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In this paper, we estimate the expected as opposed to the actual fall-off of share prices on their ex-dividend day using option prices. This provides an alternative test of an implication of the tax clientele hypothesis, namely, that the fall-off should be less than the dividend and that there should be a positive monotonic relationship between the expected fall-off and the dividend yield. Our method avoids the sampling problem present in previous studies where the ex-post fall-off was used as a proxy for the ex ante one under the assumption of rational expectations. Its disadvantage, however, is that it exhibits heteroscedasticity which cannot be removed. [ABSTRACT FROM AUTHOR]

This paper uses British data to examine the effects of dividend taxes on investors' relative valuation of dividends and capital gains. British data offer great potential to illuminate the dividends and taxes question, since there have been two radical changes and several minor reforms in British dividend tax policy during the last 30 years. Studying the relationship between dividends and stock price movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors' valuation of dividends. Using daily data on a small sample of firms, and monthly data on a much broader sample, we find clear evidence that taxes affect the equilibrium relationship between dividend yields and market returns. These findings suggest that taxes are important determinants of security market equilibrium and deepen the puzzle of why firms pay dividends. [ABSTRACT FROM AUTHOR]

UK companies raise virtually all of their new equity capital via the fights issue method. Companies can guarantee the subscription of their issues by having them underwritten (the equivalent of standby arrangements in the USA), and in recent years, this procedure has been adopted for over 90% of UK rights issues. Underwriting is usually carried out on a fixed fee basis representing at least 1¼% of the money raised, and hence it is clear that quite substantial sums of money are involved. Since underwriting is simply a put option giving the company the right to put a failed issue onto the underwriter, we can use option valuation models to determine whether this money is well spent. In this paper, we describe an application of the Black and Scholes model to the valuation of rights issue underwriting agreements over the period 1962–1975. Model prices are compared with the fees charged in order to assess whether the latter represent competitive prices. In fact, over this period, companies appear to have overpaid for underwriting. We cannot conclude from this alone, however, that the underwriting market is inefficient, since there may well be hidden ‘side payments’ between participants in the market. This issue is addressed, at least in a qualitative sense, in the final section of this paper. [ABSTRACT FROM AUTHOR]

In stressing the potential benefits of international diversification, previous empirical research has not specifically investigated the effect of institutional restrictions on the cost of foreign investment. This study adopts the British viewpoint and, after examining the cost of exchange controls and their effect on the potential benefits of international diversification, examines how a sample of internationally diversified British closed-end investment trusts performed within the institutional environment of the sixties. The previous empirical studies are reviewed in section II. Section III considers the special costs and risks of foreign investment from the British viewpoint. Section IV describes the sample of international mutual funds whose performance is investigated in section V. Section VI specifically considers the effect of foreign investment on the funds' performance. The paper is summarized in section VII. [ABSTRACT FROM AUTHOR]

The purpose of Part I of this paper is to place the contribution of Guttentag-Lindsay in historical perspective and in particular to relate the entire controversy concerning the uniqueness of commercial banks to the nineteenth century dispute regarding the uniqueness of the Bank of England. My objective will be accomplished primarily by showing how closely the Guttentag-Lindsay model parallels the framework used by Bagehot. Bagehot's objectives in Lombard Street (1873) were to disabuse the politicians and the financial community of the view that the Bank of England was not unique (i.e., that it was "like any other bank"), to show in what ways the Bank was unique, and to draw the implications of the Bank's uniqueness for Bank policies. [ABSTRACT FROM AUTHOR]

This paper investigates the market's reaction to U. K. Insider transactions and analyzes whether the reaction depends on the firm's ownership. We present three major findings. First, differences in regulation between the U. K. And United States, in particular the speedier reporting of trades in the U. K. , may explain the observed larger abnormal returns in the U. K. Second, ownership by directors and outside shareholders has an impact on the abnormal returns. Third, it is important to adjust for news released before directors' trades. In particular, trades preceded by news on mergers and acquisitions and CEO replacements contain significantly less information. [ABSTRACT FROM AUTHOR]

