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The subject of this paper is corporate decision making under perfect capital market conditions. The question raised is: If investors act as Markowitz portfolio theory suggests, and if capital market conditions as developed by Sharpe and Lintner exist, what implications follow for the corporate manager making decisions within the firm? This question is addressed for a particular type of corporate decision: the refunding decision. The approach taken, however, is generalized and lends itself to analysis of other firm decisions, particularly those which concern the choice of allocating funds to mutually exclusive uses. [ABSTRACT FROM AUTHOR]

The article presents comments on the article "The Relations Among Equity Markets: A Study of Share Price Co-Movements in the United States, United Kingdom, Germany and Japan" by Tamir Agmon, originally published in September 1972 issue of "The Journal of Finance." The authors claim that the model put forth by Agmon does not embody a single-market hypothesis. It is argued that a one-country capital asset pricing model cannot simply be extended to the international case unless exchange-risk is correctly incorporated.

The article focuses on the application of mean-variance and selection criterion to the empirical problem of generating efficient mixed portfolios of common stocks and bonds. Portfolio theory provides a positive explanation for liquidity preference and the inverse relationship between the demand for money and rate of interest. The findings of the research indicate that some imperfections in the capital market have persisted over a significant period of time. It is noted that stochastic dominance analysis lends additional support to the conclusions reached using the mean-variance portfolio model.

The article focuses on information exchange in security markets and the assumption of homogenous beliefs in the theory of finance. The theories of optimal capital budgeting and security valuation are founded on the assumption that shareholders and managers can communicate perfectly with one another across capital markets. The author focuses his research on the assumption that expectations are uniform on both sides of capital markets. Several reliable models drawn from finance-communication theory are discussed.

The article focuses on the derivation of a decision rule which indicates whether an asset should be acquired and whether that acquisition should be by purchase or lease. Some characteristics of this decision rule are emphasized, including the valuation of an asset depending on its after-tax returns and the use of appropriate discount rates based on cash flows. Several existing proposals put forth by other researchers are considered and found to be inconsistent with the investment criteria of maximizing shareholder wealth.

The article presents an econometric analysis of the interest sensitivity of the inflow and allocation of life insurance company investments. The study examines the interest sensitivity of cash flow, the investible funds employed by insurance companies. The distributed lag between the commitment and disbursement of life insurance investment funds is analyzed, as well as the determinants of new commitments. Some concluding remarks concerning the impact of monetary policy on life insurance company portfolio behavior are provided.

The authors examine whether the properties of growth optimal portfolio selection models are consistent with markets substantially populated by investors concerned with long-run growth. Focusing on the New York Stock Exchange, the authors employ Hotelling "T-squared" tests to conclude that the hypothesis of a market dominated by growth-optimizers cannot be rejected. In addition, evidence exists to support the notion that growth-optimal portfolios have greater risk than the market portfolio.

In his paper Professor Solnik has endeavored to submit his seminal theoretical work on the international structure of capital asset prices to empirical verification. As with much path-breaking research, however, Solnik's efforts appear to me to be inconclusive. Although his results appear to be consistent with the theoretical predictions of his international asset pricing model (IAPM), they also appear to be consistent with a broad range of alternative specifications of the model and, therefore, do not enable us to discriminate among alternative specifications of the IAPM. [ABSTRACT FROM AUTHOR]

The author presents comments on the market model and two-parameter models of capital market equilibrium from W.F. Sharpe and John Lintner. An overview is presented of the Sharpe-Linter model. The author notes that in a previous article he pointed out errors that Sharp and Lintner made in applying conditions on equilibrium expected returns of the two-parameter model, in which returns are generated by the so-called market model. In this article, the author asserts that some of the comments he made were incorrect.

A reply by the authors is presented to commentary by Robert R. Sterling and William Harrison on the article "Capital Market Equilibrium, Information Production, and Selecting Accounting Techniques: Theoretical Framework and Review of Empirical Work," included within the issue. The authors' thoroughly restate and clarify their initial conceptual paradigm, asserting that Sterling and Harrison misattribute their position and research design goals.

The article presents the author's comments and opinions in response to the report "Capital Market Equilibrium, Information Production, and Selecting Accounting Techniques: Theoretical Framework and Review of Empirical Work," by Nicholas J. Gonedes and Nicholas Dopuch included within the issue. The conceptual progress of the efficient market theory expressed in the article is praised but criticisms are leveled at their empirical confusion between individual and market-wide behavior.

