AEA category—G14; G30; G32
B1—Terrill R. Keasler and Karen C. Denning
B2—A Re-examination of Corporate Strategic Alliances: New Market Responses
C2—We examine strategic alliances in attempt to explain the increase in their use and the statistically significant increase in announcement day abnormal returns evident. Of the 10,141 strategic alliances we examine between 1983 and 2004, on average there is a statistically significant positive market response consistent with earlier research. Despite their increased use and positive announcement response, evidence suggests that approximately half of all strategic alliances result in negative shareholder wealth effects perhaps portending impending alliance failure. Our research helps to differentiate those strategic alliances that are viewed favorably by the market from those which are not.
B6—Quart. J. Fin. Account.
B8—48 (1), pp. 21-48
C4—
B4—Appalachian State University, Boone NC; Fairleigh Dickinson University, Teaneck NJ

AEA category—I22
B1—Jorge Brusa, Michael Carter, and George E. Heilman
B2—Differences in Academic Content, Placement, and Research Productivity among Doctoral Programs in Finance
C2—This study compares the academic content of doctoral programs in finance and examines its influence on the placement and research productivity of the programs’ graduates. We find that there is a significant relationship between the academic content of a program and both the quality of the placements and the research contributions of its graduates. Doctoral programs requiring Continuous Time Finance and/or Stochastic Calculus produce graduates who obtain better placements and publish more frequently in the top finance journals.
B6—Quart. J. Fin. Account.
B8—48 (1), pp. 3-20
C4—
B4—Texas A&M International University, Laredo TX; University of North Texas, Denton TX; Winston-Salem State University, Winston-Salem NC

AEA category—G20, G21, G28
B1—John C. Alexander, Drew Dahl, and Michael F. Spivey
B2—The Effects of Bank Lending Practices on CRA Compliance Examination Scheduling and Non-Compliant Banks’ Recovery 1990-1998
C2—This study extends past research examining the Community Reinvestment Act (CRA) compliance examinations. Using the sample period 1990 – 1998, we assess: 1) if CRA compliance examiners consider a bank’s lending practices in scheduling it’s next examination, 2) if these lending practices influence it’s ability to recover from a substandard rating by the next examination, and 3) if structural changes in the examination scheduling and recovery probability occur following the 1995 passage of the amendments to the CRA examination criteria. We observe that a bank’s current loan levels and loan quality exert significant influence on the scheduling of the next examination. We find some evidence that the probability of non-compliant banks’ recovery by the next examination is significantly influenced by its loan levels and loan quality. We also observe the time interval between examinations is significantly longer after 1995, especially for smaller banks. We also find some evidence that the OCC was more lax than other regulators, perhaps in hopes of having more banks seek national charters.
B6—Quart. J. Fin. Account.
B8—48 (1), pp. 49-66
C4—
B4—Clemson University, Clemson SC; Utah State University, Logan UT; Clemson University, Clemson SC

AEA category—G15, F31, C22
B1—C. Sherman Cheung and Peter C. Miu
B2—Currency Instability: Regime Switching versus Volatility Clustering
C2—In this paper, we demonstrate the importance of controlling for the volatility clustering effect when estimating regime-switching models. One can falsely report statistically significant distinct regimes that are in fact the ARCH effect. We provide statistical examples to this phenomenon. The simulation in our study further confirms the higher likelihood of falsely accepting regime switching when the ARCH effect is relatively pronounced. This is an important issue because of the recent interest in applying regimeswitching models to capture currency instability and other financial crises in emerging countries.
B6—Quart. J. Fin. Account.
B8—48 (1), pp. 67-82
C4—McMaster University, Hamilton, Ontario, Canada
B4—school

AEA category—
B1—Duane B. Graddy and Tom H. Strickland
B2—Market Perceptions of EPA Actions Under Different Political Regimes
C2—Studies find that the penalty imposed by the market on violators of environmental regulations is a function of the form of legal action taken and type of toxin involved as well as special circumstances such as firm size. In addition to these factors, we hypothesize that the market reacts differently to announced violations in different political environments. This hypothesis stems from the general perception that Democrats are more inclined than Republicans to use rules-based rather than market-based environmental remedies. The hypothesis was tested using an event-study methodology. Regression of cumulative abnormal returns on the dichotomous political party variables produced significant results. Evidence based on the period 1980-2002 suggests that the market responds more negatively to unexpected announcements of environmental infractions under Democratic administrations than Republican administrations, particularly when Democrats control both the presidency and the Senate.
B6—Quart. J. Fin. Account.
B8—48 (1), pp. 83-98
C4—
B4—Middle Tennessee State University, Murfreesboro TN; Middle Tennessee State University, Murfreesboro TN


Table of Contents
Quarterly Journal of Finance and Accounting
Autumn 2008 Volume 47 Number 4

Author AEA
Category Title Pages
Alexander Peter Groh, Rainer Baule, Oliver Gottschalg G13, G24, G32 Measuring Idiosyncratic Risks in Leveraged Buyout Transactions 5-24
Linus Wilson G32, G34, L2, L15 Hidden Debt and the Selectivity of Professional Partnerships 25-56
Jennifer Bethel and Laurie Krigman Managing the Costs of Issuing Common Equity: The Role of Registration Choice 57-86
Brett D. Cotton G14, G32, M41, K22 Earnings Management Prior to Initial Public Offerings: Evidence from Secondary Share Data 87-108
Jianguo Chen, Lloyd P. Blenman, and Dar-hsin Chen G28, G32, G38 Does Institutional Ownership Create Value? The New Zealand Case 109-124
Valentina Galvani and Aslan Behnamian G11, G18 Diversification Gains in the Market for Provincial Bonds 125-144
Daniel C. Benco and Larry Prather G14, G31 Market Reaction to Announcements to Invest in ERP Systems 145-170
João Paulo Torre Vieito, Walayet Khan, António Melo da Costa Cerqueira, and Elísio Fernando Moreira Brandão, G35; J38 Is Executive Compensation Different Across S&P Listed Firms? 171-192

AEA category—G13, G24, G32
B1—Alexander Peter Groh, Rainer Baule, Oliver Gottschalg
B2—Measuring Idiosyncratic Risks in Leveraged Buyout Transactions
C2—We use a contingent claims analysis model to calculate the idiosyncratic risks in Leveraged Buyout transactions. A decisive feature of the model is the consideration of amortization. From the model, asset value volatility and equity value volatility can be derived via a numerical procedure. For a sample of 40 Leveraged Buyout transactions we determine the necessary model parameters and calculate the implied idiosyncratic risks. We verify the expected model sensitivities by varying the input parameters. For the first time, we are able to calculate Sharpe Ratios for individual Leveraged Buyouts, thereby fully incorporating the leverage risks.
B6—Quart. J. Fin. Account.
B8—47 (4), pp. 5-24
C4—
B4—GSCM Montpellier Business School, Montpellier, France, and IESE Business School, University of Navarra, Barcelona, Spain; University of Göttingen, Göttingen, Germany; HEC School of Management, Paris, France

AEA category—G32, G34, L2, L15
B1—Linus Wilson
B2—Hidden Debt and the Selectivity of Professional Partnerships
C2—Levin and Tadelis (2005) argues that the partnership form is a signal to uninformed clients that the firm will be very selective about the professionals it hires. In contrast, this paper shows that increases in debt obligations cause partnerships to lower their hiring standards. If debt levels are not observed by clients, then partnerships are nearly as profitable and as selective as corporations. Financial transaction costs cause partnerships to be more selective than corporations. Large expansions in the ranks of senior employees will be more costly to partnerships than corporations when there are costs to issuing debt. The Goldman Sachs IPO is discussed in light of this result. Finally, credit constraints can raise clients’ expectations for the quality of the partners and the profitability of the partnership.
B6—Quart. J. Fin. Account.
B8—47 (4), pp. 25-56
C4—
B4—University of Louisiana-Lafayette, Lafayette LA

AEA category—
B1—Jennifer Bethel and Laurie Krigman
B2—Managing the Costs of Issuing Common Equity: The Role of Registration Choice
C2—In this paper we find that firms manage the costs of issuing common equity through their choice of SEC registration strategy. Firms that use unallocated shelf, a deregulated registration procedure, pay lower underwriter fees and access the market faster than similar firms that use the slower traditional procedure that requires detailed advance disclosure. Low information-asymmetry firms that use shelf incur minimal asymmetric-information related price declines when registering and issuing equity. High informationasymmetry firms that choose shelf, however, experience large price declines, and instead tend to choose the traditional registration procedure.
B6—Quart. J. Fin. Account.
B8—47 (4), pp. 57-86
C4—
B4—Babson College, Babson Park MA; Babson College, Babson Park MA

AEA category—G14, G32, M41, K22
B1—Brett D. Cotton
B2—Earnings Management Prior to Initial Public Offerings: Evidence from Secondary Share Data
C2—Ritter (1991) first documented the long-run underperformance of initial public offering (IPO) firms. This underperformance has become known as the new issues puzzle. One possible explanation for the new issues puzzle is that managers may manipulate earnings upwards prior to IPOs, inducing mis-pricing that is reversed during the years following the issue (Teoh, Welch, and Wong, 1998a). I compare the performance-matched discretionary accruals and the long-run abnormal stock performance of firms issuing only primary shares with those of firms issuing only secondary shares or a combination of primary and secondary shares to examine this explanation. I find evidence supporting the hypothesis that earnings management contributes to the long-run underperformance of initial public offerings. Since Ritter (1991) first documented the long-run underperformance of initial public offering (IPO) firms, the cause of this anomaly has been debated. Ritter (1991), Lerner (1994), Loughran and Ritter (1995 and 2000), and Baker and Wurgler (2000) offer theories based on asymmetric information. They suggest that managers take advantage of asymmetric information by issuing stock when it is overvalued, leading to negative abnormal returns as the market corrects the mispricing. However, Fama (1998) and Eckbo and Norli (2004) disagree. They offer rational explanations based on omitted risk factors and methodological issues. Teoh, Welch, and Wong (1998a), and Teoh, Wong, and Rao (1998) extend the asymmetric information argument, adding an earnings management component. They suggest that firms may not only take advantage of mispricing by issuing stock when it is overvalued, but also may contribute to, or induce mispricing by manipulating earnings prior to a stock issue. In this paper, I use primary and secondary share data to further examine the earnings management theory for underperformance. Specifically, I compare the performance-matched discretionary accruals and abnormal stock performance of firms issuing only primary shares with those of firms that issue a combination of primary and secondary (or all secondary) shares. I then use regression analysis to determine if the presence of secondary share explains the level of discretionary accruals, and to examine how these variables impact the abnormal stock performance following the IPO. Consistent with the liability avoidance theory, I find evidence that firms issuing only primary shares manage earnings upwards, while firms issuing secondary shares do not manage earnings upwards or manage earnings downwards. In addition, I find that the abnormal stock performance of these groups is consistent with the hypothesis that earnings management contributes to the underperformance of IPO firms.
B6—Quart. J. Fin. Account.
B8—47 (4), pp. 87-108
C4—
B4—East Carolina University, Greenville, NC

AEA category—G28, G32, G38
B1—Jianguo Chen, Lloyd P. Blenman, and Dar-hsin Chen
B2—Does Institutional Ownership Create Value? The New Zealand Case
C2—This study investigates the relationship between institutional ownership and corporate performance of New Zealand non-financial companies. We find that total institutional ownership increases firm values as measured by Tobin’s Q and operational return on equity. The top institution’s share ratio is negatively related to measurements of firm value. Institutional investors can make a positive contribution by cost-effective monitoring of management’s behaviour. The results are consistent with Cornett (2004) and the Federal Reserve Financial Economists Roundtable Statement (1998).
B6—Quart. J. Fin. Account.
B8—47 (4), pp. 109-124
C4—
B4—Massey University, New Zealand; University of North Carolina-Charlotte; National Taipei University, Taiwan

AEA category—G11, G18
B1—Valentina Galvani and Aslan Behnamian
B2—Diversification Gains in the Market for Provincial Bonds
C2—What are the potential benefits of investing in bonds issued by a province for an investor who already holds an efficient portfolio of bonds issued by the remaining nine provinces? Furthermore, how beneficial is the exposure to additional provincial bond markets from the perspective of investors whose core interests reside in maximizing the return to risk bearing? This paper addresses these and similar questions by evaluating the gains from portfolio diversification in the Canadian market for provincial bonds. Our findings indicate that market participants are unlikely to benefit from portfolio diversification. In particular, once realistic trading restrictions are taken into account, the benefits from the exposure to multiple provincial bond markets might be exhausted by investing in the bonds issued by one province alone
B6—Quart. J. Fin. Account.
B8—47 (4), pp. 125-144
C4—
B4—University of Alberta, Edmonton, Alberta, Canada; University of Alberta, Edmonton, Alberta, Canada;

AEA category—G14, G31
B1—Daniel C. Benco and Larry Prather
B2—Market Reaction to Announcements to Invest in ERP Systems
C2—We examine the reaction of 111 firms that announce investments in ERP systems. To ensure that the results are robust, we use equally weighted and value weighted indices, estimate event study betas with OLS and Scholes-Williams techniques, and use GARCH and EGARCH methods to examine how differences in assumptions concerning event-period return variance affect the results. Further examination controls for firm size, industry, and health. Finally, matched-pair analysis examines whether ERP announcements by a firm affect non-announcing firms. Results reveal that only healthy firms that announce ERP investments experience statistically significant event-period returns. Moreover, those results are robust.
B6—Quart. J. Fin. Account.
B8—47 (4), pp. 145-170
C4—
B4—Southeastern Oklahoma State University, Durant, OK; Southeastern Oklahoma State University, Durant, OK

AEA category—G35; J38
B1—João Paulo Torre Vieito, Walayet Khan, António Melo da Costa Cerqueira, and Elísio Fernando Moreira Brandão
B2—Is Executive Compensation Different Across S&P Listed Firms?
C2—Our research investigation, using 13 years of data from 1992 to 2004, is among the first to analyze whether the total value, determinants and the forms of executive compensation for firms listed on the S&P500, S&P Mid Cap and S&P Small Cap index, are same or different. We also explore whether the determinants, forms, and the total value of executive compensation change after the NASDAQ Crash in 2000 and the enactment of Sarbanes-Oxley (SO) Act in 2002. Our empirical results reveal that generally the average total compensation and component weights are significantly different across S&P index firms during each sample year and also in years before and after NASDAQ crash (2000) and the enactment of (SO) Act (2002). Use of stock options decreases and restricted stocks and bonuses increase after year 2000. We also find that the factors that explain executive compensation in these three groups are generally different and if some of the factors are equal, the intensity of the coefficients is different and statistically significant. Our results also reveal that the determinants and forms of executive compensation indeed change after NASDAQ crash
B6—Quart. J. Fin. Account.
B8—47 (4), pp. 171-192
C4—
B4—Escola Superior de Ciências Empresariais de Valença, Valença, Portugal; Evansville University, Evansville IN; Faculdade de Economia da Universidade do Porto, Porto, Portugal; Faculdade de Economia da Universidade do Porto, Porto, Portugal

AEA category—G34, G24
B1—Karen Hogan, Steven Dolvin, and Gerard T. Olson
B2—Information Asymmetry and the Cost of Going Public for Equity Carve-Outs
C2—We examine the relationship between asymmetric information and the cost of going public for equity carve outs (ECOs) as compared to ordinary initial public offerings (IPOs). We decompose underpricing into the opportunity cost of issuance (OCI) and a measure of share retention. Compared to an average IPO, we find that ECOs have lower OCI and price revisions, but higher share retention and long-term returns. However, compared to a matched sample of IPOs, we observe similar OCI and long-term returns, but still find ECO’s have higher share retention. Our analysis suggests that documented pricing differences between ECOs and IPOs are l
B6—Quart. J. Fin. Account.
B8—47 (3), pp. 3-28
C4—
B4—Saint Joseph’s University, Philadelphia PA; Butler University, Indianapolis IN; Villanova University, Villanova PA

AEA category—G13, G14
B1—Mark Bertus, Ting-Heng Chu, and Steve Swidler
B2—Quarterly versus Serial Expiration in Pure Cost of Carry Markets: The Case of Single Stock Futures Trading in the US
C2—In December of 2000, the U.S. senate passed into legislation the Commodity Futures Modernization Act to lift a moratorium on single stock futures trading enacted by the Shad Johnson Accord. Five months later, the Chicago Mercantile Exchange, the Chicago Board of Trade and the Chicago Board Options Exchange opted to trade single stock futures in a joint venture called OneChicago. Whereas previously traded stock index futures list only quarterly expiration contracts, OneChicago trades single stock futures with both serial and quarterly expiration dates. We show conceptually that in a pure cost of carry market such as single stock futures, there are limited economic benefits to listing serial expiration contracts. We then examine single stock futures trading activity and find that there is a disproportionate share of trading in quarterly expiration contracts.
B6—Quart. J. Fin. Account.
B8—47 (3), pp. 29-48
C4—
B4—Auburn University, Auburn AL;East Tennessee State University, Johnson City TN; Auburn University, Auburn AL

