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The paper argues that the market significantly overvalues firms with severely underfunded pension plans. These companies earn lower stock returns than firms with healthier pension plans for at least 5 years after the first emergence of the underfunding. The low returns are not explained by risk, price momentum, earnings momentum, or accruals. Further, the evidence suggests that investors do not anticipate the impact of the pension liability on future earnings, and they are surprised when the negative implications of underfunding ultimately materialize. Finally, underfunded firms have poor operating performance, and they earn low returns, although they are value companies. [ABSTRACT FROM AUTHOR]

Many models use noise trader risk and corresponding violations of the Law of One Price to explain pricing anomalies, but include a storage technology in perfectly elastic supply or unlimited asset liability. Storage allows aggregate consumption risk to differ from exogenous fundamental risk, but using aggregate consumption as a factor for asset returns can make noise trader risk superfluous. Using (i) limited asset liability and limited storage withdrawals, or (ii) an endogenous locally riskless interest rate eliminates violations of the Law of One Price. Our main results use only budget equations and market clearing, and require virtually no assumptions about behavior. [ABSTRACT FROM AUTHOR]

We decompose currency returns into (permanent) intrinsic-value shocks and (transitory) expected-return shocks. We explore interactions between these shocks, currency returns, and institutional-investor currency flows. Intrinsic-value shocks are: dwarfed by expected-return shocks (yet currency returns overreact to them); unrelated to flows (although expected-return shocks correlate with flows); and related positively to forecasted cumulated-interest differentials. These results suggest flows are related to short-term currency returns, while fundamentals better explain long-term returns and values. They also rationalize the long-observed poor performance of exchange-rate models: by ignoring the distinction between permanent and transitory exchange-rate changes, prior tests obscure the connection between currencies and fundamentals. [ABSTRACT FROM AUTHOR]

Many human resource systems are presently being modified so they can be administered using various forms of computer technology. These technological advances are being driven primarily by strong demands from human resource professionals for enhancements in speed, effectiveness, and cost containment. This case study presents results obtained by an educational publisher from use of an automated recruiting and screening system. The system allowed for recruiting and the automated administration of professionally developed, job-related questions aimed at deciphering whether an applicant meets the job requirements. The analyses showed conservative savings due to reduced employee turnover, reduced staffing costs, and increased hiring- process efficiencies. These cumulative savings yielded a return on investment of 6.0 to 1, or a return of $6.00 for every $1.00 invested in the program. When these savings were adjusted to reflect increased hiring trends, more pronounced savings were evident. The current system coupled with the addition of planned enhancements should increase future hiring efficiency, employee quality, and resulting financial savings. [ABSTRACT FROM AUTHOR]

In this paper, we study intertemporal portfolio choice when an investor accounts explicitly for model misspecification. We develop a framework that allows for ambiguity about not just the joint distribution of returns for all stocks in the portfolio, but also for different levels of ambiguity for the marginal distribution of returns for any subset of these stocks. We find that when the overall ambiguity about the joint distribution of returns is high, then small differences in ambiguity for the marginal return distribution will result in a portfolio that is significantly underdiversified relative to the standard mean-variance portfolio. [ABSTRACT FROM AUTHOR]

Prior research has documented positive abnormal stock returns around the announcements of repurchase programs; several explanations of these returns have been suggested, including signaling, free cash flow, and wealth redistributions. This study analyzes abnormal stock, bond, and firm returns around repurchase announcements to examine these hypotheses. We find evidence consistent with both signaling and wealth redistribution. The loss to bondholders is a function of the size of the repurchase, and the risk of the firm's debt. We also find that bond ratings are twice as likely to be downgraded as upgraded after the announcement of the repurchase program. [ABSTRACT FROM AUTHOR]

We investigate the bias in CRSP's Nasdaq data due to missing returns for delisted stocks. We find that the missing returns are large and negative on average, and that delisted stocks experience a substantial decrease in liquidity. We estimate that using a corrected return of 55 percent for missing performance-related delisting returns corrects the bias. We revisit previous work which finds a size effect among Nasdaq stocks. After correcting for the delisting bias, there is no evidence that there ever was a size effect on Nasdaq. Our results are inconsistent with most risk-based explanations of the size effect. [ABSTRACT FROM AUTHOR]

