Abstracts of Articles in
The Financial Review
Vol. 33 No. 4 - November 1998
- "Board Composition, Managerial Ownership, and Firm Performance:
An Empirical Analysis" - Scott W. Barnhart, Florida Atlantic University, and
Stuart Rosenstein, University of Colorado/Denver
Volume 33, No. 4, pp. 1-16 - "Golden Parachutes, Board and Committee Composition, and Shareholder's Wealth"
- Wallace N. Davidson III, Theodore Pilger, and Andrew Szakmary
University of Illinois/Carbondale
Volume 33, No. 4, pp. 17-32Abstract: Takeover defense mechanisms have become common for many modern corporations. In this research, we examine one potential takeover defense mechanism, golden parachutes. In particular, the relationship between the board of directors (and the board committees) and the question of whether the parachutes are aligned with shareholder interests or are a means of entrenching management, is studied. Results show that the composition of the board of directors' compensation committee influences the market's perceived outcome of golden parachute adoption. When insiders and affiliated outsiders dominate the board's compensation committee, negative returns are more likely to occur than when independent outsiders control the committee.
Keywords: golden parachutes, board of directors, board composition JEL classification: G34
- "Stock Splits: An Instituitonal Investor Preference"
- Helen B. Mason, Centenary College, and
Roger M. Shelor, Louisiana Tech University
Volume 33, No. 4, pp. 33-46 - "The Effect of Junk Bond Defaults on Common Stock Returns"
- Joseph D. Vu, DePaul University
Volume 33, No. 4, pp. 47-60 - "A Futures Duration-Convexity Hedging Method"
- Robert T. Daigler, Florida International University, and
Mark Copper, Wayne State University
Volume 33, No. 4, pp. 61-80 - "Option Pricing with Heterogeneous Expectations"
- Chen Guo, University of Ottawa
Volume 33, No. 4, pp. 81-92Abstract: This paper re-derives the finite mixture option pricing model of Ritchey (1990), based on the assumption that the option investors hold heterogeneous expectations about the parameters of the lognormal process of the underlying asset price. By proving that the model admits no riskless arbitrage, this paper justifies that the entire family of finite mixture of lognormal distributions is a desirable candidate set for recovering the risk-neutral probability distributions from contemporaneous options quotes. The parametric method derived from the model is significantly simpler than the nonparametric method of Rubinstein (1994) for recovering the risk-neutral probability distributions from contemporaneous option prices.
Keywords: mixture of distributions, options, heterogeneous expectations
JEL classification: G12 - "Further Evidence on Equity Market Contagion: the FSLIC's Solvency and the Liquidity Crisis of Financial Corporation of America"
- Elizabeth S. Cooperman, University of Colorado/Denver,
Glenn A. Wolfe, University of Toledo,
James A. Verbrugge, University of Georgia, and
Winson B. Lee, formerly, University of Colorado/Denver
Volume 33, No. 4, pp. 93-106Abstract: Whether pure contagion is more likely to occur when a federal deposit insurer is severely undercapitalized is an unanswered question. This paper provides evidence on this issue by examining the stock market reaction of savings and loans (S&Ls) to the crisis of Financial Corporation of America (FCA) in 1984, when the Federal Savings and Loan Insurance Corporation was fiscally unsound. Consistent with a contingent insurance guarantee hypothesis, the results show large, significant negative abnormal returns (ARs) for a portfolio of high insured deposit S&Ls during FCA's crisis.
Keywords: Regulatory discipline, banks, savings and loans, contagion, deposit insurance
JEL classification: G21/G28 - "Is There Excess Capacity in Rural Banking Markets?"
- James E. McNulty and Aigbe Akhigbe, Florida Atlantic University
Volume 33, No. 4, pp. 107-124 - "Adjustment Process of the Price to Book Ratio for Regulated Utilities"
- Emeka T. Nwaeze, Rutgers University
Volume 33, No. 4, pp. 125-140Abstract:This study tests whether shifts in the price to book ratio (PB) of electric utilities follow a partial adjustment rather than the pure adjustment process implied by the cost-plus pricing policy. The results for utilities are compared to benchmark results for manufacturing firms. It is shown that shifts in PB follow a partial adjustment process. The adjustment period is longer for utilities than for manufacturing firms and extends well beyond the average regulatory lag. Moreover, shifts in PB are associated with changes in future profits and investments.