The available studies that did not use the prices of firms' ownership shares in examining the effects of alternative techniques do not, in our judgment, provide much reliable evidence on the effects of alternative accounting techniques. Their failure to do so can be attributed to deficiencies at two basic levels of analysis. First, suppose that the framework of each nonprice study is accepted as being appropriate. Even if this is done, these studies are characterized by some major theoretical and technical problems. In some cases these problems are statistical ones. In other cases, the problems arise because the framework (e.g., the theory of individual behavior in the lab/field studies and the specification of materiality in the materiality approach) is not so well developed that it can yield reliable results. These problems may not be insurmountable; perhaps some of them can be alleviated by using improved statistical tools and by devoting more effort to the specification of the frameworks used. The second level of analysis involves the connection between whatever framework is used in a nonprice study and capital market agents' behavior. In each of the above subsections, we observed that the relationship between the specific framework adopted and capital market agents' resource allocation decisions was never apparent. Thus, the relevance of each framework to the issues at hand is most certainly not obvious. And this would be the case even if each framework were completely well specified and even if all data needed for its application were available. The above remarks should not be interpreted to mean that a study is deficient simply because it is a nonprice study. Rather, we are suggesting that the available nonprice studies were not successful in overcoming some seemingly major technical and theoretical problems. [ABSTRACT FROM AUTHOR]

The article analyses equilibrium prices of firms' ownership shares and how they are dependent upon assessed distribution functions of returns to those shares. These distributions are dependent on information pertaining to firms' production-investment decisions. The article considers the existing studies of accounting numbers that deal with the implications of one accounting number or one number at a time, usually the income number. The article examines the information reflected in contemporary accounting reports as determined by several or one of the accounting numbers presented in those reports. An examination of only one accounting number is likely to induce misleading inferences about the information content of contemporary accounting reports, and it has also been argued that an accounting income number is the single most important number provided in accounting reports. This paper considers both of these arguments.

This article presents an examination of the behavior of daily index changes using the techniques developed in Fama and Roll to demonstrate that nonstationary probably accounts for the phenomena observed. The article includes a description of the market model, a description of the data and its estimation procedure, and tests and results.

The article discusses teaching investments and research in the field of investments. Business school academics have done research on investment which has led to improvements in portfolio theory, capital market theory, and the efficient capital markets theory. The author feels these are the most important for the field of investments.

Decision rules for credit investigation and policy have been discussed by Mehta for sequential processes in a credit system. Others have analyzed decision rules for credit scoring functions and have suggested sequential arrangements for analysts and functions. In this paper, however, we take a broader perspective and appraise the value of credit analysis for a large class of loans, such as consumer, residential real estate, or commercial loans. We are thus able to use statistics readily available and the estimated quality of credit applicants to describe the relationship between credit function profitability and the accuracy and extent of credit analysis being performed. With estimates of current performance, the model is then used to evaluate proposed methods of analysis and market opportunities. The first section of the paper formulates the credit-granting problem in terms of the net present value of loan repayments and the expected number of good and bad loans. Methods of analysis are evaluated in the second section, and the conceptual framework developed in the first two sections is applied to a consumer loan example in the third section. Some summary comments are presented in the final section. [ABSTRACT FROM AUTHOR]

The article reports on the financial factors which influence the fluctuations of beta, or market risk, in a homogeneous industry. Firms in the electric utility industry are researched to find evidence on the relation between market risk and financial factors. The capital assets pricing model is used, during market equilibrium, to find the expected return on a capital asset for a single period.

The article reports on the development of an equilibrium capital-market model which is based on semivariance. A portfolio selection model needs to identify inefficient portfolios and reduce the set of alternative investments which the decision maker has to examine. The employment of a criterion with two parameters by a portfolio selection model increases convenience and simplicity and the most popular of these are the expected value variance formulation and the expected value semivariance model.

The article provides empirical research to test the efficiency of the market for bank stocks. Economists Friend and Herman have separated the concept of capital market efficiency into two major ingredients. First, the market should be successful in grouping resources to the highest-valued use. Second, a capital market should be operationally successful pertaining to minimizing transactions costs. The market for bank stocks will be tested for allocative and operational efficiency by comparing it to other markets.

The article focuses on the impact of spot rates, forward rates, and interest-rate differentials on international finance. The article develops a theory of interest-rate arbitrage within a simple Fisherian framework. The article also investigates some of the implications of Fisherian approach to international finance. A theory of interest-rate arbitrage is also developed under the assumption of perfect capital markets, and introduces the transaction costs into the analysis by recognizing the spread between buying and selling rates for foreign exchange. In the article's final section the implications of the analysis are presented.

