

Abstract:
Joseph Stiglitz shared the Nobel Prize in 2001 partly on the basis of an important paper of his (with Greenwald): "Externalities in Economies with Imperfect Information and Incomplete Markets." In that paper he says: "There exist government interventions (e.g., taxes and subsidies) that can make everyone better off." Stiglitz is a prolific, outspoken, and outstanding spokesman for the pro-government school. This paper of his is supposed to provide the intellectual and analytical foundation for government intervention. I will argue that this important and oft-cited paper, while containing no mathematical errors, completely fails to prove the potential worth of government interventions. It assumes the result that it attempts to prove. Stiglitz has given us an inadequate and incomplete theory with inconsistent and ad hoc assumptions. His equations contain no theory of government whatever and for that reason alone they cannot possibly provide us with real-world prescriptions. In addition, Stiglitz ignores a long list of serious issues that undermine his prescription in favor of government interventions.

Stiglitz, externality, government, intervention, Pareto optimality

Abstract:
Mutual fund splits occur in high-priced funds after unusually high returns. Split factors are related to the deviation of a fund's price from the mean of other funds' prices. Post-split numbers of shareholders and assets do not increase compared with funds having similar rates of asset growth. However, I find evidence that mutual fund splits bring per account shareholdings back up to normal levels. I argue that signaling, liquidity, and tick size theories do not apply to mutual fund splits.

stock splits, mutual funds

Abstract:
We measure the postsplit performance of 12,747 stock splits from 1927 to 1996 using two methods to measure abnormal returns: size and book-to-market reference portfolios with bootstrapping, and calendar-time abnormal returns combined with factor models. Between 1927 and 1996, neither method applied to splits 25 percent or larger finds performance significantly different from zero. Over selected subperiods, subsamples of 2-1 splits restricted by book-to-market availability requirements display positive abnormal returns using some methods. However, these samples show small or negligible abnormal returns using the calendar-time method. Overall, the stock split evidence against market efficiency is neither pervasive nor compelling.

Abstract:
Negative abnormal stock returns of about one percent occur near record dates of stock splits. Further, the lower the returns, the more positive are ex-date returns and when-issued premiums. A possible explanation of these related phenomena is that trading hindrances associated with record dates create trading inconvenience that is reflected in lower prices near record dates. In turn, anomalous positive ex-date returns arise in part from the abnormally low prices of unsplit shares caused by the negative record date returns.