Using London Stock Exchange data, we test the central implication of the canonical model of Ho and Stoll (1983) that relative inventory differences determine dealer behavior. We find that relative inventories explain which dealers obtain large trades and show that movements between best ask, best bid, and straddle are highly correlated with both standardized and relative inventory changes. We show that the mean reversion in inventories is highly nonlinear and increasing in inventory levels. We show that a key determinant of variations in interdealer trading is inventories and that interdealer trading plays an important role in managing large inventory positions. [ABSTRACT FROM AUTHOR]

This paper describes an empirical study of UK rights issues, involving various tests of semi-strong form market efficiency with respect to the announcement of rights issues. In addition, the Price Pressure Hypothesis, which asserts that equity issues, by increasing the supply of shares, temporarily depress the share price, is tested against the competing Substitution Hypothesis. Since this involves estimating the demand curve for a company's shares, our results provide evidence not only on market efficiency but also on market liquidity, and whether companies can raise new equity at existing market prices. The study is also of methodological interest in that it uses a number of alternative models for testing market efficiency, thus allowing us to test the sensitivity of our conclusions to the particular methodology employed. This is also one of the first studies to use the new London Share Price Database (LSPD), which is the first comprehensive source of UK share returns data to become available for research purposes. [ABSTRACT FROM AUTHOR]

This paper investigates a sample of forty-seven British closed-end investment trusts over the interval 1960 to 1970. Using the traditional performance measures of Jensen, Treynor, and Sharpe, it was found that no trust in any of the intervals studied had performance measures that were significantly different from zero. This either means that the test was not powerful enough to identify any superior performance if it existed, or that no trust significantly outperformed the LSE. Two other performance measures were investigated: The first involved an empirically estimated security market line and the second the zero-beta form of the capital asset pricing model. In both cases some significant measures of performance were obtained. On investigating whether the performance measures abstracted from beta, it was found that whereas the new measures were related to beta the effect in the case of the traditional measures was insignificant. [ABSTRACT FROM AUTHOR]

This article presents comments on the research paper by Joseph Aschheim entitled "Supplementary Security-Reserve Requirements Reconsidered." Presented are comments on how the volume of bank deposits is regulated in Great Britain. The author states that Aschheim's analysis is "limited to supplementary security-reserve requirements with the objective of insulating bank-held government debt, in whole or in part, from the impact of restrictive monetary policies on the private credit market." Comments on the liquidity ratio in Great Britain are also provided.

Based upon a large data set of public and private firms in the United Kingdom, I find that compared to their public counterparts, private firms rely almost exclusively on debt financing, have higher leverage ratios, and tend to avoid external capital markets, leading to a greater sensitivity of their capital structures to fluctuations in performance. I argue that these differences are due to private equity being more costly than public equity. I further examine the private firms subsample to show that private equity is more costly than its public counterpart due to information asymmetry and the desire to maintain control. [ABSTRACT FROM AUTHOR]

This paper examines the impact of a major change in dividend taxation introduced in the United Kingdom in July 1997. The reform was structured in such a way that the immediate impact fell almost entirely on the largest investor class in the United Kingdom, namely pension funds. We find significant changes in the valuation of dividend income after the reform, in particular for high-yielding companies. These results provide strong support for the hypothesis that taxation affects the valuation of companies, and that pension funds were the effective marginal investors for high-yielding companies. [ABSTRACT FROM AUTHOR]

Most of the existing studies on the international capital market are based on a segmented market approach. This approach treats the different national capital markets as separated entities, hardly related to each other. For this reason (under the assumption of market segmentation), comparable capital assets may differ in their return on different national markets. Although market segmentation enjoys a surprisingly large following, it is not the only possible interpretation of the international capital market. The alternative hypothesis, i.e., that prices of capital assets in the international capital market behave as if there is one multinational perfect capital market, should be considered. The one market hypothesis has the advantage of being consistent with much of the accepted economic theory. Also the one market hypothesis is unambiguous where market segmentation can stand for any number of specific imperfect market formations. Market segmentation is widely accepted as the only possible structure of the international capital market. Different currency areas, separated political organizations and trade barriers have been given as a priori evidence for the segmentation of the international capital market. This, however, is not necessarily the case. An examination of the behavior of capital asset prices reveals that the price behavior is consistent with the one market hypothesis. It should be noted, however, that a certain body of data can be consistent with both the one market hypothesis and any one of several specific forms of market segmentation. But as the main theme of this study is to show the validity of the one market approach to the multinational equity market, it is sufficient to show that one cannot reject the one market hypothesis with regard to this market. [ABSTRACT FROM AUTHOR]

The article focuses on a hypothesis that resource endowment influences the composition of industries of long-term foreign investments. It examines Great Britain, which doesn't have much in the way of natural resources, and the United States, which is less dependent on importing raw materials from abroad, and examines how companies in these nations differ in their investment strategies. It states that there is a positive relationship between portfolio and direct investment in Great Britain, and a degree of domestic capacity utilization, while in the United States portfolio and direct investments are negatively related to domestic capacity utilization.

