In this paper, insider trading is viewed as a signal of managements' assessments of firms' future prospects and its information content is compared to that in managements' earnings forecasts. These forecasts are explicit statements of managements' assessments of future prospects. A number of measures of insider trading designed to capture the information aspect of trading are investigated. The results indicate that the insider trading measures do not capture the information conveyed in earnings forecasts, although there is evidence that insider trading measures that take into account the timing of trades relative to the date of the release of the forecast are informative.

This paper demonstrates that the various market imperfections that have been suggested to explain observed portfolio choices and capital structures can be circumvented if securities (e.g., options) can be traded that simulate forward contracts on stock. It is shown that if the risk-adjusted returns to bondholders exceed the returns to stockholders (to reflect personal tax differences) tax-exempt investors will prefer a combination of these synthetic forward purchases and corporate bonds to purchasing stock directly. They will not, as has been suggested, include stock in their portfolios for diversification purposes when they can alternatively purchase securities that simulate forward contracts. It is also shown that firms that can sell synthetic forward positions on their own stock can essentially guarantee that sufficient funds will be available to meet their bond obligations. This gives firms the opportunity to increase their debt levels without increasing the possibility of bankruptcy and the corresponding administrative and agency costs.

Miller has analyzed capital structure in the presence of both corporate and personal taxes. The present work investigates the effect of inflation on both interest rates and equity returns when the Miller equilibrium condition is employed in a loanable funds model. Both an interest rate effect and a redistribution effect are derived. The interest rate effect forces the responsiveness of the interest rate to the inflation rate to be below that hypothesized by Darby. However, the redistribution effect may change this responsiveness in either direction.

The purpose of this paper is to compare a variety of approximation techniques for valuing contingent contracts when analytic solutions do not exist. The comparison is made with respect to the differences in both the approximation theory and the efficiency of the computation algorithms. The focus of the computational comparison is upon binomial and finite difference methods applied to option valuation models with one stochastic variable. However, many of the results would generalize to pricing corporate securities, and also to certain aspects of problems involving multiple stochastic variables.

This paper is an initial attempt to bridge the gap that presently exists between the theoretical and empirical literature on the instability of equity beta. We focus on two factors from the joint Option Pricing Model/Capital Asset Pricing Model framework—leverage and unexpected changes in the risk-free rate—which are hypothesized to influence the instability of equity beta across firms and over time. Using alternative variable parameter regression models, we find that highly leveraged firms exhibit greater equity beta instability than firms with lower leverage. Over time, equity betas exhibit greater instability during periods of large unexpected changes in the risk-free rate when compared to periods with small unexpected changes in the risk-free rate.

This paper examines the differential tax treatment of the borrower and lender at the time debt is called as a potential explanation for the widespread existence of call provisions in corporate debt. This tax effect alone cannot explain the standard call feature because greater tax benefits may be derived for bonds callable at market prices. The equilibrium implications of the model allowing for tax arbitrage opportunities both at the corporate level and the individual level also are considered.

This study documents substantial gains accuring to shareholders of discounted closed-end investment companies when these funds are reorganized to allow shareholders to obtain the market value of the fund's assets. The findings indicate that the discounts on closedend funds are real, i.e., they are not the sole result of inaccurate reporting of the fund's net asset value. The study also documents significant abnormal returns after the announcement of management-sponsored proposals to reorganize. This finding is inconsistent with the joint hypothesis of market efficiency and that the market model (as estimated) is the correct return bench mark for funds undertaking reorganization.

This note explores the properties of some stock markets indices that are claimed to approximate a continuously rebalanced equally weighted portfolio.

Several studies used a multi-factor model to examine the interest rate sensitivity of a financial intermediary's common stock. The model was re-specified in an attempt to estimate each factor's influence. This note shows that the re-specification results in biased estimators. Hypothesis tests are flawed by failure to acknowledge the bias; this casts doubt upon the reported findings