AEA category—G15, G18
B1—Peggy E. Swanson and Anchor Y. Lin
B2—The Effect of China’s Reform Policies on Stock Market Information Transmission
C2—This study focuses on the effect of four major reform policies on the level of China’s stock market integration within its four domestic markets and with regional markets and with global markets. The findings indicate that China’s security law implementation strengthens return relationships within its two domestic exchanges while market liberalization from opening its A share mar¬kets to foreign investors facilitates volatility transmission between China’s stock markets and world markets. Overall, China’s market reform is somewhat ineffective, and its segmented markets continue to provide foreign investors with the benefits of international diversification.
B6—Quart. J. Fin. Account.
B8—47 (4), pp. 49-76
C4—
B4—University of Texas at Arlington, Arlington TX; National Chung Hsing University, Taichung, CHINA

AEA category—F30
B1—Kyung-Chun Mun
B2—Effects of Exchange Rate Fluctuations on Equity Market Volatility and Correlations: Evidence from the Asian Financial Crisis
C2—This paper investigates the effect of exchange rate fluctuations on international stock market fundamentals including market volatility and cross-market correlations around the Asian financial crisis. Evidence presented in this paper indicates that exchange rate fluctuations contribute largely to higher equity market volatility and cross-market correlations. Falling (rising) US stock markets are associated with depreciating (appreciating) local currencies for most of the sample markets, i.e., a positive correlation between the US market returns and local currency values. Results from forecast error variance decomposition indicate that exchange rate fluctuations become more important in explaining the time series behavior of equity market volatility and cross-market correlations during the Asian financial crisis.
B6—Quart. J. Fin. Account.
B8—47 (3), pp. 77-102
C4—Truman State University, Kirksville, MO

AEA category—
B1—Chun I. Lee, Kimberly C. Gleason, and Jeff Madura
B2—Intraday and Night Index Arbitrage
C2—The changes to the S&P 500 index provide a unique laboratory for assessing the degree to which institutional versus individual investors capitalize on available arbitrage opportunities. We provide new evidence on the S&P 500 game using intraday data and examining the role of institutional versus individual investors in both open hours and after-hours trading. Using a sample of 135 changes to the S&P 500 index, we find the highest returns from the S&P game are obtained by investors who enter the game at the beginning of the after-hours session of the announcement date. Profits from arbitrage remain even after accounting for the bid-ask spread.
B6—Quart. J. Fin. Account.
B8—47 (2), pp. 3-16
C4—
B4—Loyola Marymount University, Los Angeles, CA; Florida Atlantic University, Davie, FL; Florida Atlantic University, Davie, FL;

AEA category—G34
B1—Halil Kiymaz and H. Kent Baker
B2—Motives and Wealth Effects of Large Mergers and Acquisitions
C2—We investigate the short-term market response associated with the announcement of large domestic mergers and acquisitions (M&As) involving public U.S. firms with public targets during 1989-2003. We partition the results by industry type, identify the underlying motives for acquiring firms engaging in M&As, and examine potential determinants of abnormal performance. Overall, abnormal returns are significantly negative for acquirers but significantly positive for targets. The wealth effects to acquirers range from significantly positive to significantly negative depending on the industry. Targets earn positive short-run abnormal returns across industries. We find that synergy is the main motive for M&As but some support exists for hubris. Determinants of acquirers’ returns include the level of financial slack, P/E, relative industry P/E, and being in a heavily regulated industry. For targets, variables influencing their abnormal returns include relative size and whether they are in a related industry to the acquirer.
B6—Quart. J. Fin. Account.
B8—47 (2), pp. 17-44
C4—
B4—Rollins College, Winter Park, FL; American University, Washington DC

AEA category—G31, G32
B1—Michael J. Highfield
B2—On the Maturity of Incremental Corporate Debt Issues
C2—Using a data source extensively researched in the equity IPO literature but not yet examined in the context of corporate debt maturity, we document the maturity of 10,617 corporate debt issues placed by U.S. corporations in public markets between January 1, 1983 and December 31, 1999. We investigate and test various theories from earlier studies regarding optimal debt maturity sug-gesting that debt maturity is influenced by signaling and asymmetric information, taxes, and agency problems. Our main finding is that firm quality is directly related to debt maturity. Although inconsistent with the signaling theory of debt, this finding does support the notion that risky firms are screened out of the long-term debt market.
B6—Quart. J. Fin. Account.
B8—47 (2), pp. 45-68
C4—
B4—Mississippi State University, Mississippi State, Mississippi

AEA category—G11
B1—Drew Fountaine, Douglas J. Jordan, and G. Michael Phillips
B2—Using Economic Value Added as a Portfolio Separation Criterion
C2—This paper explores whether economic value added (EVA) can be used to generate two portfolios with statistically different cumulative returns. The analysis is done using a portfolio separation test that examines the statistical significance of the regression coefficient generated when the cumulative returns from one portfolio are regressed against the cumulative returns from the other portfolio. We conclude EVA does provide economically useful information that can be used to forecast portfolio separation. Specifically, forming portfolios based on higher and lower values of EVA divided by the average book value of debt and equity from a buy list yields portfolios with cumulative returns that are statistically different.
B6—Quart. J. Fin. Account.
B8—47 (2), pp. 69-82
C4—
B4—California State University, Northridge, Northridge, California; Sonoma State University, Rohnert Park, California; California State University, Northridge, Northridge, California

AEA category—G14, G29
B1—Alastair Marsden, Madhu Veeraraghavan, and Min Ye
B2—Heuristics of Representativeness, Anchoring and Adjustment, and Leniency: Impact on Earnings’ Forecasts by Australian Analysts
C2—This paper investigates analysts’ earnings forecasts for equities listed on the Australian Stock Exchange. Recent research shows that heuristics may influence analysts’ decision making (see, Amir and Ganzach 1998), however, most of the evidence is limited to US and European markets. We provide further international evidence by examining the power of representativeness, anchoring and adjustment, and leniency heuristics on analysts’ forecast errors using Australian data. Our findings show that analysts in Australia make forecasts optimistically – supporting the leniency hypothesis. We also find that analysts tend to overreact when forecast revisions and changes are positive and underreact when forecast revisions and changes are negative.
B6—Quart. J. Fin. Account.
B8—47 (2), pp. 83-102
C4—
B4—University of Auckland Business School, Auckland New Zealand, Australia; Monash University, Victoria, Australia; University of Auckland Business School, Auckland New Zealand, Australia

AEA category—
B1—Frank Fehle, Susan M. Fournier, Thomas J. Madden, and David G. Shrider
B2—Brand Value and Asset Pricing
C2—We study a sample of U.S. firms with strong brands as defined by inclusion on Interbrand’s most valuable brands list between 1994 and 2006. After adjusting for risk with the Fama and French (1993) three-factor model plus a momentum factor, we find that strong-brand firms have statistically and economically sig¬nificant above-average returns. Motivated by these results and the fact that the finance literature has only a limited understanding of the reasons for the Fama-French methodology’s success, we create a new factor based on the return difference between firms with high and low brand value. We find that this new factor does not subsume the Fama-French high-minus-low factor.
B6—Quart. J. Fin. Account.
B8—47 (1), pp. 3-26
C4—
B4—Citadel Investment Group; Tuck School of Business at Dartmouth, University of South Carolina, Miami University, Oxford OH

AEA category—G21
B1—Fatma Cebenoyan, A. Sinan Cebenoyan, and Elizabeth S. Cooperman
B2—Regulatory Regime Changes and Acquisition Attributes: The Case of Commercial Bank and Thrift Acquisitions of Thrifts
C2—Significant change in regulations affecting bank/thrift activities during the 1990s provide us with an opportunity to examine shifts in acquisition charac¬teristics as deregulation leads to changes in behavior. Consistent with a regime change hypothesis, we find a structural change in acquisition attributes for pre- and post-deregulation periods. We also report significant differences in target attributes depending on acquirer identity. Our results demonstrate a higher likelihood in the deregulated period after 1994 for banks to acquire profit inefficient thrifts, while thrift acquirers focus mainly on building size. In contrast, regulatory concerns appear to dominate in prior years, with capitali¬zation as a key acquisition characteristic by thrift acquirers. The results suggest that research need to control for regimes to allow generalizations beyond period-specific implications.

B6—Quart. J. Fin. Account.
B8—47 (1), pp. 27-52
C4—
B4—Hunter College, NY NY; Hofstra University, Hempstead NY; University of Colorado at Denver and Health Sciences Center, Denver CO

AEA category—G10, G11
B1—Qiang Bu and Nelson Lacey
B2—Do Mutual Funds Exhibit a Smart Money Effect
C2—Based on a sample of equity funds, we examine mutual fund performance as it relates to cash flows into and out of funds. Controlling for both size and style, we estimate the major determinants of fund flows cross-sectionally and show that positive cash flow mutual fund portfolios have significant risk-adjusted returns in the subsequent period. Our causality tests demonstrate a predomi¬nantly one-way causal relationship between fund performance and net cash flows for several groups of funds, however. Specifically, our finding that fund performance causes cash flows is not consistent with a smart money effect.
B6—Quart. J. Fin. Account.
B8—47 (1), pp. 53-68
C4—
B4—Pennsylvania State University—Harrisburg; University of Massachusetts—Amherst

AEA category—G12
B1—Partha Gangopadhyay
B2—Monetary Policy and Pricing of Cash-Flow and Discount-Rate Risk
C2—In this paper I examine the pricing of cash-flow and discount-rate risk in the framework of Campbell and Vuolteenaho (2004), conditional on Federal Reserve monetary policy. I find that monetary policy significantly influences the pricing of cash-flow and discount-rate risk. The model can be used to calibrate the relative importance of cash-flow and discount-rate news in transmitting monetary policy effects on stock returns. The well-documented size and value premiums in stock returns are also affected by monetary policy—these are observed mainly in expansive monetary policy environments. The two-factor model successfully explains size and value anomalies when risk prices are allowed to vary in different monetary environments.
B6—Quart. J. Fin. Account.
B8—47 (1), pp. 69-96
C4—
B4—St. Cloud State University, St. Cloud, MN

AEA category—G12, G14
B1—Stephen P. Huffman and Cliff Moll
B2—In this study, we examine the relationship between a cross-section of realized equity returns and a value-at-risk (VaR) measure. Although we find that the measure of VaR is consistent across time, we find that the relationship between VaR and cross-sectional returns varies across time. Specifically, we find that the relationship between VaR and cross-sectional returns is much stronger in the month of January than in the remainder of the year. We make the conjecture that the seasonality in the relationship between VaR and returns is consistent with the tax-loss-selling hypothesis.
B6—Quart. J. Fin. Account.
B8—47 (1), pp. 97-108
C4—
B4—University of Wisconsin, Oshkosh, Oshkosh WI; Florida State University, Tallahassee FL

AEA category—F31, G14, G32
B1—Walter Dolde and Dev R. Mishra
B2—Firm Complexity and FX Derivatives Use
C2—We simultaneously test complexity (the degree of information asymmetry) and six other theories of FX derivatives use. Structural equations modeling, a method common in other disciplines but dormant in finance since Titman and Wessels (1988), provides a natural arena for testing multiple theories against each other. We find clear empirical evidence that complexity, managerial options ownership, financial distress, and primitive risk relate to two measures of hedging behavior. Our estimates do not support roles for underinvestment or scale economies in explaining hedging. Our data set comprises all US firms with sales exceeding $1 billion.
B6—Quart. J. Bus. Econ.
B8—46 (4), pp. 3-22
C4—
B4—University of Connecticut, Stamford, CT; University of Saskatchewan, Saskatoon, Saskatchewan, Canada

AEA category—
B1—Bree Dority and Scott M. Fuess, Jr.
B2—Labor Market Institutions and Unemployment: Can Earlier Findings Be Replicated?
C2—In a well-known book Layard, Nickell, and Jackman (LNJ) tried to measure how unemployment is related to labor market institutions. Using a cross-section of 20 OECD countries for 1983-88, they found that changes in inflation and labor market institutions can explain most of the unemployment differences across countries. In recent years unemployment has been acute in several countries, particularly in Europe, and there is controversy whether labor market policies should be altered. This study examines whether LNJ’s original findings can be replicated. Extending the sample period to 1989-2002, and using alternative specifications for the same group of OECD countries, we find that unemployment no longer is related to disinflation. Joblessness is still significantly related to labor market institutions, but many effects are different than those observed for 1983-88. Specifically, active labor market programs have been more potent in combating unemployment.
B6—Quart. J. Bus. Econ.
B8—46 (4), pp. 23-44
C4—
B4—University of Nebraska–Lincoln, Lincoln, Nebraska; University of Nebraska–Lincoln, Lincoln, Nebraska and Institute for the Study of Labor, Bonn, Germany

AEA category—
B1—Haiwei Chen
B2—Intraday Trading by Floor Traders and Customers in Futures Markets: Whose Trades Drive the Volatility-Volume Index?
C2—The study tests the effect of trader types on the intraday volatility-volume rela¬tion in four futures markets. Each trade is identified by the trader type on both sides of a transaction. The results from a VAR model show that the dynamic volatility-volume relation depends on the trader types involved. The positive contemporaneous volatility-volume relation is driven mainly by volume from trading between floor traders and customers. Contemporaneous volatility is either not related or negatively related to volume from trading between floor traders, which is consistent with conventional wisdom that floor traders are informed traders. On the other hand, volatility is significantly positively related to volume from trading between customers only in the two agricultural markets but not in the two foreign exchange markets. After decomposing volume into expected and unexpected parts, contemporaneous volatility-volume relation is almost symmetric between expected and unexpected volume for three major types of trading.
B6—Quart. J. Bus. Econ.
B8—46 (4), pp. 45-62
C4—
B4—California State University, San Bernardino, San Bernardino CA

AEA category—
B1—R. Stafford Johnson, Richard A. Zuber, and John M. Gandar
B2—Pricing Stock Options Under Expected Increasing and Decreasing Price Cases
C2—Several studies have shown that the distributions of logarithmic returns of many securities exhibit persistent skewness. The S&P 500 often follows patterns of persistent change that are characterized by skewness. In option pricing, skewness in a binomial process impacts the values of the up and down parameters and changes their asymptotic properties such that for a large number of subperiods, they depend on variance, skewness, and mean. We illustrate how the Johnson, Pawlukiewicz, and Mehta skewness-adjusted model can be used to calibrate a binomial tree for increasing and decreasing stock price cases where the end-of-the period distribution is characterized by skewness. We then show spot and futures option price differences between the skewness-adjusted binomial model and the traditional binomial option pricing model from simulations in which there is an expectation that the underlying security prices will be increasing or decreasing similar to the stock index trends that have been observed historically
B6—Quart. J. Bus. Econ.
B8—46 (4), pp. 63-
C4—
B4—Xavier University, Cincinnati OH; University of North Carolina at Charlotte, Charlotte NC; University of North Carolina at Charlotte, Charlotte NC;

AEA category—C22, G15
B1—Jorg Bley
B2—How Homogeneous are the Stock Markets of the Middle East and North Africa?
C2—In light of the changing economic environment in most Middle East and North African (MENA) countries, the objective of this study is to determine the contemporaneous interactions of the stock markets of Bahrain, Egypt, Israel, Jordan, Kuwait, Lebanon, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Tunisia, Turkey, and the United Arab Emirates by (1) determining the degree of market integration, (2) qualifying the return sensitivity among the markets, (3) revealing any lead-lag relationships, (4) analyzing degree and stationarity of relative market comovements, and (5) investigating the impact of US, UK, and Indian stock market movements on the MENA counterparts. Results indicate that the changing stock market dynamics within the MENA region still yield substantial intraregional diversification benefits and suggest the inclusion of regional equity in a global portfolio
B6—Quart. J. Bus. Econ.
B8—46 (3), pp. 3-26
C4—
B4—American University of Sharjah, Sharjah, United Arab Emirates

AEA category— G32, G34
B1—Sara Helms Robicheaux, Xudong Fu, and James Allen Ligon
B2—Convertible Debt Use and Corporate Governance
C2—Convertible debt is a well-recognized mechanism for reducing the agency costs of debt. This study examines whether firms that attempt to control agency costs of equity through strong governance structures, including chief executive officer compensation alignment and board independence, are more likely to use an agency cost-reducing debt structure such as convertible debt. We find modest evidence of a complementary relationship between strong governance structures and use of convertible debt among a sample of relatively larger firms.
B6—Quart. J. Bus. Econ.
B8—46 (3), pp. 65-95
C4—
B4—Birmingham-Southern College, Birmingham, AL; University of Alabama, Tuscaloosa, AL; University of Alabama, Tuscaloosa, AL

AEA category—G13, C32
B1—Paul E. Hodges, Paul J. Haensly, and John Theis
B2—On Computing Complete Distributions for American and European Standard and Exotic Options on Stocks Paying Discrete Dividends with Applications to Stochastic Dominance Analysis
C2—This paper proposes using a finite Markov chain as an intuitive, accurate and versatile method for the analysis of ordinary and exotic European and American calls and puts on dividend and non-dividend paying stocks. The approach presented in this paper allows the valuation of options under a wide variety of conditions. Previous work in the literature by Duan and Simonato (2001) and others developed Markov chain methods for standard calls and puts on non-dividend paying stocks. This paper extends their work with a finite Markov chain method that applies to both standard and exotic calls and puts on stocks paying discrete dividends. Because the approach approximates the complete probability distribution for the option, analyses of stochastic dominance are practical and are illustrated by examples in this paper.
B6—Quart. J. Bus. Econ.
B8—46 (3 and 4), pp. 45-64
C4—
B4—University of Texas of the Permian Basin, Odessa, TX; University of Texas of the Permian Basin, Odessa, TX; Columbus State University, Columbus, GA

