We provide evidence regarding mutual funds’ motivation to hold lottery stocks. Funds with higher managerial ownership invest less in lottery stocks, suggesting that managers themselves do not prefer such stocks. The evidence instead supports that managers cater to fund investors’ preference for such stocks. In particular, funds with more lottery holdings attract larger flows after portfolio disclosure compared with their peers, and poorly performing funds tend to engage in risk shifting by increasing their lottery holdings toward year-ends. Funds’ aggregate holdings of lottery stocks contribute to their overpricing.

1. This paper presents and tests a model of dealer inventory response. The estimated inventory responsiveness coefficient is statistically significant and its magnitude is consistent with reasonable values of underlying variables which, it is hypothesized, determine the coefficient.

2. The sign of the inventory responsiveness coefficient indicates that dealers tend to be passive and acquire shares when prices fall and sell shares when prices rise. This type of behavior is sometimes termed “stabilizing.”

3. Dealer inventories tend to increase on days prior to price declines and tend to decrease on days prior to price increases; that is, inventory changes tend to be “destabilizing” with respect to future price changes. This implies that a fraction of the public trades on superior information and that dealers tend to lose money to such information traders.

4. There is a strong tendency for dealer inventory levels to return to normal, presumably zero. The implied typical inventory holding period is about 8 to 10 trading days.

5. Comparison of NASDAQ dealers and NYSE specialists shows that the pattern of inventory responsiveness is very much the same for the two. This suggests that both act in accordance with the underlying economic model and that differential regulation has little effect on typical inventory responsiveness.

6. This finding does not obviate the possibility that individual dealers or specialists behave in atypical or undersirable ways, and that the extent of such atypical behavior might depend on the degree of public regulation of dealer activities. An exhaustive comparative study of deviations from normal behavior was not possible. However, it was possible to compare the frequency of nonstabilizing transactions in which price change and inventory change on a given day are in the same, rather than opposite, direction. One could not conclude that NASDAQ dealers had more nonstabilizing activity than NYSE specialists.

This paper tests the overreaction hypothesis using monthly data for stocks listed on the Toronto Stock Exchange over the 1950–1988 period. Unlike De Bondt and Thaler (1985), (1987), it finds statistically significant continuation behavior for the next one (and two) year(s) for winners and losers, and insignificant reversal behavior for winners and losers over longer formation/test periods of up to ten years. While the systematic risks of the winners decrease significantly over all test periods, the systematic risks of the losers increase significantly for only the 12-month formation/test periods (unlike Chan (1988)). The only significant change in variance from the formation to test periods occurs for the losers for the 12-month formation/test periods. The findings are robust for January versus non-January and size-based portfolios (unlike Zarowin (1989), (1990)). The findings are robust for various performance measures (specifically, market-adjusted CAR, and the Jensen (1968) and Sharpe (1966) portfolio performance measures).

This article studies how minimum-wage policies affect capital investment using the industrial census of manufacturing firms in China, where minimum-wage policies vary across counties. Exploiting discontinuities in minimum-wage policy at county borders, we find that minimum wages increase capital investment. The investment response to minimum wages is stronger for firms that are labor intensive, that have more room for technological improvement, and that cannot sufficiently pass on labor costs to consumers. A natural experiment based on county jurisdictional changes further assures the causal relationship.

This paper studies the impact of buyout sponsors’ initial public offering (IPO) timing on the leveraged buyout (LBO) restructuring process and subsequent exit strategies. I find that LBO duration is negatively related to hot IPO market conditions. Further, following IPOs, reverse leveraged buyouts (RLBOs) with shorter LBO duration experience greater deterioration of performance and higher probability of bankruptcy. This suggests that sponsors’ efforts to enhance operating efficiency succumb to market timing. IPO timing does not affect sponsors’ exit strategies and monitoring post IPO. Sponsors keep an active long-run presence with more reputable sponsors who are more likely to exit by facilitating takeovers.

