THE RELATIONSHIP BETWEEN THE VARIABILITY OF INFLATION AND STOCK RETURNS: AN EMPIRICAL INVESTIGATION

Several researchers find a negative correlation between the rate of inflation and stock returns. This phenomenon may be explained by the variability hypothesis, which posits that the negative correlation is caused by the combination of a positive relation between the rate of inflation and the variability of inflation and a negative relation between the variability of inflation and stock returns. An autoregressive conditional heteroscedastic model of inflation is used to measure the variability of inflation. Empirical results do not support the ability of the variability hypothesis to explain the negative correlation between stock returns and inflation.     

TRADING‐VOLUME SHOCKS AND STOCK RETURNS: AN EMPIRICAL ANALYSIS

We examine high‐volume premiums based on weekly risk‐adjusted returns. Significant average weekly abnormal high‐volume premiums up to 0.50% per week are documented for 1962–2005. Most premiums are generated in the first two weeks and monotonically decline as holding periods are extended. Evidence of reversal is found as the holding periods are extended. Premiums depend on realized turnover in the holding period. The last finding supports the theories of Miller and Merton. Finally, we test whether premiums are compensation for taking additional risk. Negative skewness, idiosyncratic risk, and liquidity risk do not explain the high‐volume premiums.     

INSIDER TRADING EFFECTS ON STOCK RETURNS AROUND OPEN-MARKET STOCK REPURCHASE ANNOUNCEMENTS: AN EMPIRICAL STUDY

In this paper we empirically examine the effects of insider trading activities, the percentage of common shares outstanding authorized for repurchase, and management ownership on stock returns around open-market stock repurchase announcements. The study is conducted on a sample of 204 firms that announced open-market stock repurchases between 1982 and 1990. Results show that insider trading activities during the month that immediately precedes the announcement have a significant effect. While stockholders of firms with insider net selling activities earn positive excess returns, those of firms with insider net buying activities earn larger and more significant excess returns. Insider trading activities during more distant periods do not show any effects on stock returns. Results also indicate that management ownership has a significant positive effect on stock returns, and this effect is more positive when the percentage of common shares outstanding authorized for repurchase is large.     

AN EMPIRICAL INVESTIGATION OF STOCK DIVIDENDS-IN-KIND

We investigate share price reactions to announcements of dividends payable in the common stock of corporations different from the issuing firm. We find that firms that declare these dividends (typically investment companies) experience positive abnormal returns upon announcement. We also find that such dividends are more likely to be declared when the shares to be distributed have peaked in value. Consistent with this finding, we document negative announcement-period abnormal returns for firms having their shares distributed. Additional tests reveal that prices respond more negatively when the information signal is strongest, when outside ownership is more dispersed, and when management is more entrenched.     

OTC MARKET SWITCHING AND STOCK RETURNS: SOME EMPIRICAL EVIDENCE

In this study the effect on the common stock returns of 278 firms that switched OTC market segments from 1982 to 1987 is examined. It is hypothesized that abnormally positive returns are associated with news of the move from the NASDAQ to the NASDAQ National Market System (NMS) and that the market responds more favorably during pre-NMS inclusion for stocks with low versus high liquidity before switching. Using event study methodology, results support these hypotheses. Unlike post-listing studies, the evidence reveals no anomalous return behavior during the post-NMS inclusion period studied.     

NONLINEAR DYNAMICS AND THE DISTRIBUTION OF DAILY STOCK INDEX RETURNS

Three alternative models of daily stock index returns are considered: (1) a diffusion-jump process; (2) an extended generalized autoregressive conditional heteroskedasticity (GARCH) process; and (3) a combination of the GARCH and jump processes. Non-nested tests between the diffusion-jump process and a GARCH(1.1) process with t-distributed errors reject the diffusion-jump process, but do not always reject the GARCH process. Kolmogorov-Smirnov tests of fit, however, reject the GARCH(1,1)-t process for all cases. Nonlinear dependence is not removed for the value-weighted index and the S&P 500 stock index; therefore, deterministic chaos cannot be dismissed.     