AEA category—G14
B1—Luis Garcia-Feijóo and John R. Wingender authors
B2—Y2K: Myth or Reality
C2—We examine the valuation effects to Y2K-related announcements. We find that the announcement-day abnormal return is not significantly different from zero for the whole sample. However, firms announcing the attainment of a Y2K-related contract experience a statistically significant abnormal return of 0.76% on the day of the announcement. In contrast, firms that announce that they are “Y2K Ready” experience a statistically significant negative abnormal return of –0.36% on the announcement day. For these companies, regression analysis reveals that abnormal returns are higher the more a firm spent on fixing or preventing Y2K-related problems. Furthermore, “Y2K-Ready” stocks have outperformed industry peers following the year 2000 both in terms of operating and stock return performance. The evidence suggests that investors understood the severity of the problem and were able to distinguish between companies for which the issue was important and those for which it was not.
B6—Quart. J. Bus. Econ.
B8—46 (3), pp. 27-44
C4—
B4—Creighton University, Omaha, NE

AEA category—G11
B1—Greg Filbeck, Thomas Krueger, and Dianna Preece
B2—CFO Magazine’s ‘Working Capital Survey’: Do Selected Firms Work for Shareholders?
C2—The annual “Working Capital Survey” made its debut in 1997 in CFO Maga¬zine. The survey ranks the efficiency of working capital management at 1,000 companies across 35 industries based on two measures of financial data: cash conversion efficiency and days of working capital. In this paper, we seek to determine whether shareholders reward companies that score high on the cri¬teria used to determine a firm’s rank by CFO Magazine. First, we test for share price announcement effects for firms named in CFO Magazine’s “Working Capital Survey.” While there are significant positive abnormal returns for selected firms, the gains reverse themselves in subsequent days. Second, for each year of the survey, we test whether firms named to the top ten within their respective industries have holding period returns that exceed the returns of a matched sample. Sample firms outperform matched firms on a raw return basis, although these differences are not statistically significant. Both the Sharpe and Treynor measures of risk-adjusted return indicate that sample firms generally outperform the matched sample. Finally, we test whether annual returns are positively related to CFO Magazine’s ranks of cash conversion efficiency and days of working capital. We find a positive relation¬ship between a firm’s return and its cash conversion efficiency rank but no relationship between return and days of working capital rank.
B6—Quart. J. Bus. Econ.
B8—46 (2), pp. 3-22
C4—
B4—Penn State Erie, Erie, PA; University of Wisconsin—LaCross, La Cross, WI; University of Louisville, Louisville, KY

AEA category—G24, G32
B1—Steven D. Dolvin and Mark K. Pyles
B2—Prior Debt and the Cost of Going Public
C2—Previous studies find that firms with prior debt, particularly publicly rated, have lower information asymmetry and experience a lower opportunity cost of going public, as measured by underpricing. Subsequent research suggests that underpricing may be an inaccurate measure of indirect issuance costs. Thus, we replicate and extend existing studies to examine whether previously issued debt reduces the true opportunity cost of issuance. We find that private debt issues have little effect; however, firms with public debt (particularly rated) have both significantly lower levels of underpricing and lower issuance opportunity costs, as well as narrower filing ranges and smaller price revisions, all of which are consistent with reduced asymmetry. We find, how¬ever, that matching issues by firm size eliminates the significant relations. Thus, we conclude that although prior public debt appears to reduce informa¬tion asymmetries, it is more likely a reflection of the underlying characteristics of firms with these existing securities
B6—Quart. J. Bus. Econ.
B8—46 (2), pp. 23-42
C4—
B4—Butler University, Indianapolis, IN; and College of Charleston, Charleston, SC

AEA category— G11, G14
B1—Nauzer Balsara, Gary Chen, and Lin Zheng
B2—The Chinese Stock Market: An Examination of the Random Walk Model and Technical Trading Rules
C2—Using the variance ratio test, we reject the random walk null hypothesis for class A and class B stock market indexes traded on the Shanghai and Shenzhen stock exchanges. Consistent with this result, we find that the ARIMA forecast¬ing model generates more accurate forecasts as compared to the naïve model based on the random walk assumption. We also observe significant positive returns for individual stocks after transaction costs on buy trades generated by the contrarian version of three commonly used technical trading rules: the moving average crossover rule, the channel breakout rule, and the Bollinger band breakout rule.
B6—Quart. J. Bus. Econ.
B8—46 (2), pp. 43-64
C4—
B4—Northeastern Illinois University, Chicago, IL; University of Illinois, Chicago, IL; and Georgia College and State University, Milledgeville, GA

AEA category— G11; G20
B1—Krishnan Dandapani and Edward R. Lawrence
B2—Examining Split Bond Ratings: Effect of Rating Scale
C2—In this study we confirm earlier theoretical research findings that differences in the rating scale are responsible for split ratings. We also document that rating scale differences are not the sole explanation for split ratings. The methodol¬ogy, in measuring the magnitude and documenting of the problem, is new. We first develop an illustrative example by creating two different hypothetical grading scales across two universities and find the patterns in student grades at the two universities. We then compare these results with bond ratings to find if similar patterns exist. The prior empirical research on bond ratings provides strong validation to our analysis. We show that about one-third of the bond split ratings are due to the differences in ratings scales, while the remaining two-thirds are due to the other reasons.
B6—Quart. J. Bus. Econ.
B8—46 (3 and 4), pp. 65-82
C4—
B4—Florida International University, Miami FL; Florida International University, Miami FL

AEA category—
B1—Weili Lu, Joseph Reising,and Mark Hoven Stohs
B2—Managerial Turnover and ESOP Performance
C2—This paper investigates the impact of a firm’s employee stock ownership plan (ESOP) on managerial turnover. Although earlier research suggests that the benefits to shareholders of using ESOPs are mixed at best, an estimated 6 per¬cent of public corporations still use ESOPs. Managers of firms that use ESOPs typically wield more comparative control of their companies than do their peers in similar non-ESOP firms because they possess ESOP voting rights. This greater control may better insulate these managers from the negative effects of poor company performance. We examine whether the greater control exerted by managers of ESOP companies, compared to matching non-ESOP firms, affects managerial turnover. We find that ESOPs do not appear to lead to managerial entrenchment despite greater managerial control afforded by ESOPs. This is good news for ESOPs, indicating that one of their potential managerial misuses does not appear to have consistently occurred
B6—Quart. J. Bus. Econ.
B8—46 (1), pp. 3-20
C4—
B4—California State University, Fullerton CA; Minnesota State University, Mankato, MN; California State University, Fullerton CA;

AEA category—J41
B1—Todd Brown, Kathleen A. Farrell, and Thomas S. Zorn
B2—Performance Measurement and Matching: The Market for Football Coaches
C2—The matching hypothesis asserts that it is the matching of the employee and the firm rather than the qualifications of the employee alone that matter. Using a unique and large data set of college football coaches, we perform two different tests of the matching hypothesis. The relative accuracy with which performance in college football is observed allows for a direct test of matching. We find that matching is a significant factor in team performance. A good match accounts, on average, for approximately a 5 percent improvement in performance. We also find that the hazard rate is increasing for the first five years and then subsequently decreasing over a coach’s tenure. Our evidence is consistent with a four- or five-year contracting period for football coaches.
B6—Quart. J. Bus. Econ.
B8—46 (1), pp. 21-36
C4—
B4—Stephen F. Austin State University, Nacogdoches TX; University of Nebraska–Lincoln, Lincoln NE; University of Nebraska–Lincoln, Lincoln NE

AEA category— G32, M41
B1—Ke Zhong, Donald W. Gribbin, and Xiaofan Zheng
B2—The Effect of Monitoring by Outside Blockholders on Earnings Management
C2—This study testsexamines two competing viewscompeting views concerning the effect of outside block¬holders on earnings management. First, outside blockholders, with higher motivation and ability to monitor managers’ actions than small shareholders, might reduce managers' income-increasing upward earnings management through their closer monitoring. It also suggests that when their firms experience declining financial performance before earnings management. Outside large shareholders, due to their high percentage of shareholding, have higher motivation and ability to monitor managers' actions than small shareholders. Thus, outside large shareholders might reduce managers' earnings management through their closer monitoringSecond, . However, o, and Ooutside blockholderslarge shareholdersblockholders, require a higher return from their investment and also due to holding a large block of a firm’s shares, , pose a bigger threat for the job security of interventioning to the firm’s management. They management may ownership and mightalso possibly increases man¬agers’ incentives to conduct income-increasing earnings managementmanage earnings upwardmanagementperformance (premanaged). The two views are not mutually exclusive. Which of these two competing views better describes theThe relationship between outside blockholders and earnings management is an empirical questionis determined by the balance of the two factors which . The answer to this question is dependentsubstantially depends on the effectiveness of outside blockholders in controlling managers’ accounting discretionmonitoring earnings management. This study tests the two competing views Dechow et al. (1996) provide evidence that outside blockholders are negatively associated with earnings overstatement that violates GAAP. bBy examining the association between outside blockholder ownership and earnings management for NYSE firmswithin GAAP ., this study tests whether outside blockholders generally serve as an effective monitor of within-GAAP earnings management. We used regression analysis to examine the relationshipassociation between outside blockholder ownership and discretionary accruals. Our sample was selected from NYSE firms. Our How-ever, outside large shareholders have higher motivation and ability to monitor managers' actions due to their high percentage of shareholding. The existence of outside large shareholders also possibly reduces managers' earnings management by their closer monitoring. This study tests the competing views on the association betweeninfluence of outside large shareholders on and earnings management. Consistently with our expectation, The Our results indicatewe find that outside blockholder ownership is positively associated with discretionary accruals for firms, that otherwise ffaceingwith declining premanaged performanceearnings. without earnings management,premanaged performance (premanaged) have higher discretionary accruals when they have outside large shareholders Thus, the evidence, consistent with the second view, in this study supports the second view and suggests that outside block¬holders generally are not effective monitors of upwardincome-increasing earnings management that is generally within the bounds of GAAP.
B6—Quart. J. Bus. Econ.
B8—46 (1), pp. 21-36
C4—
B4—University of Texas at Tyler, Tyler, TX; Western Michigan University, Kalamazoo, MI; University of Manitoba, Winnipeg, NB, Canada

AEA category—
B1—Gregory L. Nagel, David R. Peterson, and Robert S. Prati
B2—The Effect of Risk Factors on Estimating Cost of Equity
C2—Individual empirical tests conducted on cost of equity estimation methods increasingly have implied that sophisticated models are no more accurate than the simplest approaches. We test this implication by evaluating six commonly used methods for cost of equity estimation, contrasting them with a single fac¬tor model. Specifically, we explore whether adding risk factors to cost of equity models improves their predictive power both for individual firms and firm portfolios. When compared to the single factor model over horizons of one month to five years, we find mainstream models such as the CAPM and further evolved variants do not significantly reduce forecast error for portfolios. More importantly, the sophisticated models typically increase forecast error for indi¬vidual firms. Either estimation errors cause the mainstream models to be rejected or the models are not well-specified and their assumptions need revi¬sion. Absent better models, we conclude ex ante estimation for cost of equity should utilize a simple single factor model for individual firms.
B6—Quart. J. Bus. Econ.
B8—46 (1), pp. 61-87
C4—
B4—Mississippi State University, Mississippi State, MS, Florida State University, Tallahassee, FL; East Carolina University, Greenville NC

AEA category—E40, C32
B1—J. Cunado, L.A. Gil-Alana, and F. Perez de Gracia
B2—Seasonal and Nonseasonal Long Memory in the U.S. Interest Rate and the Monetary Aggregates
C2—In this article we examine the US interest rate along with the monetary aggregates M1, M2 and M3 by means of fractional integration techniques. We use a procedure due to Robinson (1994) that permits us to simultaneously test the degrees of integration at both the zero and the seasonal frequencies. The tests have standard null and local limit distributions, and several Monte Carlo experiments conducted across the paper show that the tests perform relatively well even with small samples. The results show that the root at the long run or zero frequency plays a much more important role that the seasonal ones. Thus, the order of integration at the zero frequency seems to be equal to or higher than 1 in all cases, while the one corresponding to the seasonal frequencies is around 0.25.
B6—Quart. J. Bus. Econ.
B8—45 (3 and 4), pp. 3-30
C4—
B4—Universidad de Navarra, Pamplona, Spain; Universidad de Navarra, Pamplona, Spain; Universidad de Navarra, Pamplona, Spain

AEA category—E25, G12
B1—Jakob B. Madsen
B2—The Dynamic Interaction between Equity Prices and Supply Shocks
C2—This paper develops a theory of medium term stock price movements under slow adjustment in the labor market relative to the stock market and perfect foresight in the stock market. The model seeks to explain the slow movements in real stock prices that have been observed in the industrialized countries in the post-war period. The empirical estimates indicate that changes in factor shares are important determinants of stock returns.
B6—Quart. J. Bus. Econ.
B8—45 (3 and 4), pp. 31-48
C4—
B4—University of Copenhagen, Copenhagen, Denmark

AEA category—G14, G20, G34
B1—Halil Kiymaz
B2—The Impact of Announced Motives, Financial Distress, and Industry Affiliation on Shareholders’ Wealth: Evidence from Large Sell-offs
C2—This study investigates the impact of sell-off announcements on both divesting and acquiring firms. The findings indicate that both divesting and acquiring firms experience statistically significant wealth gains during sell-off announcements. For the matched sample, only divesting firms continue to have statistically significant wealth gains. Further analysis of the industry affiliation of divesting and acquiring firms indicates that there are differences in wealth gains with respect to industry affiliation. The cross-sectional regression results show that some motives reported in the Wall Street Journal are important in explaining the wealth gains to divested firms. There are direct relationships between wealth gains to divesting firms and motive announcements related to paying debt and increasing firm focus. Furthermore, wealth gains are higher for financially distressed firms and firms with higher bank loans when firms announce divestitures, supporting both bankruptcy avoidance and bank-moni¬toring arguments. Additionally, wealth gains are higher for firms with higher efficiency, as measured by total asset turnovers, and for firms with higher profitability.
B6—Quart. J. Bus. Econ.
B8—45 (3 and 4), pp. 49-68
C4—
B4—Rollins College, Winter Park, FL

AEA category—G10, G18, G20
B1—Mark R. Huson, Youngsoo Kim, and Vikas C. Mehrota
B2—Did Decimalization Benefit Members of the Toronto Stock Exchange?
C2—We examine the impact of adopting decimal price quotes on the welfare of members of the Toronto Stock Exchange (TSX) based on a multivariate analysis of seat prices. Consistent with existing studies, we find that decimalization leads to lower bid-ask spreads as well as lower quoted depths. To see if the combined effect of these changes benefited TSX members, we examine changes in the TSX’s market share and total trading volume of interlisted stocks. In addition, we measure the wealth effect of decimalization on the TSX members using a multivariate analysis of seat prices. Our results suggest that TSX members anticipated positive benefits from decimalization, and that the switch to decimal prices had not adversely affected them.
B6—Quart. J. Bus. Econ.
B8—45 (3 and 4), pp. 69-90
C4—
B4—University of Alberta, Edmonton, Alberta, Canada; University of Regina, Regina SK, Canada; University of Alberta, Edmonton, Alberta, Canada;

AEA category—G1
B1—Chia-Cheng Ho and R. Stephen Sears
B2—Is There Conditional Mean Reversion in Stock Returns?
C2—This research examines the behavior of ex post returns, expected returns, and residual returns for book-to-market equity/size portfolios for the period from June 1963 through December 1996 for stocks listed on the NYSE, AMEX, and Nasdaq. Utilizing the methodological approach employed by Fama and French (1992, 1993, 1995, 1996a), the results of this research indicate that expected returns generated by the Fama-French three-factor model have a similar mean-reverting structure to their corresponding ex post returns. Furthermore, the results indicate that there is no significant decrease in the mean-reverting tendency between residual returns and their corresponding ex-post returns. The tendency for mean reversion seems to be closely related to companies traded on the AMEX and Nasdaq markets, which, for the sample period exam¬ined in this study, share common attributes of smaller size and lower book-to-market equity ratios. These findings support the hypothesis that there exists conditional mean reversion in stock returns and that the Fama-French three factor model is unable to fully account for the mean reversion tendency.
B6—Quart. J. Bus. Econ.
B8—45 (3 and 4), pp. 91-112
C4—
B4—National Chung Cheng University, Chia-Yi, Taiwan, Republic of China; West Virginia University, Morgantown, West Virginia, USA

