Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act

This article examines the effect of the Private Securities LitigationReform Act of 1995 (PSLRA) on stockholder lawsuits. We explorethe role of restatements, earnings forecasts, and insider tradingin the filing and resolution of lawsuits for a sample of hightechnology firms. Consistent with our predictions, there isa post-PSLRA shift away from litigation based on forward-lookingearnings disclosures. Conversely, there is a significantly greatercorrelation between litigation and both earnings restatementsand abnormal insider selling after the PSLRA. Finally, we finda post-PSLRA increase in the likelihood of settlement for casesinvolving earnings restatements.     

When are contrarian profits due to stock market overreaction?

If returns on some stocks systematically lead or lag those ofothers, a portfolio strategy that sells 'winners' and buys 'losers'can produce positive expected returns, even if no stock's returnsare negatively autocorrelated as virtually all models of overreactionimply. Using a particular contrarian strategy we show that,despite negative autocorrelation in individual stock returns,weekly portfolio returns are strongly positively autocorrelatedand are the result of important cross-auto-correlations. Wefind that the returns of large stocks lead those of smallerstocks, and we present evidence against overreaction as theonly source of contrarian profits.     

Stock market prices do not follow random walks: evidence from a simple specification test

In this article we test the random walk hypothesis for weeklystock market returns by comparing variance estimators derivedfrom data sampled at different frequencies. The random walkmodel is strongly rejected for the entire sample period (1962-1985)and for all subperiods for a variety of aggregate returns indexesand size-sorted portfolios. Although the rejections are duelargely to the behavior of small stocks, they cannot be attributedcompletely to the effects of infrequent trading or time-varyingvolatilities. Moreover, the rejection of the random walk forweekly returns does not support a mean-reverting model of assetprices.     

Index-futures arbitrage and the behavior of stock index futures prices

This article examines intraday transaction data for S&P500 stock index futures prices and the intraday quotes for theunderlying index. The data indicate that the futures price changesare uncorrelated and that the variability of these price changesexceeds the variability of price changes in the S&P 500index. This excess variability of the futures over the indexremains even after controlling for the nonsynchronous pricesin the index quotes, which induces auto-correlation in the indexchanges. We advance and examine empirically two hypotheses regardingthe difference between the futures price and its theoreticalvalue: that this 'mispricing' increases on average with maturity,and that it is path-dependent. Evidence supporting these hypothesesis presented.     

Data-snooping biases in tests of financial asset pricing models

Tests of financial asset pricing models may yield misleadinginferences when properties of the data are used to constructthe test statistics. In particular, such tests are often basedon returns to portfolios of common stock, where portfolios areconstructed by sorting on some empirically motivated characteristicof the securities such as market value of equity. Analyticalcalculations, Monte Carlo simulations, and two empirical examplesshow that the effects of this type of data snooping can be substantial.     

The mispricing of U.S. Treasury bonds: a case study

This article documents an apparent pricing anomaly involving9? percent, 30-year Treasury bonds during the months of Mayand June 1986. During this period, the price of the 9?s rosesharply relative to the prices of other long-term Treasury bondsand created a potential arbitrage opportunity. In addition,owners of the 9? bonds were able to borrow at a zero interestrate by pledging their bonds. Detailed examination reveals thatthis relative pricing anomaly cannot be attributed to changesin the level or term structure of interest rates or to differencesbetween the bonds with respect to liquidity, taxation, or duration.     

Competition and the Provision of Banking Services to SMEs in the U.K.

This paper examines the report produced by the Competition Commission on the provision of SME banking services in the U.K. The report is assessed in terms of underlying assumptions used to describe and assess how banks operate and perform. The Competition Commission suggested “remedies” are drawn from a specific economic model assumed to be representative of the U.K. banking industry. It is concluded the remedies proposed by the Competition Commission are misplaced and may impose a substantial future cost on both banks and SMEs receiving banking services. It is proposed that the ramifications of this case are substantial for the present system of allocating bank funding to SMEs, in both the U.K. and international economies where similar antitrust or competition guidelines are employed.     

Simplified techniques for assessing range condition for livestock production: An example from Ciskei

In the past, the only available techniques for assessing range condition in Ciskei were laborious and required specialist knowledge. Simplified techniques were developed specifically for use by extension officers and fanners in Ciskei. The techniques are for the herbaceous layer and the woody layer, and both are practical, rapid and easy to use and are best used simultaneously. The vegetation of Ciskei was stratified and data were collected for sites of different range condition in each stratum. Point surveys were conducted in the herbaceous layer and quadrat surveys in the woody layer. Stepwise multiple regression analysis was used to determine key ecological species and key forage species for the herbaceous layer, while photographs that represent different range conditions were identified for the woody layer.     

Who pays for minor league training costs?

As an alternative to monopsonistic exploitation, the underpayment of players in major league baseball may be explained as the attempt by owners to recoup general training expenses. In this article, a method is proffered for estimating the 'surplus' extracted from those players restricted by the reserve clause, where this surplus is defined as the difference between what the player is actually paid and what he would have received if he were a free agent. These estimates are then used to examine how the surplus varies across players. The results suggest a number of interesting aspects of the recovery of minor league training costs, monopsony exploitation, and the distribution of the surplus across players. First, owners only extract a surplus from 'apprentices' (i.e., those young players who are ineligible for salary arbitration). Second, the largest surpluses are extracted from those who cost the least to train. In fact, the surplus generated by star apprentices is about twice that of mediocre apprentices. Finally, the results suggest that the surplus extracted from minority apprentices is 10–15% higher than that extracted from white apprentices.