Do changes in stock market indicators, such as the short interest ratio, signal changes in stock prices? Popular stock market lore and numerous books and articles support the worth of “technical” analysis. On the other hand, to the extent that stock prices follow a random walk, technical indicators would seem to be of no value. The two positions can be reconciled to a degree by realizing that a variable can follow a random walk with respect to its own sequence and still be successfully predicated by some other variable(s). Furthermore, successful predications of stock prices can be made on the basis of available information, if that information is used in some unique manner that has not been fully developed by other market participants.

The basic model of this paper is that of a transactor who is to receive at a specified time t in the future a fixed quantity of domestic funds Ad and a fixed quantity of foreign funds Af. It is further assumed that there exists a forward market in foreign exchange in which one unit of foreign currency can be bought and sold at a given and known forward rate rf, the domestic currency price of one unit of foreign currency. Let X be the net forward purchases of foreign exchange that the transactor undertakes at the market rate rf; a negative value of X indicates net sales of forward exchange. It is assumed that at time t the foreign currency will be convertible for the transactor at a fixed but unknown spot exchange rate and that the transactor can assess or derive a probability distribution on this spot exchange rate f(rt) for rt > 0. Finally, it is assumed that the transactor can express a utility function u on the domestic currency equivalent of his ending currency holdings. This paper considers the problem of determining the optimal level of forward exchange purchases X0.

In this paper, a model is developed for deriving the implied fixed cost of a bond flotation. Using a sample of electric utility companies over the 1961–1970 period, implied fixed costs are computed for 318 bond issues. These fixed costs then are evaluated in an effort to cast light on whether companies behave optimally with respect to the size and frequency of bond issues. Regression results are consistent with the adjustment of debt issuing behavior in keeping with: (1) expectations about the future course of interest rates; (2) variable costs increasing at a decreasing rate with the size of individual issue; and (3) differences in the cost of carrying excess liquidity which arise from differences in quality rating. An estimate of the average fixed cost of issuing bonds is evaluated as is the debt issuing behavior of individual companies. Over all, the model and its testing give considerable insight into the implied fixed costs of issuing debt.

The problem of monitoring the ongoing receivables collection experience of an enterprise which sells on credit is, in essence, the problem of identification. The concern is an accurate appraisal of customer account payment patterns — in particular, a determination of whether and to what extent those patterns vary over time. Successful execution by the credit manager of his responsibilities for policy formulation, collection enforcement, and forecasting necessarily depends heavily on the availability to him of a reliable reporting mechanism.

In their provocative article that discusses risk as the probability of an investment's worth falling below some specified minimal value, Machol and Lerner observe that by this definition investments may be risky over a short time horizon but not over a long one [5, p. 484], and that a person who could invest in the stock market over a relatively long period of time without needing to withdraw capital during the period could invest with “relatively little worry” [5, p. 488]. The purpose of this comment is to examine the foregoing position rather more closely insofar as the time path of investment values is concerned. To this end, we model the value of an investment in the New York Stock Exchange Index, relative to its initial value, as a Markov chain. We assume that no part of the initial investment or dividends received on it is withdrawn before termination of the process, at which point the entire amount accumulated (which may be less than the initial investment) is realized. Values taken from a record of annual percentage changes in the New York Stock Exchange Index over the period 1940–1968 are then used to define a representative matrix of transition probabilities which describes the manner in which investment values can change from one period to the next. The probability distributions of relative investment values over differing lengths of time for which the investment may be held are then investigated using the Markov chain model.

One of the most significant developments in macroeconomic analysis in the post-World War II era has been the dramatic resurgence of interest in the role of monetary factors in economic activity. The demand for money has been a focal point of this monetary renaissance, and in recent years a proliferation of studies has focused on questions such as the motives for holding money balances, the effects of changes in the rate of interest, and the existence of economies of scale for cash balances. The trend toward disaggregation of macro functions has been reflected in demand for money studies of the corporate sector as well as the household sector.

It has been discovered in the context of various stock valuation models (see [1], [2] and [4]) that the shareholder is indifferent to the proceeds (or subscription) price chosen in a preemptive rights offering of equity capital, provided that the total equity capital raised by the offering is fixed. In this note we generalize this result to any stock valuation model in which arbitrage is present and which values only the total amount of the new investment, that is, places no value on holding more (or fewer) shares with a lower (or higher) market price.

The purpose of this comment is to make a comparison between the sufficient conditions of Soper [3] and of Norstrøm [2] for a unique internal rate of return (IRR). Such a condition is crucial for the implementation of a computer program, as for instance the one presented by Mao and Knoll [1] which makes use of Soper's condition. Therefore, it seems appropriate to investigate if one of the mentioned conditions is superior to the other, so that we could rely only on the more efficient one.

