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Abstract:
Despite the theoretical underpinnings for the use of equity and earnings in economic analysis, certain financial ratios are not suited for econometric models. In particular, when reported shareholder's equity and/or earnings are less than zero, an inverse relationship can exist between financial ratios and actual firm performance. Although certain earnings ratios can be corrected when this happens, corrections to other ratios, in particular those involving negative book values for equity would result in severe sample bias, erroneous results, and misleading conclusions.

Return on equity, Financial ratios, Sample bias, Leverage ratios, Use of accounting data in economics

Abstract:
This study, using the Cox proportional hazards model, finds that the risk of takeover rises with cost inefficiency. It also finds that a firm faces a significantly higher risk of takeover if its cost performance lags behind its industry benchmark. Moreover, these findings appear to be remarkably stable over the nearly two decades spanned by the sample. The effect of the variables used to measure the risk-size relationship, however, indicates temporal changes. Lastly, the study presents evidence from fixed-effects models of ex post cost efficiency improvements that support the hypothesis that takeover targets are selected based on the potential for improvement.

corporate finance and governance, mergers, acquisitions, econometric methods, models with panel data, truncated and censored models

Abstract:
This study, using the Cox proportional hazards model, finds that the risk of takeover rises with cost inefficiency. It also finds that a firm faces a significantly higher risk of takeover if its cost performance lags behind its industry benchmark. Moreover, these findings appear to be remarkably stable over the nearly two decades spanned by the sample. The effect of the variables used to measure the risk-size relationship, however, indicates temporal changes. Lastly, the study presents evidence from fixed-effects models of ex post cost efficiency improvements that support the hypothesis that takeover targets are selected based on the potential for improvement.

Corporate finance and governance; Mergers; Acquisitions; Econometric methods Models with panel data Truncated and censored models; Cox Hazard Model

Abstract:
This study, using the Cox proportional hazards model, finds that the risk of takeover rises with cost inefficiency. It also finds that a firm faces a significantly higher risk of takeover if its cost performance lags behind its industry benchmark. Moreover, these findings appear to be remarkably stable over the nearly two decades spanned by the sample. The effect of the variables used to measure the risk-size relationship, however, indicates temporal changes. Lastly, the study presents evidence from fixed-effects models of ex post cost efficiency improvements that support the hypothesis that takeover targets are selected based on the potential for improvement.

Corporate finance and governance; Mergers; Acquisitions; Econometric methods; Models with panel data; Truncated and censored models; Cox Hazard Model

Abstract:
While the "American Dream" of homeownership can be traced back to the homesteading spirit of the pioneers, today, the possibility for many American households of achieving that dream is precariously balanced on a tripod of price, income and interest rates. The current demand for housing has put upward pressure on prices, creating a situation were home price growth is currently outpacing income growth. Yet the potential for a reduction of affordability is being offset by historically low mortgage interest rates, which are currently favorable to affordability. Issues affecting affordability - critical to broad-based home ownership - particularly affect minority groups. The most stable of the three dimensions currently seems to be mortgage interest rates, which are low and moving in a direction favorable to affordability.

"Affordability" is a public policy target that moves in three-dimensional space measured by home prices, household income and mortgage interest rates. Analyzing it from the dimensions of home prices and income, affordability is near record lows as the ratio of home prices to income is currently at 4.14, close to the maximum of 4.19 reached in 1988. The ratio had declined to 3.90 by 1992 and ever since, it has risen steadily to today's level. For many, this high ratio brings another comparison to mind - that of a "housing bubble." If prices rise too fast, fewer Americans will be able to afford a home. The concern then becomes that the resulting reduction in demand will allow home prices to "bust." Dramatic changes in demand, however, are not likely to occur in the broad national market, but rather in regional markets where the availability of employment tends to fluctuate more dramatically.

The important difference between today's housing market and that of the 1980s is that mortgage interest rates are at 6.50 percent and falling, compared to 10.25 percent in 1988. Therefore, when this third dimension is incorporated, we find that the ratio of mortgage payment to income at the median is currently 32.4 percent, compared to 40.5 percent in 1988. This lower payment ratio is largely the result of lower interest rates, but it is also being affected by the recent increase in the income growth rate. In June 2002, personal income grew by 0.6 percent, the highest rate in two years.

