This paper examines the relation between managerial ownership and the probability of being a target firm, and the impact of managerial ownership on target shareholder returns. The paper finds that targets have lower managerial ownership than either their industry counterparts or randomly selected nontargets. Managerial ownership is significantly lower in contested compared to uncontested offers, and in unsuccessful compared to successful cases. Managerial ownership is significantly related to abnormal returns in contested cases that are ultimately successful. The results are consistent with a positive impact of managerial ownership where it is used to negotiate, but not ultimately block, an acquisition.

This paper studies the dynamic investment policies of firms under asymmetric information.Managers make decisions to maximize the wealth of existing shareholders. In equilibrium, the superior firms invest “myopically”, choosing intrinsically lower-valued projects that produce “early” cash flows. The inferior firms follow the socially preferred rule of investing in intrinsically higher-valued projects that produce “late” cash flows. In addition to explaining investment myopia, the model generates numerous predictions regarding announcement effects of equity issues and attempts by firms to stockpile cash, firms' preferences for limits on mandatory disclosure rules, and the effects of managerial entrenchment motives.

This paper presents empirical tests of the constant volatility version of the Heath, Jarrow, and Morton model, which is also the continuous time limit of the Ho and Lee model. Using a generalized method of moments (GMM) test on three years of daily data for Eurodollar futures and futures options, the model can be rejected for most subperiods. Various biases in the fitted option prices relative to the market prices are documented through a regression study. The small sample properties and power of the GMM framework to this setting are also studied through simulations.

Consistent with Connolly's (1989), (1991) evidence, this study finds that sample size and/or error term adjustments render U.S. day-of-the-week effects statistically insignificant. In contrast, day-of-the-week effects in seven European countries and in Canada and Hong Kong are robust to individual sample size or error term adjustments, and day-of-the-week effects in five European countries survive the simultaneous imposition of both types of adjustments. In most countries where day-of-the-week effects are robust, however, the effects are statistically significant in not more than two weeks out of the month. These findings are inconsistent with explanations of the day-of-the-week effect based on institutional differences or on the arrival of new information. Thus, in the absence of other potential explanations already dismissed by Jaffe and Westerfield (1985), evidence in this study further complicates the international day-of-the-week effect puzzle.

The 39 experiments reported here examine the impact on trading profits and on market performance of awarding special trading privileges to some traders and not others. In call market experiments, the last-mover and orderflow access privileges are both modestly profitable and neither impairs market performance. In continuous market experiments, quicker access to orderflow information is quite profitable and more detailed access is possibly profitable; both privileges seem to enhance market performance slightly. By contrast, privileged marketmaking is extremely profitable and greatly impairs market performance.

Most research on hedging has disregarded both the long-run cointegrating relationship between financial assets and the dynamic nature of the distributions of the assets. This study argues that neglecting these affects the hedging performance of the existing models and proposes an alternative model that accounts for both of them. Using a bivariate error correction model with a GARCH error structure, the risk-minimizing futures hedge ratios for several currencies are estimated. Both within-sample comparisons and out-of-sample comparisons reveal that the proposed model provides greater risk reduction than the conventional models. Furthermore, a dynamic hedging strategy is proposed in which the potential risk reduction is more than enough to offset the transactions costs for most investors.

This paper analyzes the consequence for shareholders of a change in organizational form, the conversion of a corporation, or the spin-off of a unit into a limited partnership. Theory suggests that, prior to the Tax Reform Act of 1986, the tax benefits of conversion to a limited partnership and the creation of a new entity separate from the parent corporation should have a positive effect on shareholder wealth. On the other hand, the increase in agency costs of such an organizational change should decrease the wealth of shareholders. Empirical results lend support to hypotheses that predict an increase in stock price at the announcement of the conversion, but cannot identify the source of the gain.

This study examines whether earnings changes convey information in bond markets and finds a significant positive (negative) reaction to unexpected earnings increases (decreases). The results are consistent whether earnings announcements precede or follow dividend announcements. Thus, earnings surprises convey information to bond markets and changes in firm value are split among bondholders and stockholders. This is in contrast to evidence from studies examining unexpected dividend announcements where bond price reaction is asymmetric. Cross-sectional analysis reveals that bond excess returns are positively related to earnings surprises.

New measures of stock return volatility are developed to increase the precision of stock option price estimates. With Bayesian statistical methods, volatility estimates for a given stock are developed using prior information on the cross-sectional patterns in return volatilities for groups of stocks sorted on size, financial leverage, and trading volume. Call option values computed with the Bayesian procedure generally improve prediction accuracy for market prices of call options relative to those computed using implied volatility, standard historical volatility, or even the actual ex post volatility that occurred during each option's life. Although the Bayesian methods produce biased call price estimators, they do reduce the systematic tendency of standard pricing approaches to overprice (underprice) options on high (low) volatility stocks. Little bias improvement is observed with respect to the time to maturity and moneyness of the call options.