The article comments on the obstacles to regional integration of capital markets in Europe. The author examines the features of the financial integration in European Economic Community and Organization of Economic Cooperation & Development. He states that both organizations have shown a increasing awareness in order to achieve integration of capital markets into a greater whole. He says that the integration will require markets to be strong enough to endure the changes. The article also discusses the differences between types of integration and the problems in finding a general sectoral equilibrium in the capital market.

The article examines the problems associated with integrating capital markets in Europe. The author comments on the integration efforts of European Economic Community and the Treaty of Rome and the restrictions in the flow of capital to third world countries. The author suggests that loan and equity capital should be allowed to move freely to places where higher returns can be achieved and he believes that borrowers should have access to credit on equal terms. The article also discusses the importance of improving the mechanism of the market.

The article comments on the article "The Problems and Prospects of Integrating European Capital Markets," written by Kurt Richebacher. The author remarks on the policy mix and conditions necessary for capital market integration and the implication of integrating capital markets. The author explains that controls over international capital movements need to be eliminated for the integration of national capital markets. The article also examines the objectives of internal and external stabilization.

The article examines the problems in the integration of National Capital Markets in Europe. The article discusses the categories of obstacles including the favoring of investment at home over investment abroad, protection of the balance of payments, and the autonomy of national monetary and financial policies. The author states that the development of the Euro-bond market is being used as a substitute for genuine integration. The article also discusses the limitations in the progress of national capital markets.

The article comments on the article "Capital Market Phenomena," written by M. Larre. The author states that Larre was incorrect in his statement that the only motive for capital market improvement was the 1962 Dillon Report, the U.S. Treasury and other reports, citing American inspiration. The author discusses the motives in improving capital market and also examines the reasons for the lack of progress in the integration of capital market. The article also examines attempts to exchange integration by Euro-bond market.

The article examines real and monetary factors in business cycles. The author questions whether cycles which resemble those examined in a money economy can arise after Say's Law of Markets is imposed on the system. The article presents an analysis of the cumulative process of expansion and contraction within a monetary system. The author argues that due to imperfections of competition in the market for liquidity, Say's Law of Markets will ultimately fail. Several equations are presented to help illustrate the study.

In this paper we have shown that a necessary condition for the existence of financial intermediaries is the existence of imperfect divisibility of primary securities. In turn, a necessary condition for imperfect divisibility is the presence of transactions costs broadly conceived. Under such conditions, there is no unambiguous measure of the risk of an asset since that risk must be measured relative to a specific portfolio. But with imperfect divisibility, attainable portfolios vary with an investor's scale of wealth. Our purpose, however, has not been to demonstrate that by relaxing the assumptions of the conventional model, we can get different conclusions. That would be a rather empty exercise. Rather, we have tried to show that just as the theory of perfect competition is useful as a benchmark in the analysis of industrial organization, so the conventional model can be used as the starting point for an analysis of the implications of real world 'imperfections.' [ABSTRACT FROM AUTHOR]

The present paper formally introduces corporate taxes and bankruptcy penalties into a single-period valuation model in a complete capital market. The firm's financing mix determines the states in which the firm will earn its debt obligation and receive the tax savings attributable to debt financing. The firm's financing mix also determines the states in which the firm is insolvent and incurs bankruptcy penalties. The problem of optimal capital structure is, therefore, formulated as the determination of that level of debt such that the resulting division of states (into those in which the firm is solvent and those in which it is insolvent) yields the maximum market value of the firm. It is shown that the total market value of the firm is not in general a concave function of financial leverage. [ABSTRACT FROM AUTHOR]

Blume has referred to King's findings concerning industry factors in the market as evidence that the epsilon[sub jt] variable in the model cannot be assumed independent, although he suggested that the model still represents a good first approximation, since these factors explained a relatively small portion of the total variance in stock prices. The purpose of this report will be to demonstrate that King's results overstate the role of industry factors in the market and that the variables, epsilon[sub it], may be more nearly independent than has been generally believed. In addition, our analysis will update part of King's results through 1967. [ABSTRACT FROM AUTHOR]

Responds to R. West et al's comments on the analysis of portfolio returns and the random walk theory of stock price changes. Resolution on differences in definition of terms used in the article; Lack of reliance between superiority of a portfolio consisting of more than one security on negative serial dependence of price relatives alone. [ABSTRACT FROM AUTHOR]

The article focuses on U.S. monetary policy in the 1970s, particularly regarding the influence and control of multinational commercial banking. Shifts in the banking structure of the U.S. due to the influx of multinational influences are described. The responsibilities of the Federal Reserve System (Fed) to monitor the changes in commercial bank credit structures and potentially regulate them are asserted by the author. It is suggested that additional financial instruments are necessary for the Fed to ensure monetary and credit control.

