A recent study by Larner [11] concluded that the managerial revolution analyzed earlier by Berle and Means [4] was close to completion because a large percentage of the nation's 200 largest nonfinancial corporations was controlled by nonowner managers. This finding makes more significant any substantial differences in financial performance that may exist between owner-controlled and manager-controlled firms, and it increases the potential impact of numerous related theories; for example, see Berle [3], Donaldson [5], Gordon [6, 7 ], Mason [14], Monsen and Downs [16], Williamson [21], and others.

By examining the annual data from 1937-1967, we found that odd-lot volume has become loss important in the market in recent years. Although the odd-lot trading volume has increased steadily in the absolute term since the end of World War II, the share of odd-lot trading in relation to total round-lot volume has been declining. By 1967, the percentage of odd-lot volume to round-lot total sales was down to 11.6 percent. The same data also indicate that odd-lot short sales have increased moderately since 1962; however, the volume is quite insignificant. The average of odd-lot short sales to total round-lot short sales for the 31-year period is only 1.9 percent. Odd-lotters were also found to be net purchasers during this period (1937-1967); however, odd-lotters have turned into net sellers in recent years. The total net sales from 1961 to 1967 amounted to 22.2 million shares, which is approximately 25 percent of the total net purchases of the entire period (1937-1967).

Many firms are short of capital. Investment opportunities offering positive net present values often exceed the amount of available internal financing. Management may either impose a capital budget constraint equal to the amount of internally generated funds or finance externally. Assuming that management chooses the latter, it must choose debt, preferred stock, common stock, or various forms or combinations of these securities. Controversy has surrounded the relative costs of debt and equity financing, but, recognizing the tax advantage of debt financing, most theorists agree that a firm will have some debt in its capital structure. This paper will not attempt to examine the important question of the optimal debt/equity ratio in the firm's capital structure but will assume that management has decided it is prudent to issue additional long-term debt. We will delineate the more modest question of the optimal size and timing of the long-term debt issues.

The current literature or business finance states that debt is a cheaper source of capital than stock (tending to reduce the firm's cost of capital), because interest is deductible for income tax purposes while the return to common stockholders is subject to tax. It is even possible to issue debt without increasing the risk to the owners (the debt is issued to stockholders in proportion to the ownership of stock, or equivalently investors buy a mixture of stocks and bonds on the market). However, it is argued in this paper that if we assume that the present stockholders have no further resources available for investment in the firm, but the enterprise needs additional resources, then the present stockholders have to make a basic decision about whether to issue stock or debt to raise the additional needed capital. The issuance of debt in this situation increases risk, and the issuance of stock dilutes ownership. Even when bondholders require a much lower contractual return than the expected annual return of stockholders, the issuance of more stock may be preferred to the issuance of debt.

Installment credit grantors require a method of distinguishing delinquent borrowers from whom an extension will be likely to result in repayment of the loans from those for whom the probability of repayment is too low to warrant further expenditure and against whom additional collection efforts would be unprofitable. A method evolved from the techniques utilized in the Marginal Credit Risk Study in the attempt to distinguish personal bankrupts, who in filing bankruptcy could be presumed to express the intent to not repay, from petitioners filing under Chapter XIII of the Bankruptcy Act and debt counselees who, under both plans, voluntarily enter programs for the repayment of their debts.

This study has addressed itself to that group most immediately affected in corporate acquisition, the stockholders of acquired companies. We find that in the years observed, acquired company stockholders seem to have benefited from the acquisitions. This study differs from other studies of post-merger performance of the common stock of acquirors and not the performance of securities received by acquirees in exchange for their common stock. It should also be noted that most of the financial gain resulting from the acquisitions accrued at the time of merger because of substantial premiums paid by acquirors. While the stockholders of the acquired companies have, on average, benefited, these results tell us little of the effect of mergers on the welfare of society or, for that matter, of their effect on the stockholders of the acquiring firm. If the merger cannot be justified on the basis of some economy of scale or synergistic advantage, the newcomers reap their lucrative returns only at the expense of the old guard. If the acquiring firm pays a premium in acquisition on the basis of justifiably sound expectations of increased profits, social welfare is not necessarily enhanced. Increased profitability may not reflect increased efficiency; it may, for example, be a manifestation of decay in the competitive environment.

One of the most vexing areas of business finance is empirical validation of theory. Many problems arise that the investigator cannot avoid. The purpose of this paper is to define a class of problems that can be avoided but that have caused many previous investigators difficulty, even though they may not have realized it. In what follows, the concept of dimensional analysis, borrowed from the physical sciences, is introduced. Then dimensional analysis is extended to the interpretation of estimated regression coefficients.

Consider the following linear programming problem, which is denoted by (S):The various vectors and matrices have the following dimensions:a = an m-vectorAj = (j = 1 … n), an m by njmatrix,bj = (j = 1 … n), an mj-vector,Bj = (j = 1 … n), an mj by nj matrix,Cj = (j = 1 … n), an nj-vector, andxj = (j = 1 … n), a variable nj-vector.

Problems with this decomposable structure have been extensively studied in economics and management science literature, because they arise in several economic contexts and situations. Therefore, (S) lends itself to more than one economic interpretation, but the following one is hereby adopted for the purposes of this paper: (S) models a two-level manufacturing organization, consisting of headquarters and n producing divisions. Let this organization be called simply “the company”. The company can produce and sell a number of different products, thereby obtaining fixed unit contributions. These contributions are given by the vectors c1, c2, … cn. The products are produced by the different divisions. The variable vector xj (j = 1 … n) gives the production program for the jth division.

If a firm is considering replacing part of its productive facility because of obsolescence rather than wear-and-tear (e.g., purchasing a new model machine), it weighs the expected gains against the expected costs. A problem may arise when the rate of technological innovation for the type of machinery is extremely rapid. Such replacement may yield a gain if made today, but because innovations are so rapid, a year's delay in replacement may yield a greater net gain, and it would seem wiser to wait the year. But each year the same reasoning seems to hold; the more rapidly innovations seem likely to occur, the more likely a firm is to delay. If technology is advancing quickly enough, a firm may never consider any time a good time for replacement.

Professor Basil Kalymon, in his recent article [1], correctly asserts that the appropriate variance for the portfolio selection model, reflecting portfolio risk, should measure the risks created “not only by the inherent fluctuations of returns, but also by the decision-maker's lack of perfect information about the parameters of his model” [1, p. 560]. He identifies a significant failing of portfolio selection models, that “the question of estimating the required parameters in the models has been largely sidestepped … by assuming that the parameter values are known” [1, p. 559]. By showing that error in estimating security returns is an important component of risk in portfolio selection models, Professor Kalymon has taken portfolio theory an important step forward.

In this note a distributed lag model is employed to analyze the flow of capital in outstanding issues of Canadian stocks between Canada and the United States. It is proposed that the movement of such capital reflects, to a large extent, changes in the relative earnings yield on stocks in the two markets.

Using the mean-variance model, Sharpe [5] and Lintner [4] have derived an equilibrium model for price determination under uncertainty. Jean [2] has tried to generalize this model so that other moments of the distribution will be taken into account. The purpose of this note is to show that unlike the Sharpe-Lintner model, Jean's results make no economic sense.

Unfortunately Professors Arditti and Levy (A-L) in their comment published in this issue of this journal did not realize that the determination of the investor optimum in my paper [1] was simultaneous with respect to the three parameters, the mean and the variance and the third moment of portfolio returns. When the nth moment was introduced, it was assumed that the investor chooses on the basis of all n parameters — the mean, second moment, third moment, etc. — through the nth moment.