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Abstract:
Considerable attention has recently been given to general equilibrium models of the pricing of capital assets. Of these, perhaps the best known is the mean-variance formulation originally developed by Sharpe (1964) and Treynor (1961), and extended and clarified by Lintner (1965a; 1965b), Mossin (1966), Fama (1968a; 1968b), and Long (1972). In addition Treynor (1965), Sharpe (1966), and Jensen (1968; 1969) have developed portfolio evaluation models which are either based on this asset pricing model or bear a close relation to it. In the development of the asset pricing model it is assumed that (1) all investors are single period risk-averse utility of terminal wealth maximizers and can choose among portfolios solely on the basis of mean and variance, (2) there are no taxes or transactions costs, (3) all investors have homogeneous views regarding the parameters of the joint probability distribution of all security returns, and (4) all investors can borrow and lend at a given riskless rate of interest. The main result of the model is a statement of the relation between the expected risk premiums on individual assets and their "systematic risk." Our main purpose is to present some additional tests of this asset pricing model which avoid some of the problems of earlier studies and which, we believe, provide additional insights into the nature of the structure of security returns.

The evidence presented in Section II indicates the expected excess return on an asset is not strictly proportional to its B, and we believe that this evidence, coupled with that given in Section IV, is sufficiently strong to warrant rejection of the traditional form of the model given by (1). We then show in Section III how the cross-sectional tests are subject to measurement error bias, provide a solution to this problem through grouping procedures, and show how cross-sectional methods are relevant to testing the expanded two-factor form of the model. We show in Section IV that the mean of the beta factor has had a positive trend over the period 1931-65 and was on the order of 1.0 to 1.3% per month in the two sample intervals we examined in the period 1948-65. This seems to have been significantly different from the average risk-free rate and indeed is roughly the same size as the average market return of 1.3 and 1.2% per month over the two sample intervals in this period. This evidence seems to be sufficiently strong enough to warrant rejection of the traditional form of the model given by (1). In addition, the standard deviation of the beta factor over these two sample intervals was 2.0 and 2.2% per month, as compared with the standard deviation of the market factor of 3.6 and 3.8% per month. Thus the beta factor seems to be an important determinant of security returns.

capital asset pricing, measurements, Cross-sectional Tests, Two-Factor Model, aggregation problem

Abstract:
billion of their own stock to establish employer stock ownership plans (ESOPs). We evaluate the common claims that there exist unique tax and incentive contracting advantages to establishing ESOPs. Our analysis suggests that, particularly for large firms, where the greatest growth in ESOPs has occurred, the case is very weak for taxes being the primary motivation to establish an ESOP. The case is also weak for employee incentives being the driving force behind their establishment. We conclude that the main motivation for the growth of ESOPs is their anti-takeover characteristics.

Abstract:
The liability to employees in a defined benefit pension plan is the present value of vested benefits, the present value of the benefits that employees would receive on the immediate termination of the pension plan. This is the literal and simple definition of the liability. Although it leads to an understanding of the economics of the promise of a pension, several common provisions of pension plans make it necessary to expand the definition. Anomalies such as vesting, early retirement benefits, lump sum provisions, and ad hoc increases in benefits for retired employees indicate that employees accrue benefits that exceed their benefits on a termination of the plan. These anomalies, however, can be explained by requiring that employees as a group possess specific human capital. Although losing one or a few employees from the group would be a small loss, losing the group of employees would be a great loss. In this group model, employees bargain with the stockholders over the compensation of the entire group; they allocate . their compensation according to marginal product, returns from previous equity investments in the human capital of the group, and to purchases and sales of claims on this capital. The model explains the anomalies as a natural outgrowth of the transactions of members within the group. In addition, the model explains the use of defined benefit pension plans, and how employees could have claims, in excess of vested benefits, on the assets in the pension plan.

Abstract:
Discount dividend-reinvestment and stock-purchase plans allow shareholders to capture part of the underwriting fees incurred in new stock offerings and save sponsoring firms some of the usual underwriting costs. We tested the degree to which individual investors can profitably serve this investment banking function by implementing simple investment/trading strategies designed to capture the discounts and distribute the shares in the market. The large profits earned by our strategies raise serious questions about why it takes firms so long to raise the target level of capital and why many eligible shareholders do not participate in these discount plans.

Abstract:
If the intent of the Employee Retirement Income Security Act, ERISA, was to assure that beneficiaries of insolvent pension plans receive adequate pension benefits, sharp increases in nominal rates of interest have blunted that purpose. Without an increase in these rates, the Pension Benefit Guarantee Corporation, PBGC, the insurance agency established to guarantee benefits, faced large liabilities on the terminations of pension plans. We examine the economics of pension funds and the funding of pension funds before and after the enactment of ERISA. The Act changed the economics of pension funds. The PBGC, the employer, and the employees have interests in the assets of the pension plan. The PBGC can tax corporations to pay off liabilities and to fund guaranteed benefits; employers can terminate pension plans or overfund them; employees can ask for more benefits or claim the assets in the fund. Although the PBGC insures benefits, the insurance agent forbears, not acting quickly to protect its own interests. To prevent potential huge increases in its liabilities, the PBGC could require that employers hedge the guaranteed benefits, and fund their increases in promised benefits. Given its policies, these requirements could protect the PBGC.

Abstract:
We present evidence that changes in tax laws passed in the 1980s, culminating with the Tax Reform Act of 1986, had a first order effect on observed merger and acquisition activity in the US. We also present evidence of increased reliance on certain institutional arrangements (unit management buyouts and going-private transactions) used to effect mergers and acquisitions that were designed to reduce the nontax costs of transacting, thereby enabling tax benefits to be realized in a larger number of mergers and acquisitions than might otherwise have occurred. We begin with a "closed-economy" perspective, focusing on the effects of changes in tax laws on the demand for mergers and acquisitions of us corporations by US corporations. We then broaden the scope of inquiry by modeling and testing the effects of changes in tax laws on the demand for mergers and acquisitions of US corporations by foreign multinationals. Here we predict and present confirmatory evidence that while the 1986 Tax Act discouraged transactions among US corporations, it increased the demand for merger and acquisition transactions between US sellers and foreign buyers.

Abstract:
We explore the degree to which debt financing can reduce the corporate-level tax on income in the U.S.. Although we show that debt is capable of shielding the competitive rate of return on projects from the corporate-level tax, debt financing cannot shield the positive net present value portion of project returns. Since nontax factors preclude corporate activities from being 100% debt-financed, a portion of the competitive return to corporate activity is also subject to double taxation. We also consider alternative mechanisms that serve to convert the corporate tax to a personal tax (or a partnership tax). These include other claims that give rise to tax deductible payments to the corporation such as obligations to employees, lessors and suppliers. As we show, all of these alternatives are limited in their ability to eliminate the corporate-level tax.