This paper will demonstrate that different margin levels are associated with the price behavior differences of certain commodity futures. In 1959, Harry Roberts suggested the methodology of rational subgrouping as a means of testing random versus systematic price changes. His methodological suggestion has had only limited testing in security markets and no direct application to domestic futures markets. This paper uses margin levels as a basis for rational subgrouping of selected commodity futures. Evidence supports the argument that, when a series of price changes is grouped according to margin levels and these levels are analyzed separately, nonrandom characteristics that tend to be offsetting in the aggregate series become evident. The nonrandom behavior observed is consistent with the hypothesis that, in certain periods, margin levels have been set too high to attract a volume of speculative services necessary for the maintenance of market balance.

Recent trends in capital budgeting have been toward more complex decision rules with increasingly sophisticated treatments of risk. Although they have the virtue of simplicity, undiscounted methods such as the payback do not account for the time value of money. Net present value and internal rate of return consider the time value of money but many questions remain about the proper discount rate, the reinvestment assumption, and the statistical interrelations among projects. The latest approaches, referred to as portfolio models, are substantially more complicated but are the only methods that consider the statistical interrelations among the various assets. The most popular portfolio approach has been the mean-variance (E-V) model developed by Sharpe [10] and Lintner [5].

This paper reexamines and extends the work of Ben Horim and Levy [1], which argued that risk decomposition should be based on standard deviation rather than on variance. Their analysis showed that decomposition of variance is wrong when β < 0 and that, in general, this procedure produces incorrect estimates of undiversifiable risk. This paper shows that these conclusions also apply to the no-risk-free asset extended CAPM if risk is adjusted for the unavoidable risk associated with the global minimum variance portfolio.

We provide strong support for the underappreciated expected earnings hypothesis of a negative correlation between aggregate stock returns and earnings. For 1970–2000, our powerful modeling strategy incorporating macroeconomic information reveals that aggregate returns are significantly and negatively correlated with expected aggregate earnings changes but uncorrelated with unexpected aggregate earnings changes. However, this negative correlation changes after 2000, perhaps from heightened volatility or accounting changes. We also show that underlying macroeconomic information explains the power of aggregate earnings to predict future gross domestic product growth.

I study the relation between corporate diversification and labor productivity in a sample of over 500,000 firms from 46 countries. Across the entire sample, greater diversification is associated with significantly lower labor productivity. The negative relation between diversification and labor productivity is not stronger in countries with more burdensome employment regulation, but it is significantly stronger in countries with better financial development. In addition, the negative relation is stronger in industries with high capital/labor ratios. Overall, the results suggest that the lower productivity in diversified firms is due more to the misallocation of capital than to the inefficient use of labor.

Whereas corporate political connections are known to enhance equity values, we demonstrate that union political activity can have the opposite effect. We examine the consequences of a recent Australian state law that restricts union political activity but does not change collective bargaining rights. In the wake of this law, the equity values of affected unionized firms significantly increase, and consistent with this market reaction, these firms are able to bargain for more favorable labor contracts than their unionized peers in other states. The evidence strongly suggests that unions use political activism to extract rents from shareholders and benefit their members.

We find that the controlling family holds both the chief executive officer and chair positions in 79% of Norwegian family firms. The family holds more governance positions when it owns large stakes in small, profitable, low-risk firms. This result suggests that the family trades off expected costs and benefits by conditioning participation intensity on observable firm characteristics. We find that the positive effect of performance on participation is twice as strong as the positive effect of participation on performance. The endogeneity of participation, therefore, should be carefully accounted for when analyzing the effect of family governance on the family firm’s behavior.

In a seminal paper in 1963, Frederick S. Hillier alerted the finance community to the importance of including probabilistic information in the process of investment decision-making [4]. The method proposed and demonstrated by Hillier introduced the use of additional information regarding the probability distributions governing three measures of investment merit: present worth; internal rate of return; and uniform annual cost. He showed that by assessing investment merit only on the basis of a measure of central tendency, crucial information regarding dispersion, hence risk, was ignored and investments were not evaluated accurately. By incorporating the amount of risk involved in terms of the probability distribution of the present worth, the internal rate of return, or uniform annual cost, a firm's management can make more sound decisions regarding risky investment proposals. Since this important paper was published, a virtual revolution has occurred in finance, particularly in the area of risk assessment. Indeed, under modern capital asset pricing theory, the dispersion in the probability distribution of future cash flows is an irrelevant statistic. Instead, as the theory goes, a project's systematic risk, as indexed by its “beta,” is the only relevant measure of risk. This disparity between modern capital asset pricing theory and the type of analysis that follows from the Hillier approach will be addressed in detail in Section III. We will show that under conditions in which dispersion is regarded as the relevant measure of risk, the Hillier approach provides a reasonable approximation of the dispersion arising from the multiperiod framework.

This paper presents a multiperiod model of a deposit-type mutual financial institution and analyzes the manager's capital accumulation and deposit pricing decisions under uncertainty. The model is meant to describe a mutual savings and loan association (SLA) or a credit union in which there are no stockholders and nominal ownership is widely diffused (see [12] and [14]). The resulting paucity of monitoring gives rise to an agency problem (see [13]) in which the manager maximizes his multiperiod expected discounted utility with minimal intervention from nominal owners.

