The risk of securities class action litigation alters corporate savings and investment policy. Firms with greater exposure to securities litigation hold significantly more cash in anticipation of future settlements and other related costs. The result is due to firms accumulating cash in anticipation of lawsuits and not a consequence of plaintiffs targeting firms with high cash levels. The market value of cash is lower for firms exposed to litigation risk. Corporate investment decisions are also affected by litigation risk, as firms reduce capital expenditures in response. Our results are robust to endogeneity concerns and possible spurious temporal effects.

The question “What's in a bond rating?” has been asked at least since 1909 when such ratings were started in the United States. Informed persons who answer this question typically admit that ratings depend in part on readily available statistics on a firm's operations and financial condition. Examples of such statistics are earnings coverage, leverage ratios, and profit rates.

This paper extends the Roll model for implicit bid-ask spreads by incorporating the possibility of serial correlation in transaction type. The validity of this formula is examined using intra-day transactions and bid-ask spread data for options traded on the Chicago Board Options Exchange. The results indicate that the model derived here closely estimates the effective bid-ask spread in that it explains more than 80 percent of the crosssectional differences in announced bid-ask spreads.

We study the effects of investor protection on stock returns and portfolio allocation decisions. In our theoretical model, if investor protection is weak, wealthy investors have an incentive to become controlling shareholders. In equilibrium, the stock price reflects the demand from both controlling shareholders and portfolio investors. Due to the high demand from controlling shareholders, the price of weak corporate governance stocks is not low enough to fully discount the extraction of private benefits. Thus, stocks have lower expected returns when investor protection is weak. This has implications for domestic and foreign investors’ stockholdings. In particular, we show that portfolio investors’ participation in the domestic stock market and home equity bias are positively related to investor protection and provide original evidence in their support.

We investigate the long-run return performance of non-U.S. firms that raise equity capital in U.S. markets. Overall, between 1982 and 1996, our sample of 333 global equity offerings with U.S. depositary receipt (ADR) tranches from 35 countries in Asia, Latin America, and Europe under-perform local market benchmarks of comparable firms by 8%–15% over the three years following issuance. We show that differences in long-run returns are related to the scope and magnitude of investment barriers that induce segmentation of capital markets around the world. While companies from markets with significant investment barriers for foreigners that issue equity on major U.S. exchanges outperform their benchmarks, those from segmented markets that issue equity in the U.S. by way of Rule 144A private placements significantly under-perform. We also show that inter-market competition for order flow in the post-issuance period affects long-run return performance. Post-issuance buy-and-hold abnormal returns are most significantly and positively related to the offering's ability to generate a larger share of U.S. trading volume.

We examine the suitability of using overnight returns to measure firm-specific investor sentiment by analyzing whether they possess characteristics expected of a sentiment measure. We document short-term overnight-return persistence, consistent with existing evidence of short-term persistence in the share demand of sentiment-influenced investors. We find that short-term persistence is stronger for harder-to-value firms, consistent with existing evidence that sentiment plays a larger role for such firms. We show that stocks with high (low) overnight returns underperform (outperform) over the longer term, consistent with prior evidence of temporary sentiment-driven mispricing. Overall, our evidence supports using overnight returns to measure firm-specific sentiment.

In recent years the application of discriminant analysis to two-category (dichotomous) classification problems in empirical financial research has substantially increased. However, these studies have given relatively little attention to design and interpretation difficulties associated with discriminant analysis. Consequently, the conclusions and generalizations that can be drawn from such studies are frequently tenuous and questionable. This paper's purpose is to discuss the methodology of discriminant analysis. While the paper is oriented toward financial applications of discriminant analysis, our discussion is not peculiar to finance. Furthermore, many of the methodological issues we address are relevant to the general problem of developing and testing dichotomous classification models and arise whether model developing is by discriminant analysis or some other method.

Consistent with institutions having an advantage over individuals, we find that newly public firms with the highest levels of institutional investment significantly outperform those with the lowest levels. While prior literature has attributed much of institutions’ higher returns around various corporate events to private information, we find that much of the difference simply reflects better interpretation of readily available public information. Individuals disproportionately invest in the types of firms that earn significantly lower abnormal returns over the long run. Individuals either disregard or misinterpret the relevance of readily available public information, and as a result, they bear the brunt of IPO underperformance.

This paper tests the hypothesis that option prices contain information not reflected in contemporaneous stock prices. An options transactions data base is used for the purpose. The evidence suggests that the magnitude of anticipation of stock prices by option prices is insufficient to overcome the bid/ask spread for intra-day holding periods. Implications of the profits in the overnight-holding periods are discussed.

We find a strong tendency for positive returns during the overnight period followed by reversals during the trading day. This behavior is driven by an opening price that is high relative to intraday prices. It is concentrated among stocks that have recently attracted the attention of retail investors, it is more pronounced for stocks that are difficult to value and costly to arbitrage, and it is greater during periods of high overall retail investor sentiment. The additional implicit transaction costs for retail traders who buy high-attention stocks near the open frequently exceed the effective half spread.

Early access to stock recommendations provides brokerage firm clients with incremental investment value. After controlling for transaction costs, purchasing (selling) quickly following upgrades (downgrades) results in average two-day returns of 1.02% (1.50%). Short-term profit opportunities persist for two hours following the pre-market release of new recommendations. The results are robust within sub-periods and a calendar-based strategy produces positive abnormal daily returns of over 10 basis points, or roughly 30% annualized. Recommending firms' market makers shift their quotes accordingly, providing indirect evidence that clients make use of the informational advantage that arises from analysts' opinion changes.

