Search

This paper deals with the producer's optimal use of commodity futures in hedging. The framework for analysis is an intertemporal consumption and investment model. The producer makes his production decisions at the beginning of the period and realizes his return at the end of the time interval. During the period, he faces both price and output uncertainties. In applying stochastic dynamic programming methods, this paper shows the effect of these risks on his consumption behavior. Further, the paper investigates his optimal hedging positions in the futures market over time and his optimal production decisions. Finally, implications of these results on the futures markets are discussed. [ABSTRACT FROM AUTHOR]

This paper, utilizing dealer's "trading book" information, presents some empirical evidence supporting the validity of a dealer pricing model. It shows that much of the transaction prices variation may be explained by the specialist's optimal determination of his bid and ask quotes. Furthermore, it demonstrates that the dealer's bid-ask spread is an important explanatory variable in the observed transaction return. Finally, it indicates that the dealer's inventory level may affect his quotes and thus the transaction prices and order arrivals. The paper provides insights into the relationship between transaction prices and equilibrium prices, which will permit more extensive use of transaction data in empirical investigations. It also provides a better understanding of optimal dealer pricing strategies, suggesting that the proposed empirical model may be used to evaluate a dealer's trading performance. [ABSTRACT FROM AUTHOR]

The effect of personal taxation on stock prices remains controversial. While some researchers have found evidence of a tax effect in the stock market, others have found evidence to the contrary. This paper provides additional empirical evidence on the effect of the differential taxation of dividends and capital gains on stock prices by analyzing stock price changes around the 1971 Canadian Tax Reform and its subsequent amendments in 1977. The results show that changes in the taxation of cash dividends and capital gains affected high-yield and low-yield stocks listed on the Toronto Stock Exchange (TSE) differently. Section I of the paper describes the tax changes. The method used to analyze the tax effect is described in Section II. Section III reports the results, and conclusions are presented in Section IV. [ABSTRACT FROM AUTHOR]

This paper by Kane, Rosenthal and Ljung follows the work of Fama (1975) in examining the adjustment of nominal interest rates to expected inflation. In that piece, Fama presented evidence that was not inconsistent with the joint hypothesis that the real pre-tax rate of interest is constant and nominal interest rates incorporate rational expectations about future inflation. One of the criticisms raised by Nelson and Schwert (1977), among others, about Fama's work has been the low power of his tests. The authors, in this paper, attempt to provide a more powerful test of the Fisher hypothesis using data from six countries, including the U.S. Their main contribution is to shed some light on whether nominal interest rates have fully adjusted to reflect expected inflation for countries other than the U.S. While this provides us with a greater quantity of evidence, the main shortcomings of the paper is that the authors could have provided us with better quality evidence. [ABSTRACT FROM AUTHOR]

Presents the author's message as the departing managing editor of the 'Journal of Finance.' Appreciation for the authors who have published works in the journal; Data on total number of manuscripts received by the journal. [ABSTRACT FROM AUTHOR]

Rate of return regulation in principle suggests strong linkages between interest rates, utility return on book equity (ROE), and stock price/book equity ratios: ceteris paribus, changes in interest rates should be quickly transformed into changes in ROEs, and stock prices should tend toward book value. Absent lags in the process, it also suggests that utility investors are minimally exposed to the risks of unanticipated changes in interest rates, notably those associated with inflation. In this paper we examine the financial implications of electric utility regulation from 1971-1980. Over this period, which was characterized by inflation-related rises in interest rates, we find that the gap between allowed and earned ROEs, on the one hand, and interest rates, on the other hand, increased. Since this outcome is in contradiction of the conceptual model of regulation and investors' exposure to inflation risk, we test the hypothesis that investors respond to the reality of regulation by imposing risk premiums which are functionally related to interest rates. The basic idea is that an ROE shortfall leads to an expectation that regulation will respond in the future with a higher earnings level, but this "IOU" in the implicit social contract is risky. And the question addressed in this paper is whether the degree of riskiness is related to the level of interest rates. Using two valuation models we conclude that at least during the 1970s risk premiums were not related to the level of interest rates. [ABSTRACT FROM AUTHOR]

This paper answers the comments of readers of our earlier paper. Additional insight is gained by adding recent data to show the effect of following Value Line Investment Service recommendations in active stock market trading over the years 1974-81. We show that Value Line makes a statistically significant contribution, which cannot be explained by the Beta risk factor. We offer our results as an unexplained divergence from the Efficient Market Hypothesis, but with the tentative hypothesis that investment timing (i.e., the fact that the Efficient Market Hypothesis does not operate instantaneously) may explain much of the abnormality. [ABSTRACT FROM AUTHOR]

This paper extends, corrects, and unifies earlier statements concerning the social value of public information as well as the no-trading conditions in pure exchange. Sufficient and necessary conditions are provided for both the single-period and two-period cases in a postsignal trading model. The social value of information is shown to be closely linked to the allocational efficiency of the market, the degree of homogeneity of prior beliefs, and of information structures, the time-additivity of preferences, and the efficiency of endowments. We conclude that the case in favor of public information is much stronger than previously suggested. [ABSTRACT FROM AUTHOR]