In Gonedes [5], the results of an empirical analysis of accounting-based and market-based estimates of systematic risk were presented. These results suggested that there is, in general, a “statistically significant” relationship between accounting-based and market-based estimates of systematic risk at the level of individual securities, if the accounting-based estimates are conditional upon first-differences or scaled first-differences of the accounting numbers. The differencing transformation seemed to induce relatively better specified models for the accounting numbers.

Many Wall Street financial analysts believe that a positive relationship exists between the level of short interest in equities and subsequent movements in the prices of these equities. This view is apparently grounded in the belief that short traders will push prices up in the future as they attempt to cover their short positions.

Numerous empirical studies have appeared in recent years concerning the behavior of stock market prices. Cootner's book [2] presents an excellent summary of pre-1964 efforts, while Fama's paper [5] discusses some of the more recent work. While a few writers believe that certain price trends and patterns exist which enable the investor to make better predictions of the expected value of future stock price changes, the majority of these studies conclude that past price data alone cannot form the basis for the prediction of the expected value of price movements in the stock market.

This paper extends a recent study by Malatesta [14] on measuring abnormal performance using joint generalized least squares. For monthly data and a random sample of securities, Malatesta finds that there is little benefit in using more sophisticated econometric techniques to identify abnormal returns. The current study extends these results using a design that is more amenable to the benefits of the generalized methods and is consistent with actual event studies. Most notably, the study uses a sample of securities experiencing an actual event and tests both monthly and daily data. In addition, iterative techniques are compared to the ordinary least squares and estimated generalized least squares methods. The results of this study support the original conclusions of Malatesta, indicating no measurable gain in using any of the systems methods for event study applications.

The recent wave of revaluations has again brought to the fore the foreign exchange risks with which most multinational corporations have to live constantly. While these latest parity changes have tended to increase the value of foreign currencies relative to the dollar, most exchange risks arise from pending devaluations.

We use a multitude of tax reforms across the Organisation for Economic Co-Operation and Development (OECD) countries as natural experiments to estimate the market value of the tax benefits of debt financing. We report time-series evidence that tax reforms are followed by large changes in the value of corporate equity. However, the impact of tax reforms is greatly mitigated by the presence of leverage. The value of debt tax savings is greater among top taxpayers, among highly profitable firms, and in countries where tax laws are more strongly enforced. Importantly, the value of debt tax savings is in line with the benchmark implied by a traditional approach.

The relationship between capital market equilibrium and firm financial policy has received extensive attention in recent years. Until recently, accepted theory was generally consistent in its view that the diversification effect of new investment on firm earnings is a necessary consideration in project selection. In arguing this position, no distinction was made between the perfect market situation exemplified by the models of Modigliani and Miller (M-M) [9, 10, 11] and those of Sharpe [19], Lintner [6, 7] and Mossin [12] (LSM model) and the traditional case in which firm value is not independent of debt policy, e.g., as might be the case if individual investors cannot lever on terms comparable to those available to firms. In a recent article, Mossin [13] examines the implications of the former case of perfect markets. Using a single period model with riskless rate borrowing and lending by individuals and firms, homogeneous expectations, mean-variance portfolio selection, and no taxes, Mossin shows that the effect on the investing firm's value of a new project is independent of the stochastic properties of the other income earned by the firm. This conclusion and the M-M [10] Proposition I follow from the statistical property of Mossin's model that any income stream has the same value regardless of how that stream is divided into the equity or debt streams of one or more firms; or, equivalently, firm value and financial structure are independent. Schall [18] presents a general proof that firm value and financial structure are independent and that firm investment diversification effects are irrelevant in perfect capital markets.

One of the remarkable features of the mean-variance capital asset pricing model is its robustness with respect to changes in assumption (Jensen [1]). An example of this property is given by David Mayers [4], who shows that the structure of prices of marketable assets is unaffected by relaxing the assumption that all risky assets are marketable. The result has been used in the analysis of public sector investments by Stapleton and Subrahmanyam [6]. However, although relative prices are unaffected, the general level may be due to the effect of marketability on the market price of risk.

In a timely, comprehensive article in this journal, Joy and Tollefson (J & T hereafter) treated design and interpretation problems for linear multiple discriminant analysis (LMDA). Although the article is generally correct in treating a complex topic, it has two problems:

1. The (widely-used) split-sample validation technique that J & T used is an inappropriate method for establishing the efficacy of the estimated discriminant function.

2. J & T reach erroneous conclusions on the correctness of two methods for assessing the discriminatory power of individual variables.

This comment addresses these two problems.

Since the publication of Markowitz's article on “Portfolio Selection,” which was subsequently expanded into a monograph, there has been a great deal of further articulation, a not inconsiderable amount of mathematical programming and sensitivity analysis, the arrival of several competing portfolio balance models, and a near revolution in the theory of money and asset preference. While few formulas for solving a practical problem can claim to have generated as much theoretical fall-out, the new approach to portfolio management apparently has not been very successful at reaching the practitioners for which it was intended.

Questions have been raised in recent years concerning the interpretation of previous studies purporting to show that distributed earnings have had a consistently greater impact on equity prices than have retained earnings. Miller and Modigliani have convincingly argued that if capital markets are perfect and rational behavior of market participants is assumed, the price-earnings ratio of the shares of a firm with a given investment policy should be invariant to alternative earnings-payout ratios. They also point out, however, that with the present tax subsidy on capital gains and the existence of substantial brokerage fees and flotation costs, dividend policy might be expected to have an effect on share prices, even though the amount and direction of this effect is an empirical matter and not determinable a priori.