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on Corporate Finance |
| By: | Michelle Lowry; Micah S. Officer; G. William Schwert |
| Abstract: | The monthly volatility of IPO initial returns is substantial and fluctuates dramatically over time. Moreover, the monthly volatility of initial returns is significantly positively correlated with monthly mean initial returns. This contrasts strongly with the strong negative correlation between the mean and volatility of secondary-market returns. Consistent with IPO theory, our empirical findings suggest that information asymmetry about the firm’s market value drives this positive correlation. Specifically, months in which a greater portion of the offerings are for companies for which information asymmetry is likely to be a problem tend to have higher average initial returns and a higher volatility of initial returns. Moreover, information asymmetry proxies are able to explain much of the positive correlation between average initial returns and the variability of initial returns, and the same proxies are significantly associated with both the level and dispersion of initial returns at the firm level. |
| JEL: | G32 G24 G14 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12295&r=cfn |
| By: | Roger Gordon; Martin Dietz |
| Abstract: | How do dividend taxes affect firm behavior and what are their distributional and efficiency effects? To answer these questions, the first problem is coming up with an explanation for why firms pay dividends, in spite of their tax penalty. This paper surveys three different models for why firms pay dividends, and then uses each model to examine the behavioral and efficiency effects of dividend taxes. The three models examined are: the “new view,” an agency cost explanation, and a signaling model. While all three models forecast dividends, their forecasts regarding other firm behavior, and their forecasts for the efficiency and distributional effects of a dividend tax, often differ. Given the evidence to date, we find the agency model is the one most consistent with the data. |
| JEL: | H25 G35 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12292&r=cfn |
| By: | Frank Milne (Queen's University); David Kelsey (University of Exeter) |
| Abstract: | This paper studies corporate governance when a firm operates in imperfect markets. We derive firms’ decisions from utility maximisation by individuals. If those involved in decisions are also consumers, the usual monopoly distortion is reduced. Corporate governance can effect the equilibrium in the product (or input) markets. This enables us to endogenise the objective function of the firm. If the firm cannot commit not to change its constitution, we find a Coase-like result where all market power is lost in the limit. We present a more abstract model of governance in the presence of market distortions. |
| Keywords: | corporate governance, stakeholder, oligopoly, strategic delegation |
| JEL: | D70 L13 L20 |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1079&r=cfn |
| By: | Carl Chiarella (School of Finance and Economics, University of Technology, Sydney); Andrew Ziogas (School of Finance and Economics, University of Technology, Sydney) |
| Abstract: | This paper considers the Fourier transform approach to derive the implicit integral equation for the price of an American call option in the case where the underlying asset follows a jump-diffusion process. Using the method of Jamshidian (1992), we demonstrate that the call option price is given by the solution to an inhomogeneous integro-partial differential equation in an unbounded domain, and subsequently derive the solution using Fourier transforms. We also extend McKean?s incomplete Fourier transform approach to solve the free boundary problem under Merton?s framework, for a general jump size distribution. We show how the two methods are related to each other, and also to the Geske-Johnson compound option approach used by Gukhal (2001). The paper also derives results concerning the limit for the free boundary at expiry, and presents a numerical algorithm for solving the linked integral equation system for the American call price, delta and early exercise boundary. This scheme is applied to Merton?s jump-diffusion model, where the jumps are log-normally distributed. |
| Keywords: | American options; jump-diffusion; Volterra integral equation; free boundary problem |
| JEL: | C61 D11 |
| Date: | 2006–05–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:174&r=cfn |
| By: | Eckhard Platen (School of Finance and Economics, University of Technology, Sydney) |
| Abstract: | This paper aims to discuss the optimal selection of investments for the short and long run in a continuous time financial market setting. First it documents the almost sure pathwise long run outperformance of all positive portfolios by the growth optimal portfolio. Secondly it assumes that every investor prefers more rather than less wealth and keeps the freedom to adjust his or her risk aversion at any time. In a general continuous market, a two fund separation result is derived which yields optimal portfolios located on the Markowitz efficient frontier. An optimal portfolio is shown to have a fraction of its wealth invested in the growth optimal portfolio and the remaining fraction in the savings account. The risk aversion of the investor at a given time determines the volatility of her or his optimal portfolio. It is pointed out that it is usually not rational to reduce risk aversion further than is necessary to achieve the maximum growth rate. Assuming an optimal dynamics for a global market, the market portfolio turns out to be growth optimal. The discounted market portfolio is shown to follow a particular time transformed diffusion process with explicitly known transition density. Assuming that the transformed time growth exponentially, a parsimonious and realistic model for the market portfolio dynamics results. It allows for efficient portfolio optimization and derivative pricing. |
| Keywords: | growth optimal portfolio; portfolio selection; risk aversion; minimal market model |
| JEL: | G10 G13 |
| Date: | 2005–08–01 |
| URL: | http://d.repec.org/n?u=RePEc:uts:rpaper:163&r=cfn |
| By: | Gunther Capelle-Blancard (Centre d'Economie de la Sorbonne et EconomiX Université Paris Nanterre); Nicolas Couderc (Centre d'Economie de la Sorbonne) |
| Abstract: | This paper investigates the relative importance of different types of news in driving significant stock price changes of firms in the defense industry. We implement a systematic event study with a sample of the 58 largest publicly listed companies in the defense industry, over the time period 1995-2005. We first identify, for each firm, the statistically significant abnormal returns over the time period, and then we look for information releases likely to cause such stock price movements. We find that stock price movements in the defense industry are, in many ways, influenced by the same events as in other industries (key role of formal earnings announcements or analysts' recommendations) but this industry also has some specific features, in particular the influence of geopolitical events and the relevance and frequency of bids and contracts on stock prices. |
| Keywords: | Event study, financial markets, defense industry, information releases, GARCH models. |
| JEL: | G14 G34 L64 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:bla06037&r=cfn |