In this paper we will introduce and develop a nontraditional theory of portfolio selection. The theory assumes that investors choose their portfolios to have a certain minimax property which we will describe in detail below. As we will see in the next two sections, the minimax portfolios turn out to be identical to portfolios that are often recommended on other grounds. In this paper we have examined the implications of certain forms of minimax behavior in portfolio selection. Though minimax behavior is not truly optimal, there are reasons to suppose that it might approximate the behavior of some investors. One reason is the obvious discomfort that many decision-makers feel when forced to make decisions based on subjective probability distributions, particularly when those distributions were formed on the basis of vague information. One would not be surprised if a decision-maker sought to protect himself against the possibility that his distribution is incorrect. Portfolio selection seems a natural context for minimax behavior because of the enormous amount of information, both direct and indirect, that an investor must incorporate into his probability distributions. The results of this paper, which show that minimax behavior leads to reasonable portfolios of the sort we observe in practice, lend some support to the minimax hypothesis. [ABSTRACT FROM AUTHOR]

Our understanding of why corporations pay dividends is currently unsatisfactory. On the one hand, received theory tells us that dividends are irrelevant (in the sense that any two arbitrarily chosen dividend policies have equivalent consequences), both in the absence of taxes (Miller and Modigliani) and in their presence (Miller and Scholes). On the other hand, dividends continue to flood the empirical world with cash as regularly and as consistently as the sun scorches the desert, and one is hard put to characterize this pattern (currently at an annual rate of about $63 billion) as being founded on irrelevance. Not surprisingly, the attendant anomaly has led some, notably Black, to suggest that we really don't know why companies pay dividends. Something is clearly amiss. The present paper will look to the information content of dividends as a substantive (although not necessarily complete) explanation for the prevalence and persistence of positive dividend policies in market economies. The notion that dividends may constitute a source of information is, of course, not new (see e.g., Miller and Modigliani, Black, Stern). The basic idea is that the raising and lowering of dividends communicates information over and beyond what is provided by (mandated and nonmandated historical cost-based) earnings reports, forecasts, and other announcements. By in effect merging extant dividend theory with the theory of public information, the present paper generates several noteworthy consequences. [ABSTRACT FROM AUTHOR]

In a previous paper it was shown that the traditional rule that the allowed return on the equity of a regulated firm should be set equal to its cost of equity capital was conceptually deficient. This deficiency arises because the cost of equity capital of a regulated firm depends upon its risk, which depends in turn upon the regulatory policy that will be followed in the future, including the allowed rate of return. It was argued therefore that this traditional rule should be replaced by the requirement that the regulatory policy be consistent. A consistent regulatory policy achieves what the traditional rule only attempts: it ensures that at the time of a regulatory hearing the market value of the firm equity is equal to the equity financed portion of the rate base. To devise a consistent regulatory policy, it is necessary to have a valuation model which takes explicit account of regulatory policy. Such a model was developed in the above-mentioned paper. In this paper we generalize the earlier valuation model so that the investment policy of the regulated firm is determined by the value maximizing decisions of the management instead of being taken as exogenous. To the extent that investment policy is discretionary, its endogeneity must be taken into account in devising a consistent regulatory policy, and this is made possible by the generalized model. In reality it seems unclear to what extent the investment policies of regulated firms are predetermined by the requirement that they meet demand, and to what extent they are discretionary. Since the model presented here easily accommodates constraints on the investment policy it is the more appropriate model so long as there exists any element of discretionary investment behaviour, and permits a more adequate approach to the determination of consistent regulatory policies. [ABSTRACT FROM AUTHOR]

This paper is an application of efficient markets-rational expectations theory to analyze empirically the relationship of money supply growth and short-term interest rates, a hotly debated issue in the literature. This approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests. The empirical results uniformly do not support the proposition that increases in money growth are correlated with declines in short rates. [ABSTRACT FROM AUTHOR]

A stochastic framework for coordination of macroeconomic policies is introduced in this paper. It is suggested that: (i) measures of policy accountability should allow for the climate of uncertainty that surrounds policy decisions, and (ii) most models of aggregate economic activity impose arbitrary specifications of uncertainty that do not appear to be empirically justifiable. Ambiguities in interpreting the Humphrey-Hawkins reports of policy authorities are sketched in section II; a proposal for maximizing the ex ante prospects of policy objectives is illustrated in section III; finally, nonstationary allocations of uncertainty are discussed in sections IV and V. This paper provides a brief survey of ongoing work by members of the Federal Reserve Board staff on the role of uncertainty in policy forecasts. It suggests that policy discussion could be improved by more explicit consideration of the allocation of uncertainty. [ABSTRACT FROM AUTHOR]

This article presents a discussion on an article that examines the effects of volatility on market efficiency. In observation of the work in the paper the author notes that since several variances are directly used in the usual tests of regression parameters and orthogonality, the relations between the volatility bounds and the standard set statistics should be more fully explored. He also notes that violations of the variance constraints should be attributed to the inappropriateness or inadequacy of the model tested rather than to market efficiency.