AEA category—G14 and C22
B1—Martin T. Bohl and Stefan Reitz
B2—Do Positive Feedback Traders Act in Germany’s Neuer Markt?
C2—In this paper we provide the first empirical evidence on the importance of positive feedback trading on the return behavior in Germany’s Neuer Markt. Relying on the theoretical models of by Shiller, Sentana, and Wadhwani, we exploit the link between index return autocorrelation and volatility to receive deeper insight into the return characteristics generated by traders adhering to positive feedback trading strategies. Our empirical evidence shows that positive feedback traders are present in Germany’s Neuer Markt and induce negative return autocorrelation during periods of high volatility.
B6—Quart. J. Bus. Econ.
B8—45 (1 and 2), pp. 3-14
C4—
B4—European University Viadrina Frankfurt (Oder) Germany; Justus-Liebig-University Giessen, Germany

AEA category—
B1—Jorge L. Urrutia and Joseph Vu
B2—Empirical Evidence of Nonlinearity and Chaos in the Returns of American Depository Receipts
C2—This paper examines the time series behavior of the returns of American depository receipts, ADRs. We postulate that the unique characteristics of these financial instruments make the ADR returns exhibit time series properties that are different from that of the U.S. equity market as a whole. Variance ratio tests of linear dependence reject the null hypothesis of random walk for the ADR returns. Tests based on the correlation dimension and the BDS statistic indicate the presence of nonlinearity in the ADR data. The BDS statistic applied to the standardized residuals of the EGARCH model rejects the null hypothesis that the data are independently and identically distributed, suggest¬ing that conditional heteroskedasticity is not the cause of nonlinear structure in the data. On the other hand, tests of chaos, based on the locally weighted regression indicate that ADR returns exhibit chaotic behavior. This finding differs from previous research, which has failed to report evidence of chaos in the time series of American stock returns. Important contributions of this paper are the findings of statistically significant evidence of nonlinearity and low deterministic chaotic behavior in ADR returns. These results are important because knowing that returns of ADRs exhibit chaotic behavior can help us to understand this sector of the market better and find ways of predicting returns. In this respect our results also have practical implications, because they sug¬gest that pricing forecasting models for ADR returns should include some nonlinear terms.
B6—Quart. J. Bus. Econ.
B8—45 (1 and 2), pp. 15-30
C4—
B4—Loyola University, Chicago, IL; DePaul University, Chicago, IL

AEA category—G15
B1—M. Kabir Hassan, Mahfuzul Haque, and Shari B. Lawrence
B2—An Empirical Analysis of Emerging Stock Markets of Europe
C2—This paper examines several aspects pertaining to the seven stock markets in Europe classified by the International Finance Corporation (IFC) as emerging markets. Specifically, we investigate correlations among the European emerging markets as well the U.S. and U.K. equity markets. In addition, we test for market efficiency and autocorrelation. Using weekly stock market data from the IFC, our findings indicate the greatest potential diversification benefits from a portfolio containing equities from Slovakia, Turkey, and the U.S. Further, we find that returns for Greece, Slovakia, and Turkey are unstable over time. Based on our results, we conclude that European emerging markets overall are unpredictable. Finally, our results show evidence of autocorrelation in European emerging markets.
B6—Quart. J. Bus. Econ.
B8—45 (1 and 2), pp. 31-52
C4—
B4—University of New Orleans, New Orleans, LA; Indiana State University, Terre Haute, IN; University of New Orleans, New Orleans, LA

AEA category—G34
B1—Ben Branch and Taewon Yang
B2—The Risk Arbitrage Performance: Failed Acquisition Attempts
C2—This paper explores the performance of risk arbitrage for failed acquisition attempts. We find that the return of a risk arbitrage position for a failed acquisition attempt varies with the payment method and the acquisition type. This finding supports the proposition that the payment method and the acquisition type provide informational signals relevant to both firms’ values and the likelihood of the target receiving competing offers. These signals help explain the performance of a risk arbitrage position for a failed acquisition attempt. We also find that a simple prediction model based on our research may be helpful for those seeking to enhance the returns from their risk arbitrage positions.
B6—Quart. J. Bus. Econ.
B8—45 (1 and 2), pp. 53-68
C4—
B4—University of Massachusetts-Amherst, Amherst MA; California State University-San Bernardino, San Bernardino, CA

AEA category—G38 and M42
B1—Wallace N. Davidson III, Pornsit Jiraporn, and Peter DaDalt
B2—Causes and Consequences of Audit Shopping: An Analysis of Auditor Opinions, Earnings Management, and Auditor Changes
C2—Companies change auditors for a variety of reasons. At one end of the continuum, companies change auditors to improve operating performance. At the other, managers change auditors to enhance their own position. If auditor changes are driven by managerial opportunism, companies may increase their level of earnings management after the change. In this paper we reexamine prior research in earnings management that surround auditor changes (DeFond & Subramanyam, 1998) and extend prior work by examining earnings management and auditor changes while controlling for prior audit opinion. We find that, on average, earnings management does not increase following auditor changes. However, we do find that the level of earnings management is larger for companies that switch from Big Six to non-Big Six auditors following the receipt of a modified audit opinion from their original auditor.
B6—Quart. J. Bus. Econ.
B8—45 (1 and 2), pp. 69-88
C4—
B4—Southern Illinois University, Carbondale, IL; Texas A&M University at Laredo, Laredo, TX; Morgan State University, Baltimore, MD

AEA category—G10, G14
B1—Diane Scott Docking and Richard J. Dowen
B2—Evidence on Stock Price Effects Associated with Changes in the S&P 600 SmallCap Index
C2—Two widely recognized indices of the performance of small capitalization stock are the Russell 2000 Index and the S&P 600 SmallCap Index. While there have been many studies on the effect of the addition of a stock to an index, two recent and important studies are Chen, Noronha, and Singal (2004) and Biktimirov, Cowan, and Jordan (2004). Chen et al. (2004) find evidence in support of the investor awareness hypothesis for the S&P 500 Index, while the Biktimirov et al. (2004) study supports the price pressure hypothesis for changes in the Russell 2000 Index. We contribute to the literature by explain¬ing this difference as relating to the manner in which the Standard & Poor’s and Russell indices are constructed. In this paper, we examine the returns effects associated with changes in the S&P 600 SmallCap Index and find evidence supporting the investor awareness hypothesis.
B6—Quart. J. Bus. Econ.
B8—45 (1 and 2), pp. 89-114
C4—
B4—Northern Illinois University, DeKalb, IL

AEA category—
B1—Elyas Elyasiani and Ali H.M. Zadeh
B2—Selection of the Scale Measure in Narrow Money Demand: The Cases of Japan and Germany
C2—The purpose of this paper is to apply pair-wise and multiple-alternative non-nested tests to the choice of the scale variable in the money demand functions of Japan and Germany. Findings based on the multiple-alternative procedure indicate that domestic absorption (income minus net exports) is the appropriate scale variable in the money demand function of Japan, while pair-wise tests produce somewhat mixed results. For Germany, private consumption is found to be the proper scale variable in the narrow money demand function by both type procedures. These findings contrast with the established literature that uses income measures as the scale variable. The choice of domestic absorption in Japan by the multiple-alternative procedure provides a role not only for consumption, which correlates with income measures, but also for investment and government spending, as determinants of the level of monetary balances held. The choice of consumption as the appropriate scale variable for Germany supports the shopping time model of money demand and the Mankiw-Summers proposition. These results have implications on formulation of monetary policy and the magnitude of the effect of fiscal policies such as government spending and tax cuts.
B6—Quart. J. Bus. Econ.
B8—45 (1 and 2), pp. 115-133
C4—
B4—Temple University, Philadelphia, PA; Susquehanna University, Selinsgrove, PA

AEA category—G14
B1—Yang Li, Bonnie F. Van Ness, Robert A. Van Ness
B2—Daily and Intraday Patterns in Spread and Depth: Limit Orders and Specialists
C2—We examine daily and intraday spreads and depth for both the specialist and limit order book. Spreads are lower and depth is greater on Tuesday than the other days of the week. This increased depth on Tuesday can be attributed to the limit order book. Quoted depth from both the specialist and limit order book exhibits an inverted U-shaped pattern on an intraday basis. We also find that the specialist provides less depth, on average, than the limit order book. This finding holds on a daily and an intraday basis.
B6—Quart. J. Bus. Econ.
B8—44 (3 and 4), pp. 3-16
C4—
B4—University of Mississippi, Mississippi, MS

AEA category—G14
B1—W. Scott Bauman, Robert E. Miller, and E. Theodore Veit
B2—Managing Portfolio Turnover: An Empirical Study
C2—This study compares the return on stocks bought with the return on stocks sold by investment advisors. We look at each pair of buy and sell transactions for the period 1990-1999. To enhance portfolio performance, the spread between the return on stocks bought and sold must exceed the associated transaction costs. We also compare the return and risk of stocks bought to both the return and risk of stocks sold and the return and risk of a market index. The results suggest that some investment advisors consistently enhance portfolio perform¬ance with their transactions, while others consistently reduce portfolio performance.
B6—Quart. J. Bus. Econ.
B8—44 (3 and 4), pp. 17-32
C4—
B4—Winshir Group, Decatur, GA; Northern Illinois University, DeKalb, IL; Rollins College, Winter Park, FL

AEA category—G14
B1—Larry Prather, Ting-Heng Chu, and Che-Chun Lin
B2—An Extension of Security Price Reactions Around Product Recall Announcements
C2—We examine 269 non-automotive product recall announcements that were pub¬lished in the Wall Street Journal Index between January 1984 and December 2003. Consistent with previous research, we find statistically significant nega¬tive abnormal returns on, and one day prior to, the announcement date. Mean cumulative abnormal returns are not statistically significant over the pre- and post-announcement periods, however, providing evidence in support of the effi¬cient market hypothesis (EMH). These results are robust with respect to the selected index, beta estimation method, and assumption about the behavior of residuals. Moreover, empirical results suggest that important differential industry effects exist and that companies in the drugs/cosmetics industry suffer most from their recall announcements.
B6—Quart. J. Bus. Econ.
B8—44 (3 and 4), pp. 33-48
C4—
B4—East Tennessee State University, Johnson City, Tennessee; East Tennessee State University, Johnson City, Tennessee; National Tsing Hua University, Hsinch, Taiwan

AEA category—
B1—Chun-Da Chen, Mingchih Lee, Jer-Shiou Chiou, and Pei-Shan Wu
B2—Hedging with Floor-traded and E-mini Stock Index Futures
C2—This study investigates the out-of-sample hedging effectiveness and dynamic hedge ratios of floor-traded and E mini futures with VAR, ECM, bivariate GARCH, Kalman filter, and Markov regime switching in the S&P500 and Nasdaq 100 markets. The empirical results show that both the floor-traded and E mini futures can be good instruments to be used as hedge objectives. The correlation coefficient between spot and futures increases and hedge effective¬ness goes up when the hedging period is extended. Moreover, the bivariate GARCH and Markov regime switching show a higher HEI performance in short-term and long-term hedging periods, respectively. Furthermore, floor-traded futures with an open outcry system surprisingly do better than E mini futures contracts. This study proposes meaningful evidence of hedging strate¬gies for investors with different spot index, hedging periods, and trading mechanisms.
B6—Quart. J. Bus. Econ.
B8—44 (3 and 4), pp. 49-68
C4—
B4—Tamkang University, Tamsui, Taipei, ROC; Tamkang University, Tamsui, Taipei, ROC; Chung Kuo Institute of Technology, Taiwan, ROC; Chung Kuo Institute of Technology, Taiwan, ROC

AEA category—G14
B1—Zhen Li
B2—The Persistence of Runs—The Directional Movement of Index Returns
C2—I test a stronger version of the random walk hypothesis by examining the hazard ratio of runs and find the directional movement of the CRSP index return predictable. A run is defined as a sequence of returns of the same sign. The persistence level of a run tends to abate in its length but enhance itself in the magnitude of its components (historical return realizations). A positive run lasts longer than a negative run. The impact of a run’s components on its persistence level becomes more pronounced when the measuring frequency increases. Size and book-to-market equity ratio have some limited impact on the persistence level of a run. The market interest (T-bill) rate generally decreases the persistence level of a positive run and increases the persistence level of a negative run.
B6—Quart. J. Bus. Econ.
B8—44 (3 and 4), pp. 69-92
C4—
B4—University of Notre Dame, Notre Dame, IN

AEA category—
B1—Ho Young Lee and Vivek Mande
B2—The Relationship of Audit Committee Characteristics with Endogenously Determined Audit and Non-Audit Fees
C2—The Securities and Exchange Commission and Congress expect audit commit¬tees to monitor the economic ties between management and the external auditor. We examine the association between the fees paid to the external auditor and effective audit committees. We find that variables proxying for the effectiveness of audit committees are positively associated with audit fees. These results suggest that effective audit committees positively influence the level of audit coverage. Our initial results also suggest that effective audit committees seek to increase audit quality by reducing the non-audit services provided by the external auditor. Once we model the non-audit fees endoge¬nously, however, our results show that there is no statistically significant association between the non-audit fees and audit committee effectiveness.
B6—Quart. J. Bus. Econ.
B8—44 (3 and 4), pp. 93-112
C4—
B4—University of Nebraska at Omaha, Omaha, NE; Cal State Fullerton, Fullerton, CA

AEA category—G14
B1—Yulong Ma, Alex P. Tang, and Tanweer Hasan
B2—The Stock Price Overreaction Effect: Evidence on Nasdaq Stocks
C2—We empirically investigate the market overreaction effect of the stocks with the largest daily percentage increases or decreases in price reported in The Wall Street Journal between January 1996 and December 1997. We select 852 stocks for the NYSE and Nasdaq samples of gainers and losers. We find strong evidence of stock price overreaction effects for both the Nasdaq gainers and losers samples but no such evidence for either the NYSE samples. The reversal of stock returns occurs within a two-day post-event period. Regression analysis shows that the stock price reversal is inversely related to the price gains or losses controlling for the size of Nasdaq firms.
B6—Quart. J. Bus. Econ.
B8—44 (3 and 4), pp. 113-128
C4—
B4—Cal State Long Beach, Long Beach, CA; Morgan State University, Baltimore, Maryland; Roosevelt University, Schaumburg, IL

AEA category—C1, C12, C13, C2, C20
B1—Peter M. Ellis and C. Richard Cutler
B2—A Simple Model to Predict Loss Ratios in the Domestic Stock Property—Liability Insurance Industry
C2—We evaluate the relative contributions of exogenous macroeconomic variables and industry-specific variables for predicting the aggregated property-casualty insurance loss ratio using multiple linear regression models. Our work was motivated by Grace and Hotchkiss (1995), who used only economic exogenous variables in a similar analysis. We find that the macroeconomic variables that we consider contributed little to the explanation and prediction of the property-casualty insurance loss ratio, and that a simple model with just two industry variables predicted a transformed version of loss ratio very well.
B6—Quart. J. Bus. Econ.
B8—44 (3 and 4), pp. 129-139
C4—
B4—Utah State University, Logan, UT

AEA category—
B1—John F. O’Connell
B2—Administrative Compensation in Private Nonprofits: The Case of Liberal Arts Colleges
C2—In for profit institutions executive compensation often is theorized to reflect the profit maximizing objectives of the institution. The executive is an agent of the principal. In nonprofits the objective of the principal is much more difficult to define or quantify. This paper examines the link between compensation and nonprofit institutions. The test case is private liberal arts colleges. The findings are that college presidents’ compensation depends positively on the academic reputation of the institution, faculty salaries, and the net price of the product and negatively on the alumni giving rate. Financial success is not as important as academic prowess in determining payment and academic prowess is multi¬dimensional. Neither hierarchy nor credentialing seems important. Applying the model to other administrators proves problematic because of the way the data are reported. Numerous estimation techniques are applied to the censured sample. For academic deans the most important determinant of payment is faculty salary. Development officers’ compensation depends on faculty sala¬ries, net price, and enrollment and depends weakly on the institution’s reputation. Overall, the model proves least effective in explaining the payments for finance officers; the same determinants that proved effective in determining the president’s compensation determine those of finance officers.
B6—Quart. J. Bus. Econ.
B8—44 (1 and 2), pp. 3-12
C4—
B4—College of the Holy Cross, Worcester, MA

AEA category—C22, F31, G15
B1—Shakila Jeisman
B2—Exchange Market Pressure in Australia
C2—This paper measures the exchange market pressure (EMP) on the Australian dollar over the post float period using the model dependent approach pro¬posed by Weymark (1995, 1998) and the model independent approach developed by Eichengreen, Rose, and Wyplosz (1996). Although there are some concerns over the estimation of the model dependent index, the resulting EMP indices both appear to provide relatively plausible descriptions of the pressure on the Australian dollar. The role of foreign exchange intervention is examined through the construction of degree of intervention (DI) indices. The results reveal that intervention by the Reserve Bank of Australia contributed to the large depreciation of the Australian dollar between 1997 and 2001.
B6—Quart. J. Bus. Econ.
B8—44 (1 and 2), pp. 13-28
C4—
B4—Queensland University of Technology, Brisbane, Australia

