This paper is concerned with the effect of futures trading in Treasury bills on the volatility of yields in the cash market. It is found that futures trading led to a decrease in volatility initially, but the effect disappeared when futures volume became large and possibly resulted in increased volatility in the secondary cash market. The results also indicated that the deliverable bill appears to sell at a small premium relative to the adjacent maturities prior to the delivery date.

This paper examines the differential tax treatment of the borrower and lender at the time debt is called as a potential explanation for the widespread existence of call provisions in corporate debt. This tax effect alone cannot explain the standard call feature because greater tax benefits may be derived for bonds callable at market prices. The equilibrium implications of the model allowing for tax arbitrage opportunities both at the corporate level and the individual level also are considered.

This research develops and tests a model for the prediction of tender offer outcomes. Variables that increase the supply of “obtainable shares” (such as increased bid premiums or the payment of solicitation fees) are shown to increase the probability of success. Increased ownership of target firm shares by the bidder also increases the probability of success. Variables that impede the tendering of shares (such as target management opposition or a competing bid) decrease the probability of success. Tests of the model utilizing both linear and logistic analysis support the theoretical constructs and help resolve the paradoxical findings of previous research.

The implicit contract theory explored by Azariadis [2] suggests that wage rigidity and underemployment are explained by the microeconomic optimizing behavior of each agent in the labor market. In this theory, the former phenomenon is interpreted as risk-sharing arrangements between firms and workers, whereas the latter may occur when workers have the opportunity to use leisure or unemployment insurance benefits.

Equilibrium in the market for real assets requires that the price of those assets be bid up to reflect the tax shields they can offer to levered firms. Thus, there must be an equality between the market values of real assets and the values of optimally levered firms. The standard measure of the advantage to leverage compares the values of levered and unlevered assets, and can be misleading and difficult to interpret. We show that a meaningful measure of the advantage to debt is the extra rate of return, net of a market premium for bankruptcy risk, earned by a levered firm relative to an otherwise-identical unlevered firm. We construct an option valuation model to calculate such a measure and present extensive simulation results. We use this model to compute optimal debt maturities, show how this approach can be used for capital budgeting, and discuss its implications for the comparison of bankruptcy costs versus tax shields.

A necessary and sufficient condition for linear sharing rules to be Pareto optimal, as generally accepted by the finance community, is that utility functions be of the equicautious HARA class. We demonstrate that this condition is not necessary for a fixed distribution of initial endowments and derive the necessary and sufficient condition. We show examples of utility functions satisfying our conditions.

This study documents substantial gains accuring to shareholders of discounted closed-end investment companies when these funds are reorganized to allow shareholders to obtain the market value of the fund's assets. The findings indicate that the discounts on closedend funds are real, i.e., they are not the sole result of inaccurate reporting of the fund's net asset value. The study also documents significant abnormal returns after the announcement of management-sponsored proposals to reorganize. This finding is inconsistent with the joint hypothesis of market efficiency and that the market model (as estimated) is the correct return bench mark for funds undertaking reorganization.

In Japan, it has long been a common practice among corporations to issue new shares at par value and offer them to shareholders without underwriting agreements. However, in January 1969, Nihon Gakki (a musical instrument maker) successfully offered new shares at the market price through underwriting agreements. Other corporations followed suit and the capital raised through this method in fiscal year 1972 amounted to ¥861 billion, accounting for more than 65 percent of the total capital raised during the year. At present, over 70 percent of Japanese corporations raise new equity capital at the market price via the negotiated underwriting method. Almost all underwriters employ a “firm commitment” agreement, in which the underwriter agrees to purchase the whole issue from the firm at a particular price for resale to the public. The agreement is normally signed on the day before the issue announcement, at which time the offering price to the public is specified. As soon as the offering price is filed with the Tokyo Stock Exchange, the underwriter is precluded from selling the shares above this price. Though the offering price initially was highly discounted, between 1970 and 1980 this discount rate gradually decreased from 15 percent to 5 percent of the daily stock price (see Table 1). The final settlement with the underwriter usually takes place fourteen to nineteen days after the registration statement becomes effective. At that time, the company receives the proceeds of the sale, minus the underwriter's fee. This fee, which is usually fixed at 3.5 percent of the money to be raised, consists of a compensation fee, a managing fee, a sales fee, and a brokerage fee, none of which can be separated on the contract.

In this note, a loss shared by the security holders of merging firms is pointed out: separate corporate entities provide double protection against future negative cash flows that are partof any production process (e.g., when customer or employee liabilities exceed future income), independent of whether or not debt is used in the corporate capital structure. A merger involvesa relinquishment of this double protection in return for a less valuable single protection: limited liability in the merged corporation against combined negative cash flows.

Errors in variables due to nonsynchronous trading and benchmark error are significant problems for capital market research. This paper develops the use of direct and reverse regression to bound true coefficient estimates when the data exhibit error structures arising from these two sources both separately and jointly. The approach appears to have broad applicability for capital markets research. As an example, the paper reexamines the small-firm effect to show that it cannot be attributed to nonsynchronous trading or benchmark error in the estimated variance of the market portfolio. This result is shown to hold even when the tax-selling effect is controlled for by excluding January returns.

This note explores the properties of some stock markets indices that are claimed to approximate a continuously rebalanced equally weighted portfolio.

Little attention has been paid by the academic community in the United States to the Japanese stock market and its structure. Japan has the second largest economy in the Western world, and the Tokyo Stock Exchange (TSE) is second only to the New York Stock Exchange (NYSE) in terms of aggregate market values and sales volume. Analysis of the Japanese stock market is useful given its relative importance, but, in addition, examination of the Japanese market may offer insights into controversies surrounding U.S. markets. This study focuses on two such current controversies: the January and size anomalies.

Several studies used a multi-factor model to examine the interest rate sensitivity of a financial intermediary's common stock. The model was re-specified in an attempt to estimate each factor's influence. This note shows that the re-specification results in biased estimators. Hypothesis tests are flawed by failure to acknowledge the bias; this casts doubt upon the reported findings

Common stock portfolios of large, heavily traded firms exhibit daily first-order serial correlation in excess of what would be expected, given the individual security coefficients. Further, this correlation rises as the number of securities in the portfolio increases. The direct implication of this finding is that nonsynchronous trading is not the only cause of correlation in daily market indices. Related implications are also discussed.

Stock markets in the United States and foreign countries exhibit a strong weekly seasonal, an empirical regularity for which no theoretical explanation has been found. One's belief in this phenomenon would be strengthened if it is known to also occur in capital markets separated from those in the United States by distance, institutional arrangements, and culture.

While access to financial data and information about the performance of Japanese companies remains less than ideal, it is now possible to get much more of the information necessary to test research questions in Japanese finance than was possible even a few years ago. Data sources once available only in Japan have now become available to U.S. -based researchers as well.