This article focuses on how the existing Human Resource Management function in a mature, large corporation can transform itself into a more sophisticated competitive tool to help the corporation's line management achieve superior organizational capability. [ABSTRACT FROM AUTHOR]

Duality theory is employed to provide necessary and sufficient conditions for portfolios on the minimum-variance frontier to have positive investment proportions in all assets. These conditions involve the feasibility of portfolios that have non-negative correlation with all assets and positive correlation with at least one. Using these results, several "qualitative" results concerning the signs of investment proportions in efficient portfolios are proved. It is argued that the conditions that ensure all-positive weights in efficient portfolios are intuitively compelling and are not unique to the CAPM. With large numbers of assets, however, the signs of weights in minimum-variance portfolios can be very sensitive to slight departures from these conditions due to, for example, sampling error. [ABSTRACT FROM AUTHOR]

This paper analyzes the major factors which determine the effects of taxation on the value of risky assets and on the cost of capital, and shows how the magnitudes and even the signs of these effects depend on the values assumed for a few key parameters in the model. Using plausible values for these parameters, it is shown that the results obtained are frequently counter-intuitive. [ABSTRACT FROM AUTHOR]

We develop an analytical model to address the question of optimal deposit insurance policy and to examine the impact of deregulation on depositors' welfare and the soundness of the insurance system. We find that the optimal level of regulation depends critically on the functional relationship between risk and return. We show that in general deregulation of bank activities and/or of deposit rate ceilings will involve tradeoff between depositors' welfare and the soundness of the insurance system. Our analysis also indicates that risk-sensitive premium and capital requirement schedules may not be efficient in managing the risk of banks. [ABSTRACT FROM AUTHOR]

This paper provides new tests of the arbitrage pricing theory (APT). Test results appear to be extremely sensitive to the number of securities used in the two stages of the tests of the APT model. New tests also indicate that unique risk is fully as important as common risk. While these tests have serious limitations, they are inconsistent with the APT. [ABSTRACT FROM AUTHOR]

The gain to stockholders from mergers is well documented. However, there is little evidence as to whether the source of the gain is due to synergy or management displacement. Merger is just one of an almost limitless variety of ways in which firms combine resources to accomplish some objective. A joint venture is another. In addition to being of interest as an independent phenomenon, because the original managements of the parent firms remain intact under a joint venture, investigation of wealth gains from joint ventures provides an opportunity to isolate the management displacement hypothesis from the synergy hypothesis as the source of gains in corporate combinations. Our results are 1) there are significant wealth gains from joint ventures, 2) the smaller partner earns a larger excess rate of return while the dollar gains are more equally divided, and 3) the gains, scaled by resources committed, yield “premiums” similar to those in mergers. We are inclined to interpret our results as supportive of the synergy hypothesis as the source of gain from corporate combinations. [ABSTRACT FROM AUTHOR]

A nonparametric statistical procedure is employed to examine the returns to speculators in wheat, corn, and soybeans futures markets. We find that the theory of normal backwardation is supported. Moreover, the presence of the risk premiums to speculators tends to be more prominent in recent years than in earlier years. We also find that large wheat speculators as a whole possessed some superior forecasting ability. The evidence is inconsistent with the hypothesis that commodity futures prices are unbiased estimates of the corresponding future spot prices. [ABSTRACT FROM AUTHOR]

This paper characterizes conditions under which asset returns and consumption are consistent with risk-averse preferences. It is shown that risk aversion is equivalent to "zero arbitrage" on a transformation of the payoff space. The implicit state prices which are dual to this no-arbitrage condition can be interpreted as prices of "pure consumption hedges." This zero-arbitrage restriction implies the usual restrictions associated with nonsatiation. The analysis holds in both complete and incomplete market settings. [ABSTRACT FROM AUTHOR]