The article discusses the use of capital levy as a fiscal policy towards war debt in Great Britain from 1815 to 1840. Recent use of the levy to cope with postwar debt elsewhere has revived academic interest in the policy. After the Napoleonic wars British debt was around twice the national income. David Ricardo first suggested the idea of a levy on capital, yet it was not adopted. Among the opponents was David Hume, who believed it unfairly penalized the propertied class and that it would be difficult to administer.

A central measure of the efficiency of the Initial Public Offering (IPO) market is the extent to which issues are underpriced. We present new and comprehensive evidence covering British IPOs since World War I. During the period from 1917 to 1945, public offers were underpriced by an average of only 3.80%, as compared to 9.15% in the period from 1946 to 1986, and even more after the U.K. stock market was deregulated in 1986. The post-WWII rise in underpricing cannot be attributed to changes in firm composition, and occurred in spite of improvements in regulation, disclosure, and the prestige of IPO underwriters. [ABSTRACT FROM AUTHOR]

Using a sample of small firms that defaulted on their bank debt in France, Germany, and the United Kingdom, we find that large differences in creditors' rights across countries lead banks to adjust their lending and reorganization practices to mitigate costly aspects of bankruptcy law. In particular, French banks respond to a creditor-unfriendly code by requiring more collateral than lenders elsewhere, and by relying on collateral forms that minimize the statutory dilution of their claims in bankruptcy. Despite such adjustments, bank recovery rates in default remain sharply different across the three countries, reflecting very different levels of creditor protection. [ABSTRACT FROM AUTHOR]

Gruber (1996) and Zheng (1999) report that investors channel money toward mutual funds that subsequently perform well. Sapp and Tiwari (2004) find that this “smart money” effect no longer holds after controlling for stock return momentum. While prior work uses quarterly U.S. data, we employ a British data set of monthly fund inflows and outflows differentiated between individual and institutional investors. We document a robust smart money effect in the United Kingdom. The effect is caused by buying (but not selling) decisions of both individuals and institutions. Using monthly data available post-1991 we show that money is comparably smart in the United States. [ABSTRACT FROM AUTHOR]

We study the rivalry between Euronext and the London Stock Exchange (LSE) in the Dutch stock market to test hypotheses about the effect of market fragmentation. As predicted by our theory, the consolidated limit order book is deeper after entry of the LSE. Moreover, cross-sectionally, we find that a higher trade-through rate in the entrant market coincides with less liquidity supply in this market. These findings imply that (i) fragmentation of order flow can enhance liquidity supply and (ii) protecting limit orders against trade-throughs is important. [ABSTRACT FROM AUTHOR]

A number of firms in the United Kingdom list without issuing equity and then issue equity shortly thereafter. We argue that this two-stage offering strategy is less costly than an initial public offering (IPO) because trading reduces the valuation uncertainty of these firms before they issue equity. We find that initial returns are 10% to 30% lower for these firms than for comparable IPOs, and we provide evidence that the market in the firm's shares lowers financing costs. We also show that these firms time the market both when they list and when they issue equity. [ABSTRACT FROM AUTHOR]

We use unique data from the London Stock Exchange to test whether interdealer trade facilitates inventory risk sharing among dealers. We develop a methodology that focuses on periods of "extreme" inventories--inventory cycles. We further distinguish between inventory cycles that are unanticipated and those that are anticipated because of "worked" orders. The pattern of interdealer trade during inventory cycles matches theoretical predictions for the direction of trade and the inventories of trade counterparts. We also show that London dealers receive higher trading revenues for taking larger positions. [ABSTRACT FROM AUTHOR]