AEA category—G11, G14, G15
B1—Chien-Liang Chiu, MingChih Lee, Cho-Min Lin, and Chun-Da Chen
B2—Studies on the Effect of Trading Volume and Return Volatility on Call Warrants and Underlying Stocks in Taiwan
C2—This study selects ten call warrants on electronics stocks and utilizes the bivariate GARCH model to investigate the influence of return and expected and unexpected trading volume on the call warrants and underlying stocks. The results reveal that stocks and call warrants are correlated and function as leading factors for each other. The volatilities of underlying stock returns are positively influenced by the expected and unexpected trading volumes of the underlying stocks. The influence of expected and unexpected trading volumes of warrants on the volatility of target stock returns is also positively correlated. Expected and unexpected trading volumes of warrants as well as underlying stocks show a positive correlation with the return volatility of warrants.
B6—Quart. J. Bus. Econ.
B8—44 (1 and 2), pp. 29-44
C4—
B4—Tamkang University, Taiwan, ROC; Tamkang University, Taiwan, ROC; Ling Tung College, Taiwan, ROC; Tamkang University, Taiwan, ROC

AEA category—G3
B1—Lawrence Fogelberg and John M. Griffith
B2—Financing Strategies of the R&D Firm
C2—This paper investigates the financing strategies of the R&D firm. Our hypotheses are based on Cho’s (1992) game theory model where the firm develops a product but needs additional financing to bring it to market. The model generates a particularly rich set of hypotheses: 1) to fund the completion of its project and bring its product to market, the firm initiates negotiations with an established firm; 2) the majority of the acquisitions will be partial cash acquisitions through private secondary offerings. Confirming the model’s hypotheses, we find that the majority of the acquisitions are partial cash acquisitions by significantly larger established R&D firms.
B6—Quart. J. Bus. Econ.
B8—44 (3 and 4), pp. 45-54
C4—
B4—Troy State University, Troy, MI; Old Dominion University, Norfolk, VA

AEA category—G13
B1—Olgun Fuat Sahin and Pattarake Sarajoti
B2—The Impact of Trading Party on the Execution Spread: Evidence From Futures Markets
C2—In this study, we examine the execution spread, i.e., the transaction cost for traders who demand liquidity. Using the transaction records of four futures contracts traded on the CME, we calculate the execution spread to reflect the transaction costs incurred by customers and find that the cost of trading for customers is lower when they initiate transactions with floor traders than with other customers. We also examine the determinants of the execution spread. The findings indicate that trading volume reduces the execution spread, while market volatility increases it. The impact of competition in the pit varies depending on the execution spread measures. Competition among floor traders reduces the spread for transactions between customers and floor traders; however, competition does not affect the execution spread when customers trade with each other.
B6—Quart. J. Bus. Econ.
B8—44 (1 and 2), pp. 55-66
C4—
B4—Moorhead State University, Moorehead, MN; Sasin GIBA of Chulalongkorn University

AEA category—G14, G18
B1—Robin K. Chou
B2—The Impact of Limit Order Handling on NYSE and Nasdaq Transaction Costs
C2— The NYSE and Nasdaq stock markets treat limit orders differently before Nasdaq adopted the Order Handling Rule (OHR) in 1997. Most of the studies before OHR, which compare the trading costs between these two markets, do not explicitly take this fact into consideration. As a consequence, the case for possible collusion among the Nasdaq dealers, as suggested by Christie and Schultz (1994), is likely to be overstated. We compare average trading costs on Nasdaq to those on the NYSE only when the specialists trade on their own account. We do not find strong evidence that trading costs on these two markets are significantly different for smaller firms or lower price stocks. In addition, after controlling for economic variables that are likely to affect spread sizes, the differences in spreads between these two markets are no longer significant.
B6—Quart. J. Bus. Econ.
B8—44 (1 and 2), pp. 67-88
C4—
B4—National Central University, Taoyuan, Taiwan ROC

AEA category—G14; G21
B1—Dominic Gasbarro, Mark Stevenson, Robert G. Schwebach, J. Kenton Zumwalt
B2—The Response of Bank Share Prices to Securitization Announcements
C2—This paper examines the impact of securitization announcements on share prices of multibank holding companies. Prior studies report share price responses are industry-specific. Because a few frequent issuers dominate multibank holding company securitizations, we move from an industry com¬parison to a comparison of firms within the banking industry. The data are partitioned on financial characteristics, and we observe significantly positive wealth effects for banks with high bond ratings, high financial leverage, low non-interest expense, and high issue frequency. We argue that these charac-teristics serve as proxies for, respectively, information asymmetry and creditworthiness, financial slack, comparative advantage in loan origination, and reputation. When the data are partitioned into Citigroup, MBNA and other MBHCs, we find that the two major securitizers differ substantially and that the other MBHCs exhibit significantly positive share price responses.
abstract
B6—Quart. J. Bus. Econ.
B8—44 (1 and 2), pp. 89-106
C4—
B4—Western Australia, Australia; Western Australia, Australia; Fort Collins, Colorado; Western Australia, Australia

AEA category—G35
B1—Sanjay Deshmukh
B2—The Effect of Asymmetric Information on Dividend Policy
C2— We examine the effect of asymmetric information on dividend policy in light of an alternative explanation based on the pecking order theory. We present evi¬dence that dividends are inversely related to the level of asymmetric information. This finding is consistent with the pecking order theory, but incon¬sistent with the signaling theory. We provide further support for the pecking order theory by documenting a negative relation between dividends and issue costs that derives from asymmetric information problems. We also find that the previous evidence on the relation between dividends and insider ownership appears to be more strongly related to asymmetric information than to agency costs.
B6—Quart. J. Bus. Econ.
B8—44 (1 and 2), pp. 107-127
C4—
B4—DePaul University, Chicago, IL

AEA category—G31, G32
B1—Joel R. Barber
B2—Costs of Capital with Flotation Costs
C2—A zero net present value project is one whose acceptance does not affect share price. Based upon the above invariance property and the assumption the firm maintains constant capital structure weights, this paper derives a formula for the cost of capital with flotation costs. It is shown that other widely used methods do not possess the invariance property and, consequently, could lead to incorrect capital budgeting decisions.
B6—Quart. J. Bus. Econ.
B8—43 (3 and 4), pp. 3-12
C4—
B4—Florida International University, Miami, FL

AEA category—G34
B1—Pornsit Jiraporn, Wallace N. Davidson III, and Hong Qian
B2—MBO Withdrawals and Determinants of Stockholders’ Wealth
C2—Not all firms that intend to go private do so successfully. A number of management buyouts are announced but subsequently withdrawn. We document that the stock market reacts negatively to the withdrawal announcement. This adverse effect, however, is alleviated in firms where inside directors hold higher proportions of equity ownership and where boards of directors are dominated by independent directors. The results suggest that higher ownership by inside directors helps align management’s and shareholders’ interests whereas outsider-dominated boards better monitor management, whose fiduciary duties to shareholders may be compromised by conflicts of interest inherent in management buyouts. Finally, there is evidence that firms that could have taken the offer by another bidder but decided in favor of the MBO, which subsequently fails, suffer more adverse market reactions when the MBO is withdrawn.
B6—Quart. J. Bus. Econ.
B8—43 (3 and 4), pp. 13-30
C4—
B4—school, city, state

AEA category—E44
B1—Unro Lee
B2—U.S. Asset Returns and Fiscal Policy: New Empirical Investigation
C2—Persistent government budget deficit that has plagued both the United States and other countries since the 1970s has invariably attracted attention from academicians and politicians alike. Although the United States had enjoyed a brief period of federal budget surplus from 1998 to 2001, it is once again experiencing ballooning budget deficit, partly due to a recession in 2001, extended bearish stock markets fueled by dot.com bust in 2000, and a significant boost in government spending to fight a war against terrorism. This study investigates whether the U.S. stock and corporate bond markets are informationally efficient with respect to fiscal policy (proxied by government budget deficit). The Granger causality test procedure is utilized in the context of a vector autoregression (VAR) model to investigate a dynamic relationship between excess U.S. asset returns and fiscal policy. This study finds that both stock (small-capitalization as well as large-capitalization) and bond excess returns had fully captured information on fiscal and monetary policies in the United States during the period 1969-1998, a period marked by persistent budget deficit.
B6—Quart. J. Bus. Econ.
B8—43 (3 and 4), pp. 31-48
C4—
B4—University of the Pacific, Stockton, California

AEA category—G14
B1—Ken C. Yook
B2—The Measurement of Post-Acquisition Performance Using EVA
C2—This study reexamines post-acquisition performance of acquiring firms using EVA. Investigation of the largest 75 acquisitions occurring during 1989 to 1993 reveals that acquiring firms experience significantly deteriorating raw EVA after the completion of acquisitions. When industry-adjusted EVA is looked at, however, the difference is almost indiscernible. These results indicate that the sharp decline in raw EVA is mostly accounted for by industry effects. If EVA is calculated assuming that no premium was paid to target firms, i.e., the premium is excluded from the acquiring firm’s capital in the post-acquisition period, industry-adjusted EVA shows an insignificant improvement. These results suggest that acquiring firms tend to experience slightly improved performance relative to their industry counterparts after completion of the acquisition. But the improved operating performance is wiped out by capital costs of the large premiums paid to the target firm, creating no real economic gains to the acquiring firm’s shareholders.
B6—Quart. J. Bus. Econ.
B8—43 (3 and 4), pp. 49-66
C4—
B4—The Johns Hopkins University, Washington, D.C.


AEA category—G14
B1—Eric Higgins and Amir Tavakkol
B2—The Impact of Weekly Time-Period Choice on Volume and Size Cross-Autocorrelations
C2—This study determines if the U-Shaped pattern that Boudoukh, Richardson, and Whitelaw (1994) find in weekly return autocorrelations exists for weekly return cross-autocorrelations. Using size-sorted and volume-sorted portfolios of equity returns from 1963-2000, we find that the U-shaped pattern observed for autocorrelations does not exist for cross-autocorrelations in size or volume sorted return portfolios, consistent with the findings of Boudouk, Richardson, and Whitelaw. Our results are shown to be robust after controlling for the Fama and French (1993) factors and for prior market condition.
B6—Quart. J. Bus. Econ.
B8—43 (3 and 4), pp. 67-84
C4—
B4—Kansas State University, Manhattan, Kansas

AEA category—G10, G14, G19
B1—P.C. Kumar
B2—Bid-Ask Spreads in U.S. Equity Markets
C2—Transaction costs are important elements of market microstructure. This paper presents a detailed survey of a specific component of transaction costs, namely, the bid-ask spread, for trades in US equity markets. Bid-ask spreads emerge from divergent objectives of the two principal participants in security markets. The buyer’s (seller’s) goal is to acquire (relinquish) the asset at the lowest (highest) price possible within an acceptable time frame. For the buyer, this goal implies reducing total costs consisting of increasing opportunity costs and declining costs related to the supply of immediacy by the market maker. The market maker, who is the counter-party to the transaction, seeks to maximize wealth. This objective implies reducing both the inventory-carrying cost and the adverse information cost arising from dealing with traders with superior information. The paper discusses the nature of bid-ask spreads, explores their conceptual foundations building on the differing objectives of the two parties to a trade, and provides empirical estimates of their magnitudes. It also surveys impacts of various corporate announcements on firm bid-ask spreads. Finally, US equity markets are organized along the lines of dealer markets and specialist markets. This paper surveys the empirical studies that provide detailed estimates of bid-ask spreads in these different markets. However, given the disparate data, assumptions, and methodologies in these studies, the evidence on the superiority of one or the other market structure is ambiguous.
B6—Quart. J. Bus. Econ.
B8—43 (3 and 4), pp. 85-112
C4—
B4—American University, Washington D.C.

AEA category—
B1—Mark C. Berger and Jodi Messer Pelkowski
B2—Health and Family Labor Force Transitions
C2—We examine the labor force participation responses of older families to changes in the health of family members in the U.S. using the Health and Retirement Study. We estimate transitions among four labor force states for married couples: both working, husband working, wife working and neither working. We find evidence that the onset of health problems increase the probability that the affected individual leaves the labor market. The unaffected spouse is likely to continue working if originally working, but is not likely to enter the labor market if not originally working following the onset of health problems of the spouse. Comparing our results to previous studies suggests that family responses to health changes have remained fairly stable over time in the U.S. In contrast, differences exist in family responses to health changes in the U.S. and Germany, possibly reflecting differences in the institutional environments in the two countries.
B6—Quart. J. Bus. Econ.
B8—43 (3 and 4), pp. 113-138
C4—
B4—Wichita State University, Wichita, KS

AEA category—M10, G14
B1—Godwin Onyeaso and Michael Rogers
B2—An Econometric Investigation of the Volatility and Market Efficiency of the U.S. Small Cap 600 Stock Index
C2—Using the framework of econometric models, this paper finds positive answers to three research questions: Is the volatility of small capitalization 600 predictable? Does the volatility of SC 600 exhibit the same empirical regularities reported in the literature about the behavior of other stock prices? Can SC 600 pass a test of market efficiency? The research results are valuable for at least three entities: economic agents investing in SC 600e recommendations, academics for teaching and research, and policy markers keenly watching stock market volatility because it destabilized the stock market and dampens investors’ incentive to invest. Finally, because the volatility dynamics and predictions of small cap 600 had hitherto received no empirical investigation, the outcome of this paper is particularly timely.
B6—Quart. J. Bus. Econ.
B8—43 (3 and 4), pp. 139-155
C4—
B4—Concordia College/University System, Selma, AL

AEA category—G34; G38
B1—Yulong Ma, Huey-Lian Sun, and Alex P. Tang
B2—The Valuation Effect of Government’s Merger Challenges: Evidence from a Regulated Industry
C2—Earlier studies on horizontal mergers have failed to provide conclusive empirical evidence in supportive of the market power effect. In this study we examine the market power effect in the railroad industry using the two merger attempts made by Santa Fe and Southern Pacific in the 1980s. We find significantly negative stock price reactions of the merging and rival firms to the announcement of government’s rejection of the second merger attempt. In addition, the negative stock price reaction of rival firms is mainly associated with rival firms that are similar to merging firms in terms of size and operating territory. These results present significant evidence of the existence of the market power effect for horizontal mergers in a regulated industry.

B6—Quart. J. Bus. Econ.
B8—43 (1 and 2), pp. 3-20
C4—
B4—Cal State University, Long Beach, CA; Morgan State University, Baltimore, MD; Morgan State University, Baltimore, MD

AEA category—G11, F36
B1—Eric Girard and Eurico J. Ferreira
B2—On the Evolution of Inter- and Intra-Regional Linkages to Middle East and North African Capital Market
C2—This paper investigates the contribution of Middle East and North African (MENA) capital markets to global asset allocation strategies. Eleven MENA stock markets are examined from January 1st, 1990 to December 30th, 2001. Spillover studies are conducted on daily stock market index price to investigate short-term market linkages. Our results indicate that most MENA markets are segmented (to the exception of Turkey and Israel); we also find evidence of an increasing sensitivity to exogenous intra-regional shocks throughout the period of study. Sensitivity to inter-regional exogenous shocks, however, remains modest. Finally, we uncover an uncanny situation in which most MENA capital markets exhibit a high degree of endogenous predictability. We suggest that MENA markets provide diversification potentials for the global investor and should not be treated as a block for global tactical asset allocation purposes.
B6—Quart. J. Bus. Econ.
B8—43 (1 and 2), pp. 21-44
C4—
B4—Indiana State University, Terre Haute, IN; Indiana State University, Terre Haute, IN

AEA category—G12
B1—Lakshman Alles
B2—Time-Varying Skewness in Stock Returns: An Information-Based Explanation
C2—There is evidence of regularities in the skewness of asset returns reported in the literature. The literature, however, offers no adequate explanations for these phenomena. Based on a simulation approach, we provide evidence that at least some aspects of skewness can be explained in terms of extant information-based theories in finance. Using a well-accepted model for generating asset returns, we demonstrate that when the effects of the uncertain information hypothesis and Kahneman and Tversky’s prospect theory are incorporated in the return-generating process, the resulting return distributions can show negative skewness and variations of skewness with changing economic climates similar to what has been observed in empirical distributions.
B6—Quart. J. Bus. Econ.
B8—43 (1 and 2), pp. 45-56
C4—
B4—Curtin University of Technology, Perth, Australia
AEA category—E41

B1—Amanda Swift King
B2—Untangling the Effects of Credit Cards on Money Demand: Convenience Usage vs. Borrowing
C2— This paper examines whether households are using credit cards for the con¬venience of paying all cash at once and enjoying the float that is created in the meantime or merely using credit cards as an easy form of borrowing. Previous studies of credit cards on money demand are extended by adding borrowing into the empirical framework. By looking at the impact that the volume of a credit card revolving balance has on a transactions account as well as whether a household owns a credit card, the effects of convenience usage versus bor¬rowing on the card can begin to be untangled. The results suggest that part of the negative effect of being a credit card-holder on money demand is due to borrowing.
B6—Quart. J. Bus. Econ.
B8—43 (1 and 2), pp. 57-80
C4—
B4—Georgia Southern University, Statesboro, GA

AEA category—J71, J31, J4, L83
B1—James Richard Hill
B2—Pay Discrimination in the NBA Revisited
C2—An investigation of pay discrimination in the National Basketball Association is conducted using a panel data set spanning the 1990 to 2000 time period. Studies using 1984-1986 NBA season data suggested that salaries for black players were approximately 14 percent to 20 percent lower than those of comparable white players. Evidence suggested this shortfall might be the result of fan discrimination. Studies using data from some seasons in the 1990s found either no evidence of pay discrimination or evidence of pay discrimination only at the highest player performance levels. The results of the current study suggest a lack of pay discrimination in the NBA during this time period. False positive conclusions are possible because of a correlation between height and race.
B6—Quart. J. Bus. Econ.
B8—43 (1 and 2), pp. 81-92
C4—
B4—Central Michigan University, Mt. Pleasant, MI