Sell-off activities arise when a firm sells part of its assets (e.g., a segment, a division, etc.) but continues to exist in essentially the same form. This study investigates the effect of voluntary sell-offs on stock returns. From a sample of over 1000 sell-off events (first public announcements), the evidence shows that both sellers and buyers earn significant positive excess returns from these transactions. The excess returns earned by buyers are smaller than those earned by sellers. There is also evidence that sell-off announcements are preceded by a period of significant negative returns for the sellers which suggests that the sellers, on average, performed poorly prior to their sell-off activities. [ABSTRACT FROM AUTHOR]

In this paper we extend the multigood futures pricing model of Grauer and Litzenberger [9] to a dynamic discrete time setting. We then test the model using data on futures prices for corn, wheat, and soybeans. The parameter estimates we obtain are similar to those obtained by other researchers using stock return data. The model itself is rejected and we offer some suggestions as to which assumption may be violated. We also give an interpretation to the Hansen-Singleton nonlinear instrumental variables estimation technique used in our empirical work. [ABSTRACT FROM AUTHOR]

Empirical tests are reported for Ross' arbitrage pricing theory using monthly data for U.S. Treasury securities during the 1960-1979 period. We find that mean returns on bond portfolios are linearly related to at least two factor loadings. Multivariate test results, however, are not consistent with the APT. Our sample data in the U.S. Treasury securities market are also not consistent with either version of the CAPM. One-month-ahead forecasts of excess returns using factor-generating models are compared with corresponding naive predictions or predictions using the "market model" with various market portfolios. [ABSTRACT FROM AUTHOR]

The primary purpose of this paper is the use of survey expectations data to study the empirical relationships between stock returns, inflation, and economic activity. In the course of this analysis and as a secondary purpose, the paper discusses general considerations involving the use of expectations proxies and makes recommendations for econometric techniques. The main empirical findings are: (1) Hypothesized relationships between expected economic activity and expected inflation do not in practice appear to be important in explaining the negative relationship between expected inflation and stock returns. (2) Nevertheless, the survey data do lend some support to the hypothesis of a quantity theory relationship between expected inflation and expected economic activity, holding constant monetary growth. (3) The cross-forecaster dispersion of economic activity forecasts, a proxy for real uncertainty, appears to be a significant determinant of stock returns. Inclusion of this variable eliminates the negative impact of expected inflation. [ABSTRACT FROM AUTHOR]

This paper values options on assets whose returns, over a finite interval of time, are generated by a binomial process. It shows that a simple valuation relationship, between the option and the underlying stock, obtains if investors have preference functions that belong to a particular class, even if opportunities to hedge do not exist. One particular application of the theory is in the case where the stock price over a finite interval could increase by an amount, fall by the same amount, or stay at the same level. The results in this paper may be viewed as the foundation of the preference-based approaches to obtaining a risk neutral valuation relationship. [ABSTRACT FROM AUTHOR]

This paper tests the Arbitrage Pricing Theory (APT) by estimating the factor loadings that are consistent between two industry groups of securities. One of the pitfalls in the study by Roll and Ross is that the factors estimated in one group may not be the same with the factors estimated in another group. This raises some concerns on the acceptability of their conclusions. For our study, we employ inter-battery factor analysis which enables us to estimate factor loadings by constraining the factors to be the same between two different groups. Our results show that there seem to be five or six inter-group common factors that generate daily returns for two industry groups of securities, and these inter-group common factors do not seem to depend on the size of groups. Also, based on our cross-sectional tests on the risk premia, we conclude that the APT should not be rejected. [ABSTRACT FROM AUTHOR]