Three alternative characterizations of corporate debt management policy, which have had wide currency in the literature, are examined. They are shown to give rise to substantial differences in their predictions of total-firm value. This study concludes that, of the three, the one that assumes that management periodically rebalances the firm's debt levels in response to evolving new information on expected future operating cash flows is the most logically consistent. On that basis, a reinterpretation of the available empirical evidence on the “tax effect” of debt is indicated.

The Securities and Exchange Commission (SEC) and the New York Stock Exchange are concerned with the full disclosure of information insiders normally would be expected to possess about their company, including any facts that would materially affect the market's valuation of the firm's worth if they were publicly known. At present, the regulatory agencies have limited their activities to the collection and dissemination of historical information and facts. The motives of insiders, based in large part, presumably, on their knowledge regarding future operating results are hidden from the public eye. The SEC in compiling the Official Summary of Stock Transactions does not require insider to reveal his motivation for trading.

This study investigates the implications of cross-country differences in banking regulation and supervision for the international subsidiary locations and risk of U.S. bank holding companies (BHCs). We find that BHCs are more likely to operate subsidiaries in countries with weaker regulation and supervision and that such location decisions are associated with elevated BHC risk and higher contribution to systemic risk. The quality of BHCs’ internal controls and risk management plays an important role in these location choices and risk outcomes. Overall, our study suggests that U.S. banking organizations engage in cross-country regulatory arbitrage, with potentially adverse consequences.

This paper investigates the efficiency of the market for foreign currency options with the help of a modified version of the Black-Scholes model. The evidence in the ex post tests is inconsistent with this hypothesis since we find a large number of opportunities for abnormal profits. A second set of tests is conducted on an ex ante basis to determine whether these profit opportunities exist even if the execution of the strategy is delayed by one day. The evidence from these tests provides more support for the hypothesis of market efficiency.

Samuelson called accepting a sequence of independent positive mean bets that are individually unacceptable a fallacy of large numbers, and subsequent researchers have extended Samuelson's condition on utility functions to assure that they would not allow this fallacy. By contrast, some behavioralists, arguing the merits of diversification, believe that it is simply wrong headed to refuse a long series of independent “good” bets out of a misguided faith in expected utility theory. Contrary to what one might infer from the literature, this paper shows that accepting sequences of good bets is both consistent with expected utility theory and quite usual.

This paper presents empirical evidence demonstrating that the risk and expected returns of common stocks typically change in the aftermath of large price movements. When temporary changes in uncertainty follow major financial events, subsequent stock returns should be positively correlated with the shift in return volatility. This prediction is strongly supported by the data on more than 9,100 daily price change events during 1962–1985. Moreover, the data also suggest that ex ante returns on common stocks may incorporate a premium for increases in parameter uncertainty associated with the events.

The launch of the Single Supervisory Mechanism (SSM) was an historic event. Beginning in Nov. 2014, the most significant banks came under the direct supervision of the European Central Bank (ECB), while national supervisory authorities (NSAs) maintained direct supervision of the remaining banks. Thus, supervision is conducted on two levels, which could cause inconsistency problems. Did the behavior of the significant banks differ from that of the less significant banks during the SSM launch? We find that the significant banks reduced their lending activity more than the less significant banks did in order to shrink their balance sheets and increase their capitalization.

Cost-of-capital assessments with factor models require quantitative forward-looking estimates. We recommend estimating Vasicek-shrunk betas with 1–4 years of daily stock returns and then shrinking betas a second time (and more for smaller stocks and longer-term projects), because the underlying betas are themselves time-varying. Such estimators also work well in other developed countries and for small-minus-big (SMB) and high-minus-low (HML) exposures. If own historical stock returns are not available, peer betas based on market cap should be used. Historical industry averages have almost no predictive power and should never be used.