The article presents an analysis of macroeconomic impacts of external investor relations (IR) firms on common stock prices. The contrasting theories of positively promoting and marketing corporate relations to investors and that of efficient capital markets are both outlined. Unlisted matched pair tests were utilized to further investigate the empirical correlations between stock valuation of companies before and after hiring outside investor relations services, citing no particular benefit of IR marketing to stock price performance.

The article focuses on the derivation of proxies for real rates of interest through inflation expectations and reactions in capital markets. The foundations of the process put forth by Irving Fischer are reviewed. This study highlights liquidity preference and loanable funds as instruments for estimating inflation impacts on nominal bond yields through a capital market equilibrium approach. An estimation model for the expected real rate is derived and empirically tested with data from 1960-1971.

The article draws upon the theory of revealed preference (RP) to evaluate the impact changes in capital structure can have on a firm's cost of capital. After using RP to derive Modigliani and Miller's famous proposition regarding the indifference of firm value to capital structure, the author details how a shift in capital structure implies equal but offsetting effects that leave share value unchanged. He also examines the consequences of lending and borrowing in different debt markets. Additional topics include optimal debt policy and weighted average cost of capital.

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 Eurobond is an international security floated and traded in an international market. It is consequently natural to inquire into the potency and limitation of the Eurobond market as an integrative force on the financial scene. This paper does so. The Eurobond market and its relation to the Eurodollar market are described briefly in parts I and II respectively. Part III examines the confluence of yields. The limitations of integration are appraised in the two sections that follow. The first of these deals with legal impediments to integration, and the second with the structural character of the securities industry which impede it. [ABSTRACT FROM AUTHOR]

This article compares and contrasts the economic and financial theories espoused by Myron Gordon versus those held by Franco Modigliani and Merton H. Miller regarding the effect dividends have upon share prices in a theoretical "perfect capital market." Gordon's stock price valuation model is examined and his approach towards dividend growth rate, earnings per share, and rates of return are explored. The author discusses Modigliani and Miller's approach to rational pricing and the valuation of stocks based upon future earnings and their assertion that investors should be immune to irrelevant information in financial markets.

The article discusses risk-adjusted valuation of investments. Using a single-period, mean-variance expected utility framework, the author first draws upon previous research to illustrate how investors who differ with respect to prior beliefs and risk preference will trade risk for yield in different ways. Specific examples are provided. Then he shows how security pricing depends upon the trading environment. A key insight for firms is that financial decisions cannot be made irrespective of shareholders' utility functions and prior probabilities.

Recent economic journals have been carrying articles dealing with the problem of government investment under the assumption that biases against government spending, frictions in the capital market, and a systematic divergence between the non-risk interest rate and the rate of return required for private investment prevent an equality between marginal social time preference and marginal social benefit. The purpose of this article, however, is to demonstrate that these biases are exaggerated or non-existent. The market cost-of-capital (properly defined) can be used to approach Pareto optimality in rationing capital between the public and private sector. A major point of the article is an attempt to approximate the social cost of capital. In any case, we show that the social cost-of-capital must be higher than the government's borrowing rate since the government's borrowing rate is not the result of the government's superiority in the pooling of risk but arises from the government's legal superiority as a borrower against the private holders of all claims. [ABSTRACT FROM AUTHOR]

This article presents information on equilibrium in the equity market under conditions of uncertainty. The author extends previous research by using the mean-variability approach to uncertainty in the analysis of the market risk premium function in a capital market primarily made up of risk averse institutional investors. The author attempts to show that these investors reduce the risk in their portfolios by diversifying their financial assets. The author also explores how firms manage the risk in their portfolios.