AEA category—C12, C52, E24
B1—Param Silvapulle
B2—Testing for Seasonal Behavior of Monthly Stock Returns: Evidence from International Markets
C2—This paper investigates the seasonal behavior of monthly stock return series of some OECD countries and emerging economies. The Bealieu-Miron’s (1993) and the Franses’ (1991) procedures were used for testing for the presence of multiple unit roots at the monthly seasonal frequencies, followed by Canova-Hansen’s (1995) procedure for testing for stability of seasonal patterns. Evidence suggests that many stock return series are non-stationary at some monthly seasonal frequencies and that the ‘January effect’, much studied in financial economics, is present in many stock returns. Utilizing the nature of seasonality found in this study, the prediction of stock returns can be improved. The findings of this study are useful to two groups: (i) market participants whose success precariously depends on the ability to predict stock return behaviour and (ii) in empirical analyses of financial markets, applied researches can improve model specifications considerably by taking account of the nature of seasonality.
B6—Quart. J. Bus. Econ.
B8—43 (1 and 2), pp. 93-110
C4—
B4—Monash University, Australia

AEA category—G34
B1—Arman Kosedag and David Michayluk
B2—Repeated LBOs: The Case of Multiple LBO Transactions
C2—Firms that undergo a second LBO transaction are unique because they have a second experience in the capital markets after being privately held. Motiva¬tions for repeated LBOs may differ from first-time LBOs—because of the past experience, the market may be able to better distinguish the competing motiva¬tions that have been suggested in the literature. We find that for repeated LBOs, the market response is more strongly positive than that typically found for first-time LBOs. The market reaction is also strongly related to a variant of Tobin’ Q, implying that the timing of the LBO may coincide with a low percep¬tion in market value. It is not surprising that the majority of the repeated LBOs were performed following the 1987 stock market crash. It appears that the instigators of the LBO believed the price was undervalued and their experience let them act accordingly.
B6—Quart. J. Bus. Econ.
B8—43 (1 and 2), pp. 111-122
C4—
B4—Sabanci University, Istanbul, Turkey; University of Rhode Island, Kingston, RI

AEA category—G14, G18
B1—Prem G. Mathew, J. Christopher Hughen, and Kent P. Ragan
B2—A Reexamination of Information Flow in Financial Markets: The Impact of Regulation FD and Decimation
C2—We investigate the impact of Regulation FD on information flow in the equities market. Our analysis indicates that information flow around earnings announcements, proxied by abnormal return volatility around those announcements, of U.S. stocks increased in the first effective quarter of Regulation FD (the fourth quarter of 2000). The information flow of ADRs, which are exempt from Regulation FD, does not change. This supports the inference that Regulation FD, not general market conditions, caused the increase in volatility, but Regulation FD did not have a persistent impact on information flow. A multivariate regression analysis shows that our results are robust to controls that include decimalization, which was implemented concurrently with Regulation FD and has reduced return volatility. Our comparison of return volatilities across firm size indicates that small firms temporarily had larger return volatilities, thus Regulation FD only temporarily had a differential impact on the information environment of small firms.
B6—Quart. J. Bus. Econ.
B8—43 (1 and 2), pp. 123-147
C4—
B4—University of Saskatchewan, Saskatoon, SK, Canada; Bowling Green State University, Bowling Green, OH; Southwest Missouri State University, Springfield, MO

AEA category—
B1—Glenn N. Pettengill
B2—A Survey of the Monday Effect Literature
C2—An extensive and long-standing literature documents calendar patterns in asset returns. In the inaugural edition of the Review of Economic Statistics, Persons (1919) makes reference to a January effect in equity securities, as one of several “seasonals” in stock returns. Another seasonal, the Monday effect, the tendency for Monday stock returns to be low relative to other weekdays and on average negative, provides the focus of this survey paper and other papers in this issue. Maberly (1995) shows that financial practitioners were aware of the Monday effect as early as the late 1920s (see, Kelly (1930)). Then, as now, the existence of negative returns on Mondays was a puzzling phenomenon. Why should investors on Friday or Saturday buy securities that, based on historical data, should be expected to exhibit negative returns the following trading day?
Academic researchers have spent considerable effort attempting to document and, with limited success, to explain the tendency for asset returns to be negative on Monday. In recent years a new dimension has arisen that presents both obstacles and opportunities for explaining the Monday effect. Monday returns for large-firm equities have become positive and in some years these returns are significantly higher than returns for other weekdays.
This survey serves as an introduction to a series of papers that examine the Monday effect including the shift from negative Monday returns to positive Monday returns.
B6—Quart. J. Bus. Econ.
B8—42 (Special), pp. 3-28
C4—
B4—Emporia State University

AEA category—
B1—Cynthia Royal Tori
B2—Re-examining Return Autocorrelation and Monday Returns
C2—This study examines conditional Monday returns in light of the recent evidence of a reversal of the Monday effect. Using S&P 500 and Nasdaq market returns from January 3, 1970 to December 31, 2001, the study finds that the reversal of the Monday effect for the S&P and the disappearance of a significant Monday effect for the Nasdaq cannot be attributed to the correlation of the Monday return with the previous day return. Shifts do occur in this correlation, but even accounting for good news/ bad news markets and the week-of-the-month timing, these shifts do not explain shifts in the average Monday return. In the Nasdaq market, where Monday returns remain negative, daily return correlation has disappeared completely suggesting that the “wait-analyze-invest” argument postulated by information-processing hypothesis is no longer supported.
B6—Quart. J. Bus. Econ.
B8—42 (Special), pp. 29-48
C4—
B4—Valdosta State University, Valdosta GA

AEA category—
B1—Glenn N. Pettengill, John Wingender, and Raj Kohli
B2—Arbitrage, Institutional Investors and the Monday Effect
C2—In this paper we examine the hypothesis that the Monday effect disappeared as a result of arbitrage activity by institutional investor trading empowered by a reduction in transaction costs. Our empirical results argue against this conclusion because of the following: 1) We find that changes in Monday returns are too large to be consistent with arbitrage activity; 2) the shift in the Monday effect occurs primarily in the bull market of the 1990s, much later than the timing of shifts in transaction costs identified in previous research; and 3) when returns are segmented based on magnitude, we find that the patterns in the shifts of weekday returns are inconsistent with profitable arbitrage activity.
B6—Quart. J. Bus. Econ.
B8—42 (Special), pp. 49-64
C4—
B4—Grand Valley State University, Grand Valley, MI; Creighton University, Omaha, NE; Indiana University, South Bend, IN

AEA category—
B1—Joe H. Sullivan and Kartono Liano
B2—Market Breadth and the Monday Seasonal in Stock Returns
C2—This study shows that when the Monday seasonal in stock returns was the strongest, the effect was broadly based, attributable to a large number of declines, as opposed to sharp declines in only a few stocks. The breadth of decline casts doubt on potential explanations relating to an excess of information announcements over the weekend. In the most recent decade, the average Monday return for the value-weighted index is larger than the average return for the rest of the week, confirming the disappearance of the Monday effect for large-firm securities. In contrast the percent of declining issues, which places greater emphasis on small firm securities, remains greater on Monday than on the rest of the week. This finding suggests that the persistent Monday effect for small-firm securities, as documented in the literature, remains a broad based effect.
B6—Quart. J. Bus. Econ.
B8—42 (Special), pp. 65-72
C4—
B4—Mississippi State University, Mississippi State MS; Mississippi State University, Mississippi State MS

AEA category—
B1—Vijay Gondhalekar and Seyed Mehdian
B2—The Blue-Monday Hypothesis: Evidence Based on Nasdaq Stocks, 1971-2000
C2—As part of this special issue on the Monday effect, we examine the blue-Monday hypothesis that the inherent gloom among investors on Mondays (relative to other days), because of there being a pervasive risk factor, contributes to the famous Monday pattern in stock returns. For the period 1971-2000, we find that the Monday pattern is widespread across industries tracked by the Nasdaq sub-indices. Furthermore, the Monday seasonal in most industries is positively correlated over time. In regressions of industry returns against market (composite) returns, the r-squared values for a bulk of the industries are higher for Mondays than non-Mondays even though the composite itself exhibits a Monday seasonal. Across industries, the higher these Monday r-squared values are the more pronounced is the Monday effect. Finally, for many of the industries, the Monday seasonal is related to proxies for pessimism among investors. We take these findings to be consistent with the blue-Monday hypothesis.
B6—Quart. J. Bus. Econ.
B8—42 (Special), pp. 73-90
C4—
B4—Grand Valley State University, Grand Rapids MI; University of Michigan—Flint, Flint MI

AEA category—
B1—J. Clay Singleton and John Wingender
B2—The Monday Effect: A Disaggregation Analysis
C2—In this research we employ two statistical approaches not previously used to examine the Monday effect: exploratory data analysis and content analysis. While most previous Monday effect studies examine confirmatory analysis statistics (means and variances), exploratory data analysis employs counting and visual techniques to describe the empirical distributions of daily returns. The results indicate that Monday returns are highly affected by large, infrequent, negative outliers in both large and small cap stocks, regardless of the shift over time in the Monday effect for large cap stocks.
Content analysis is used to investigate whether there are any micro or macro events newsworthy enough to be cited more often by the financial press (as reported in the Wall Street Journal) to explain these large, negative outlier Monday markets than are cited to explain the returns for other Mondays. Our results indicate that economic or psychological factors may be responsible for the Monday effect. This research points out new directions for researchers to consider when examining the causes of the Monday effect.
B6—Quart. J. Bus. Econ.
B8—42 (Special), pp. 91-112
C4—
B4—Rollins College, Winter Park, Florida; Creighton University, Omaha, Nebraska

AEA category—
B1—Edward M. Miller, Larry J. Prather, and M. Imtiaz Mazumder
B2—Day-of-the-Week Effects among Mutual Funds
C2—We extend the evidence on day-of-the-week effects by examining the return patterns of ten open-end mutual fund asset classes to establish whether previously observed predictabilities in stock returns are reflected in mutual fund asset-class returns. This determination is consequential because institutional characteristics may permit the exploitation of this well-documented pattern by using mutual funds. We then propose two trading strategies to exploit salient empirical regularities and test these rules empirically. Empirical testing reveals that daily dynamic trading strategies exist that can reduce risk and increase returns resulting in improved Sharpe and Treynor measures. Furthermore, Treynor-Mazuy and Henriksson-Merton timing measures are positive.
B6—Quart. J. Bus. Econ.
B8—42 (Special), pp. 113-128
C4—
B4—University of New Orleans, New Orleans LA; East Tennessee State University, Johnson City TN; University of New Orleans, New Orleans LA

AEA category—G34
B1—Ben Branch and Taewon Yang
B2—Predicting Successful Takeovers and Risk Arbitrage
C2—In this paper, we explore the probability of merger completion/success for the 1991 to 2001 period. We construct a prediction model for merger completion and, among other issues, test how payment methods/merger types can influence success for three basic types of takeover offers: cash tender, stock swap and collar. Our multivariate test reveals that takeover attempts offering cash are more likely to succeed than those which offer payment in the form of stock. We argue that the uncertain equity values implicit in the stock payment method accounts for their reduced success rate. A range of exchange ratios (collar offers) tends to improve the chance of success as compared with a fixed exchange ratio. We find that our prediction model, based on both historical and new findings, can be used to improve the risk adjusted returns of risk arbitrage and related strategies.
B6—Quart. J. Bus. Econ.
B8—42 (1 and 2), pp. 3-18
C4—
B4—University of Massachusetts, Amherst, MA; California State University, San Bernardino, CA

AEA category—G10, G30, G32
B1—Mohamed A. Ayadi and Yoser Gadhoum
B2—Ownership Structure and Risk: A Canadian Empirical Analysis
C2—This study attempts to relate ownership structure to changes in corporate risk behavior for Canadian firms using seven competing risk measurement models and three ownership structure indicators selected in a manner so that they can reflect the roles of the firm major players. Univariate and multivariate cross-sectional tests are conducted using a sample of 569 Canadian non-financial listed firms. This study tests the hypothesis that ownership structure of the firm is negatively related to its level of risk and this relation is rather complex and non-linear one. We provide evidence that the ownership structure can explain the cross-sectional variation in the firm level of risk. A non-linear relationship between managerial ownership and both total risk and systematic risk is uncovered, with higher risk-taking at lower and very high ownership levels, consistent with evidence of Chen and Steiner (1999) for US non-financial firms.
B6—Quart. J. Bus. Econ.
B8—42 (1 and 2), pp. 19-40
C4—
B4—Brock University, Ontario, Canada; Universityof Quebec in Montreal, Quebec, Canada

AEA category—C50, E32
B1—Rolando F. Peláez
B2—A New Index Outperforms the Purchasing Managers’ Index
C2—Several recent papers have documented the effects on domestic and overseas financial markets of unexpected changes in the Purchasing Managers’ Index (PMI). This paper introduces a new composite index of diffusion indices from the Institute for Supply Management. The proposed index dominates the PMI as an indicator of the growth rates of real GDP and of industrial production. Moreover, as a stand-alone indicator of business cycle turning points, the new index is superior in timeliness to the Conference Board’s composite coincident index, and equal to it in consistency.
B6—Quart. J. Bus. Econ.
B8—42 (1 and 2), pp. 41-56
C4—
B4—University of Houston-Downtown

AEA category—G12, G10
B1—George Athanassakos and Madhu Kalimipalli
B2—Analyst Forecast Dispersion and Future Stock Return Volatility
C2—In this paper, we examine the relationship between analysts’ forecast dispersion and future stock return volatility using monthly data for a cross section of 160 U.S. firms from 1981 to 1996. We find that there is a strong and positive relationship between analysts’ forecast dispersion and future return volatility. The dispersion measure has incremental information content even after accounting for market volatility. These results are robust across sub-sample periods and sub-samples based on the number of analysts following a firm, forecast dispersion, and market capitalization. There is also a strong seasonal relationship between the dispersion measure and future volatility. The importance of dispersion on future return volatility is high in January and the first few months of the year and declines thereafter. Such information content of analysts’ earnings forecast dispersion is of great importance for active portfolio management, option pricing, and arbitrage trading strategies.
B6—Quart. J. Bus. Econ.
B8—42 (1 and 2), pp. 57-78
C4—
B4—Wilfrid Laurier University, Waterloo, Onstario, Canada

AEA category—G21, G24
B1—Gregory M. Hebb and Donald R. Fraser
B2—Conflict of Interest in Commercial Bank Security Underwritings: United Kingdom Evidence
C2—The recent repeal of the Glass-Steagall Act in the United States has cleared the way for commercial banks to enter the securities underwriting business. Many of the concerns that resulted in the original passage of the Glass-Steagall Act, however, still exist. One of these is the possible conflict of interest a universal bank faces. This paper provides evidence on this issue from the experience of the United Kingdom following its removal of restrictions on commercial bank ownership of investment banks more than a decade before the United States. We find that ex ante yields of commercial bank underwritten corporate bonds generally do not differ from that of investment bank underwritten issues. The longer time period available from the UK experience also provides a unique opportunity for additional ex post tests not previously available in U. S. tests of the conflict of interest hypothesis. These ex post tests suggest no significant longer-term differences in ex post performance of the two samples. We thus find no evidence that would support the conflict of interest argument.
B6—Quart. J. Bus. Econ.
B8—42 (1 and 2), pp. 79-96
C4—
B4—Dalhouse University, Halifax, Nova Scotia, Canada; Texas A&M University, College Station, TX

AEA category—G10; G12; G14; G35
B1—Kartono Liano, Gow-Cheng Huang, and Herman Manakyan
B2—Market Reaction to Open Market Stock Repurchases and Industry Affiliation
C2—This study conducts an inter-industry comparison of open market common stock repurchases to identify the role of industry affiliation in the magnitude of the short- and long-term returns to firms following the repurchase announcements. Results indicate that stock repurchasing firms enjoy significant positive excess returns during the five-day announcement window, with significant differences across industry groups. Stock repurchasing firms overall do not outperform their industry peers in the long run, however, though firms from different industries exhibit differential long-term perform¬ance subsequent to the repurchase announcement. Consequently, industry affiliation is important in the analysis of stock buybacks.
B6—Quart. J. Bus. Econ.
B8—42 (1 and 2), pp. 97-120
C4—
B4—Mississippi State University, Mississippi State, MS; Alabama State University, Montgomery, AL; Salisbury University, Salisbury, MD

