Efficiency and Organizational Structure: A Study of Reverse LBOs

This paper is a report on 72 firms which went public since 1983 but previously underwent a full or divisional LBO. Accounting measures of performance reveal significant improvements in profitability which resulted mainly from these firms' ability to reduce costs. Firms experience dramatic increases in leverage at the LBO, but the leverage ratios are gradually reduced. The evidence is consistent with the hypothesis that the change in the governance structure of these firms towards more concentrated residual claims created a new organizational structure which is more efficient than its predecessor.     

The Quality Delivery Option in Treasury Bond Futures Contracts

This paper uses three methods to estimate quality option values for CBOT Treasury bond futures contracts. It presents evidence regarding: (1) payoffs from exercising this option at delivery, (2) estimates from a T-bond futures pricing model that incorporates this option, and (3) estimates obtained from an exchange option pricing formula. The results indicate that this option is worth considerably less than reported by Kane and Marcus (1986a) . For example, payoffs obtained by switching from the bond cheapest to deliver three months prior to delivery to the one cheapest at time of delivery average less than 0.30 percentage points of par.     

Excess Asset Reversions and Shareholder Wealth

The ownership of pension assets in a defined benefit pension plan is an unresolved issue in corporate finance. The issue is important because it defines the appropriate investment policy for a pension fund. In this paper, we summarize the ownership debate in the form of two mutually exclusive theories. We then focus on a recently popular event in pension finance, excess asset reversions. Our paper demonstrates the valuation effects associated with this event in a stochastic dominance framework. Under certain conditions, a reversion constitutes an expropriation of wealth from the participants and beneficiaries of the plan to the firm. Using data provided by the Pension Benefit Guaranty Corporation and the Center for Research in Security Prices tape, we examine the returns to the shareholders of 58 companies which conducted excess asset reversions between 1980 and 1984. Our results show that large abnormal returns accrued to these shareholders around the time of the reversion. These findings have implications both for the appropriate investment policy of pension funds and for public policy with respect to plan terminations.     

The Mode of Acquisition in Takeovers: Taxes and Asymmetric Information

We develop a model in which the mode of acquisition conveys information concerning the value of the bidder. The model incorporates the possibility that offers containing both cash and stock can be made in a setting consistent with the U.S. tax code. We demonstrate that bidders with unfavorable private information about their equity value choose offers containing some stock to avoid the capital gains tax consequences of cash offers. The model yields a number of unique predictions about the construction of acquisition offers. We present evidence consistent with the model.     

The Effects of Stock Repurchases on Rival Firms

This paper investigates the stock price behavior of rival firms in the same industry as firms announcing stock repurchase tender offers. Using a sample of 134 repurchase announcements, I find that rival firms on average realize insignificant announcement period abnormal returns. Negative rival stock price performance is detected over longer intervals surrounding the announcement period and for a subset of announcements which ex ante were identified as most likely to affect rivals. This evidence, however, is statistically weak and does little to alter the overall conclusion that the information in repurchase announcements is primarily firm-specific.     

Equity Issuance and Adverse Selection: A Direct Test Using Conditional Stock Offers

We conduct a unique test of adverse selection in the equity issuance process. While common stock is the dominant means of payment in bank mergers, stock acquisition agreements provide target shareholders with varying degrees of protection against adverse price movements in the bidder's stock between the time of the merger agreement and the time of merger completion. We show that it is the degree of protection against adverse price changes and not the percent of stock offered in a bank merger that explains bidder merger announcement abnormal returns. This result is difficult to explain outside of an adverse selection framework.     

Measuring the Performance Drivers of a Pilot Implementation of a Purchasing Card System

Corporate purchasing cards have been offered as an efficient means of maintaining control over purchasing while reducing the administrative cost associated with the acquisition of low-dollar items. However, despite its growing popularity, there has been little systematic research on the use of this technology. This study uses archival data and a survey of users from a single large organisation to describe the nature of purchasing card technology and to investigate the consequences of its implementation. The card was found to be more positively accepted by younger, more committed employees who had shorter periods of tenure at the organisation studied, but who had received higher levels of supervisory encouragement, and who had more experience with credit cards.     

Discrimination in Mortgage Lending: A Critical Review of the Literature

This article surveys the diverse research that examines racial disparities in mortgage lending markets in the context of the fair housing legislation of recent decades. A review of the theoretical models, data, and empirical methods reveals deficiencies in all three areas. A new research agenda focusing on development of more complete models of mortgage lending together with panel data tracking mortgage loan performance over time is needed.     

The Evolution of Security Designs

We consider a competitive and perfect financial market in which agents have heterogeneous cash flow valuations. Instead of assuming that agents are endowed with rational expectations, we model their behavior as the product of adaptive learning. Our results demonstrate that adaptive learning affects security design profoundly, with securities mispriced even in the long run and optimal designs trading off underpricing against intrinsic value maximization. The evolutionary dominant security design calls for issuing securities that engender large losses with a small but positive probability, but that otherwise produce stable payoffs, almost the exact opposite of the pure state claims that are optimal in the rational expectations framework.