THE VALUATION OF STOCK WARRANTS: A REJOINDER

The purpose of the comment was to evaluate the Bird model in relation to the characteristics which were claimed for it, rather than against any other criteria. the conclusion which now might be drawn is that the warrant market is unsystematic in its valuation of securities.
Les observations apportées précédemmentavaient pour but de juger le modèle Bird. Pour cela, il était préférable de s'appuyer sur les caracteristiques qui le définissaient, plutôt que de lui opposer d'autres critères. Tenant compte de la réponse de Bird, on pourrait maintenant deduire que le marché des warrants est incohérent dans son évaluation des titres.
Der Zweck der ursprünglichen Anmerkung solte keine Beurteilung des Bird Modells gegenüber den Kriterien von Skerratt, sondern gegenüber den Merkmalen des Modells darstellen. Angesichts der Antwort von Bird, könnte man jetzt schliessen, dass der Berechtigungscheinmarkt Wertpapiere unsystematisch bewertet.     

VALUATION EFFECTS OF OPEN MARKET STOCK REPURCHASES FOR FINANCIALLY WEAK FIRMS

We test the proposition that announcements of open market stock repurchases improve the flow of positive information regarding the firm's prospects, particularly for financially weak firms. For financially strong firms with already good prospects for cash flows, the role of stock repurchases is less important. We provide evidence for an inverse relationship between financial risk, measured by bond rating, and the magnitude of stock repurchase-induced abnormal returns. Results also suggest that the value of information implied by announcements of open market repurchases about increases in cash flows and leverage, is more important for financially weak firms than for financially strong firms.     

ON THE RATIONALITY OF COMMON STOCK RETURN VOLATILITY

This paper derives the relationship between the population unconditional variance of common stock returns and the variance of expected returns conditional on a well-specified information set. As a consequence, a lower bound is obtained for the variance of common stock returns. The sample counterpart of this bound is then empirically tested against the sample variance of returns. The paper's main conclusion can be stated as follows: the observed volatility of real (inflation-adjusted) common stock returns is not “irrationally” large. The paper admits of this conclusion because the point estimate of the lower-bound variance derived in this model is actually larger than the point estimate of common stock return volatility. However, since these point estimates are found to have a statistically insignificant difference, equality of the two variances cannot be ruled out. Hence, “rationality” of common stock returns—as implied by a utility-based valuation conditional on a specified information set—cannot be rejected.     

EVIDENCE ON THE EXISTENCE OF COMMON STOCK INFLATION HEDGES

Previous researchers have been unable to identify (on an ex ante basis) inflation hedge portfolios consisting of common stocks. This study demonstrates a procedure for forming common stock portfolios that offer returns that vary positively with unexpected inflation. The strategy could have been used to hedge against purchasing power risk during the 1974–1979 period. In addition to its practical value, the research has important implications for capital asset pricing theory since the existence of hedge portfolios is a necessary condition for the superiority of the multi-period CAPM over the single-period models.     

THE VALUATION EFFECTS OF OUT-OF-THE-MONEY CALLS OF CONVERTIBLE SECURITIES

We examine the valuation effects of out-of-the-money calls of convertible securities. In general, out-of-the-money calls generate positive abnormal stock returns. These returns are higher when the call price exceeds the market value of the called securities (positive premium calls), compared with when the market value exceeds the call price (negative premium calls). Furthermore, Value Line Investment Survey net operating income forecasts are significantly higher after call announcements for positive premium calls, while the revision is insignificant for negative premium calls. The results are consistent with the hypothesis that positive premium calls signal positive information.