In a 1976 paper in this Journal, William Brainard and I reported the results of applying a mixed estimation procedure to the asset demand equations of savings and loan associations and mutual savings banks. In each sector, the least squares estimates were both implausible and receptive to a priori information. Even with the simplifying assumptions of normality and exchangeability, the incorporation of prior information through a mixed estimation technique yielded estimates which predicted reasonable asset responses to a wide variety of experiments. Actual root mean square errors for one to eight quarter ahead predictions were also calculated within and outside the sample period used for estimation. For savings and loans, the least squares estimates, mixed estimates and even our pure priors (using prior means for all parameters other than the intercept) forecast out of sample about equally well. Although their overall records were roughly comparable, there were some differences in forecasting particular variables a specific number of quarters ahead. Surprisingly often, one method would forecast better than another method one quarter ahead but not as well as eight quarters ahead. For mutual savings banks, the pure priors outforecast the pure data for five of the six assets in the one quarter ahead tests and were roughly comparable to least squares in the farther ahead tests. The mixed predictions were more accurate than least squares in every case but one, short term bonds one quarter ahead. For both sectors, naive autoregressive forecasts had an impressive accuracy one quarter ahead that declined dramatically as the forecasting period lengthened. A number of developments may now have made these results obsolete. The Federal Reserve Board's flow of funds data have been revised and, with the passage of time, there are now more data available. In addition, the orthogonalization routine in the computer program that we used has been changed. Computational accura... [ABSTRACT FROM AUTHOR]

Taxes affect capital budgeting under inflation in many ways. This note focuses on two of the most important—depreciation deductions and interest deductions. Because depreciation for tax purposes is based on historical costs rather than current values, investments in depreciable assets become less attractive under inflation. Because debtors can deduct nominal interest payments, not just real interest charges, debt-financed investments become more attractive under inflation. The impact of inflation and taxes on the value of potential investment projects depends on which factor dominates. In a recent paper in this journal, Gandolfi argued that the existence of a tax on corporate profits will not alter the real rate of return on the firm's marginal investment. In a subsequent paper, Jaffe exposed Gandolfi's error in ignoring the tax subsidy to debt-financed investments. Both authors assumed that the firm's investment takes the form of a non-depreciating machine—a special case, as Jaffe notes, among an infinite number of possible depreciation schedules. An extension of Jaffe's analysis to handle alternative depreciable lives confirms his assertion that investments which would be marginal in a world without taxes can become profitable in a world with taxes. However, the cutoff rate of return exceeds the rate calculated by Jaffe whenever the machines have finite lives. Moreover, in the limiting case of an asset which has a single period life, the required rate of return will be unaffected by a tax on profits. The section which follows introduces a depreciable asset into Jaffe's analysis; quantitative results of the impact of inflation and taxes on the firm's cutoff rate of return are calculated. Section three summarizes the main conclusions from the analysis. [ABSTRACT FROM AUTHOR]

This paper attempts to continue a line of attack on capital budgeting problems that was essentially begun by Myers and Turnbull. Their method was to use simple, tractable assumptions about cash flow stochastic processes and an intertemporal capital asset pricing relationship to investigate the accuracy of "cruder," traditional methods of valuation like discounting at a risk-adjusted cost of capital. We extend this approach to some prototypical mean-reverting cash flow processes which, we argue, are economically more relevant than the extrapolative, purely indeterministic processes used by Myers and Turnbull. In his discussion of the Myers and Turnbull paper, Hamada suggested that their results needed to be examined in the context of other types of cash flow processes; this paper is an attempt in that direction. It is our belief that, given the fact that risk-adjusted discount rate valuation (with project classes or divisions serving as surrogate measures of risk) is an important capital budgeting practice in many firms, asking questions of this type is a useful exercise in applied corporate finance. [ABSTRACT FROM AUTHOR]

A common statistic for a bond is its market yield or internal rate of return. Numerous articles have been written utilizing the internal rate of return to examine the price volatility of bonds. However, all these studies have two factors in common. One, they are nonstochastic and two, they involve Macaulay's duration. This paper, by introducing uncertainty, derives the general relationship between the expected return on a bond and its market yield. The derivation is for risky corporate as well as for default free government bonds. The relationship is nonlinear and involves an expression which is an approximation to the duration of a bond. As a corollary to the above methodology, an alternate expression for the systematic risk of a bond is discovered. The expression involves only the market yield and the approximation to a bond's duration. This corollary generalizes the previous work of Boquist, Racette, and Schalarbaum in two respects. First, this paper's formulation is for any type of a bond, while Boquist, et al. examined only default free securities. Second, the single period capital asset pricing model (CAPM) is replaced by its intertemporal counterpart as formulated by Merton. An outline for the paper is as follows. Section I derives the relationship between a bond's market yield and expected return. Section II examines the systematic risk of a bond, while Section III concludes the paper. [ABSTRACT FROM AUTHOR]