We study optimal replacement and abandonment decisions for real assets, when both revenues and costs are uncertain and deteriorate with age. We develop an implicit representation of the renewal boundary as the solution to a set of simultaneous equations. This quasi-analytical method has the merit of computational ease and transparency. We show that the correlation between revenues and operating costs has a significant influence on the renewal boundary, and that the increase in revenue immediately following a renewal has a greater relative influence on the boundary than either operating cost or renewal cost. The quasi-analytical method is sufficiently flexible to deal with other real option models involving 2 variables.

Several years ago Sharpe suggested a measure for the evaluation of portfolio performance. The measure was conceptually simple, easily calculated, and applicable to an entire investment portfolio, in contrast to the measures of Treynor and Jensen which measure only the undiversifiable risk in a portfolio. Sharpe's measure is still a frequently recommended tool for measuring portfolio performance. The measure is, however, biased. It is the purpose of this note to demonstrate the existence of the bias, indicate its size, and provide a means of correcting it.

This study is an extension of Leland and Pyle's (1977) signaling model. It introduces, in addition to the retained ownership, the length of the holding period to which the owner commits in the prospectus as a signal of firm value. The length of the holding period is found to be a signaling mechanism that complements ownership retention. Depending on the information structure of the firm, the entrepreneur may prefer to commit to a holding period longer than the minimum required by securities regulations.

This paper provides further empirical evidence on the relation between entrepreneurial ownership retention and the initial value of unseasoned common shares. A Canadian data set is employed to estimate the various empirical specifications used in previous studies and to examine additional variables suggested by recent developments in the theoretical literature. The estimation is carried out using a more general procedure to correct for heteroskedasticity. In contrast to previous findings, the entrepreneurial ownership retention signal does not possess statistical significance in any of the models examined.

Prior research has used inaccurate classification rules to distinguish between stock splits and stock dividends. The CRSP classification of two-for-one stock distributions agrees with the actual accounting treatment only 23% of the time. In addition, the accounting treatment impacts the announcement period reaction—two-for-one distributions accounted for as stock dividends are associated with five-day announcement period returns of 2.70%, significantly greater that the 0.93% announcement returns for distributions accounted for as stock splits. Announcement returns are positively related to earnings growth in the two years following the distribution for stock dividend firms but not for stock split firms. The accounting choice appears to be used to confirm management's private information about future earnings revealed at the time of the distribution announcement.

Statistical estimates of securities' systematic risk and the Market Model R2 are not invariant to the length of the differencing interval over which securities' returns are measured. This phenomenon, referred to as “The Intervaling Effect,” has been widely observed and discussed in the literature. Assuming that returns are multiplicative and independently distributed, Levhari and Levy [7] have developed a model that explains the intervaling effect on systematic risk for differencing intervals of one to 30 months. However, with intervals as, short as a day, their independence assumption does not usually hold.

While the signaling hypothesis has played a prominent role as the economic rationale associated with the initial public offering (IPO) underpricing puzzle (Welch (1989)), the empirical evidence on it has been mixed at best (Jegadeesh, Weinstein, and Welch (1993), Michaely and Shaw (1994)). This paper revisits the issue from the vantage point of close to two decades of additional experience by examining a sample of foreign IPOs—firms from both financially integrated and segmented markets—in U.S. markets. The evidence indicates that signaling does matter in determining IPO underpricing, especially for firms domiciled in countries with segmented markets, which as a result face higher information asymmetry and lack access to external capital markets. We find a significant positive and robust relationship between the degree of IPO underpricing and segmented-market firms’ seasoned equity offering (SEO) activities. For firms from integrated markets, in contrast, the analyst-coverage purchase hypothesis appears to matter more in explaining IPO underpricing, and the aftermarket price appreciation explains these firms’ SEO activities. The evidence, therefore, clearly supports the notion that some firms are willing to leave money on the table voluntarily to get a more favorable price at seasoned offerings when they are substantially wealth constrained, a prediction embedded in the signaling hypothesis.