This paper presents the mean-Gini (MG) approach to analyze risky prospects and construct optimum portfolios. The proposed method has the simplicity of a mean-variance model and the main features of stochastic dominance efficiency. Since mean-Gini is consistent with investor behavior under uncertainty for a wide class of probability distributions, Gini's mean difference is shown to be more adequate than the variance for evaluating the variability of a prospect. The MG approach is then applied to capital markets and the security valuation theorem is derived as a general relationship between average return and risk. This is further extended to include a degree of risk aversion that can be estimated from capital market data. The analysis is concluded with the concentration ratio to allow for the classification of different securities with respect to their relative riskiness. [ABSTRACT FROM AUTHOR]

This study provides further evidence on the rates of return realized by the shareholders of multinational firms relative to those of purely domestic firms. The results indicate that the risk-adjusted returns realized by the shareholders are identical across the two groups except where the MNC operates in competitive foreign markets. In that case, MNC shareholders experience negative abnormal returns. The study also provides further evidence on the risk-reduction effect of international diversification. The results fail to support the hypothesis that the beta is a convex function of the degree of international involvement. Finally, the paper provides some preliminary evidence on the effect of corporate international diversification on shareholders' returns. It is found that abnormal returns rise by some 18 percent during the 14 months preceding the initial foreign diversification. [ABSTRACT FROM AUTHOR]

We examine abnormal stock returns surrounding contemporaneous earnings and dividend announcements in order to determine whether investors evaluate the two announcements in relation to each other, We find that there is a statistically significant interaction effect. The abnormal return corresponding to any earnings or dividend announcement depends upon the value of the other announcement. This evidence suggests the existence of a corroborative relationship between the two announcements. Investors give more credence to unanticipated dividend increases or decreases when earnings are also above or below expectations, and vice versa. [ABSTRACT FROM AUTHOR]

We examine the hypothesis originally advanced by Roll [12] that observed anomalies in excess returns can be explained by misspecification of the market model used to estimate systematic risk. We find substantial misspecifications in the model systematically related to size and period of listing of the securities in question. There is some evidence that these misspecifications are associated with systemic biases in measured betas used to construct excess returns. [ABSTRACT FROM AUTHOR]

While there has been an abundance of empirical research on the subject of mergers and acquisitions, little research exists on a closely related topic—voluntary corporate selloffs. This study examines the effect on shareholder wealth of the announcement by management of an investment decision to voluntarily sell part of its operations to another firm. Positive abnormal returns are found to occur on the announcement date. However, it is found that such selloffs generally occur after a period of abnormally negative returns, suggesting the announcement is preceded by the release of negative information about the firm. [ABSTRACT FROM AUTHOR]

This paper demonstrates that the Roll and Ross (RR) and other previously published tests of the APT are subject to several basic limitations. There is a general nonequivalence of factor analyzing small groups of securities and factor analyzing a group of securities sufficiently large for the APT model to hold. It is found that as one increases the number of securities, the number of "factors" determined increases. This increase in the number of "factors" with larger groups of securities cannot readily be explained by a distinction between "priced" and "nonpriced" risk factors as it is impermissible to carry out tests on whether a given "risk factor is priced" using factor analytic procedures. [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]

Removing interest rate ceilings on bank deposits or reducing the tax rate applicable to the interest earned on such deposits are alternative means of increasing the after-tax return to depositors. These alternatives, however, have differing impacts on the structure of a competitive banking industry. This paper develops a model which focuses on a bank's choice between paying an explicit interest rate on its deposits and paying a return in the form of services. The model allows banks to differ in their production technologies and depositors in their marginal tax rates and preferences for services. The effects of tax rate changes and a ceiling on the explicit deposit interest rate are analyzed. [ABSTRACT FROM AUTHOR]

The article discusses aspects of international portfolio choice. In international portfolio models nations are defined as zones of common purchasing power units or as subsets of investors who use the same price index in deflating their anticipated monetary returns. Nations may further be separated by sovereignty of taxes and border controls, which constrain private financial transactions between countries. Analysts say nations can be meaningfully distinguished by Purchasing Power Parity deviations. It is reasonable to surmise that investors residing in different countries have different yardsticks for measuring real returns and risks.

