The current merger movement has been characterized by the willingness of the management of some acquiring companies to pay substantial merger premiums. A merger premium exists when the common stockholders of an acquired company receive cash and/or securities possessing a value greater than the company's premerger market value. The rationalization or justification of these “premiums” is based on a merger synergy concept. Contemporary merger literature recognizes two broad forms of merger synergy — the potential for greater operating efficiencies [14] and/or potential financial benefits — with the latter containing instantaneous [12] and real elements [1, 7, 9, 10, 11, 13].

The FTC reported 22,517 corporate acquisitions during the 1960s compared with 7200 for the period, 1940–1959. The increased employment of this method of corporate growth has generated a number of studies explaining certain segments of the merger movement. Attempts have been made to explain why firms merge, how firms merge, and how mergers have affected subsequent performance of firms. Mergers have been described as consummated to avoid bankruptcy (for the acquired firm), to capitalize upon managerial inefficiencies, to gain from valuation discrepancies, to achieve portfolio diversification, and for synergistic purposes and many other reasons.

Professors Nielsen and Melicher (N-M) have conducted well an interesting study of merger premiums as related to various measures of synergy connected with those mergers. Their study is another in a growing body of literature concerned with the merger phenomenon which increased substantially during the sixties and has continued into this decade. In order to provide an evaluation of their study, I shall consider their choice of research design and their analysis of research findings.

Professor Stevens has attempted to determine whether or not a consistent financial basis for merger exists as measured by premerger financial characteristics of the acquired firms. He suggests that results of his study are useful in identifying merger motives and in relating such motives to a general framework for analysis of merger movements.

Over the years there has been a growing interest in the over-the-counter (OTC) trading of exchange-listed securities (known as the third market). Although the third market has flourished and its advantages have been expounded, it has not been possible to compare accurately the third market with organized exchanges because of an incomplete quotation system. On April 5, 1971, the National Association of Security Dealers Automatic Quotation (NASDAQ) system began including bid-and-ask quotations for 30 stocks listed on the New York Stock Exchange (NYSE); see Table 1.

The theory of efficient capital markets indicates that the prices in an efficient market fully reflect all available information. In much of the literature on efficient markets the term fully reflect is made operational with the assumption that the conditions for market equilibrium can be expressed as expected returns. Fama suggests that most expected return theories can be expressed in the following manner:

(1)

where — adopting Fama's notation — E is the expected value operator; Pjt is the price of security j at time t; Pj,t+1 is its price at t+1; is the one-period percentage return (Pj,t+1|Pjt); φt is a general symbol to represent whatever set of information is assumed to be fully reflected in the price at time t; and the tildes indicate that Pj,t+1 and rj,t+1 are random variables at t.

In their paper Messrs. Reilly and Slaughter set out two questions, namely:

1. Prior to the introduction of technological advance in the securities market was there any difference in the market making between the NYSE and OTC on a sample of 30 stocks?

2. Following that introduction what was the effect on the market making of these securities listed on the NYSE?

The authors clearly stated the basic economic theory that underlies this exchange of assets and the price setting mechanism, and then concentrated on the empirical study. Their findings are inconsistent with their a priori expectations. This empirical study is well done; the methodology is sound and well presented. However, the authors appear to have overlooked one vital aspect of this type of study, i.e., institutional effects. I shall concentrate upon this area.

Louis Bachelier would be pleased with the findings reported in John T. Emery's paper, even though Bachelier wrote in 1900 before there was any popular support for technical analysis. Considering technical analysis historically, the Dow Theory was the first popular technical approach, although Charles H. Dow, editor of The Wall Street Journal at about the time of Bachelier's writing, did not consider his theory a forecasting method. Later William P. Hamilton began to forecast with Dow's Theory, and then in 1932 Robert Rhea's publication of The Dow Theory popularized this technical approach. Earlier Bachelier had struck the first blow of an obviously continuing quest to execute the technical security analysts. (A technical security analyst, often called a chartest, develops esoteric charts or computer printouts which he hopes will allow him to make better than average returns in the stock market.) In the United States serious economic and statistical testing of technical analysis did not begin until the early 1950s; these academic tests continue today. Test results support the efficient capital market theory or, put more bluntly, technical analysis does not lead to greater than average profits in the stock market. On the other hand, perhaps technical analysis does work, but no statistical method used in testing has uncovered this fact. In short, perhaps our statistical tools are not sophisticated enough to disclose the relation between stock price and “daily market indicators.”

The problem of monitoring the ongoing receivables collection experience of an enterprise which sells on credit is, in essence, the problem of identification. The concern is an accurate appraisal of customer account payment patterns — in particular, a determination of whether and to what extent those patterns vary over time. Successful execution by the credit manager of his responsibilities for policy formulation, collection enforcement, and forecasting necessarily depends heavily on the availability to him of a reliable reporting mechanism.