Professor Aliber looks at the United States as a financial intermediary for the rest of the world and examines three hypotheses regarding the nature of this intermediation process. He does this by looking at the difference in the slope of yield curves among countries. One of the three hypotheses is the familiar proposition that capital markets are better developed in the United States than elsewhere. The second, attributable to Despres, Kindleberger and Salant (DKS), is that liquidity preference is higher abroad than in the United States. The third hypothesis, which I take to be Professor Aliber's, introduces the notion that exchange risk helps to explain differences in yield curves among countries. The three alternative hypotheses have different implications for feedback from restriction on capital outflow--and this is the policy significance of the analysis. [ABSTRACT FROM AUTHOR]

This paper is directed toward two issues. The first involves several competing explanations for the U.S. position in international capital market relationships. One of these explanations involves the concept of international financial intermediation; the usefulness of this analogy to domestic intermediation is questioned. The second involves the implications of each of these explanations for capital market relationships for the impact of U.S. capital outflows on the U.S. payments balance. [ABSTRACT FROM AUTHOR]

This paper has attempted to develop a rational and objective basis for making capital budgeting decisions under conditions of less than perfect knowledge about the future. Two assumptions were made in order to simplify the initial analysis: (1) a perfectly competitive securities market made up of small, risk-averse investors with non-diversified portfolios and (2) a perfect correlation between returns from the investment project and returns from the firm's mix of assets. Given these it was demonstrated that the internal rate of return on an investment project could be made risk-equivalent to the firm's equity capitalization rate by the proper amount of borrowing or lending. The procedure was based on a linear transformation between return and risk when leverage is introduced. These risk-equivalent rates were then incorporated into the standard present value capital budgeting framework. The possibility of substituting personal for corporate leverage in the process of neutralizing the risk effect of a given investment opportunity was considered next. Since the assumption of perfect correlation of investment project returns and equity returns is not realistic, a new measure of risk on the investment opportunity was derived to reflect the diversification effect of less than perfect correlation between returns. [ABSTRACT FROM AUTHOR]

The article presents commentary and criticism on the reports "Pension Funds in the American Economy," by Roger F. Murray and "Critical Evaluation of Pension Plans," by William T. Gibb, both included within the issue and addressing the government policy and economic underpinnings of social security and pension plans within the United States. The two articles are compared and contrasted, highlighting their differences in scope and discrepancies regarding the definition of basic issues in pension management. It is suggested that further synthesis between the two ideological camps is necessary for a working theory to manifest itself.

Corporation finance emerged as a separate field of study about sixty years ago. Until the end of World War II the scope and content of the field was essentially a consolidation and extension of the framework laid down by the earliest writers. Basic changes were suggested, but these did not have a major impact. After World War II the emphasis of academic work in the field began to move away from the traditional pattern. During the past decade the pace of change has quickened and right now the rate of change is very rapid. [ABSTRACT FROM AUTHOR]

The article comments on the interest of life insurance companies in the equity capital markets, particularly in reference to the impact of separate accounts and variable annuities. Postwar conditions of life insurance companies are discussed. The author attributes the inability of life insurance companies to compete in the pension field on the fact that they are required to heavily invest their funds in bonds and mortgages. He also notes that the earnings of life insurance companies are subject to income taxation, as opposed to the earnings of noninsured plans.

The article comments on the papers "The Changing Role of U.S. Banks in International Financing," by George H. Chittenden, "The International Money Market: Structure, Scope and Instruments," by Fred H. Klopstock, and "The Integration of European Capital Markets," by Oscar L. Altman, all published within the issue. The author looks at changes occurring in European capital markets, international money markets, and commercial bank lending. The shortage of international liquidity is discussed. The author feels that broadened exchange controls among major countries are not as effective as simply remaining solvent.

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.

In a recent article in this Journal, W. F. Sharpe suggests that the model of investment behavior developed by Markowitz, Tobin and others can be extended in order "to construct a market equilibrium theory of asset prices under conditions of risk.'' His analysis, however, stops short of providing such an extension. His main concern is to develop what he calls "the capital market line" and to discuss the relationship between prices of assets and various components of their risk. In this note, we show that models of the form considered by Markowitz and Tobin can explain how asset prices are simultaneously determined by the interactions of investors seeking to maximize utility. In Section II below, we develop a simple modal of two assets. A general model of n assets is developed in the Appendix. [ABSTRACT FROM AUTHOR]

The article presents an inventory of research on the U.S. capital market from 1954 to 1963 that was compiled by a committee of the National Bureau of Economic Research. Many ongoing research projects related to various aspects of the U.S. economy are, the article notes, being undertaken by agencies such as the U.S. Federal Reserve, the Commission on Money and Credit, and Harvard University. A bibliography is also included in the article that illustrates articles and books on the capital market and financial institutions, including the book "Individual's Saving: Volume and Composition," by I. Friend and V. Natrella, the article "Saving in the National Economy: From the National Income Perspective," by E. F. Denison, and "Variation in Bank Asset Portfolios," by R. McEvoy.