This article develops a new framework for measuring financial and real economic linkages between countries. Using United States and United Kingdom data from 1957 to 1989, we find closer financial linkages after the Bretton Woods currency arrangement was abandoned and Britain suspended exchange controls. In a pair-wise application to fifteen countries over a shorter period, we also find that news about future dividend growth is more highly correlated between countries than contemporaneous output measures. This suggests that there are lags in the international transmission of economic shocks and that contemporaneous output correlation may understate the magnitude of integration. [ABSTRACT FROM AUTHOR]

We provide evidence that taxes affect equity valuation by studying British investment trusts having otherwise identical classes of cash- and stock-dividend-paying shares outstanding. We study 1969-1982, a period in which there were two dramatic changes in tax policy. We find that stock-dividend shares, which are convertible into cash-dividend shares, sell at premiums when the tax system favors capital gains and at discounts when the tax advantage of capital gains is reduced. After the 1975 elimination of the tax advantage to stock-dividend shares, we observe that investors convert virtually all stock-dividend shares into cash-dividend shares. [ABSTRACT FROM AUTHOR]

This empirical study of security issues by UK companies between 1959 and 1974 focuses on how companies select between financing instruments at a given point in time. It throws light on a number of interesting questions. First, it demonstrates that companies are heavily influenced by market conditions and the past history of security prices in choosing between debt and equity. Second, it provides evidence that companies appear to make their choice of financing instrument as if they have target levels of debt in mind. Finally, the results are consistent with the notion that these target debt levels are themselves a function of company size, bankruptcy risk, and asset composition. [ABSTRACT FROM AUTHOR]

The article discusses the balance of payments adjustment process. The author notes that policy problems generated by unsatisfactory developments in world economic activity have increased due to a number of countries which are in considerable external disequilibrium. The account balance of Organization of Petroleum Exporting Countries (OPEC) is looked at, having stabilized at approximately $35 billion. Imbalances within the Organization for Economic Cooperation and Development (OECD), however, are considerable in spite of the progress made towards better balance achieved by Great Britain and Italy. A table is presented which demonstrates the changes in account balance, liabilities to foreign official agencies, and balances financed by transactions in reserve assets of several industrial countries from 1973 to 1977.

This article examines whether capital flow restrictions, originally enacted for balance of payments reasons, also had the intended effect of isolating the national segments of the international equity market. Specific focus is given to measures adopted in the U.S., Great Britain and France. Arbitrage would assure that the market price of a security in one country would be equal to the market price of the same security in the second country, given that there are instantaneous information flows and no barriers to capital movements. However, the prices for a given security differs between markets, and such price differentials can be viewed as indicators of the impact of different capital control measures.

We compare initial offer prices in privatizations to initial prices in public offerings of private companies. The evidence indicates that government officials in the United Kingdom underprice IPOs significantly more than their private company counterparts. In Canada and Malaysia, however, the opposite is true. There does not appear to be a general tendency for privatizations to be underpriced to a greater degree than private company IPOs. We provide additional evidence on the determinants of privatization initial returns. Our findings indicate that initial returns are significantly higher in relatively primitive capital markets and for privatized companies in regulated industries. [ABSTRACT FROM AUTHOR]

This article presents the first application in finance of recently developed methods for the Gaussian estimation of continuous time dynamic models. A range of one factor continuous time models of the short-term interest rate are estimated using a discrete time model and compared to a recent discrete approximation used by Chan, Karolyi, Longstaff, and Sanders (1992a, hereafter CKLS). Whereas the volatility of short-term rates is highly sensitive to the level of rates in the United States, it is not in the United Kingdom. [ABSTRACT FROM AUTHOR]

The article presents a model of British monetary policy that includes the objectives, techniques, and trade-offs from 1951-1964. The author claims that the revival of the British monetary policy coincided with U.S. efforts to do the same, and attempts to negotiate the discomfort of a monetary policy faced with a differentiated set of financial institutions whose liabilities mirror those of commercial banks. The article reviews the policy objectives in terms of interest rates, price stability, full employment, a satisfactory balance of payments, and a satisfactory rate of growth. The article refers to the significance of the 1959 Radcliffe Report on monetary policy in those years.