The relationship between forward foreign exchange rates and subsequent future spot rates has received extensive theoretical and empirical attention in the literature. Two hypotheses have been advanced on the theoretical side. The first hypothesis is that the forward rate is an unbiased estimate of the future spot rate. The second hypothesis holds that speculators in the foreign exchange markets require a return for assuming a speculative position and, hence, that the forward rate is not an unbiased estimate of the future spot rate. Several studies have attempted to test the empirical validity of the above hypotheses, but so far the results have been inconclusive. The basic proposition advanced and tested empirically in this paper is that a firm's (or an individual's) foreign exchange position must be analyzed within the context of the capital asset pricing model (CAPM). A summary of certain basic propositions in foreign exchange theory is given in Section II. The prior literature in the field is reviewed in Section III. Section IV develops the principal ideas of the paper. The precise nature of the risky asset represented by the foreign exchange commitment is identified and the asset's rate of return is specified in measurable form. In addition, the appropriate form of the empirical test is outlined. The results of the empirical tests are reported and analyzed in Section V. The conclusions of this study are that the forward rate is a biased predictor of the future spot rate and that speculative positions do not receive a return above that expected in the CAPM framework. The relationship between forward foreign exchange rates and subsequent future spot rates has received extensive theoretical and empirical attention in the literature. Two hypotheses have been advanced on the theoretical side. The first hypothesis is that the forward rate is an unbiased estimate of the future spot rate. The second hypothesis holds that speculators in the foreign exchange mar... [ABSTRACT FROM AUTHOR]

The article comments on a paper published within the issue, "Capital Formation and the Recent Productivity Slowdown," by Peter Clark. The author also discusses results from his own research in "Accounting for United States Economic Growth, 1929-1969," and applies it to Clark's paper. It is suggested that an abrupt rise in energy prices may have affected growth rates during the mid-1970s. The author also looks at a similar analysis made by John Kendrick, who focuses on the U.S. postwar period of 1948-1966.

In the early sixties a number of papers developed stock value models in which the cost of equity capital is a function of the firm's equity investment rate. The conclusions reached, however, have for the most part been rejected in the subsequent literature. Instead, it has become widely accepted both in the theoretical work and in the textbooks on finance that the cost of equity capital is equal to the yield at which a firm's stock is selling, and the latter is independent of the firm's investment rate. In fact, one frequently finds the two terms, share yield and cost of equity capital used interchangeably in the literature. However, contributions to the literature during the last few years provide additional support for and clarification of the alternative theory, and a broad reconsideration of the subject is in order. Part I below critically reviews the literature of the early sixties on both sides of the subject and certain subsequent papers which contributed to the conclusion that share yield and cost of equity capital are equal and independent of investment policy. Parts II and III examine the recent contributions which have materially strengthened the theoretical basis for the contrary conclusion, that the cost of equity in a firm is an increasing function of its investment rate. Part IV reviews the empirical evidence on the subject, and Part V both summarizes the conclusions reached and discusses the areas in which the model requires further development. [ABSTRACT FROM AUTHOR]

The article comments on a paper published within the issue, "Elimination of the Double Taxation of Dividends and Corporate Financial Policy," by Robert H. Litzenberger and James C. Van Horne. The author summarizes the paper by claiming the authors' have clearly demonstrated the inability to separately analyze capital structure decisions and dividend policy in the presence of differential personal income taxes and dividend paying firms. He also discusses Litzenberger and Van Horne's development of a multi-period state-preference model. The model incorporates differential personal income taxes by introducing a time state claim on taxable ordinary income and a time state claim on nontaxable wealth. The author feels that Litzenberger and Van Horne carry out a thorough and careful analysis of two alternative ways to eliminate the double taxation of dividends.

In their well known and controversial paper, Andersen and Jordan [2] presented evidence that, when responses of GNP to monetary and fiscal actions are analyzed, only money matters. The equation from which these results were derived has since been subjected to much criticism. This criticism has centered mostly on the statistical specification of the St. Louis equation (e.g., [14]) and on the "reversecausation" argument (e.g., [12]). In perhaps its most popularized form, the St. Louis equation measures monetary actions by employing changes in the narrowly defined money stock (DeltaM[sub 1]). Fiscal actions are measured by changes in high employment federal expenditures (DeltaE). In addition, statistical constraints are imposed upon the equation for estimation purposes. These constraints are: 1) each independent variable has the same lag length, 2) the distributed lag weights are estimated by a fourth degree polynomial by the Almon technique with both endpoints constrained to zero. Schmidt and Waud [14] show that if the statistical constraints are removed, estimation of the St. Louis equation indicates that money matters, but so do fiscal actions. Lombra and Torto [12] demonstrate that, if the variable employed to measure monetary actions is adjusted to account for "reverse-causation," the conclusion derived from the St. Louis equation is that money still matters, but again, so do fiscal actions. In spite of these criticisms, the St. Louis equation continues to be used in its original form (e.g., [4]). The purpose of this paper is to show that, even if 1) the Andersen-Jordan constraints are imposed upon the equation, and 2) the monetary variable is not adjusted for reverse-causation, estimation of the St. Louis equation with a weighted aggregate money stock variable leads to conclusions different from those discovered by Andersen and Jordan. [ABSTRACT FROM AUTHOR]

