Payout flexibility and capital expenditure

Over the past two decades or so, repurchases have become an appealing method for disbursing cash to shareholders compared to the traditional dividends. Managerial perception as well as empirical evidence suggests that repurchases are inherently more flexible than dividends, which may account for their increasing popularity. The rigidity of dividends and the apparent flexibility of share repurchases could impact firm investments. Firms may forego profitable investment opportunities to maintain their dividend levels, while repurchases could be easily scaled back to fund profitable investment projects without fear of an adverse market reaction. We test the flexibility hypothesis of repurchases by regressing capital expenditures on repurchases and dividends in addition to other control variables. Consistent with our hypotheses, we find an inverse relationship between capital expenditures and repurchases but an insignificant relationship with dividends. Further, we find that the flexibility associated with repurchases is especially evident for firms that are financially constrained, and during the recent financial crisis period when external capital constraints were severe. Finally, we find that flexibility of repurchases with respect to capital expenditures is stronger in the more recent time period during which regulatory changes made repurchases more attractive as a mechanism to disburse cash back to shareholders.     

Labor Unions as Shareholder Activists: Champions or Detractors?

We examine the impact of labor union shareholder activism through the submission of shareholder proposals during the period 1988–2002. We examine the effect of labor union‐sponsored shareholder proposals on announcement period returns; on the corporate governance environment of the firm including shareholder rights, board composition, and CEO compensation; on changes in unionization rates and labor expense; and on long‐run shareholder wealth. We do not find any observable patterns for the overall sample of proposals. However, subsets of proposals associated with union presence at the target firm and shareholder voting support for the proposal are associated with significant effects surrounding and subsequent to targeting.     

THE RELATIVE INCOME HYPOTHESIS-A CROSS COUNTRY ANALYSIS

This paper presents an attempt to examine the applicability of the relative income hypothesis (RIH) in terms of its various specifications proposed by Duesenberry, Duesenberry, Eckstein and Fromm (DEF), Davis and the authors (MD). Using the time series data for 1951 through 1968 the analysis has been carried out for Canada, Finland, Guatemala, Honduras, India, Japan, Philippines, Sweden, United Kingdom and the United States. It is found that RIH provides a fairly good representation of the consumption behaviour of all the countries included in the study. All specifications, however, do not perform equally well. DEF and Davis functions score the maximum points; MD comes at par with DEF in case of Finland, Guatemala, and India. The original Duesenberry specification performs very poorly. This leads us to conclude that the process of habit formation is continuous contrary to what is implied by Duesenberry's original specification and that consumption is a better indicator of the standard of living than income is. Estimates of the long-run marginal propensities to consume are essentially the same as those computed from the permanent income hypothesis by Singh and Drost [1970]. This lends support to the view that the two hypotheses have essentially the same long-run implications.     

Estimation Risk and Adaptive Behavior in the Pricing of Options

We consider the effects of uncertainty in the statistical parameters of the Gaussian process in the context of the Black-Scholes option pricing model. With continuous time observation of returns, uncertainty about the variance disappears over any finite time interval, but uncertainty about the mean diminishes at the rate of 1/τ, where T is the length of the time interval of observation. In a market in which participants base their portfolio decisions on the predictive distribution of returns, option prices will be higher than in a market in which uncertainty in the mean is ignored. Even though the mean parameter, μ, is itself irrelevant in the Black-Scholes model, uncertainty about μ affects option values under our behavioral assumptions.     

ADVERSE SELECTION,SPREAD BEHAVIOR,AND OVER-THE-COUNTER SEASONED EQUITY OFFERINGS

In this paper the effects of over-the-counter seasoned equity issuances on the percentage bid-ask spreads around announcement and offer dates are examined. A declining spread in the pre-announcement period suggests that resolution of information asymmetry begins well before the announcement date. Further, using issue size as a proxy for the extent of information asymmetry, we observe that spreads for larger issues reach “normal” levels before the first public disclosure of the offering. For smaller issues this occurs only on the offer date. Results are consistent with the dealer experiencing reduced adverse information risk as a result of information-gathering efforts during the underwriting process.     

Price/Book Value Ratios and Equity Returns on the Tokyo Stock Exchange: Empirical Evidence of an Anomalous Regularity

This study examines the relationship between accounting data and financial market data for securities listed on the Tokyo Stock Exchange. We document, for the first time for a non-U.S. market, a significant price to book value ratio effect; i.e., Japanese equities with low price to book value ratios earn higher returns than those with high price to book value ratios, and this price to book value effect is stronger in January and June and for smaller firms. One implication of the international pervasiveness of these empirical regularities is that explanations for these effects that are based on unique institutional or accounting procedures are unlikely to be sufficient.     

Co-Integration and Causality Testing of the Energy–GDP Relationship: A Cross-Country Study

In this paper, the energy–GDP relationship (in per capita terms) is analysed for a sample of 16 countries, over the time period 1950–51 to 1984–85. Co-integration theory is first used to test whether a long-run equilibrium relation exists between the two variables. After co-integration has been established, causality measures are constructed to quantify various types of feedback between energy and GDP for each country. It is then examined whether the causality measures are longitudinally related to certain basic economic indicators of the countries in the sample.     

Auditor Concentration of Listed Public Companies on International Stock Exchanges

This paper explores the concentration of audit services provided to listed public companies on the Stock Exchanges of Canada, Hong Kong, London, and Singapore. The Canadian and London stock exchanges are chosen as representatives of the North American and European markets, while the Hong Kong and Singapore exchanges represent the newly developed Asia Pacific markets. Public accounting firms have benefited from the globalisation trends by expanding their own markets. The reason frequently mentioned for the mergers of the Big 8 accounting firms to form the Big 6 is that they want to increase their international presence and be in a better position to service multinationals in different markets. However, previous studies of concentration of firms in providing auditing services have all been restricted to the USA or individual countries. This study uses both concentration ratios and Herfindahl indices to examine concentration of audit firms in the international stock exchanges. The results indicate a disparate competition amongst the larger firms in each of the Canadian, Hong Kong, London, and Singapore markets. In all of the four markets, the concentration ratios and Herfindahl indices calculated indicate a lack of competition even at the four firm level. This imbalance was very pronounced when the size of the companies audited is considered using their reported total assets. We also present the market shares of the leading six firms in each exchange and discuss some implications of this disparate competition.     

Failure rate of the minimum and maximum of a multivariate normal distribution

It is well known that if the parent distribution has a nonnegative support and has increasing failure rate (IFR), then all the order statistics have IFR. The result is not necessarily true in the case of bivariate distributions with dependent structures. In this paper we consider a multivariate normal distribution and prove that, the distributions of the minimum and maximum retain the IFR property. Received: September 1999     

The effect of non-convertible preferred stock retirement on shareholder wealth

In this paper the authors examine the common stock price behavior of firms that call their non-convertible preferred stock. The findings for the entire sample of preferred stock calls are consistent with the Modigliani and Miller (MM) leverage hypothesis that preferred stock financing adds no value to the firm. However, for those firms whose preferred stock was completely eliminated from the capital structure, a significant, positive announcement effect is observed. This finding is consistent with an information signaling effect related to the earnings prospects and tax status of the calling firms and also is suggestive of a burdensome covenant effect. No evidence is found to support the free cash flow theory of common stock price reactions to preferred stock calls.