Professor Wu, in his recent article [8], investigated the trading activities of odd-lotters and their market impact. The purpose of this note is to update the data examined by Wu since recent trends are extremely significant and to question the use and interpretation of some of Wu's original data. In addition, some errors in Wu's article will be discussed.

The importance of an explicit consideration of uncertainty in evaluating the economic desirability of investment propositions is generally recognized in contemporary literature on capital budgeting. The emphasis has been on analyzing the effects of uncertainty of future cash-flows which result from an investment on the economic desirability of that investment. However, although future cash-flows are one important source of uncertainty, it should be recognized that other factors may contribute to uncertainty in a significant way. Uncertainty regarding alternate future investment opportunities is of obvious importance in the capital budgeting context. Thus, an investor who makes the best possible investment decision at a given point in time may deplore such a decision a short time afterward simply because his commitment prevents him from exploiting a better opportunity. While it might be assumed implicitly that an investor, in considering his alternatives, ought to include in such deliberations all the courses of action that may become available in the future, this aspect seems important enough to warrant explicit attention.

Professor Stevenson in his comment of my recent paper on odd-lot trading introduces some interesting additional odd-lot data for both the NYSE and the ASE. His criticisms, however, in my opinion are without merit. First, in my paper I state clearly that due to limited financial resources the study concentrates only on the NYSE. Therefore, the odd-lot participation rate on the ASE is not calculated. Although Stevenson's ASE data are interesting, I fail to see how these ASE data raise serious doubts as to whether my statistical significant results between NYSE odd-lot purchases and sales and ASE odd-lot purchases and sales have any meaningful interpretation. Secondly, Stevenson quarrels with my observation in regard to odd-lot short sales that “odd-lotters have become somewhat more speculative and perhaps more sophisticated in the 1960's.” Again I fail to see why a shifting of marketplaces by small investors, which he mentions but does not prove, makes my statement less valid. Thirdly, because of the nature of the distributed lag model, I do not see why I cannot conclude that “results suggest that odd-lot and round-lot volume did affect each other.” Of course his interpretation that odd-lot and round-lot volume tend to move together is also valid. Finally, my data are through 1967, and the two odd-lot dealer firms did not merge until 1970. In short, as Stevenson's criticisms are all minor, he is making a mountain out of a molehill.

In [2]Sethi and Thompson illustrated the applications of the maximum principle to solve simple dynamic cash balance problems. In Section IV of that paper, we introduced the idea of penalty function to solve the cash balance problem with bounded state variables arising out of disallowing overdrafts and short selling. This resulted in the adjoint equations containing terms in the state variables x(t) and y(t). We then stated the need for solving a two-point boundary value problem.

Professors Lewellen and Edmister (L-E) are to be complimented on careful development and specification of the basic conceptual framework for an accounts-receivable control model. I consider the model to be a real contribution to the basic theory of financial management and will find it a useful supplement to my basic financial management classes.

The weighted average cost of capital is a widely used concept in the theoretical literature of finance as well as in the analysis of capital expenditures of business firms. The importance of the concept derives from its use as the cutoff point for investment in capital projects and as an indicator of optimal capital structure. Differences between the weighted average cost of capital and the true overall cost of capital are typically attributed to deviations of market values from book values, changes in the proportional use of specific capital sources, or alterations in the risk characteristics of the stream of payments to owners and creditors. This paper abstracts from the aforementioned problems to focus on the mathematical error of using weighted average cost of capital to represent the true overall capital cost. It is determined that, in general, the calculation of weighted average cost leads to an erroneous value of the minimum acceptable level of return. The fault lies in the general inability to express the root(s) of a polynomial as an algebraic combination of the roots of other related polynomials.

The paper presented by Professors Marcis and Smith (M-S), analyzing the determinants of the demand for cash and short-term Treasury obligations held by U. S. manufacturing corporations, is praiseworthy. The authors have made an interesting application of a seemingly unrelated regression (SUR) technique developed by Arnold Zellner [3] in estimating demand functions jointly for each of the liquid assets of corporations belonging to nine asset size categories. Nonetheless, I have some reservations about the implications of the model employed in their present study and the reliability of their results. Some of my reservations concern the theoretical foundation of their model itself, while others are related to their methodology and estimation techniques.

The interdependence of the optimal investment program and capital prices, when capital and other markets are imperfect, has been one of the least tractable problems in capital budgeting. The nature of the problem is described in Amey [1]. Suggested solutions to the problem may be found in Baumol and Quandt [2], Carleton [3], Hirshleifer [4], Lusztig and Schwab [7], and Weingartner [9]. The purpose of this note is to extend the mathematical results reported by Lusztig and Schwab (L & S) and draw implications that will shed light on the controversy.