THE ELIMINATION OF DIRECTOR LIABILITY AND STOCKHOLDER RETURNS: AN EMPIRICAL INVESTIGATION

In this paper, the performance of the common stock of Delaware and non-Delaware firms is examined during the Delaware legislature's debate and approval of an amendment to the Delaware General Corporation Law permitting the elimination of director liability. In addition, stockholder returns surrounding the proxy and meeting dates for certain Delaware firms are examined. Results indicate that Delaware firms performed worse than non-Delaware firms during the legislative period; however, strong differences between the two groups are not documented.     

THE ANOMALOUS AND ASYMMETRIC NATURE OF EQUITY RETURNS: AN EMPIRICAL SYNTHESIS

On the basis of seemingly anomalous common stock returns, several authors have concluded that the mean and variance testing paradigm is incomplete and that an unspecified missing factor or factors exist. This work advances distributional asymmetry as a reasonable explanation of the empirical results. This position is supported by evidence indicating that “variance,” “size,” and “price per share” effects are more closely associated with the second and third moments than with the first and second.     

STOCK RETURNS AND OPTION PRICES: AN EXPLORATORY STUDY

This study is an investigation of estimates of expected stock returns implicit in option data. The Lee-Rao-Auchmuty option valuation model provides a unique opportunity to examine whether return measurements derived by nonlinear estimation techniques show any correlation with future stock returns. During the short period covered in this study, the Lee-Rao-Auchmuty estimates give preliminary indications that they are better predictors of actual stock returns than are estimates obtained from historical data.     

STOCK RETURNS AND CLASSIFICATION PATTERN OF FIRM-SPECIFIC FINANCIAL VARIABLES: EMPIRICAL EVIDENCE WITH FINNISH DATA

This paper incorporates the findings of empirical classification patterns of financial ratios to studies investigating the relation between stock returns and financial factors of a firm. The empirical results indicate that the relevant information of the investigated financial characteristics of a firm can be presented in one factor, with respect to which single financial ratios seem not to have incremental information content in the Finnish stock market. In crossindustry sample this factor is reported to be leverage. However, when studying purely industrial firms, the most important factor consists of ratios representing several a priori characteristics of a firm.     

AN EMPIRICAL TEST OF AN EX-ANTE MODEL OF THE DETERMINATION OF STOCK RETURN VOLATILITY

The assumption that changing expected cash flows and discount factors affect a security's return is at the foundation of many financial models. This study examines empirically the hypothesis that expected stock return variability is a function of cash flow and discount rate uncertainty. Maximum likelihood estimation techniques and expectational data are employed. Strong, positive relationships are found, verifying the foundations of the ex-ante models with ex-ante data and providing a better understanding of security markets by explaining, in part, the causes of expected stock price variability.     

HEDGED DIVIDEND CAPTURE AND EX-DAY RETURNS: AN EMPIRICAL UPDATE

We find that the magnitude of abnormal ex-day returns exhibited by US equities diminished in 1987 and 1988, subsequent to the US Tax Reform Act of 1986. We also report the results of a dividend capture strategy, hedged with the sale of stock index futures contracts. Hedging removes more than 50 percent of the risk of dividend capture, and even after transactions costs, can provide returns in excess of buying and holding the market portfolio of equities.     

AN EMPIRICAL INVESTIGATION OF STOCK MARKET VALUATION OF CORPORATE PROJECTED PENSION LIABILITIES

This study extends the work of Landsman (1986) by making use of the newly available projected benefit pension obligations (PBO) information. Our analysis documents that investors perceive pension assets and pension liabilities, respectively, as corporate assets and liabilities. We also developed and tested a decomposition model of pension obligations by examining the market valuation of the three components of PBO: vested, non-vested and future salary progression. Our results indicate that future salary progression is indeed considered by market participants as a liability of the firm. The results of the study have important implications for accounting policy making.