Institutional investors' holdings surrounding equity rights offerings

We examine shareholding surrounding Swedish rights offerings using detailed information on the ownership in firms. We analyze shareholding levels and their changes for domestic and foreign institutional investors. As institutional holdings change, domestic institutions increase their holdings more than foreign institutions. Our examination of low and high buying activities by institutional investors surrounding rights offerings shows no stock picking ability, thus not supporting the “smart-money hypothesis” (Gibson et al., 2004). We also find that investor domicile influences firm value following the offering. Overall, foreign investors exhibit a strong and opposite directional reaction to adverse selection costs than domestic investors.     

Managerial actions and nominal stock price levels

We examine nominal and real stock prices and the sequential price pattern of stock dividends and stock splits. We find that the average stock price has been fairly stable over time except for two decades in the beginning and end of the twentieth century. Inclusion of these periods yield a decline over time which is generally consistent with the drop in price levels found by Chittenden et al. [2010. “A Note on Affordability and the Optimal Share Price.” Financial Review 45: 205–216]. In a multivariate setting, the frequency of stock dividends and stock splits is positively related to the frequency for these events the prior year and recent market return. In further tests of the price change we find a positive relationship to the median price change for stock dividends/splits and negatively to labour income growth for stock splits. These findings indicate that stock price reduction via stock dividends and splits attracts individual investors as income grows. One key conclusion is that the primary reason for any stock action, dividend or split, is to fit the ‘norm’ stock price level of the market.     

An Empirical Evaluation of the Friedman Hypothesis of Inflation on Capital Asset Pricing

An empirical model incorporating the Friedman inflation uncertainty hypothesis is evaluated on capital asset pricing in conjunction with the covariance effect of the Fisher inflation hypothesis. The Fisher-Friedman capital asset pricing empirical model (FFCAPM) is compared to the capital asset pricing model (CAPM) and the Chen-Boness (C-B) model for explanatory power and significance over three periods. The FFCAPM performed better than the two competing models in explaining the variation in equity returns. The Friedman hypotheses of a positive economy-wide inflation adjustment and a negative inflation uncertainty impact are supported. A firm-specific inflation response of Fisher inflation covariance was also supported. These results indicate that empirical support for the Fisher effect may be limited given the normal testing procedure of simply adding an inflation term as in previous studies.     

The Firm Size Effect and the Economic Cycle

Small firms have, on average, lower return on assets and higher leverage than do large firms. Small firms tend to do well in good economic conditions but to perform poorly in the worst economic conditions. We investigate the hypothesis that the small firm effect is manifest in the expansion phase of the economic cycle but not in the contraction phase. The empirical results of our study confirm the hypothesis for 1976–95. We use the alpha, residual, and regression methods in testing the hypothesis.     

Sovereignty, Separation and Risk Premiums

This study investigates the risk premia of Canadian debt issuers in the U.S. capital markets under conditions of sovereignty stress. In particular, the impact of separatist activity is considered. The incidence of separation news around the sale of debt issues is associated with a specific increase in the proceeds yield or cost to the issuer, but not the market yield. Debt issues by Quebec parties within the separation news event window had an added cost. The added cost is estimated at more than 0.56% to the issuer or about $1.30 million per average $230.77 million issue. These costs are additional fees that are paid to the investment banking syndicate, but these do not increase the yield to the investors. Brown, Durbin and Evans (BDE) recursive residuals tests support the hypothesis of structural changes over time in the pricing process. Debt issues from other countries facing political risk may be priced in a similar manner.