One of the most significant developments in macroeconomic analysis in the post-World War II era has been the dramatic resurgence of interest in the role of monetary factors in economic activity. The demand for money has been a focal point of this monetary renaissance, and in recent years a proliferation of studies has focused on questions such as the motives for holding money balances, the effects of changes in the rate of interest, and the existence of economies of scale for cash balances. The trend toward disaggregation of macro functions has been reflected in demand for money studies of the corporate sector as well as the household sector.

Professors Lewellen and Edmister (L-E) are to be complimented on careful development and specification of the basic conceptual framework for an accounts-receivable control model. I consider the model to be a real contribution to the basic theory of financial management and will find it a useful supplement to my basic financial management classes.

The paper presented by Professors Marcis and Smith (M-S), analyzing the determinants of the demand for cash and short-term Treasury obligations held by U. S. manufacturing corporations, is praiseworthy. The authors have made an interesting application of a seemingly unrelated regression (SUR) technique developed by Arnold Zellner [3] in estimating demand functions jointly for each of the liquid assets of corporations belonging to nine asset size categories. Nonetheless, I have some reservations about the implications of the model employed in their present study and the reliability of their results. Some of my reservations concern the theoretical foundation of their model itself, while others are related to their methodology and estimation techniques.

A major difficulty with testing the Modigliani-Miller (M-M) theory of the effect of leverage on the firm's value arises from the existence of interfirm differences in operating risk. Based upon the Sharpe-Lintner capital asset pricing model, the present study develops a test of the M-M theory that takes cognizance of heterogeneity with respect to operating risk. The empirical results support the M-M theory: holding total systematic risk constant, there was no relationship between leverage and required rates of return on equities. That is, investors appear to demand complete compensation for the increase in systematic risk attributable to financial leverage.

The objective of this paper is to carry out tests of the general hypothesis, most recently urged by Scherer [14, pp. 100–102] and Weston and Brigham [17, p. 689], that the cost-of-equity capital of small industrial corporations is greater than that of large industrial corporations. The paper denotes this cost as ke and defines it as the expected rate of return on the stock of a company when the current price of the stock is in equilibrium. A common designation of ke of course is the equity capitalization rate. It will be noted that this definition of the cost-of-equity capital abstracts from the flotation costs that are usually incurred when companies sell new stock. Archer and Faerber [2] have already shown that these costs are inversely related to the size of companies.

Professors Alberts and Archer provide a valuable addition to our understanding of capital markets and how resources are allocated to firms of different asset sizes. Their hypothesis is that the cost of equity capital to smaller firms is higher than it is to larger industrial firms. They test their hypothesis by analyzing the variability of returns of 658 industrial firms and attempt to determine whether variability of return is inversely related to asset size. The authors assume that for all firms Ke must equal the sum of the risk-free rate of interest and a risk premium, when risk is defined by four different measures. Two measures of risk use ex post rates of return on book value and two measures of risk employ ex post rates of return on market value. In the first two cases, risk is defined as variability of the firm alone and, in the second two cases, risk is defined as the firm's variability incorporated with the variability of a market portfolio of securities.

The bear market of the late sixties amidst inflation has led to growing concern over the validity of the proposition that stocks provide a good hedge against inflation. Conflicting arguments have been raised on both sides of the issue but a synthesis has as yet failed to emerge. The gains resulting from a careful assessment of the various propositions are obvious. If stock prices are adversely affected by inflation, the financial analyst must search for other hedges against the erosion of the purchasing power of money, while the economist must note that inflation has a depressing effect on economic growth through the rise of the cost of capital.

In this paper the traditional capital asset pricing model is reformulated as a system of simultaneous equations in which returns on similar securities are treated as endogenous variables and in which pertinent financial data for particular firms and a market factor are treated as exogenous variables. Such a system is estimated, and serious questions are raised concerning the tenability of the simple linear model so often used to explain capital asset prices under uncertainty.

Modern micro-capital theory offers three major alternative choice theoretic approaches from which a set of market equilibrium prices can be derived. These approaches are:

1. Time-state preference theory of Arrow [1] and Debreu [6],

2. The capital asset pricing model (hereafter CAPM) of Sharpe [34], Lintner [23], and Fama [7],

3. The capital growth model of Kelly [16], Breiman [5], and Latané [17]

Professors Simkowitz and Logue (S-L) remind us that capital asset pricing is a simultaneous process. Their approach differs from traditional capital market models [3 and 6 ], where an investment's risk and return characteristics depend solely on a structural relationship between asset and market portfolio returns. Simkowitz and Logue argue that, within groups of homogeneous securities, investment returns are determined simultaneously and that market portfolio return as well as certain firm-related factors are exogeneous determinants of investment returns. This comment will, first, examine their basis for a simultaneous model and, then, look at presented empirical results.

Since this comment should be primarily addressed to Professors Bicksler's and Thorp's own research and results, I will not consider those pages that contain the authors' interpretation of prior studies.

Professors Bicksler and Thorp study the short-run properties of the optimal growth model via Monte Carlo simulation. This is an interesting idea because of the mathematical difficulty of the problem.