The purpose of this study is to provide further empirical evidence for the Australian case. It differs from previous studies in a number of respects. For example, the process by which expectations are generated differs from the processes adopted in previous studies. It also has two additional aims which differentiate it from earlier studies. First, it considers the validity of aggregating the demands for certain monetary assets into a single demand for money function. Most of the studies mentioned above deal with a single monetary aggregate; Lewis and Wallace consider only the demand for savings deposits. This study reports separate equations explaining the demand for notes and coin and current (cheque) deposits. These assets have been chosen because they possess the common characteristic that they can be converted into cash on demand. Secondly, an aspect of the Australian banking system which has been ignored in previous studies is examined in this paper. Australian trading banks lend on the overdraft system and at any point in time there is a substantial amount available to borrowers in the unused portions of their overdraft accounts. It has frequently been argued that the value of this store of liquidity should be included in measures of the money supply. This proposition is tested by the equations reported in this paper. [ABSTRACT FROM AUTHOR]

The present paper examines the validity of MM's valuation method for a regulated firm and reaches conclusions even more pessimistic than those of previous authors. We show that there is no a priori method of estimating the effect of leverage on the value of a regulated firm without a knowledge of the specific supply and demand conditions of that firm. Researchers do not usually know the supply and demand conditions of an industry. This means, first, that all the papers examining MM's propositions by using data on regulated industries may very well be invalid, or at least their conclusions are ambiguous. Furthermore, it implies that future researchers must be quite cautious when using and interpreting data on regulated industries. [ABSTRACT FROM AUTHOR]

The article presents commentary about a paper written by Paul Griffen entitled "Competitive Information in the Stock Market: An Empirical Study of Earnings, Dividends and Analysts' Forecasts," which was published in the May, 1976 edition of the "Journal of Finance." The author observes that of the three hypotheses Griffen tests, two are operationally equivalent and none has been supported with adequate evidence. However, he believes that Griffen's investigation of the marginal and joint effects of earnings, dividends, and analysts' forecasts is a worthy endeavor.

I would like to congratulate Professor Ellert on his paper. I think it is a significant and valuable contribution to economic analysis of mergers and anti-trust legislation. As with most examples of good empirical research, the paper not only clarifies the validity of some a priori hypotheses, it also stimulates interest in particular lines of future research. One such line that strikes me has to do with the behavior of the anti-trust enforcement agencies. The evidence presented by Professor Ellert certainly suggests that, at least in merger cases, the agencies do impose non-negligable costs on the firms they choose to prosecute. This ability to impose costs is, of course, a prerequisite for effective enforcement of the law. Another prerequisite that is at least as important, however, is that the agencies apply their punitive power in such a way that firms whose merger activity truly violates the law face a significantly higher probability of prosecution than do firms whose activity does not violate the law. [ABSTRACT FROM AUTHOR]

The article presents commentary about a paper written by Robert K. Eskew and William F. Wright (E&W) entitled "An Empirical Analysis of Differential Capital Market Reactions to Extraordinary Accounting Items," which appeared in the May, 1976 edition of the "Journal of Finance." The author does not believe that E&W's work represents a significant contribution because its two main findings appeared in previous research. He also raises several issues with E&W's approach, including their assumption that a security's risk remains fixed over a given 12-month period.

The question of "Is there a capital shortage?" has two facets. Are we short of capital now and have we been in the recent past? And will there be a capital shortage over the foreseeable future? The papers delivered today deal mostly with the second question. In fact, the plethora of recent literature--both in journals and in the media--that deals with the question of a capital shortage is overwhelmingly concerned with a possible future shortage. True, references to the past are used as a basis for some of the arguments directed toward the need for "doing something" about the problem. [ABSTRACT FROM AUTHOR]

As previously mentioned, there has been relatively little work concerning the effect of public information on the allocation of consumption. To fill this gap, the present paper examined the social value of public information in a pure exchange economy under different types of markets and utility functions. A model with time-independent utility functions and complete capital markets is a common one in the financial literature. Our paper yields the surprising result that public information has no value in this model. Conversely, the dissemination of information may affect consumption decisions and, hence, may have social value when either capital markets are incomplete or utility functions are time-dependent. This paper is intended as a first step toward assessing the social value of public information. The models presented here are limited by some restrictive assumptions. Among them, we assumed a pure exchange economy, information release after an initial equilibrium, homogeneous expectations, and specific utility functions. It is hoped that future research will relax these assumptions so that the theory of public information may become as rich as the theory of private information. [ABSTRACT FROM AUTHOR]