AEA category—G12
B1—Don U. A Galagedera, Darren Henry, and Param Silvapulle
B2—Empirical Evidence on the Conditional Relation Between Higher-Order Systematic Co-Moments and Security Returns
C2—This paper contributes to the debate on whether systematic higher-order co-moments are able to explain the cross-sectional security returns. We argue that a possible reason for inconclusive evidence in the previous studies might be the failure to accommodate market movements in the analysis. We estimate two risk premiums for each systematic variance, systematic skewness and systematic kurtosis corresponding to the up market (positive excess market returns) and the down market (negative excess market returns). The results show that in the up market, the beta risk premium is positive and the co-skewness risk premium has the opposite sign to the up market skewness. In the down market, the beta risk premium is negative and the co-skewness risk premium has the same sign as the up market skewness. The systematic co-kurtosis does not appear to be priced.
B6—Quart. J. Bus. Econ.
B8—42 (1 and 2), pp. 121-138
C4—
B4—Monash University, Victoria, Australia; La Trobe University, Melbourne, Australia; Monash University, Victoria, Australia

AEA category—J51
B1—Wayne Edwards and Scott M. Fuess, Jr.
B2—Declining Unionization: Further Analysis of the ‘Fringe Benefits’ Effect
C2—Benefits have become a more prominent component of compensation. As a result, it has been suggested that support for organized labor has been diluted. New research reports that as fringe benefits have become more prominent, ceteris paribus, unionization has been adversely affected. This study looks for further evidence of a “fringe effect,” by analyzing the diverse industries asso¬ciated with manufacturing. With data for 1983-1996 for twenty sub-sectors of U.S. manufacturing, we confirm a “fringe effect,” but the effect varies sub¬stantially across industries.
B6—Quart. J. Bus. Econ.
B8—42 (1 and 2), pp. 139-150
C4—
B4—University of Alaska, Anchorage, AK; University of Nebraska, Lincoln, NE

AEA category—E31, R10
B1—Hiranya K. Nath
B2—Relative Price Changes as Supply Shocks: Evidence from U.S. Cities
C2—This paper estimates a fixed effects regression model using panel data on prices for U.S. cities to test the supply-side theory of inflation that takes the distribution of relative price changes as an aggregate supply shock. The results indicate that the positive correlation between inflation and relative price variability is a robust empirical regularity that gives some credibility to the supply-side theory of inflation. During the early 1980s, however, this relationship, though positive, weakens, indicating predominance of monetary shocks in determining changes in the aggregate price level. On the other hand, inflation and skewness are not found to be strongly related when aggregate macroeconomic effects are controlled.
B6—Quart. J. Bus. Econ.
B8—41 (3 and 4), pp. 3-20
C4—
B4—Sam Houston State University, Huntsville TX

AEA category—M49
B1—Sharad Asthana and Roland Lipka
B2—Management of Defined-Benefit Pension Funds and Shareholder Value
C2—This paper examines the determinants of portfolio management of defined-benefit pension funds and the impact of portfolio management on shareholder value. We present evidence that managers of funds that perform poorly (well), relative to funds with similar risk profiles, are more (less) likely to reallocate their pension assets in the following period. Moreover, poorly (well) performing funds, relative to funds with similar risk profiles, are more (less) likely to improve their performances in the subsequent period. The effect on shareholders is mixed. The market reacts negatively to the increase in portfolio risk, while the reaction to improved performance is positive. The results persist even after controlling for financial structure and pension characteristics. This paper contributes to our understanding of the link between shareholder value, the management of pension funds, and the factors that influence the decision making process of fund managers. Pension plan adjustments and improvement in performance are reliably predictable. They impact future earnings and, although not an integral part of core earnings, do reduce future pension costs. Thus, earnings forecasts should incorporate the effects of these predictable adjustments on earnings.
B6—Quart. J. Bus. Econ.
B8—41 (3 and 4), pp. 49-70
C4—
B4—Temple University, Philadelphia PA

AEA category—G21, F34
B1—Martin Schüler
B2—The Threat of Systematic Risk in European Banking
C2—This paper attempts to assess changes in the systemic risk potential in Euro¬pean banking. Following De Nicolo and Kwast (2002), mean rolling-window correlations between bank stock returns are used as a measure for the interde¬pendencies among European banks and, hence, for the systemic risk potential in Europe. I eliminate national influences on stock returns by estimating a return-generating model. There is some evidence that interdependencies among European banks have increased over the past 15 years and that the potential of systemic risk at the European level has increased.
B6—Quart. J. Bus. Econ.
B8—41 (3 and 4), pp. 145-165
C4—
B4—Zentrum für Europäische Wirtschaftsforschung GmbH, Mannheim, Germany

AEA category—G21
B1—James E. McNulty
B2—Lender Liability Involving Breach of Contract and the Value of Banking Relationship: A Survey and Interpretation
C2—This paper summarizes financial theory and empirical studies related to the case law on lender liability, focusing particularly on breach of contract. Lender liability reflects asymmetric information, market imperfections, and transactions costs. It appears to arise in part from agency problems between the bank and the loan officer. Damage awards from lender liability cases illustrate that the value of a bank loan relationship is substantial.
B6—Quart. J. Bus. Econ.
B8—41 (3 and 4), pp. 83-94
C4—
B4—Florida Atlantic University, Boca Raton, FL

AEA category—G11
B1—John E. Cresson
B2—R2: A Market-Based Measure of Portfolio and Mutual Fund Diversification
C2—The ability to diversify a portfolio across a broad range of stocks leads to effi¬cient risk-sharing, but how do investors know if they are well-diversified? There are many commonly accepted measures of corporate diversification, but measures of portfolio and mutual fund diversification are lacking. Barnea and Logue (1973) argue that R2 from the market model regression is a measure of diversification. In this study, I evaluate R2 as a valid measure of portfolio and mutual fund diversification. I provide evidence that diversified portfolios and diversified mutual funds have significantly higher R2s than undiversified port¬folios and undiversified mutual funds, respectively. With the complexities of portfolio theory and the varied educational backgrounds of stockholders, an unambiguous, objective, and easily calculated measure of diversification such as R2 is of great value.
B6—Quart. J. Bus. Econ.
B8—41 (3 and 4), pp. 115-144
C4—
B4—Southeastern Louisiana University, Hammond, LA

AEA category—G32,G30, G24
B1—Amani Khaled Bouresli, Wallace N. Davidson III, and Fayez A. Abdulsalam
B2—Role of Venture Capitalists in IPO Corporate Governance
C2—We find that corporate insiders control fewer board seats both before and after an IPO when a venture capital firm has provided capital to the firm. When venture capital firms supply capital to corporations they take an active role in the governance structure. In particular, we find that before and after an IPO, corporate insiders control fewer board seats when there is venture capital financing. Non-venture capital outsiders control more board seats when venture capital firms are involved. In addition, the CEOs of venture capital-backed firms own fewer shares of stock. We conclude that venture capital financing is associated with a more independent governance structure.
B6—Quart. J. Bus. Econ.
B8—41 (3 and 4), pp. 71-82
C4—
B4—Kuwait University, Kuwait; Southern Illinois University, Carbondale, IL; Kuwait University, Kuwait

AEA category—
B1—Edward Nissan
B2—Changes in the Size Structure of the World’s Largest Banks by Country
C2—Using data on assets of the major banks of 29 countries, this paper compares these countries in terms of totals and averages. The paper also compares asset concentration among the leading banks of those 29 countries using the Herfin¬dahl and Theil’s entropy indexes for measuring concentration. Special comparisons are made among the leading countries. The paper also looks at banking laws and regulations that may impact the levels of concentration among the countries.
B6—Quart. J. Bus. Econ.
B8—41 (3 and 4), pp. 21-48
C4—
B4—University of Southern Mississippi, Hattiesburg, MS

AEA category—G14
B1—Shigeyuki Hamori, David A. Anderson, and Naoko Hamori
B2—Stock Returns and Real Activity: New Evidence from the United States and Japan
C2—If stock prices reflect the fundamentals of their value, there should be a close relationship between stock returns and expected future real activity. Fama (1990) finds that stock returns are a significant predictor of future real activity for the period from 1953 to 1987 in the United States. This paper confronts these issues with new data, and makes comparisons across two time periods and countries. We examine whether Fama’s earlier findings are relevant to the new economy and analyze data from the two largest economies in the world: the United States and Japan. The findings indicate considerable differences in the relationship between stock returns and production growth rates across time and cultures. The results also suggest a breakdown in the explanatory power of stock returns over the past fifteen years, perhaps resulting from speculative bubbles and other persistent economic anomalies.
B6—Quart. J. Bus. Econ.
B8—41 (3 and 4), pp. 95-114
C4—
B4—Kobe University, Japan; Centre College, Danville, KY; University of Marketing and Distribution Sciences, Japan

AEA category—G35, G21
B1—Ross N. Dickens, K. Michael Casey, and Joseph A. Newman
B2—Bank Dividend Policy: Explanatory Factors
C2—This study identifies factors that explain bank dividend policy by adapting the Barclay, Smith, and Watts (1995) model. Our model uses investment opportu¬nities, capital adequacy, size, signaling, ownership, dividend history, and risk to explain dividend payments. Empirical analysis suggests a negative relation¬ship between dividend payments and investment opportunities, signaling, ownership, and risk and a positive relationship to size and dividend history. Our results lead to five guidelines for making dividend payout decisions.
B6—Quart. J. Bus. Econ.
B8—41 (1 and 2),
C4—
B4—University of South Alabama, Mobile, AL; University of Central Arkansas at Conway, Conway, AR; Marshall University, Huntington, WV

AEA category—G35
B1—Zahid Iqbal and Mohammad Habibur Rahman
B2—Operational Actions and Reliability of the Signaling Theory of Dividends: An Investigation of Earnings Anomaly Following Dividend Cuts and Omissions
C2—The signaling theory of dividends provides no information on dividend cuts and omissions by firms that undertake operational actions to improve performance. Do managers of these firms reduce dividends to signal a decrease in future earnings? This issue may explain the anomalous findings in prior studies that earnings rise following dividend cuts and omissions. We find that firms who cut or omit dividends in conjunction with other operational measures experience an earnings increase, while firms without an operational measure show no earnings increase. Furthermore, a dividend cut is a reliable signal of poor future earnings for profitable firms in the nonaction group.
B6—Quart. J. Bus. Econ.
B8—41 (1 and 2),
C4—
B4—Texas Southern University, Houston, TX; York Center for Asian Research

AEA category—J33
B1—H. Young Baek and José A. Pagán
B2—Executive Compensation and Corporate Production Efficiency: A Stochastic Frontier Approach
C2—This study uses 1992-1998 data on the S&P 1500 firms to study the relationship between executive pay and technical productive efficiency. The parameters of a stochastic frontier production function are estimated simultaneously with the firm-specific inefficiency effects in a panel framework. After controlling for industry and firm size, the level of CEO total compensation is positively related to technical efficiency. Annual salary and the value of restricted stocks and stock options as a percentage of total compensation, however, are both negatively related to technical efficiency. Number of years as a company CEO is also negatively related to technical efficiency. In all, the results suggest that both the level and the structure of CEO compensation are important factors when assessing the technical efficiency and economic performance of firms.
B6—Quart. J. Bus. Econ.
B8—41 (1 and 2),
C4—
B4—Nova Southeastern University, Fort Lauderdale, FL; University of Texas—Pan American, Edinburg, TX

AEA category—
B1—Gregory E. Goering and Michael K. Pippenger
B2—Managerial Incentives and Strategic Investor Behavior
C2—Using a simple two-stage duopoly model, we demonstrate that risk-averse investors generally will not wish a firm’s manager to maximize the value of the firm due to the strategic (commitment) impact of managerial incentive contracts. Hence, we cannot assume that risk aversion necessarily implies that investors will wish contracts, incentives, and executive compensation to be based purely on maximizing firm value. We show that an executive’s incentive package will cause the manager to act as if investors are less risk-averse than they actually are. This, of course, indicates that firm behavior and the observed selection of risky projects may not be a good measure of investors’ true risk preferences due to the distortions caused by strategic industry effects. Thus, the strategic value of managerial incentives, which is inherently linked to the industry structure of the firm’s product market, cannot be ignored when examining investor behavior.
B6—Quart. J. Bus. Econ.
B8—41 (1 and 2),
C4—
B4—University of Alaska, Fairbanks, AK

AEA category—
B1—Stephen P. Keef and Melvin L. Roush
B2—The Weather and Stock Returns in New Zealand
C2—We examine how the daily returns of the Value-Weighted All Shares Stock Index of the New Zealand Stock Exchange are influenced by different facets of Wel¬lington’s weather. The period studied is June 1986 to October 2002. Factor analysis of eight weather variables results in the extraction of three distinct factors: CLOUD, TEMP and WIND. OLS regression and bootstrap-t methods are used to test the implied hypotheses. CLOUD has no influence on returns. TEMP has a small influence on returns. WIND has a significant influence on returns. This latter result should not come as a surprise to those who live in, or have visited, Wellington, New Zealand.
B6—Quart. J. Bus. Econ.
B8—41 (1 and 2),
C4—
B4—Victoria University of Wellington, New Zealand

AEA category—G14
B1—Ming-Ming Lai, Balachandher K. Guru, and Fauzias Mat Nor
B2—An Examination of the Random Walk Model and Technical Trading Rules in the Malaysian Stock Market
C2—This paper examines the predictability of technical trading rules on the daily returns of the Kuala Lumpur Stock Exchange Composite Index for the full-sample period from January 1977 to December 1999 which includes both bullish and bearish periods. The methodology employed includes both the variance ratio test and moving average rules. The results indicate non-randomness of successive price changes. The degree of predictability is supported as the trading rules examined indicate technical attractiveness with the presence of transaction costs.
B6—Quart. J. Bus. Econ.
B8—41 (1 and 2),
C4—
B4—Multimedia University, Selangor Darul Ehsan, Malaysia Multimedia University, Selangor Darul Ehsan, Malaysia, Universiti Kegangsaan, Malaysia

AEA category—O18
B1—Rob Roy McGregor and Gaines H. Liner
B2—Municipal Economic Growth, 1960-1990
C2—This study uses a sample of 597 U.S. municipalities to examine the effects of municipal characteristics in 1960 on municipal population and income growth over the subsequent three decades. This work builds on the analysis of municipal economic growth presented by Glaeser, Scheinkman, and Shleifer (1995). Using a much larger sample of U.S. municipalities (597 versus 203), the results affirm the robustness of several of their key conclusions. The larger sample also produces evidence of convergence across municipalities in levels of per capita real income. A sensitivity analysis of the results suggests that human capital is the most important determinant of municipal economic growth.
B6—Quart. J. Bus. Econ.
B8—41 (1 and 2),
C4—
B4—University of North Carolina at Charlotte, Charlotte, NC 28223

AEA category—G14, B42
B1—Glenn N. Pettengill and John M. Clark
B2—Estimating Expected Returns in an Event Study Framework: Evidence from the Dartboard Column
C2—This paper examines methodological issues surrounding estimation of abnor¬mal returns in an event study framework. We study a bias in estimating expected returns when applying the market model to study samples that include momentum securities. Based on this bias, an alternative method for estimating expected return is recommended. Numerous event studies have examined the performance of stocks recommended by investment professionals. We argue that these recommendations have a tendency to involve momentum securities. To examine these issues we study recommendations made in the well-known Wall Street Journal Dartboard contest. We find that these securities are indeed momentum securities and that application of the market model provides biased results.
B6—Quart. J. Bus. Econ.
B8—40 (3), pp. 3-22
C4—
B4—Emporia State University, Emporia, Kansas; University of Missouri-Kansas City, Kansas City, Missouri

AEA category—G15
B1—Mahfuzul Haque, M. Kabir Hassan, Oscar Varela
B2—Stability, Volatility, Risk Premiums, and Predictability in Latin American Emerging Stock Markets
C2—This study investigates the stability, volatility, risk premiums, and persistence of volatility in the standardized 1988-98 exchange-converted U.S. dollar equity returns of Argentina, Brazil, Chile, Columbia, Mexico, Peru, and Venezuela. All markets, except for Argentina, Colombia, and Mexico, have time-varying risk premiums, indicative of risk aversion, and all markets have ARCH/GARCH effects, except for Venezuela, which also offers the best potential diversification gains because of low correlation. This study also investigates returns’ predictability both in U.S. dollars and local currency. The predictability results are mixed, with better results when using local currency. The non-parametric runs test rejects weak form efficiency for all markets. Venezuela and Chile are not stable. Residual kurtosis or fat tails are present in all markets; Argentina, Colombia and Peru have serial correlation; and shocks to volatility are persistent only in Brazil. In general, Latin American emerging markets have shown remarkable performance using return to risk measures; predictability seems mixed; and the Latin American emerging markets have volatility clustering with shocks that decay with time.
B6—Quart. J. Bus. Econ.
B8—40 (3), pp. 23-44
C4—
B4—Indiana State University, Terre Haute, IN; University of New Orleans, New Orleans, LA; University of New Orleans, New Orleans, LA

AEA category—G33
B1—Paul J. Haensly, John Theis, Zane Swanson
B2—Reassessment of Contagion and Competitive Intra-Industry Effects of Bankruptcy Announcements
C2—We investigate the effects of bankruptcy on equity value of the bankrupt firm’s competitors and find that these effects are unclear. Using a sample of bank¬ruptcies with debt over $120 million, Lang and Stulz (1992) find competitive and contagion effects on other firms in the same industry. We replicate their stratification of industry portfolios by concentration and leverage but use a sample of bankruptcy filings from a single legal regime. Our tests do not sup¬port their conclusions. Furthermore, use of a debt screen on bankruptcies appears to confound the conclusions, because test significance depends on the debt screen applied.
B6—Quart. J. Bus. Econ.
B8—40 (3), pp. 45-64
C4—
B4—University of Texas of the Permian Basin, Odessa, TX; University of Texas of the Permian Basin, Odessa, TX; Emporia State University, Emporia, KS