Using a database of more than 8,000 companies from 35 countries, we find that the value of corporate diversification is related to the level of capital market development, international integration, and legal systems. Our results suggest that the financial, legal, and regulatory environments each have an important influence on the value of diversification. Moreover, the optimal organizational structure and corporate governance may be very different for firms operating in emerging markets than they are for firms operating in more developed and internationally integrated countries.

On March 28, 1979, failure occurred in one of the two nuclear reactors at the Three Mile Island (TMI) nuclear power generation facility owned by General Public Utilities (GPU). This nuclear “accident” was the first of its type in the United States, and much anecdotal evidence suggests that the accident intensified public concern and increased regulatory activity. Since this event, several proposed nuclear plants have been cancelled; safety rules have been tightened; certification (by the Nuclear Regulatory Commission) of newly completed nuclear plants has been delayed; and the pressure to curtail or ban the use of nuclear technology continues.

We study the impact of the Sarbanes-Oxley Act on the relationship between corporate governance and company performance. We consider 5 measures of corporate governance during the period 1998–2007. We find a significant negative relationship between board independence and operating performance during the pre-2002 period, but a positive and significant relationship during the post-2002 period. Our most important contribution is a proposal of a governance measure, namely, dollar ownership of the board members, that is simple, intuitive, less prone to measurement error, and not subject to the problem of weighting a multitude of governance provisions in constructing a governance index.

This paper analyzes the strategy that minimizes the initial cost of replicating a contingent claim in a market with transactions costs and trading constraints. The linear programming and two-stage backward recursive models developed are applicable to the replication of convex as well as nonconvex payoffs and to a portfolio of options with different maturities. The paper's formulation conveniently accounts for fixed and variable transactions costs, lot size constraints, and position limits on trading. The article shows that in the presence of trading frictions, it is no longer optimal to revise one's portfolio in each period. At the optimum, cash flows in excess of the desired ones may be generated. The optimal policy trades off the curvature of the payoff that is generated against the terminal slack.

A large mean price change is observed on the last daily NYSE transaction. This suggests that closing prices may not consistently represent stock values. Transaction prices are studied to further characterize the day-end price rise and to determine whether it is due to any limited subsample of stocks or dates. The results indicate that the phenomenon is pervasive over most firms and days. Some evidence suggests that it is caused by a change in the frequency of ask prices at day-end.

There exists a relatively large body of evidence that is consistent with the proposition that the market for securities (in particular, the New York Stock Exchange) is an efficient market in the sense that market prices react instantaneously and unbiasedly to new information and, therefore, market prices fully reflect all publicly available information. To what extent do accounting numbers reflect the kinds of information reflected in market prices? One might not, of course, expect accounting numbers to reflect all events reflected in current market prices. For example, if an economically significant piece of legislation is under discussion in, say, the United States Senate, then the expected effects (if any) of this legislation may be impounded in current market prices. One should not, however, expect these effects (if any) to be reflected in currently issued accounting numbers because of the nature of accepted accounting procedures. Yet, in general, over a period of time, there may be a systematic correspondence between some types of events reflected in market prices and accounting numbers. That is, over time, there may be a correlation between the information impounded in market prices and that impounded in accounting numbers.

Recent evidence supports the notion that capital markets are substantially integrated in a return/systematic risk sense [1, 12]. Other studies show that investors can reduce the total level of risk borne without reducing expected returns by holding an internationally diversified portfolio [8, 9, 17]. Together these studies imply that the various economies mirrored by financial markets are not perfectly integrated. Some assert, however, that because of controls on capital flows, differential trading costs, different tax structures, and a number of other factors, markets are imperfectly (albeit substantially) integrated. Hence investors may not actually be diversifying internationally and thus forego advantages which would accrue to them if they were willing to hold foreign security issues.

This study uses a large sample of firms to examine how human capital considerations affect the process of CEO succession. Costs and benefits of succession planning are affected by a firm's level of operational complexity and human capital requirements; firms that are more complex incur greater costs to transferring firm-specific knowledge and expertise to an outsider, and should be more likely to groom an internal candidate for the CEO position. Consistent with this, I find that a firm's propensity to groom an internal candidate for the CEO position is related to firm size, degree of diversification, and industry structure. My results also suggest that succession planning is associated with a higher probability of inside succession and voluntary succession and a lower probability of forced succession. I also provide evidence that horizon problems are mitigated to some extent by having a succession plan.

We have been concerned with investigating the structure of rate-of-return comovements among major international equity markets. Working with 12 such markets we have analyzed the structural features of the configurations over alternative time periods (one-, three-, five- and ten-year periods) and the intertemporal stability of the configurations.

On the issue of intertemporal stability we found considerable one-year and three-year stability, but somewhat weaker stability in the five-year case. As a measure of stability we used cophenetic correlation coefficients between successive (in time) dendrograms. This technique was described in the methodology section.

We uncovered several interesting structural features. There seems to be a core of international markets that have higher degrees of similarity than the other markets. Furthermore, these markets (the United States, Canada, the Netherlands, Switzerland, West Germany and to a lesser extent, Belgium) may be generally described as relatively well developed and open to international capital flows. There is also an obviously strong tie between the United States and Canadian markets. There are less strong, but identifiable ties between France and Belgium, Germany and the Netherlands, and England and Australia. Many of these results parallel Ripley's [14] findings. We also noticed some countries that tend to be least similar to most other countries: Austria and Italy. Ten-year results corroborated these findings.

This study is only descriptive. We have only attempted to identify international equity market structure and structural change. A logical subsequent research area is to explain observed structural properties and the causes of structural change. We hope that our research will help provide some basis for this further analysis.