One important attribute of an efficient capital market is that current market prices fully reflect all available information and, thus, capital market equilibrium is conditional upon this information. There is, however, nothing in the efficient capital market model that provides theoretical insights on the nature or properties of the mechanism through which this conditioning information becomes available. In this paper, some properties and implications of one scheme for information-production were examined. The assumptions underlying this scheme are consistent with those that imply capital market efficiency. The production arid dissemination of information for use by capital market agents was handled via market game theory. Insofar as information about the allocation of real resources is concerned, it was shown that a Pareto optimal competitive solution (in the game-theoretic sense) is attained.[22] And, from the definition of this solution, one knows that the solution involves nonzero expenditures on information so long as at least one group of agents finds it desirable to invest in information-production. Moreover, it was shown that the returns (from information-production) to each agent converge to that agent's competitive allocation (in the classical sense). A basic idea used was as follows. The value of information to an individual was expressed in terms of a certainty equivalent. The certainty equivalents for the members of a coalition defined the payoff vector for that coalition. Then, it was shown that a core for the information- production game exists. The effects of information-production on the equilibrium production-investment decisions of firms whose securities are traded in the capital market were also examined. [ABSTRACT FROM AUTHOR]

The paper by Shapiro is a discussion of the impact of changes in the price level and exchange rate on the profit, and thus value, of a multinational firm. The unit of analysis is the overseas (which I shall designate, for convenience, as European) subsidiary of an oligopolistic American (again for convenience) multinational corporation which sells output both locally (in Europe) and abroad (the U.S.). The impact of exchange rate movements and European price level changes on the profits and production of the subsidiary are deduced in this two-country model. The local and foreign demand curves for the output of the subsidiary and cost curve of the subsidiary are expressed in functional form and the partial deviations with respect to the exchange rate and European price level are specified. The profit relation for the subsidiary--revenue less costs--is then differentiated with respect to the exchange rate and price level, in turn, and the resultant expressions are checked to see under what conditions they will be positive (profit will increase) or negative (profit will decrease). Since the value of a firm is the discounted value of its future after-tax cash flows, an increase in profit will raise the value of the firm and a decrease will lower the value. This is the heart of the paper. [ABSTRACT FROM AUTHOR]

This short paper had addressed the question of whether or not the stochastic nature of capitalization rates gives rise to a component of the risk of common stocks that we term systematic capitalization risk and whether corporate growth plays an important role in determining the magnitude of that risk. A second objective of the paper was to determine the most relevant definition of corporate growth for purposes of studying the determinants of systematic risk. Employing Cov[sub t-1](R[sub jt], R[sub mt])/Var[sub t-1](R[sub mt]) from the Sharpe-Lintner security market line as the appropriate measure of systematic risk for a stock we succeeded in deriving the underlying functions for R[sub jt] and R[sub mt] in terms of fundamental corporate characteristics such as the rate of return on investment, the rate of earnings retention, and the rate of stock financing. The result is that the systematic capitalization risk of common stocks is undoubtedly a positive function of the rate of growth of expected total corporate earnings. Moreover, retention policy, per se, appears to be neutral as a causal variable but is probably closely associated with systematic risk through its correlation with the rate of investment. Since the rate of growth of total expected earnings on equity is a positive multiplicative function of the investment rate and the rate of return on that investment it follows that an increase in either or both of these variables tends to increase systematic capitalization risk as well. The extension of capital market theory to include the notion that systematic risk is a positive function of total earnings growth promises to have profound implications for almost every type of economic decision. For example, Hamada, Myers, and others have shown with the use of stationary earnings distributions that the cost of capital for an investment project is a function of the covariance of return on the project with the return on the market portfolio. However, if we m... [ABSTRACT FROM AUTHOR]

Econometric model building of the type represented in the Duesenberry-Bosworth paper was at best an attempt to see whether systems of, say more than 25 equations, add much to our knowledge of the economy and the response to policy changes. They have not, I believe, at least to this point, and I am not optimistic about a change in the next few years, instead of commenting on the details of the particular models presented at this session, I will explain some of the reasoning that brings me to that conclusion. Before doing so, let me make clear that my comments are not directed at either "theory" or empirical science. There is very little of either in current econometric practice. I view my comments as a criticism of large models, models of twenty-five or more equations, not as a criticism of modelling or testing economic hypotheses. [ABSTRACT FROM AUTHOR]

The article presents commentary from George C. Pinches about two papers in the current issue, "Adaptation, Information, and Dependence in Commodities Markets" by Martell and Philippatos (MP), and "The Tokyo Stock Exchange and the Capital Asset Pricing Model" by Lau, Quay, and Ramsey (LQR). He believes the paper by MP needs to provide more information about the definition of filter rules, commission structure, funds required to use the filter rules described, and risk measurement. He also has reservations abut the authors' pooling of wheat and soybean futures. He also believes the paper by LQR needs to explain the existence of lower excess returns for Japanese stocks.

