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Abstracts of Articles in
The Financial Review
Vol. 36, No. 1 - February 2001
“Forced Versus Voluntary Dividend Reduction: An Agency Cost Explanation”
Ranjan D'Mello, Tarun Mukherjee, and Oranee Tawatnuntachai“Aggregate Dividend Behavior and Permanent Earnings Hypothesis”
Ming-Shiun Pan“Selectivity and Market Timing Performance of Fidelity Sector Mutual Funds”
Wilfred L. Dellva, Andrea L. DeMaskey, and Colleen A. Smith“Is Volatility Risk for the British Pound Priced in U.S. Options Markets?”
Ghulam Sarwar“Index Options-Futures Arbitrage: A Comparative Study with Bid/Ask and Transaction Data”
Joseph K.W. Fung, Henry M.K. Mok“Further Evidence on Mean Reversion in Index Basis Changes”
Yan He and Chunchi Wu“The Effects of the Asian Crisis on Global Equity Markets”
Sorin A. Tuluca and Burton Zwick
“Forced Versus Voluntary Dividend Reduction: An Agency Cost Explanation”
Ranjan D'Mello, Tarun Mukherjee, and Oranee Tawatnuntachai
Volume 36, No. 1, pp. 1-22We examine whether the agency cost arising from shareholder-bondholder conflict is an important determinant of the timing of dividend reduction decisions. Firms forced to reduce dividends owing to bond covenant violations experience lower earnings, more frequent losses, and greater earnings declines around the dividend reduction year than do firms that voluntarily reduce dividends. Relative to voluntary-reduction firms, forced-reduction firms have higher debt-to-equity ratios and managerial holdings. These findings coupled with the increased dividend payout ratios and lower announcement period returns suggest that financially distressed firms that anticipate poor performance have greater incentives to delay reducing dividends to avoid a wealth transfer to bondholders.
“Aggregate Dividend Behavior and Permanent Earnings Hypothesis”
Ming-Shiun Pan
Volume 36, No. 1, pp. 23-38The study examines the aggregate dividend behavior of U.S. corporations based on the permanent earnings hypothesis. Using annual data of aggregate earnings and dividends from 1871-1993, I find that although managers change dividends proportional to permanent earnings changes, they make revisions with a larger percentage change in dividends than in permanent earnings. The results from the post-war data show that firms follow a partial adjustment policy with a long-term dividend payout target in mind and make revisions with a delay. The quarterly data analysis yields results similar to those of the post-war annual data.
“Selectivity and Market Timing Performance of Fidelity Sector Mutual Funds”
Wilfred L. Dellva, Andrea L. DeMaskey, and Colleen A. Smith
Volume 36, No. 1, pp. 39-54In this paper, we test the selectivity and timing performance of the Fidelity sector mutual funds during the 1989-1998 time period. We use the S&P 500, the Dow Jones Industry Group Total Return Indexes, and the Dow Jones Subgroup Total Return Indexes as benchmarks. When we use the Dow Jones Industry benchmarks, our results indicate that many sector fund managers have positive selectivity but negative timing ability. We also find that the results are sensitive to our choice of benchmark and timing model.
“Is Volatility Risk for the British Pound Priced in U.S. Options Markets?”
Ghulam Sarwar
Volume 36, No. 1, pp. 55-70This paper estimates the premium for volatility risk for European currency options written on British pounds. The average annualized premiums for volatility risk is neither statistically different from zero nor invariant to the option’s moneyness. However, the risk premium is positively and nonproportionaly related to the level of volatility, except for out-of-the-money options. Finding a zero premium for volatility risk does not undermine the assumption of a zero-price volatility risk in many extant stochastic-volatility option pricing models and the option pricing formulas in those models.
“Index Options-Futures Arbitrage: A Comparative Study with Bid/Ask and Transaction Data”
Joseph K.W. Fung, Henry M.K. Mok
Volume 36, No. 1, pp. 71-54We can infer from bid/ask quotations and transaction prices that where options contracts are traded under a competitive open-outcry market-making system, the options and futures markets are dynamically efficient. Ex-ante analysis shows that potential arbitrage opportunities disappear within five minutes. Transaction price data understate both the frequency and magnitude of arbitrage opportunities that are signaled by bid/ask quotes. Quotes stale fast, so opportunities are short-lived and some of the arbitrage opportunities are deceptive. Nonetheless, the evidence suggests that bid/ask quotes provide valuable trading signals to arbitrageurs. Profitability from exploiting the quotes is negatively related to execution delay and execution risk.
“Further Evidence on Mean Reversion in Index Basis Changes”
Yan He and Chunchi Wu
Volume 36, No. 1, pp. 95-124We provide further evidence on the stochastic behavior of the futures minus cash index basis. In addition to infrequent trading, we identify index aggregation as an additional source of mean reversion in basis changes. An aggregation of individual stocks in the index portfolio produces a moving average component that induces a negative autocorrelation in basis changes. Our empirical results show that index price and basis changes often contain a moving average component. After the effects of infrequent trading and index aggregation are purged, we find that the autocorrelation of the adjusted index basis changes is significantly reduced.
“The Effects of the Asian Crisis on Global Equity Markets”
Sorin A. Tuluca and Burton Zwick
Volume 36, No. 1, pp. 125-142We investigate the comovement of daily returns from 13 Asian and non-Asian markets before and after the advent of the Asian crisis in July 1997. For individual pairs of markets, our analysis shows a seven-fold increase in feedback relations. For the markets as a group, we find a reduction in the number of common factors that generate returns. Since the post-crisis period included the collapse of the Russian market and attack on the Brazilian real, we also analyze six three-month subperiods surrounding the crisis. We find that the perceived increase in comovement during the post-crisis interval was the result of subperiod transitory shocks.