THE EFFECT OF VOLUNTARY CORPORATE LIQUIDATION ON SHAREHOLDER WEALTH

This paper presents an analysis of the shareholder wealth effect of voluntary corporate liquidation, the extreme form of corporate divestiture classified as a “selloff.” For a sample of 37 firms that liquidated during the 1970–1982 period, the liquidation announcement is associated with statistically and economically significant stock price increases.     

EVIDENCE OF THE EFFECT ON SHAREHOLDER WEALTH OF CORPORATE SPINOFFS: THE CREATION OF ROYALTY TRUSTS

Corporate spinoffs and divestitures cause positive revaluation of the firm by the market. This paper examines a particular kind of spinoff, one of mineral interests into a royalty trust. Royalty trusts are associated with abnormal returns that come from positive market revalution and from special tax incentives inherent to trusts.     

VOLATILITY FORECASTS,TRADING VOLUME,AND THE ARCH VERSUS OPTION‐IMPLIED VOLATILITY TRADE‐OFF

We investigate empirically the role of trading volume (1) in predicting the relative informativeness of volatility forecasts produced by autoregressive conditional heteroskedasticity (ARCH) models versus the volatility forecasts derived from option prices, and (2) in improving volatility forecasts produced by ARCH and option models and combinations of models. Daily and monthly data are explored. We find that if trading volume was low during period t?1 relative to the recent past, ARCH is at least as important as options for forecasting future stock market volatility. Conversely, if volume was high during period t?1 relative to the recent past, option‐implied volatility is much more important than ARCH for forecasting future volatility. Considering relative trading volume as a proxy for changes in the set of information available to investors, our findings reveal an important switching role for trading volume between a volatility forecast that reflects relatively stale information (the historical ARCH estimate) and the option‐implied forward‐looking estimate.     

MANAGERIAL INCENTIVES AND THE USE OF FOREIGN‐EXCHANGE DERIVATIVES BY BANKS

We examine the effect of managerial compensation and ownership on the use of foreign‐exchange derivatives by U.S. bank holding companies. We focus on derivatives used for purposes other than trading to investigate derivative use in a hedging framework. We use instrumental variables probit and sample‐selection models to estimate the effects of endogenous and exogenous factors on the probability and extent of foreign‐exchange derivatives used. We find that the use of derivatives is inversely related to option awards but positively related to managerial ownership. Finally, our results suggest that ownership by large institutional shareholders provides incentive for managers to hedge.     

THE EFFECTS OF SPIN-OFFS ON CORPORATE INVESTMENT AND PERFORMANCE

We examine characteristics of firms involved in spin-offs and test whether these spin-offs induce changes in investment incentives and economic performance. We find that firms engaging in spin-offs are larger, more highly leveraged, and have higher asset turnover and lower real asset growth than their industry rivals. We also find that spin-offs generate significant increases in real asset growth and cash flow margin on sales for combined firm measures (spun-off firm plus parent firm). The gains result from increases in real asset growth for parent and spun-off firms, and improvements in cash flow margin on sales for parents. Our evidence is consistent with models in which spin-offs create value by improving investment incentives and economic performance.     

THE EFFECT OF SFAS 87 ON CORPORATE FUNDING OF DEFINED BENEFIT PENSION PLANS

Statement of Financia1 Accounting Standards No. 87 (SFAS 87) modifies the method of accounting for pensions by requiring companies sponsoring defined benefit pension plans to (1) recognize a balance sheet liability for unfunded pension benefits and (2) disclose their obligation for pension benefits based on expected future compensation levels (the projected benefit obligation). These requirements may affect users' perceptions of a company's financial position, especially if these plans are underfunded. This research examines whether the requirements of SFAS 87 result in increased funding of corporate pension plans to counteract possible adverse perceptions of users about these plans. The results indicate that early adopters (companies adopting SFAS 87 in 1985 and 1986) increased the funding of their defined benefit pension plans in response to SFAS 87 ; however, later adopters did not do so. These findings provide evidence that companies may alter economic policies when faced with significant changes in financial disclosure requirements. Further analysis suggests that the effect of SFAS 87 on the pension expense recognized by the sample companies provided impetus for early adoption of this pronouncement.     

CORPORATE GOVERNANCE AND CORPORATE PERFORMANCE: A COMPARISON OF GERMANY, JAPAN, AND THE U.S.

Contrary to assertions that there are fundamental differences in the efficiency of "market-based" and "relationship-oriented" corporate governance systems, this article presents evidence that the German, Japanese, and American systems appear about equally effective in disciplining poor managerial performance. For example, both the job security and total compensation of German and Japanese managers appear to be tied to stock performance and current cash flows- measures that some would refer to as "short-term"-to roughly the same extent as those of U.S. managers. Furthermore, the punishments and rewards for German and Japanese managers are not more sensitive to sales growth-a measure some would refer to as "long-term"-than those of their U.S. counterparts.
But, if there is no clear difference between the three governance systems in responding to poor stock and earnings performance, there is one important difference: the U.S. system is more effective than the German and Japanese systems in discouraging successful companies from overinvest-ing. One reason for this is the fact that U.S. managers hold much larger equity positions than managers in Japan and Germany. Another important factor, however, is the difficulty faced by Japanese companies in returning capital to their shareholders. Dividends are minimal; and, until 1995, it was illegal for a Japanese company to repurchase its stock.