The article discusses accounting practices for flotation cost allowances. Flotation costs are incurred when a public utility sells new equity securities. There are two recognized approaches to accounting for flotation costs which have been advocated in regulatory hearings. The first consists of reimbursing the utility in each period for flotation costs actually incurred during that period. The second approach increases the allowed return on equity in all future periods to compensate the equity investor for the erosion of his initial equity contribution, due to flotation costs.

The impact of events on the time series properties of common stock returns has been the subject of numerous articles in the finance literature. Most studies have shown that capital markets are highly efficient in the sense that prices quickly adjust to publicly available information as investors act to receive a return commensurate with the level of perceived risk. This note examines the effect on the stock returns of public utility firms of the Three Mile Island (TMI) nuclear accident. In stock valuation models based on investor rationality, permanent price declines are brought about either by a decline in expected cash flows or by an increase in the rate used to discount future cash flows. Such a nuclear accident may directly affect investors' perceptions of both the expected cash flows of utilities and their risk. These future cash flows are affected because a nuclear accident may cause additional costs due to extended shutdowns or abandonment of nuclear plants, expenses of responding to a nuclear accident, and costs of purchasing replacement power. The response of utility returns to TMI is analyzed at three levels. First, the risk-adjusted returns for the utility experiencing the nuclear accident (General Public Utilities (GPU)) are measured over monthly time periods surrounding TMI. The same analysis is performed on an aggregate sample of electric utility firms to assess the direction and magnitude of TMI's impact on other firms in the industry. Lastly, the sample is divided into utilities with significant nuclear generating capacity at the time of TMI and utilities with no nuclear generating capacity, so that the differential impact of the nuclear accident on nuclear and non-nuclear public utilities may be assessed. Both a single and two index market model are used to estimate risk-adjusted returns. The latter index model includes an interest rate index as well as an equity market index. [ABSTRACT FROM AUTHOR]

This paper has examined the returns behavior of the stocks of bankrupt corporations. Similar to earlier studies, we found evidence of mounting losses sustained by shareholders over long periods prior to bankruptcy. Estimates of average shareholder losses occurring when bankruptcy is announced are the main items of new information presented by this study. Shareholders suffer large losses during the month a bankruptcy occurs, and those losses are especially concentrated into the three trading day interval surrounding a bankruptcy filing. Based upon these findings, we conclude that bankruptcy filings convey important unanticipated information to the market. Attempts were made to see if there were profound differences between (a) Chapter X and Chapter X! bankruptcies and between (b) bankruptcies in which shares became worthless and bankruptcies in which shares retained value. Although some apparent differences were detected, the existence of these differences was not conclusively demonstrated because they were observed in very small samples. [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]

Empirical research indicates that small firms earn higher average rates of return than large firms, even after accounting for beta risk. Roll conjectured that the small firm effect might be attributed to improper estimation of security betas. The evidence shows that while the direction of the bias in beta estimation is consistent with Roll's conjecture, the magnitude of the bias appears to be too small to explain the firm size effect. [ABSTRACT FROM AUTHOR]

GNMA mortgage-backed pass-through securities are supported by pools of amortizing, callable loans. Additionally, mortgagors often prepay their loans when the market interest rate is above the coupon rate of their loans. This paper develops a model for pricing GNMA securities and uses it to examine the impact of the amortization, call, and prepayment features on the prices, risks and expected returns of GNMA's. The amortization and prepayment features each have a positive effect on price, while the call feature has a negative impact. All three features reduce a GNMA security's interest rate risk and, consequently, its expected return. [ABSTRACT FROM AUTHOR]

A mean-variance risk-return tradeoff relationship is derived for the diffusion process limiting case of a state-preference model, with aggregate consumption serving as a pivotal variable. The model is compared to other recent models along the dimensions of generality and tractable implementation. The incorporation of stochastic interest rates in general equilibrium and arbitrage-based valuation models is examined, and an extension to earlier methods is discussed, in connection with the implementation of "robust" general valuation procedures. [ABSTRACT FROM AUTHOR]

This study compares the characteristics of bankrupt and non-bankrupt firms, prior to actual bankruptcy, with respect to various risk and return measures suggested by the capital asset pricing model. In addition, the study suggests an approach to estimating the probability of corporate failure, using capital market data . The conventional measure of the total risk borne by common stockholders is the variability of the rates of return. For the purpose of this study, shifts in the variance of stock returns are used to measure changes in the risk of corporate failure. Extensive cross-sectional and time series analysis indicate that certain risk measures based on market data exhibit significantly different behavior between the two samples examined in the study.