The common theme running through the three papers prepared for this session is the nature and effectiveness of the international balance-of-payments adjustment process. Klein projects the effect of exchange-rate changes on national balance-of-payments positions. Kenen assumes fixed exchange rates and simulates the effects on the U.S. balance of payments of changes in U.S. monetary and fiscal policy. Adler and Stevens analyze the relationship between foreign direct investment by U.S. firms and U.S. exports, and then use their model to simulate the effect of several kinds of policy measures (exchange-rate, tariff and tax-rate changes) on that key aspect of the adjustment process. [ABSTRACT FROM AUTHOR]

This paper analyses the movements in the total and the form of the external financing of the firms covered in the Nonfinancial Corporate Business Sector of the Flow of Funds Accounts over the period 1956 to 1973. It is centrally concerned with the determinants of the volume of short and long-term debt raised by these firms. On average, short-term debt issues accounted for about one-third of the total debt issues of these firms. The relative proportion of short and long-term debt varies significantly and has a marked cyclical pattern, however. Short debt expands very rapidly as the expansion approaches its peak and falls off dramatically in the subsequent recession. Long debt increases more slowly during the expansion and persists at relatively high levels well into the recession. The first issue to which the paper is addressed is that of whether there is any evidence that is consistent with the hypothesis that this variability arises in part because business firms manage the maturity of their debt issues in an attempt to lower the average cost of the debt they issue. If so, how important is this factor as opposed to a more straightforward attempt to finance short assets predominantly with short liabilities and long assets with long debt? A second issue of interest is whether the variability in the volume of long and short term debt issued in the period 1966 to 1973, and in particular around the time of the turmoil in the commercial paper market in mid 1970, was different from what one would have expected on the basis of earlier financing behavior. [ABSTRACT FROM AUTHOR]

This paper has introduced L(W[sub 0], k, A) and R(W[sub 0], k, A) as three-parameter risk measures embodying decisions about a reference level about which deviations are to be measured, the relative importance of small versus large deviations, and the range of deviations that will be included in the risk measure. The popular risk measures of variance, semi-variance, mean absolute deviation, and probability of an outcome worse than some prespecified level are special cases of L(W[sub 0], k, A) and standard deviation is a special case of R(W[sub 0], k, A). These risk measures were shown to differ in their choice of one or more of the parameters W[sub 0], k, and A. It was shown that both L and R are monotone increasing functions of A; however, neither L nor R are necessarily monotone increasing functions of k. Clearly L(W[sub 0], k, A) and R(W[sub 0], k, A), are not the only potentially useful functions of the three decision parameters that have been implicit in the selection of the popular risk measures; they are, however, a rich and fairly general family. Further study of their properties should lead to advances in the theory of risk and specification of criteria for the selection of risk measures. This paper has attempted to establish a foundation for these advances. [ABSTRACT FROM AUTHOR]

This article presents the author's comments on a research paper that examined banking panics. The author discusses the position set forth in the paper and notes that bank runs can be initiated for a variety of reasons such as a large number of seemingly random withdrawals. When these withdrawals exceed a critical level the bank is forced to liquidate loans and incur a transaction cost. The author notes that their model differs from panic induced models of bank runs and briefly discusses the differences in these various research papers.

The article presents a response to the paper "Credit Granting: A Comparative Analysis of Classification Procedures," by Venkat Srinivasan and Yong H. Kim. The author states that the original article describes an elaborate, confusing and imprecise formulation of the credit granting problem. The lack of a precise definition of what will be assumed about the audience's understanding of both the credit granting problem and the statistical techniques being evaluated is one of the author's issues with the tutorial paper, among others.

The paper by Messrs. Ho and Saunders rationalizes the determination of the Federal funds rate in the context of a micro theoretic model that is relatively rich in institutional detail. For several reasons, I believe that the line of inquiry developed in the paper is of basic significance for the study and modeling of capital markets. In the first place, because it is the closest thing to an instantaneous spot rate that we observe in the actual capital market, the (overnight) funds rate is pivotal in the term structure if expectations matter. Then too, the particular role played by the funds rate in the conduct and interpretation of monetary policy gives it a unique significance in the capital market. It is therefore important that we thoroughly understand the mechanism whereby this rate is determined. Secondly, the funds rate is typically explained in an aggregative framework—i.e., without explicit reference to the actual market in which Federal funds are traded. The funds rate is used variously, for example, to clear the aggregate "market" for bank reserves, or even the market for "money." But this type of analysis does not embody enough institutional detail to be useful for studying the relationship between the funds rate and other short-term rates or for analyzing interesting variations in monetary policy. Finally, those studies which have looked specifically at the market in which Federal funds are traded have been primarily descriptive rather than analytical in nature. Ho and Saunders are clearly aware of these shortcomings in the existing literature, and their paper represents a constructive effort to fill the gaps. [ABSTRACT FROM AUTHOR]