The article looks at three aspects of European capital markets. It considers the characteristics of integrated capital markets, the relationship of integration to efficiency, the extent to which developments have affected integrated capital markets, and the prospects for future development. The author notes that, while Europe contains capital markets of importance, no European capital market exists, leaving markets for long-term capital to be organized on unintegrated national lines. The efficiency of European capital markets are considered from an international point of view. Capital markets in Germany, Sweden, Great Britain, and other European countries are discussed.

The article reports on the U.S. dollar and the British pound in relation to forward rates and interest parity values. In the 1960s the dollar and pound experienced attacks resulting in an arbitraging capital flow. Research is focused on analyzing the differential between U.S. Treasury bill yields for Great Britain and the U.S. during 1959-1961. The theory of interest parity involves the adjustment of the discount on forward exchange to the short term interest differential that exists between home and a foreign country.

The article examines the extent to which monetary authorities might operate to good advantage in the forward exchange market. Examples of the forward exchange markets in the U.S. and Great Britain are given. The equilibrium differential between spot and forward exchange rates is explored. The author advocates a policy of limited official intervention in the forward exchange market, feeling that such intervention should be limited to purchases or sales to keep the forward rate at the interest arbitrage margin.

The article presents a response to the reappraisal of the monetary and credit system in Great Britain, conducted by the Radcliffe Committee. The article discusses the three titles produced by the committee, "Report of the Committee on the Working of the Monetary System," "Principal Memoranda of Evidence," and "Minutes of Evidence." The three works contain opinions and recommendation, recommendations for monetary policy, and comments as to the relationship between the Bank of England and the British government. The author considers the perplexing lack of dissention amongst committee members, the committee recommendations, the committee's thoughts on the technical aspects of public financing, and monetary policy and its domestic and international implications.

The article discusses liquidity ratios and the monetary experience in Great Britain in the late 1950s. The author examines the possible efficacy of prescribed liquidity ratios as a tool of monetary policy. The author states that a 30 per cent ratio that was in use as the conventional liquid-asset-deposit relationship, was equally as faulty after 1951 as during the pre-war period. He explains that the proportion which such assets bore to deposits has varied widely within each year for each particular bank even though the banks have kept a substantial fraction of their assets in liquid form.

The article discusses the method of control of capital issues adopted by Great Britain. The author states that an increasing number of economists have focused their interest on the problems associated with secular acceleration. These problems include a long-run tendency for planned investment to exceed planned savings, rather than on the main concern of the 1930's, which was secular stagnation. The article also discusses the scope of controls, the argument of the "bonus-issue," and problems with hiring and purchasing.

The article analyzes the effects of taxes on business policies and practices in Great Britain. The author provides a description of the tax system and discusses the sources of tax revenues. The author explains facets of the tax system, such as taxation of corporations and the criteria for fixed asset investment and replacement. The article also discusses statistical differences between the tax systems, computation of profits tax, and the effect of profits tax on dividend distribution. The taxation of private companies is also examined.

The article discusses issues related to the restoration of Great Britain's sterling as a world currency and London, England as an international financial center. Emphasis is placed on an examination of the ideas put forth by A.C.L. Day in his book "The Future of Sterling." Day advocates for the re-emergence of the pound sterling as a world currency, and also for a payments union whose members would compose all non-dollar countries. The author discusses Day's ideas and generally finds them lacking.

This article examines the principles of profit and compensation that were employed during the nationalization process to determine the resulting effects on the finances of the industries in Great Britain. Factors influencing compensation, an overview of postwar compensation experience and the implications for corporate finance are all discussed. The assumption of the liability for interest and principal payments on the compensation bonds was incorporated into the firms' capital structure. Previous cases of compensation for the British sugar, coal and transportation industry are also discussed.

The article presents an exploration into the financial conditions of the housing market in Great Britain throughout the first half of the 20th century. The parallels between the housing crisis being addressed in the 1950s and that of the post-World War I era are outlined, with additional data examining the interim period between the wars. An overview of statistical data is provided for housing materials and labor costs through the various time frames. Additional mention is given to the market forces which led to recovery, including private enterprise growth, local authority housing contracts, and other government subsidies.

While it is frequently asserted that British industry has earned an inadequate return on investment, there has been little agreement among economists as to what exactly this rate has been in recent years. This note provides striking new evidence that the profitability of British industry is currently much lower than anyone had previously supposed. [ABSTRACT FROM AUTHOR]