AEA category—G14, Q11, C32
B1—Leo Chan and Donald Lien
B2—Cash Settlement and Price Discovery in Futures Markets
C2—In this paper, we examine how cash settlement affects the ability of the futures market to predict future spot prices. Adopting the Geweke feedback measure, we find that the feeder cattle futures contract improves its price discovery function after the cash settlement was adopted in August 1986. Moreover, spot and futures markets become more integrated thereafter. We also consider the case in which the cash settled lean hog futures contract replaced the physical delivery settled live hog futures contract in December 1996. Herein the conclusion is drastically different. After cash settlement was adopted, the futures market is less effective in price discovery. Further, spot and futures markets are more segmented.
B6—Quart. J. Bus. Econ.
B8—40 (3), pp. 65-78
C4—
B4—College of Wooster, Wooster, Ohio; University of Texas-San Antonio, San Antonio, TX

AEA category—
B1—Sanjay Gupta and Charles D. Bailey
B2—The Role of Performance Plans in Mitigating Agency Problems: An Empirical Examination
C2—This paper examines the role of performance plans in mitigating managers’ short-term decision orientation and risk-averse behavior. With capital expenditure levels as a proxy for long-term decision orientation, the study uses regression analysis to examine a period of eight years surrounding the adoption of a performance plan.
The results indicate a greater post-adoption increase in capital expenditures for adopting than non-adopting firms. Two moderating factors, investment opportunity set and internally generated cash, are found to be important; performance plans appear to align capital expenditures with the availability of investment opportunities and internal cash. Performance plan adoption decreases total and systematic risk, however, indicating that managers of adopting firms may become more risk-averse.
B6—Quart. J. Bus. Econ.
B8—40 (3), pp. 79-100
C4—
B4—Valdosta State University, Valdosta, Georgia; University of Central Florida, Orlando, Florida

AEA category—G10
B1—Paul Haensly, Niranjan Tripathy, and Daniel Peak
B2—Tracking Error in the Dow Jones Industrial Average Versus Alternative Market Indices: New Evidence
C2—This study investigates whether changes in the Dow Jones Industrial Average (DJIA) adequately track changes in the U.S. stock market by comparing DJIA changes during a given time period with contemporaneous changes in alterna¬tive market indices. Earlier studies show that change in the DJIA is an unbiased predictor of change in capitalization of value-weighted portfolios of the Dow Jones Industrials (DJI) or the S&P 500. The authors observe that the DJIA exhibits a systematic tendency to overstate contemporaneous changes in market capitalization versus value-weighted portfolios of either the DJI or S&P 500. The authors also find that the DJIA exhibits significant and system¬atic tracking error as a measure of change in total wealth in the market.
B6—Quart. J. Bus. Econ.
B8—40 (3), pp. 101-116
C4—
B4—University of Texas of the Permian Basin, Odessa, Texas; University of North Texas, Denton, Texas; University of North Texas, Denton, Texas

AEA category—G14
B1—Eric James Higgins and David R. Peterson
B2—The Significance of Serial Cross-Correlations After Controlling for a Specific Factor Structure in Security Returns
C2—Two important sources of predictability in security returns are serial cross-correlations and time-varying factors. Hameed (1997) finds that serial cross-correlation patterns in security returns do not exist after controlling for a general, time-varying factor structure in returns. This paper finds significant serial cross-correlations in daily returns after controlling for autocorrelation and the Fama and French (1993) factors. When returns are conditioned on prior market-wide information, serial cross-correlations in daily returns are found to be significant only after bad news.
B6—Quart. J. Bus. Econ.
B8—40 (3), pp. 117-140
C4—
B4—Kansas State University, Manhattan, Kansas; Florida State University, Tallahassee, Florida

AEA category—G34
B1—Carolyn Carroll and John M. Griffith
B2—Free Cash Flow, Leverage, and Investment Opportunities
C2—Do firms have excess financial capacity and do they use this extra capacity to finance negative NPV projects? A firm that has excess financial capacity has high free cash flow and excess debt capacity. To examine this question, we select a group of firms that we know tend to adopt negative NPV projects. We find that white knights lack positive NPV projects and waste free cash flow and excess debt capacity on buying value-decreasing targets rather than pay it out to shareholders. On the other hand, hostile bidders generally do not have high free cash flow and the few that do, apparently do not waste it by buying bad targets.
B6—Quart. J. Bus. Econ.
B8—40 (3), pp. 141-153
C4—
B4—University of Alabama, Tuscaloosa, Alabama; Old Dominion University, Norfolk, Virginia

AEA category—G14, G21, G32, D82
B1—Robert M. Hull
B2—Stock Offerings, Issue Costs, and Bank Debt Reductions
C2—Prior stock-for-debt research compares announcement period stock returns between bank debt reductions and nonbank debt reductions. The research finds that returns for bank debt reductions are significantly more negative than nonbank debt reductions. In this paper, we examine whether the more negative returns are caused by issue costs. We find that firms retiring bank debt have greater issue costs. We show that these greater issue costs help explain why returns for bank debt reductions are significantly more negative than returns for nonbank debt reductions
B6—Quart. J. Bus. Econ.
B8—40 (2), pp.
C4—
B4—Washburn University, Topeka, Kansas

AEA category—G14
B1—Greg Filbeck and Shelly E. Webb
B2—Information Asymmetries, Managerial Ownership, and the Impact of Layoff Announcements on Shareholder Wealth
C2—In this paper, we test the impact of layoff announcements on share price returns with respect to the magnitude of the layoff on the total firm workforce, the level of inside ownership, and the firm size; while controlling for the number of employees, the level of institutional ownership, and profitability. We find a statistically significant negative share price response associated with layoff announcements, with layoffs constituting a greater percentage of a firm’s workforce resulting in larger negative share price responses. Using an information asymmetry framework, we discover that firm size significantly explains the cross-sectional distribution of share price responses to layoff announcements. However, we find no evidence of a relationship between the insider ownership and share price response to layoff announcements.
B6—Quart. J. Bus. Econ.
B8—40 (2), pp.
C4—
B4—Schweser Study Program, LaCrosse, WI; Xavier University, Cincinnati, OH

AEA category—
B1—Arun J. Prakash, Raul Moncarz, and Gary A. Anderson
B2—An Empirical Investigation of the Stability of the Risk Measures of Latin-American Common Stocks Through Their Underlying Return-Generating Processes
C2—A recent empirical study (Prakash, Moncarz, and deBoyrie, 2002) found that the rates of return probability distribution of neither the market index nor the individual stocks traded in the Latin American capital markets conform to the Gaussian (standard univariate normal) distributions. Hence, the pricing of assets in these markets may be better modeled through the Kraus and Litzenberger (1976) three-moment Capital Asset Pricing Model (CAPM) rather than Sharpe’s two-moment CAPM. If that is the case, then the underlying return-generating process will be the quadratic characteristic line model for the three-moment CAPM rather than the linear characteristic line model of the two-moment CAPM. This paper examines the stability of the parameters of these two alternative characteristic line models (which proxy for measures of market risk) over three non-overlapping regimes during the period examined. The study finds that, in general, these parameters are stable for individual stocks over our chosen sample period.
B6—Quart. J. Bus. Econ.
B8—40 (2), pp.
C4—
B4—school affiliation

AEA category—G14
B1—Frederick P. Schadler and Stanley G. Eakins
B2—Merrill Lynch’s Focus Stock Picks: A Test of Analysts’ Stock Picking Ability
C2—This paper tests the market reaction and the holding period performance of the recommendation by Merrill Lynch Corporation of a stock being placed on their Focus Stocks list. Being placed on this list indicates the stock carries a strong buy recommendation. We find the firms being placed on the list respond to the positive information by generating positive announcement date abnormal returns. We also find these abnormal returns on the two days prior to the announcement. The performance of the portfolio of all Focus Stocks results in insignificant holding period abnormal returns. Stocks remaining on the list for the initially recommended 1-year holding period do beat the market. The stocks removed by Merrill Lynch prior to the recommended 1-year period do not perform better than the market. Our results provide support for semi-strong efficient markets since investors cannot identify ex ante which stocks will be removed early.
B6—Quart. J. Bus. Econ.
B8—40 (2), pp.
C4—
B4—East Carolina University, Greenville, North Carolina; East Carolina University, Greenville, North Carolina

AEA category—G14
B1—Walayet A. Khan and Asjeet S. Lamba
B2—The Effectiveness of Legal Sanctions in Curtailing Insider Trading: Evidence From Exchange Listings
C2—In this paper, we examine whether a tightening of legal sanctions on insider trading via the implementation of the Insider Trading Sanctions Act (ITSA) in 1984 has affected the trading behavior of insiders where traders have the flexibility of trading on their private information over a long period of time to potentially obscure their trades from regulatory authorities. There is evidence to indicate that ITSA may not have had a deterrent effect on the trading behavior of insiders because insiders prosecuted for illegal trading generally do not suffer high penalties and typically only have to repay the profits earned on their trades (Meulbroek, 1992). The specific event around which we examine the trading behavior of corporate insiders before and after the ITSA is exchange listings by NASDAQ firms. Exchange listings are events initiated by NASDAQ firms in close consultation with exchange officials and which are accompanied by significant positive abnormal returns before and at their announcement. This gives managers/insiders the incentive to purchase shares on personal account over a period of time when a decision on the listing application is pending. Given the imposition of substantial legal penalties after the passage of ITSA, we examine whether the behavior of insiders around the exchange listing event has changed significantly. We find that insiders continue to be net purchasers of their firm’s stock around the listing event before and after the passage of ITSA. These findings differ from previous research on the effect of the passage of ITSA, where researchers have found that ITSA has had a deterrent effect on the trading behavior of insiders around events such as tender offers and seasoned equity offerings. We argue that these results cannot be generalized to events such as exchange listings where insiders have the ability to trade over a long period of time before the release of material information.
B6—Quart. J. Bus. Econ.
B8—40 (1), pp. 3-16
C4—
B4—University of Evansville, Evansville, IN; University of Melbourne, Parkville, Victoria Australia

AEA category—D210, D240, L190
B1—Charles E. Hegji
B2—Fixed Cost, Marginal Cost, and Market Structure
C2—The paper examines the impact of cost-reducing expenditures on output, profit and number of firms under alternative market structures. A unique feature of the model is that it explicitly introduces a function linking reduction in marginal cost to an increase in fixed expenditures, and allows the firm to choose a profit-maximizing level of fixed costs. This results in a better representation of long-run equilibrium than earlier studies, which treat fixed cost as exogenous.
The model considers both blocked and free entry. Output and profit under blocked entry are found to be sensitive to both vertical and horizontal market growths. The principle finding is that the optimal choice of fixed costs results in the equilibrium number of firms being more sensitive to vertical market growth than had previously been thought.
B6—Quart. J. Bus. Econ.
B8—40 (1), pp. 17-24
C4—
B4—Auburn University at Montgomery, Montgomery, Alabama

AEA category—D23, L80
B1—Kris Joseph Knox, Eric C. Blankmeyer, J. R. Stutzman
B2—Organizational Structure, Performance, Quality and Administrative Compensation in Texas Nursing Facilities
C2—This study examines the link between pay of the top administrator and the firm’s performance by comparing profit-seeking versus nonprofit nursing facilities in Texas. Using both cost and profit functions to measure resource allocation by management, we rank various nursing facility classifications in terms of cost efficiency and overall economic efficiency (that is, both cost and price efficiency). Our empirical compensation function reflects both agency performance measures and variables suggested by the human-resource market model—firm size, degree of risk taking, sales and capacity utilization, and quality. Although we find that the administrators of more efficient profit-seeking firms are better paid than their nonprofit counterparts, the statistical evidence is not as convincing as financial economic-agency theorists would assert. While quality of care has no systematic impact on administrative compensation in Texas nursing facilities, we believe that the compensation market model is more viable than the pay-performance paradigm.
B6—Quart. J. Bus. Econ.
B8—40 (1), pp. 45-67
C4—
B4—Texas A&M University at Galveston, Galveston, TX; Southwest Texas State University, San Marcos, TX; Southwest Texas State University, San Marcos, TX

AEA category—L91
B1—Patricia M. Poli and Carl A. Scheraga
B2—A Quality Assessment of Motor Carrier Maintenance Strategies: An Application of Data Envelopment Analysis
C2— This study seeks to extend the literature examining the relative importance of service and cost as determinants of the transportation choice decision in the motor carrier industry by investigating the quality of maintenance operations. The high replacement cost of equipment and its increasing age contribute to the need for efficient, high quality maintenance operations. Of particular importance in this study is the perception of the safety of the carriers’ service measured by the Quest for Quality’s equipment quality rating.
Data envelopment analysis is utilized to identify the causes of inefficiencies in maintenance strategies and their impact on firms’ quality rating performance. A sample of 160 observations is examined over the period 1990-1997 and it is found that only 8 percent of the observations are classified as efficient with respect to the maintenance operation as it affects the quality of service. It is determined that significant reductions and changes in the maintenance cost mix are needed to attain the quality level demanded by shippers.
B6—Quart. J. Bus. Econ.
B8—40 (1), pp. 25-44
C4—
B4—Fairfield University, Fairfield Connecticut

AEA category—M41
B1—Scott B. Jackson and William E. Wilcox
B2—Do Managers Grant Sales Price Reductions to Avoid Losses and Declines in Earnings and Sales?
C2—The financial press is replete with examples of how companies purportedly manage earnings to meet short-term financial reporting targets. In this study, we investigate whether managers grant sales price reductions in the fourth quarter to accelerate customers’ purchases and, as a result, avoid losses and declines in earnings and sales. While granting sales price reductions may allow firms to meet short-term financial reporting losses, it is arguably harmful to them in the long run. Consistent with expectations, the results of univariate and multivariate tests indicate that firm managers grant sales price reductions in the fourth quarter to meet annual financial reporting target.
B6—Quart. J. Bus. Econ.
B8—39 (4), pp. 3-20
C4—
B4—University of Texas at San Antonio, San Antonio, Texas; Bradley University, Peoria, Illinois

AEA category—M41
B1—Dominic Peltier-Rivest and Steve Swirsky
B2—Earnings Management in Healthy Firms
C2—Earnings management is a frequent subject of positive accounting research because of its importance to a wide range of constituencies. This study uses a multivariate regression analysis to examine the determinants of earnings management in 161 healthy firms. Healthy firms are defined as those that did not experience a loss for five years in a row.
Most studies in positive accounting research examine samples of firms that include both healthy and financially distressed firms. These studies assume implicitly that contracting incentives have the same effect on the accounting choices of distressed firms as those of healthy firms and that the marginal cost of managing earnings is the same for both types of firms. However, this paper focuses on healthy firms only.
The results provided in this paper indicate that the closer a healthy firm is to violating its debt covenant restrictions, the more likely its managers will make income-increasing accounting choices. Healthy firms also have incentives to adopt income-decreasing accounting choices when involved in labor negotiations with their unions. However, the results do not support earnings management due to government lobbying or top executive changes. This suggests that, for healthy firms, the benefits from these types of earnings management are too low to influence managers’ accounting choices.
B6—Quart. J. Bus. Econ.
B8—39 (4), pp. 21-37
C4—
B4—Concordia University, Montreal, Quebec, Canada; Florida State University, Tallahassee, Florida

AEA category—G12
B1—David Porras and Melissa Griswold
B2—The Value Line Enigma Revisited
C2—This paper reexamines the Value Line enigma documented in Copeland and Mayers (1982). Copeland and Mayers find that between 1965 and 1978 Value Line timeliness rankings yield statistically significant abnormal returned with evaluated with the market model. We extend this work over the period 1982-1995 using both the CAPM and the multifactor models of Fama and French (1993) and Carhart (1997). We find that the Value Line effect continues to hold. Like Copeland and Mayers, we find that this is a result of the abnormal negative performance of firms that Value Line ranks poorly, not the positive performance of firms it recommends.
B6—Quart. J. Bus. Econ.
B8—39 (4), pp. 38-49
C4—
B4—Quincy University, Quincy, Illinois

AEA category—G14
B1—Ken Johnston, Don R. Cox, and Tony Barilla
B2—A Reexamination of Institutions and Individuals at the Turn of the Year
C2—This study reexamines the findings of Sias and Starks (1997). They evaluate the tax-loss selling hypothesis and the window dressing hypothesis as explanations for the turn-of-the-year effect. After controlling for market capitalization, they find that stocks with a greater percentage of individual ownership outperform stocks with a greater percentage of institutional ownership at the turn of the year; consistent with the tax-loss selling explanation. This study reexamines the issue, adjusting for risk and controlling more closely for share price differences, and find results that support neither hypothesis.
B6—Quart. J. Bus. Econ.
B8—39 (4), pp. 50-58
C4—
B4—Georgia Southern University, Statesboro, GA; Appalachian State University, Boone, NC; Georgia Southern University, Statesboro, GA