This interesting paper by Professors John and Nachman [5] draws together some central issues in mainstream finance with emerging techniques to examine reputation-based phenomena in a variety of market contexts. The paper is a nice synthesis of several strands in the literature. These include the Kreps and Wilson [6, 7] approach to sequential rationality and reputation, the idea developed in Spatt [10] in studying the reputation aspects of debt contracts and debt repayment that in the presence of correlated opportunities the firm's first period actions can reveal information about second period opportunities, and the Myers [8] analysis of the underinvestment problem that emerges from the incentive conflict between debtbolders and equityholders. This paper examines the underinvestment problem studied by Myers [8] in an agency setting by introducing repeated play in a two-period model with correlated investment opportunities by the firm. Reputation incentives reduce the frequency of underinvestment in the first period so that the Myers [8] phenomenon arises in muted form at that date. In the first period underinvestment still occurs, but to a lesser degree than in a single period economy. The equityholders in the first period undertake the project in relatively more states of the world than in a one-period setting, although the project is then still not undertaken in as many states as the full information Pareto outcome. The first-period actions provide the market information about subsequent opportunities. The equityholders favor investment relatively more often than in a single-period model in that the first-period investment signals a more favorable distribution of second-period opportunities. [ABSTRACT FROM AUTHOR]

This paper by Jack Treynor and Robert Ferguson (TF) is an attempt to demonstrate the usefulness of knowing past price information in making investment decisions. The normative contribution of the paper is the development of a Bayesian probability estimate to assess using past price data whether or not the market has already incorporated some firm-specific information, which has been made available to the investor. The obvious implication is that if the market has not discovered the information, and this can be confirmed with past price data, then the holder of private information can act accordingly. [ABSTRACT FROM AUTHOR]

This article presents the author's opinion on the article presented by Professors Brennan and Schwartz. The article distinguished between the book and market values of the assets and liabilities of a firm and financial constraints are posed in terms of plausible accounting ratios. The author discusses some concerns he had with the paper including that personal taxes are ignored and interest rates are assumed to be constant in their examination of the financial policy of an evolving firm.

This article presents the author's opinion on an article that provided evidence that advances a rehabilitation of the expectations theory of the term structure of interest rates. The author focuses on the econometric meaning and implications of this argument and expresses some concerns about the work. The paper presents a novel approach to testing the expectations theory; however, the evidence is weak and the explanations offered for interest rate movements should be view with suspicion.

The article presents commentary on three papers that appeared in the May, 1982 issue of the "Journal of Finance," including "Projecting the Financial Condition of a Pension Plan Using Simulation Analysis" by Louis Kingsland, "Plasm: Pension Liability and Asset Simulation Model" by Howard E. Winklevoss, and "SOFASIM: A Dynamic Insurance Model with Investment Structure, Policy Benefits, and Taxes" by Alice B. Goldstein and Barbara G. Markowitz. The author believes the simulation models described in each paper can aid in long-term planning. However, he also discusses several perceived shortcomings.

The article presents commentary about a paper written by Patrick J. Hess entitled "The Ex-Dividend Day Behavior of Stock Returns: Further Evidence on Tax Effects," which appeared in the May, 1982 edition of the "Journal of Finance." The author acknowledges several assumptions made by Hess that Hess believes are missing from a previous paper by Litzenberger and Ramaswamy. However, he believes that Hess' use of daily data introduces certain difficulties, including those associated with distributional assumptions and informational effects.

The article presents commentary about a paper written by Nils H. Hakansson entitled "To Pay or Not to Pay Dividend," which appeared in the May, 1982 edition of the "Journal of Finance." The author believes Hakansson's paper raises several issues that could benefit from further research. Specifically, additional inquiry should be made into the questions of whether investors are rational, whether dividends are informative, and whether conclusions reached in Hakansson's paper hold within a multiperiod framework.

This article presents a discussion of a paper that examined exchange risk. The author notes that the main argument set forth in the paper is related to portfolio management and maintaining purchasing power in situations where inflation is ignored and too much home currency is included in the portfolio. The author comments that while this situation is possible, it is not a necessary outcome. The author notes that the commodities in the portfolio play a more significant role in determining how the portfolio performs than is stated in the paper.

The article critiques two studies concerning predictive models and efficient market theory. A study referred to as the Goodman paper evaluated commercial forecasting services for the foreign exchange market. The Fisk and Rimlinger paper proposed a model that estimates creditworthiness and the likelihood of debt reschedulings in developing countries. The issues in the Goodman study are the research methods for testing forecasting services and the conditions that contribute to market inefficiency. The issue in the Fisk-Rimlinger study is the usefulness of economic information when reschedulings are also influenced by political decisions.