Keywords: Price to book ratio, adjustment process, regulatory effects
JEL classification: L94/L51 - "Pension Benefits: Wealth Accumulation, and Capital Market Equilibruim:
A Life Cycle Hypothesis-Based Dynamic Model" - Winston T. Lin, State University of New York/Buffalo, and
Yueh H. Chen, National Sun Yat-sen University
Volume 33, No. 4, pp. 141-162Abstract:This paper examines the impacts of pension benefits on capital asset pricing in conjunction with wealth accumulation and retirement, and derives and tests a dynamic capital asset pricing model (CAPM) within the framework of a life cycle hypothesis-based dynamic model. The life cycle hypothesis-based dynamic model maximizes the expected utility of the individual's lifetime wealth in a continuous time process. An optimal solution of the individual's wealth path, incorporating the ages of retirement and death, is obtained and, based on the optimal wealth path, an analysis of comparative dynamics is pursued. The dynamic CAPM is then derived from the optimal wealth path; simulation and nonparametric tests are undertaken to evaluate the performance of the dynamic CAPM as compared to the traditional model which does not consider the impacts of pension benefits and the static model that incorporates the effects of pension benefits. The test results suggest that the proposed dynamic CAPM closely states the expected rate of return for a capital asset; that the new dynamic CAPM is preferable over the static model that is preferable over the traditional model; and that the three models considered are statistically distinguishable from one another.
Keywords: Optimal wealth path, pension benefits, dynamic capital asset pricing, life cycle hypothesis, nonparametric Wilcoxon signed-rank test
JEL classification: D91/G12/G23
Abstract: Our objective is to examine the sensitivity of simultaneous-equations techniques in corporate governance research. We model Tobin's Q, board composition, and managerial ownership using a three-equation instrumental variables approach, with two specifications and four instruments. We find that the variables are jointly determined. However, results depend strongly on the specification of the model and the instruments. We conclude that results using simultaneous equations methods must be interpreted cautiously, OLS estimates should not be casually dismissed, and that sensitivity analysis is essential when estimating an empirical model whose structure is uncertain.Keywords: simultaneous equation models, cross-sectional methods, corporate governance
JEL classifications: C31/G34
Abstract: This study examines the relationship between the level of institutional ownership and the likelihood that firms will enact a stock split. There is evidence of a positive relationship between institutional ownership and subsequent split behavior. A firm size effect emerges from the finding that larger firms have higher percentages of institutional owners. This implies that institutional investors either encourage stock split behavior or invest in firms that exhibit indicators of eminent stock splits. Institutions purchasing shares before the split are likely to obtain short-term and long-term earnings increases.Keywords: stock splits, institutional investors
JEL classifications: G30/G32
Abstract: This paper examines the effect of junk bond defaults on common stock returns. The evidence indicates that stockholders uncover the signs of financial distress long before the default date. Stock prices fall sharply at the time of the default announcement. Although stocks of fallen angel sample recover slowly and steadily after the default announcement, stocks of the original-issue junk bond sample continue to decline. On average, bankrupt firms suffer larger negative stock returns than defaulted firms not only at the time of announcement, but also in both pre- and post-event periods.Keywords: junk bond, default, fallen angels, bankruptcy
JEL classifications: G30/G33
Abstract: A duration-based hedge ratio is the conventional method to hedge against price changes of a fixed-income instrument. However, the relationship between bond prices and interest rates is nonlinear, creating a convexity effect. Moreover, term structure changes often are nonparallel in nature, which causes imperfect hedges for the duration-based hedging model. One solution to these problems is to dynamically change the duration-based hedge ratio; however, this procedure is costly and is not effective when jumps in prices occur. A superior solution is to develop a two-instrument hedge ratio that simultaneously hedges both duration and convexity effects. This paper first presents such a two-instrument hedge ratio and then we examine its effectiveness. The simulation results show that this duration-convexity hedge ratio is vastly superior to alternative hedge ratio methods for both simple and complex changes in the term structure.Keywords: futures, hedging, duration, convexity
JEL classifications: G13
Abstract:The literature indicates that it is difficult to identify and quantify the degree of excess capacity in banking. Economic theory indicates that there are at least three indicators of excess capacity in banking: (a) low loan-to-asset ratios, (b) low profitability and (c) high per unit operating expense relative to some norm. If excess capacity exists, it will be easiest to identify, through these indicators, at small rural banks. This paper finds significant evidence of excess capacity at rural Colorado banks using univariate analysis; simultaneous equations analysis reinforces this conclusion. It appears that the "excess capacity effect" outweighs the "market power effect" in these rural banking markets.Keywords: banking markets, excess capacity, univariate analysis, simultaneous equations analysis
JEL classification: E44/G21/D24
Return to the top of the page.