Several studies indicate the presence of large abnormal returns accruing to shareholders of merged firms in the period immediately before the merger. For example, Mandelker [18] reports that stockholders of acquired firms earn abnormal returns of approximately 14 percent in the seven months preceding merger. Franks, Broyles, and Hecht [15] find abnormal returns of 26 percent for British firms during the four months prior to merger; Elgers and Clark [11] report 43 percent abnormal returns accruing over two years before merger to shareholders of acquired firms.

The effect of dividends on the valuation of securities has been a controversial subject in financial research in recent years. Since Miller and Modigliani [8] demonstrated the irrelevance of dividend policy, researchers have tested and attempted to explain market price reaction to firms’ dividend decisions. Explanations of market reactions to dividend policyhave centered around information issues and tax effects. Information issues have been empirically investigated by examining market reactions to announcements of dividend changes. The effect of differential tax treatments of dividends and capital gains usually has been examined through cross-sectional regression testing the significance of dividend yield in explaining returns. Any market return study of dividends, however, should consider both the potential information effect and the tax effect.

Corporate investment in an economy without a complete set of contingent claims markets has the characteristic of a public good in the sense that the stockholders’ consumption planscannot be separated from, but depend on, the specific investment plans of the firms. Drèze [4] has shown that a constrained Pareto optimal (CPO) allocation of investment in a stock market economy must satisfy a generalization of the Samuelson [24] condition for efficient production of public goods: the investment plan should maximize a weighted sum of the stockholders’ personal valuations of future output minus current input cost. However, except for those special cases in which CPO investment plans are unanimously supported by stockholders (see [17], [20], and [2]), the theory of the firm in incomplete markets lacks a suitable maximization criterion. Although the Drèze-Samuelson condition is a most appealing candidate, it is not unanimously preferred by stockholders, each of whom prefers that his or her own valuation of future output receives all the weight in the investment decision. Furthermore, the application of the Drèze-Samuelson condition depends on the correct revelation of stockholders’ preferences, which, in the absence of special inducements, cannot be expected from economic agents.

The purpose of this paper is to demonstrate how multiple regression software may be used for computing estimates of efficient set parameters and for performing tests of mean-standard deviation efficiency. Regression software also is shown to be useful for selecting, from a set of assets, a subset that maximizes performance and for comparing the performance of the set to the subset. The underlying multiple regression model fitted by the software has no relation to the analysis; the regression software is employed simply as a computing device. Since the multiple regression procedure is familiar to most finance researchers and since regression software is commonly available, the techniques presented here should be of wide interest.

Empirical studies in finance generally use data defined over the shortest return period available. Originally, data bases such as CRSP, tended to have data collected over monthly periods and most analyses tended to use monthly data rather than data compounded over periods greater than a month with the implicit argument that the more data the “better”. Since the development of data bases with data collected over shorter differencing intervals, there has been a growing tendency in finance to use returns data defined over increasingly shorter differencing intervals. This development is desirable, but is not without problems. The problem with using data defined over shorter differencing intervals is that, although greater estimating efficiency will be achieved, nontrading effects could be introduced into the analysis. These will lead to biased beta estimators and biases in tests of capital market efficiency. The purpose of this paper is to investigate, analytically, the interrelation of the intervaling and nontrading effects both in estimating beta factors and in testing capital market efficiency.

The question of whether security return distributions have a finite or an infinite variance has been debated for many years. The possibility that the security return-generating process actually has an infinite variance is particularly vexing since it implies that all statistical techniques and theoretical frameworks utilizing the second (or higher) moment are invalid. While this is clearly not a disaster—alternatives do exist—much of the work which has been done in the field of finance has assumed the existence of the second moment. It is, therefore, important to determine whether or not the security return distribution actually has a finite variance.

In the analysis of problems of choice under uncertainty, many results depend on the investigator's ability to determine the signs of certain integrals. A recently derived method of doing this—christened the “covariance method” by Batra [2]—demonstrates that, in certain cases, recognition of the fact that the integrals involved are composed of covariance terms can provide a simple and elegant solution to the problem. This paper uses a simple portfolio model to demonstrate that these covariance terms can be exploited to obtain other useful results as well.

In this paper, we explore the nature of equilibria in an asymmetrically informed bank credit market in which credit applicants know their own (intrinsic) default risks, but potential lenders can discover these default risks only by expending resources to produce information. The resolution of informational asymmetries in the capital market is, in the contemporary view, considered a very important function served by financial intermediaries like commercial banks and, in the opinion of some, even the primary justification for their existence [17]. We, therefore, focus on how the presence of asymmetric information—in particular, the response of (expected) profit-maximizing banks to it—affects the equilibrium prices and quantities of credit offered in the banking system.

The Sharpe-Lintner Capital Asset Pricing Model (CAPM) has always contained an implicit question: what if all investors are single-period wealth maximizers but the length of the single period varies across investors? Gressis, Philappatos, and Hayya (GPH) [7] have pointed out that as the assumption of investment horizon length is changed, the Capital Market Line (CML) intersects the Efficient Frontier (EF) at different points causing different investors to hold different efficient portfolios. GPH assert that these different portfolio holdings will result in an inefficient market portfolio—and dire consequences for the capital market model.