Since interest rates are not expected to rise in the near future, and income is experiencing strong growth, the demand that supports the current prices can be expected to remain stable for the near term. That's good news for the housing market in generally, but particularly for those interested in housing affordability

Real Estate, Affordable Housing, Mortgage Rates, Mortgage Payments

Abstract:
This study analyzes the determinants of the risk of takeover from 1981 to 1997 based on a sample of 896 Fortune 500 firms using sophisticated methodology. The measure of firm efficiency includes both production costs and overhead expenses. If relatively inefficient firms are chosen as the targets in takeovers and the new owners reduce the costs of these inefficiencies, then the potential for gains from takeovers for the US economy exists. Because firm-level costs are adjusted for the industry median, the study is able to capture the inefficiency implications of firms where it is clear that other firms in the same general product line are better controlling their costs. Indeed, high total cost per unit of revenue is a powerful determinant of the risk of takeover throughout the period under study. The impact of size on the risk of takeover, however, changed across time.

When financing was readily available, in particular during the period of the early 1980s, larger firms actually faced a higher risk of takeover. Since both costs and size are measured in terms of revenue, one can easily see that the cost savings associated with the takeover of a larger firm might result in larger dollar savings. Unfortunately, our analysis shows that regulatory actions against takeover financing changed this. Distinct from other active takeover periods, that of the 1980s was characterized by the use of high yield financing. Beginning in 1983, almost coincidental to the announcement of the first large takeover attempt financed completely with high yield debt, a bill was introduced in the US Congress to eliminate the tax deduction for all debt used in takeovers. By the time of its passage in 1989, the bill was directed at only high yield financing.

After that, size began to have a strong negative effect on the risk of takeover. By 1990, once a firm reached a certain size threshold, being inefficient relative to other firms in its industry was no longer sufficient to put it at risk for takeover. This policy brief demonstrates how these and other regulatory changes established a size-efficiency tradeoff by which the risk of takeover decreased with size for larger, relatively inefficient firms in the late 1980s. This finding has serious implications for the efficiency enhancement gains available from takeovers after regulations were enforced against the use of high yield securities for financing corporate control activity.

Takeovers, mergers, targets, "junk bonds", high-yield bonds, corporate governance,regulation

Abstract:
This paper examines whether financial buyers are more likely to initiate takeovers ofinefficient firms. We show that they indeed are and thus conclude that takeovers byfinancial buyers play a potentially beneficial role in the allocation of corporate assets in the U.S. economy. Our analysis of determinants of takeovers initiated by financial buyers uses an application of the methodology developed in Trimbath, Frydman and Frydman (2001). In order to illustrate efficiency enhancements introduced by financial buyers, we select Forstmann and Little s acquisition of General Instrument for a brief case study. We show that their aggressive programs of cost management substantially improved theefficiency of General Instrument. Moreover, it allowed General Instrument to expandresearch and development to become the global leader in high definition television.

Investment Banking, Corporate Finance and Governance, Mergers, Acquisitions, Econometric Methods

Abstract:
This paper examines whether financial buyers are more likely to initiate takeovers of inefficient firms. We show that they indeed are and thus conclude that takeovers by financial buyers play a potentially beneficial role in the allocation of corporate assets in the U.S. economy. Our analysis of determinants of takeovers initiated by financial buyers uses an application of the methodology developed in Trimbath, Frydman and Frydman (2001). In order to illustrate efficiency enhancements introduced by financial buyers, we select Forstmann and Little's acquisition of General Instrument for a brief case study. We show that their aggressive programs of cost management substantially improved the efficiency of General Instrument. Moreover, it allowed General Instrument to expand research and development to become the global leader in high definition television.

Investment Banking, Corporate Finance and Governance, Mergers and Acquisitions

Abstract:
This paper examines whether financial buyers are more likely to initiate takeovers of inefficient firms. We show that they indeed are and thus conclude that takeovers by financial buyers play a potentially beneficial role in the allocation of corporate assets in the U.S. economy. Our analysis of determinants of takeovers initiated by financial buyers uses an application of the methodology developed in Trimbath, Frydman and Frydman (2001). In order to illustrate efficiency enhancements introduced by financial buyers, we select Forstmann and Little's acquisition of General Instrument for a brief case study. We show that their aggressive programs of cost management substantially improved the efficiency of General Instrument. Moreover, it allowed General Instrument to expand research and development to become the global leader in high definition television.