This paper proposes a measure of attitude of individuals towards risk. This measure includes the characteristics of the existing measures as special cases. It enables one to predict how a proportional change in the individual's expected wealth affects his risk premium for a wide range of relationship between the mean wealth and its variance. [ABSTRACT FROM AUTHOR]

The first objective of this paper is to examine how the temporal resolution of uncertainty affects market prices and consumption-investment decisions. We adopt the simplest model that makes possible the analysis of temporal resolution, namely a three period (t = 1, 2, 3) model. Individuals are assumed to act so as to maximize the expected utility of present and future consumption. It is assumed that individuals can trade in the shares of assets which provide uncertain returns and there exists a riskless asset which provides a riskless return over the three periods. Before the beginning of the second period new information arrives. As there is trading at date t = 2, investors will revise their portfolios and prices of the different assets will adjust to the new information. [ABSTRACT FROM AUTHOR]

The authors comment on the article "Investment Decisions, Repetitive Games, and the Unequal Distribution of Wealth" by Markowitz. They state that the distribution of wealth doesn't need to be highly concentrated due to persistent exploitative situations but can instead be deduced from accepted portfolio theory constructs. They present a Monte Carlo game of investment behavior similar to the one in the Markowitz paper that is composed of a series of shorter turns of the wheel that represent definite time periods that establish rewards of the game randomly according to the portfolio assets inherent variances. They state the game reveals that distribution of wealth can be skewed naturally from the participants' behavior in a competitive, private capital market.

The article comments on the paper published within the issue, "The Cost of Equity Capital: A Reconsideration," by M. J. Gordon and L. I. Gould. The author looks at the implications of the mutual dependence of earnings on investment and investment upon earnings under conditions of a constant investment rate and constant earnings growth. The constant growth stock valuation model is looked at as a device for explaining observed stock prices in terms of historical growth rate of dividends as well as a method to determine a firm's optimal investment strategy.

It has long been suggested that the financial structure of a firm communicates information about its returns, and in Ross [1977] some models were developed in which, at an equilibrium, managers would use finance to transmit and validate information about their firms. While these models have the virtue of describing a positive role for finance they are missing some important elements. Perhaps their principal limitation is that they assign no significant function to the manager beyond that of choosing the financial structure. This is in contrast to the neoclassical view of the manager as being concerned solely with activity choice, rather than with irrelevant financial matters. One of the purposes of this paper is to explore the relationship between these two functions. It is not unlikely that in some situations no incentive schedule can be found that simultaneously motivates that manager to make correct activity choices—efficient ones—and to signal the firm's type through the financial structure. Such a structure must reward the manager on the basis of competence while signalling, through finance, the framework of choice faced by the manager. The problem of assessing performance is further complicated by the inability to identify states. In the absence of a complete contingent description of the economy it will always be difficult to separate out the extent to which a particular firm's returns were the consequence of the manager's choices or nature's, i.e., skill or luck. The problems of moral hazard in such a situation are evident; if the manager's productive performance is positively rewarded it is in his interest to bias downward the market's perception of the activity set open to him. This evaluation problem is the second theme of this paper. The first section of the paper introduces the general incentive-signalling-financial (ISF) equilibrium model, and the following section specializes the model to a traditional state-space framework. Here... [ABSTRACT FROM AUTHOR]

