AN EXAMINATION OF MERGER SYNERGISM

The empirical research discussed in this paper measures the synergistic effects of mergers on the stockholders of the acquiring and acquired firms. Synergism is defined as the incremental wealth to the shareholders of both merging firms due to the merger—net of any potential gains achievable through investors' personal diversification over the common stocks of the merging firms. Three types of mergers are identified and studied—nonconglomerate, conglomerate with increasing financial leverage, and conglomerate with decreasing financial leverage. The results indicate that these types of mergers are affected differently by the combination. Moreover, the evidence suggests operational and/or financial synergism.     

AN EXAMINATION OF FEDERAL AGENCY DEBT PRICING PRACTICES

Debt issuance procedures for federally sponsored agency securities differ considerably from the methods used by the U.S. Treasury and most corporate and municipal debt issuers. This paper examines the debt issuing procedures of the three major federally sponsored agencies and the efficiency with which the fiscal agents for those agencies price new debt issues. The conclusions from the analysis are: (1) fiscal agents for the major federally sponsored agencies are extremely adept at estimating the equilibrium competitive yields for new debt issues; (2) pricing errors on new issues are generally due to factors beyond a fiscal agent's control, such as the volatility of debt market conditions; and (3) the debt pricing practices for federally sponsored agency securities are efficient and effective.     

AN EXAMINATION OF ASKED-BID SPREADS FOR TWO OVER-THE-COUNTER MARKET SEGMENTS

Previous studies of over-the-counter (OTC) asked-bid spread behavior treat the sample stocks as a homogeneous group. Actually, there are several segments of the OTC market, ranging from the recently created National Market System to the pink sheets. We find that although previously proposed independent variables (risk, transaction rate, number of dealers, and price) determine inside spreads for two OTC market segments in ways consistent with the results of others, the models do explain the observed spreads differently.     

ACCOUNTING FOR THE COST OF CAPITAL: AN EMPIRICAL EXAMINATION

One of accounting's oldest issues, accounting for interest costs, has become a subject of increased concern in recent years. This study empirically addresses the issue of whether the cost of equity capital should be charged against income. Fourteen measures of the cost of equity capital are examined. The empirical tests involve contemporaneous correlation of accounting betas for each income measure with market betas for a sample of 200 companies. The results of these association tests indicate that income measures, net of the cost of equity capital, may have greater information content than income as presently reported.     

AN EMPIRICAL EXAMINATION OF THE IMPACT OF LIMITED REVIEW ON EQUITY PRICES

SEC Accounting Series Release No. 177 required independent auditors to make a limited review of summarized quarterly data included in annual reports. This paper examines the reaction of investors to earnings announcements based on financial statements subject to limited review relative to announcements when no auditor involvement was required. The reaction of market participants is measured by an abnormal daily return metric of the common stock surrounding the published earnings announcement in The Wall Street Journal. As hypothesized, no difference in investor reaction is observed for the sample of firms subject to limited review for the 1977 fiscal year, but exempt in the 1976 fiscal year.     

AN EXAMINATION OF THE SMALL-FIRM EFFECT ON THE BASIS OF SKEWNESS PREFERENCE

This paper tests the hypothesis that the small-firm effect can be explained on the basis of investor preference for positive skewness. Traditional stochastic dominance methodology is extended to consider portfolios including variable weights of investment in a riskless asset. Including a riskless asset provides the result that small-firm portfolios stochastically dominate all other portfolios. This result, which is derived on the basis of 19 years of monthly returns, indicates that the small-firm effect cannot be fully attributed to tax effects, benchmark error, or incorrect assumptions of the CAPM about investor risk aversion.     

AN EMPIRICAL EXAMINATION OF THE EXISTENCE OF A SIGNALING VALUE FUNCTION FOR DIVIDENDS

The purpose of this study is to address the reliability of dividend signals. To determine if dividend signals are followed by changes in earnings in a direction consistent with the signal, the dividend-earning relationship is examined using both Granger tests of causality and nonparametric tests. Results are consistent with the hypothesis that dividend signals are followed by unanticipated changes in earnings in the subsequent two quarters.