Investment Banking, Corporate Finance and Governance, Mergers and Acquisitions

Abstract:
This paper is based on the author's comments before the Group of 15 (G15) Conference "Cooperation among G15 Stock Market Exchanges - G15 Capital Markets: Challenges & Opportunities in the New World". The conference was hosted by the Ministry of Foreign Affairs in Egypt, and sponsored and organized by the Cairo & Alexandria Stock Exchanges. Dr. Trimbath addressed the topic of "Financial Crisis Management and Prevention Mechanisms" for banks and stock exchanges. The conference took place March 25 - 26, 2001 at the Semiramis Intercontinental Hotel, Cairo, Egypt.

Regulators and policy makers are coming to realize what capital market participants have known for a long time: When it comes to developing the financial institutions that provide the infrastructure for robust capital markets, there is no "one size fits all". This article provides a review of recent developments in economic and finance studies on the link between financial markets and economic growth. Significant advances in the development of stock exchange safety and infrastructure in G15 countries are included throughout the discussion by way of example. The focus on stock exchange development is highlighted by a discussion of new research on capital market integration.

Financial Markets Regulation, Financial Institutions and Services, Development Planning and Policy, Capitalist Systems, Financial Architecture

Abstract:
Since the 1960s, Americans have looked to the stock market for investments. Residential real estate was just a place to live. No more. Much like gold in the 1970s, the purchase of residential real estate now appears to be treated by Americans like the investment of choice in times of economic uncertainty. This paper shows that there are two reasons for this major behavioral change.

First, real estate has become the psychological equivalent of gold, the asset considered most tangible and therefore, rationally or not, the safest. Second, the timing of the shift in real estate investment patterns suggests that the change is a side effect of the stimulative monetary policy used during economic recessions. Reduced interest rates encourage investment in real estate by making it more affordable.

Real Estate, Investment Allocation, Property, Economic Uncertainty

Abstract:
In this study (an update and revision to our 2007 working paper), we estimate the total value of trade settlement failures in the US bond markets. Analyzing data from multiple sources, we show that the value of settlement failures is rising. Regulatory and market efforts to reduce the problem have been largely unsuccessful. In April 2008 fails to deliver in bond markets reached a peak value of $600 billion, a fail rate of nearly 9%. We calculate the resulting loss of tax revenue on payments in lieu of interest (on tax-exempt municipal and Treasury securities) to be $42 million per year to the federal government and $271 million per year to the states. We calculate the loss of use of funds to investors as a result of securities paid for but not received to be $7 billion per year.

failure to deliver

Abstract:
Economists and practitioners alike would agree that information plays an important role in capital markets. But the practical job of gathering, organizing and disseminating information in markets is too often left to chance. This paper dramatizes the difficulties that can occur when that happens by using the high yield market as an example. The transition from rapid expansion in the 1980s to stable growth in the 1990s was not without its informational road-bumps. The main point of the paper is to emphasize the importance of the informational role being played by industry organizations such as the Loan Syndication and Trading Association (LSTA) in the U.S.

Syndicated loan market, financial markets, information and market efficiency

Abstract:
There's something about "Affordability" that makes it very popular: Presidents past and present set goals around it. The popularity of this perennial policy goal is based on the feel-good idea that everyone would live in a home that they own if only they could afford it. Owning your own home is declared near and far to be the American Dream. Recently, however, it seems that Americans' aren't all having the same dream. Despite improving conditions of affordability, home sales continue to decline. As income becomes unstable because of mounting job losses, housing falls further out of balance - no change in price or mortgage interest rates will be enough to rebalance the tripod in the next year.

Housing, Affordability, Income, Employment, Finance, Homeownership, Real estate, Mortgage

Abstract:
This study, using the Cox proportional hazards model, finds that the risk of takeover rises with cost inefficiency. It also finds that a firm faces a significantly higher risk of takeover if its cost performance lags behind its industry benchmark. These findings, moreover, appear to be remarkably stable over the nearly two decades spanned by the sample. The effect of the variables measuring the risk-size relationship, however, indicate temporal changes. Lastly, the study presents evidence from fixed-effects models of ex post cost efficiency improvements that support the hypothesis that takeover targets are selected based on the potential for improvement.

Corporate Finance and Governance, Mergers, Acquisitions, Econometric Methods, Models with Panel Data, Truncated and Censored Models