Do the Merits Matter More? The Impact of the Private Securities Litigation Reform Act

This article examines the effect of the Private Securities LitigationReform Act of 1995 (PSLRA) on stockholder lawsuits. We explorethe role of restatements, earnings forecasts, and insider tradingin the filing and resolution of lawsuits for a sample of hightechnology firms. Consistent with our predictions, there isa post-PSLRA shift away from litigation based on forward-lookingearnings disclosures. Conversely, there is a significantly greatercorrelation between litigation and both earnings restatementsand abnormal insider selling after the PSLRA. Finally, we finda post-PSLRA increase in the likelihood of settlement for casesinvolving earnings restatements.     

Inefficient sales delays by a durable‐good monopoly facing a finite number of buyers

This article offers a new explanation for unscheduled price cuts and slow adoption of durable goods. We study a standard durable‐good monopoly model with a finite number of buyers and show that this game can have multiple subgame perfect equilibria in addition to the Pacman outcome—including the Coase conjecture. Of particular interest is a class of equilibria where the seller first charges a high price and only lowers that price once some—but not all—high‐valuation buyers purchase. This price structure creates a war of attrition between those buyers, which delays market clearing and rationalizes unscheduled purchase and price cut dates.     

When are contrarian profits due to stock market overreaction?

If returns on some stocks systematically lead or lag those ofothers, a portfolio strategy that sells 'winners' and buys 'losers'can produce positive expected returns, even if no stock's returnsare negatively autocorrelated as virtually all models of overreactionimply. Using a particular contrarian strategy we show that,despite negative autocorrelation in individual stock returns,weekly portfolio returns are strongly positively autocorrelatedand are the result of important cross-auto-correlations. Wefind that the returns of large stocks lead those of smallerstocks, and we present evidence against overreaction as theonly source of contrarian profits.     

Stock market prices do not follow random walks: evidence from a simple specification test

In this article we test the random walk hypothesis for weeklystock market returns by comparing variance estimators derivedfrom data sampled at different frequencies. The random walkmodel is strongly rejected for the entire sample period (1962-1985)and for all subperiods for a variety of aggregate returns indexesand size-sorted portfolios. Although the rejections are duelargely to the behavior of small stocks, they cannot be attributedcompletely to the effects of infrequent trading or time-varyingvolatilities. Moreover, the rejection of the random walk forweekly returns does not support a mean-reverting model of assetprices.     

Buyer power and mutual dependency in a model of negotiations

We study bilateral bargaining between several buyers and sellers in a framework that allows both sides, in case of a bilateral disagreement, flexibility to adjust trade with each of their other trading partners and receive the gross benefit generated by each adjustment. A larger buyer pays a higher per‐unit price when buyers' bargaining power in bilateral negotiations is sufficiently low, and a lower price otherwise. An analogous result holds for sellers. These predictions, and the implications of different technologies, are explained by the fact that size is a source of mutual dependency and not an unequivocal source of power.     

Fiduciary responsibility and potential liabilities in health care cost management

This article addresses the key legal issues facing ERISA welfare plan fiduciaries in health care cost management and explores the current status of a number of fiduciary obligations particularly relevant to welfare plan trustees. The authors discuss the fiduciary issues raised by the selection of a health care delivery system, plan design decision making and provider discount arrangements with health plans, and provide suggestion for administering reimbursements for health care costs from third party recoveries and addressing provider fraud.     

Index-futures arbitrage and the behavior of stock index futures prices

This article examines intraday transaction data for S&P500 stock index futures prices and the intraday quotes for theunderlying index. The data indicate that the futures price changesare uncorrelated and that the variability of these price changesexceeds the variability of price changes in the S&P 500index. This excess variability of the futures over the indexremains even after controlling for the nonsynchronous pricesin the index quotes, which induces auto-correlation in the indexchanges. We advance and examine empirically two hypotheses regardingthe difference between the futures price and its theoreticalvalue: that this 'mispricing' increases on average with maturity,and that it is path-dependent. Evidence supporting these hypothesesis presented.     

Data-snooping biases in tests of financial asset pricing models

Tests of financial asset pricing models may yield misleadinginferences when properties of the data are used to constructthe test statistics. In particular, such tests are often basedon returns to portfolios of common stock, where portfolios areconstructed by sorting on some empirically motivated characteristicof the securities such as market value of equity. Analyticalcalculations, Monte Carlo simulations, and two empirical examplesshow that the effects of this type of data snooping can be substantial.     

The mispricing of U.S. Treasury bonds: a case study

This article documents an apparent pricing anomaly involving9? percent, 30-year Treasury bonds during the months of Mayand June 1986. During this period, the price of the 9?s rosesharply relative to the prices of other long-term Treasury bondsand created a potential arbitrage opportunity. In addition,owners of the 9? bonds were able to borrow at a zero interestrate by pledging their bonds. Detailed examination reveals thatthis relative pricing anomaly cannot be attributed to changesin the level or term structure of interest rates or to differencesbetween the bonds with respect to liquidity, taxation, or duration.