In recent years, we have experienced numerous disputes over the rate a public utility should be allowed to earn. More often than not the difference between what a company requests and what the staff of a public utility commission recommends is substantial. Prolonged hearings are held with great costs to both parties. Even when the Commission reaches a decision, it sometimes is appealed to the courts with additional costs and delays. The problem is that the law relating to regulation is subject to ambiguous interpretations in a number of key areas. The purpose of my address is to explore this ambiguity in some detail and to examine an alternative approach to establishing a proper rate of return on equity capital. While this examination is rooted in modern finance theory, the focus of my address is on developing a better understanding of the problem and on policy implications as opposed to extending the theory. We begin by reviewing the legal principles underlying regulation followed by an examination of the rate-making process as it is practiced. The meaning of a "just and reasonable" rate of return to the equity holder is next explored. An alternative approach to regulation and its implications will be discussed in Sections V and VI. Concluding comments appear in the last section. [ABSTRACT FROM AUTHOR]

The article discusses security market information announcements and what impact these may have on financial market reactions. A content analysis is provided of financial information announcements that companies must make and how this effects the adjustment of the stock market. It is noted that other researchers investigating this subject will need to consider cross-sectional differences in shared value information. The article concludes that the "precision" of earnings statements may indeed effect stock pricing.

It is well documented that expected stock returns vary with the day-of-the-week (the Monday or weekend effect). In this article we show that the well-known Monday effect occurs primarily in the last two weeks (fourth and fifth weeks) of the month. In addition, the mean Monday return of the first three weeks of the month is not significantly different from zero. This result holds for most of the subperiods during the 1962-1993 sampling period and for various stock return indexes. The monthly effect reported by Ariel (1987) and Lakonishok and Smidt (1988) cannot fully explain this phenomenon. [ABSTRACT FROM AUTHOR]

Mutual funds represent one of the fastest growing type of financial intermediary in the American economy. The question remains as to why mutual funds and in particular actively managed mutual funds have grown so fast, when their performance on average has been inferior to that of index funds. One possible explanation of why investors buy actively managed open end funds lies in the fact that they are bought and sold at net asset value, and thus management ability may not be priced. If management ability exists and it is not included in the price of open end funds, then performance should be predictable. If performance is predictable and at least some investors are aware of this, then cash flows into and out of funds should be predictable by the very same metrics that predict performance. Finally, if predictors exist and at least some investors act on these predictors in investing in mutual funds, the return on new cash flows should be better than the average return for all investors in these funds. This article presents empirical evidence on all of these issues and shows that investors in actively managed mutual funds may have been more rational than we have assumed. [ABSTRACT FROM AUTHOR]

We study whether the behavior of stock prices, in relation to size and book-to-market-equity (BE/ME), reflects the behavior of earnings. Consistent with rational pricing, high BE/ME signals persistent poor earnings and low BE/ME signals strong earnings. Moreover, stock prices forecast the reversion of earnings growth observed after firms are ranked on size and BE/ME. Finally, there are market, size, and BE/ME factors in earnings like those in returns. The market and size factors in earnings help explain those in returns, but we find no link between BE/ME factors in earnings and returns. [ABSTRACT FROM AUTHOR]

The predictability of an asset's returns will affect the prices of options on that asset, even though predictability is typically induced by the drift, which does not enter the option pricing formula. For discretely-sampled data, predictability is linked to the parameters that do enter the option pricing formula. We construct an adjustment for predictability to the Black-Scholes formula and show that this adjustment can be important even for small levels of predictability, especially for longer maturity options. We propose several continuous-time linear diffusion processes that can capture broader forms of predictability, and provide numerical examples that illustrate their importance for pricing options. [ABSTRACT FROM AUTHOR]

Consistent with previous research, we fail to find a significant correlation between the abnormal returns of our sample firms with international activities and changes in the dollar. We investigate the possibility that this failure is due to mispricing. Lagged changes in the dollar are a significant variable in explaining current abnormal returns of our sample firms, suggesting that mispricing does occur. A simple trading strategy based upon these results generates significant abnormal returns. Corroborating evidence from returns around earnings announcements as well as errors in analysts' forecasts of earnings is also provided. [ABSTRACT FROM AUTHOR]