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The article investigates the economic results of municipal bond selling through negotiation, particularly in response to empirical research inversely linking bidder competition to borrowing costs for issuers. Questions are raised outlining the efficiency of selling by negotiation rather than competitive bidding in high demand uncertainty scenarios. Common elements of both negotiation and competitive bidding methods are reviewed and cost differentials are analyzed in consideration of bond issue demand uncertainty.

In the last several years, there has been increased theoretical emphasis on the agent-principal problem as it applies to corporate finance. This paper is an attempt to empirically test for the presence of the agency costs and their relation to the debt policy of corporations. We find that firms with higher insider ownership have greater debt ratios than firms with lower insider ownership, which may be explained by the agency costs of debt and/or the agency costs of equity. Other regression results tend to confirm the theoretically optimal relationships put forth by Myers. We find that high-growth firms use less debt rather than more debt, high-operating-risk firms use more debt rather than less debt, and firm size appears to be uncorrelated to the level of debt. [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]

Stock prices are frequently affected by events, and foreknowledge of these events can allow traders to realize large profits on their stock trades. For advance knowledge to be economically useful in this way, it must be accurate and it must not be generally known by other market participants. A model is developed that allows investors to estimate the likelihood of the market's learning of stock-price affecting events. The model indicates that although analysis of past stock prices can allow profitable portfolio management, the non-price events affecting stock prices actually provide the greatest opportunity for profit. The effects of past stock prices and company-specific knowledge on stock trading prices are further discussed following the presentation of the research.

Here we examine the equity risk premium as a key component of the asset allocation decision. Our purpose is to test the predictive value of various equity market risk premium proxies. To do this we conduct statistical tests to determine if the risk premium proxy, measured in any month, is directly correlated with subsequent market returns in the following month. The results are encouraging, suggesting the following: 1) Earnings yield and dividend yield are very effective tools for asset allocation. 2) The earnings yield approach can be improved substantially with appropriate attention given to some of the quirks of the earnings stream. 3) By combining various techniques, we can produce an "equity excess return predictor," which turned bearish three months before the October 1987 crash.

The article presents a method of focusing on the sensitivity of a security or a portfolio to changes in the market discount rate. The portfolio manager can properly assess duration and its measurement in the overall context of the factors that affect the theoretical valuation. It is appropriate to assess equity duration at both the portfolio level and the level of a single security. Duration analysis for individual securities is particularly relevant for stocks with consistent, high-quality earnings growth. It appears that Approximate Certainty Equivalent-type stocks react sharply and predictably to changes in the equity market discount rate. However, the application of duration analysis is more difficult for stocks with less predictable earnings due to cyclicity or firm-specific risks.

The article examines the factors affecting the municipal's upward slope of the yield curve in the U.S. According to the authors, the slope of the municipal yield curve is directly related to the volatility of interest rates when compared over time to the slope of the government yield curve. In the test the conducted by the authors, they found that yield curve steepens in slope as interest rates become more volatile because long-term municipal bonds have greater downside risk than do short-term bonds on an after-tax basis under conditions of volatile but symmetrical interest rate fluctuations. An overview of the study is offered.

The article presents a new tool to assess the profits of new issue bond. Call provisions, default risk, sinking fund, maturity, volatility of market rates, and excess supply conditions all complicate the underwriter's job of pricing new corporate bonds. Numerous studies have shown that early call provisions have an impact upon new issue borrowing costs. As a general rule, immediately callable issues sell at lower prices than deferred or noncallable issues. Most bonds are nonrefundable during the period of deferment. This implies that they cannot be called for the purpose of refunding at a lower interest cost. The yield-to-maturity on a new bond issue is closely related to market conditions as well as to the specific features of the bond issue. As a general rule, immediately callable issues sell at lower prices than deferred or noncallable issues. Multiple regression to fit linear equations to sample data was used to estimate the impact of variables upon corporate bond yields. Though model lost some of its predictive power when used to estimate yields on bonds sold far outside of the sample period.

This paper presents evidence that credit evaluations provided by rating agencies differ in some cases from credit evaluations made by investors. The results demonstrates that investors in municipal revenue bonds do use published ratings to discriminate credit quality, but they also require risk premiums that vary according to the purpose intended for the bond proceeds. Credit analysis for revenue bonds issues poses a different set of problems from analysis of general obligation issues. Since the types of operations financed with revenue bonds vary considerably, the methods of credit analysis also vary.