The observed use (and indeed tremendous growth in volume) of forward contracts, futures, options, and swaps as hedges against interest rate risk, foreign exchange risk, and commodity price risk indicates that hedging does add value to the firm. The purpose this research was to empirically examine the value of off-balance-sheet hedging. The benefits of off-balance-sheet hedging were found to accrue from reducing (1) taxes, (2) expected financial distress costs, and (3) agency costs. Taxes. Hedging reduces the firm's tax liability by reducing the variability in taxable income. The value of hedging to the firm is a positive function of the convexity of the tax function and the variability of taxable income. Expected Financial Distress Costs. The value of hedging is a positive function of the degree to which hedging reduces the probability of financial distress and the costs of financial distress. Agency Cost. Due to the fact that bondholders and some managers hold fixed claims while shareholders hold variable claims, shareholders desire more risky projects than do bondholders or managers. Hedging reduces this conflict by allowing shareholders to undertake higher risk projects while protecting the holders of fixed claims. Firms can achieve the same benefits of hedging by using alternative …

The purpose of the study is to empirically determine the relevance of PPP theory under the traditional arbitrage and the efficient markets (EPPP) frameworks during the recent floating period of the 1980s. Monthly data was collected for fifteen industrial nations from January 1980 to December 1986. The models tested included the short-run PPP, the long-run PPP, the EPPP, the EPPP with deviations from expectations, the forward rates as unbiased estimators of future spot rates, the EPPP and the forward rates, and the EPPP with forward rates and lagged values. A generalized regression method called Seemingly Unrelated Regression (SUR) was employed to test the models. The results support the efficient markets approach to PPP but fail to support the traditional PPP in both the short term and the long term. Moreover, the forward rates are poor and biased predictors of the future spot rates. The random walk hypothesis is generally supported.

The effect of a change in capital structure on the risk and return of common stockholders is investigated. Also, the information content of dividends when a firm goes for new outside financing is examined. Data used in the study are collected from the Moody's Bond Survey, the Prentice Hall's Capital Adjustments, the Wall Street Journal Index, and the Center for Research in Security Prices Tape. The study uses an event study methodology. The risk (beta) of common stock before an issuance of debt securities is compared with the risk after the issue. The stock market reaction to the issuance of new debt securities is measured using after-the-event risk. The information content of dividend announcement before a new debt issue is compared to that of after the issue. The findings show that debt issue reduces stock holders' risk if the issuer is a dividend paying company. Also, debt securities issued through an exchange offer increase stockholders' wealth. Finally, issuance of new debt does not affect the information content of dividends.

Monthly returns on twenty-seven Eurobonds from July 1982 to June 1986 were examined. There were no consistent differences in returns based on the country in which a firm is located. There were consistent differences due to industry classification, with energy-related firms exhibiting higher average returns and variances. Excess returns were calculated using the capital asset pricing model and arbitrage pricing theory. The results from calculation of mean average deviation, root mean square, and R2 all indicate that the arbitrage pricing theory was a better descriptor of the Eurobond market. The excess returns were also examined using stochastic dominance. Arbitrage pricing theory never dominated the capital asset pricing model using first-order criteria, but consistently dominated using second-order criteria. The results were discussed in terms of the implications for investors and portfolio managers.

This study examines the differential effect of each of the ten largest bank failures on shareholders' wealth of non-failed banks over the period from 1973 through 1984. It examines how contagion and information effects of major bank failures have changed over time. FDIC policy for settling failures has important implications for system stability, and has changed over time. This study's purpose is to provide empirical evidence on the effects of FDIC policy. The FDIC's handling of the Penn Square failure signaled a policy shift and offers a unique opportunity to examine changes in market reactions to large bank failures. The literature on the capital market effects of major bank failures provides limited evidence on the impact of bank failures and related FDIC policy. Most fail to discriminate between contagion and information effects, and conduct analysis on one (or a few) bank failure(s) in the mid-1970s using traditional event study methodology. This study considers multivariate regression (MVRM) an appropriate methodology for bank failures which are likely to have simultaneous impact on non-failed banks. MVRM, which accounts for contemporaneous cross-sectional dependence of residuals, has three advantages over standard residual analysis: no "event clustering" problem, multiple hypotheses tests, and computational efficiency. This study …

In this study, the possibility that money demand of one country might be affected by macroeconomic activities of other countries is investigated. We use the seemingly unrelated regression (SUR) technique, which takes into account all covariances between residuals of country-specific money demand equations. Efficiency of estimates using the SUR technique is enhanced because it uses information contained in the contemporaneous correlation of the error terms. The hypothesis of economic interdependence is tested. A proxy for foreign influence, deviation from interest rate parity (DIRP), is tested for significance in the money demand function.

Catastrophe theory (CT) is a relatively new mathematical theory that comprehensively describes a system exhibiting discontinuous behavior when subjected to continuous stimuli. This study tests the theory using capital-market data. The data is a time series of stock returns on firms that filed for Chapter 11 reorganization during 1980-1985. The CT model used is based on a corporate failure model suggested by Francis, Hastings and Fabozzi (1983). The model predicts 1) as the filing date approaches, there will be a structural shift in the underlying stock-return generating process of the filing firm, and 2) firms with lower operating risk will have a smaller jump than firms with higher operating risk, corresponding to their relative positions within the bifurcation set of the catastrophe cusp.

The forces that shaped banking practices in the late 1970s and which fostered attempts by the banks to rapidly expand their markets are examined. Why, and to what extent, the Texas energy banks committed themselves to the oil industry in those years, as well as the effects of the oil industry's four-and-one-half year decline on the banks' financial strength is detailed. How banks structured loans to various energy borrowers and why these borrowers lost their ability to service their debts is analyzed. The changes that the Texas banks' painfully learned lessons will bring about in energy and other specialized lending is considered.

The primary purpose of the study was to investigate whether takeover markets are allocationally efficient using Tobin's q as the variable which summarizes the investment opportunities of firms. Chapter I presented the purposes, hypotheses, methodology, and limitations of the study. The two hypotheses proposed were as follows: Acquiring firms' q should be significantly higher than that of control firms, on average, and target firms' q should be significantly lower than that of control firms, on average. Chapter II presented the review of literature on takeovers and theory of investments. Chapter III presented the research design adopted to test the above hypotheses. The methodology to calculate q-values and methods to reduce the bias which may result from choice-based sampling were also given. A paired comparison t-test was employed to test the hypotheses. Sample firms were selected from the COMPUSTAT RESEARCH and COMPUSTAT INDUSTRIAL tape.

This study provides information about convertible preferreds generally and, in particular, those used in financing mergers during the period 1968-1984. Specifically, the following topics are examined: (1) traditional corporate motives for the use of convertible preferreds as a financing means in mergers and acquisitions, (2) annual data about convertible preferreds' issuance by volume and purpose for the period 1968-1984, (3) average annual returns of merger-related convertible preferreds and average annual returns of common stock of the same companies for the period 1968-1980, (4) performance of convertible preferreds in relation to the market in general, and (5) the future of convertible preferreds as a financing instrument in merger activity.

Few areas of research in the finance literature have received greater attention than the efficient market hypothesis. Much of the research has been directed toward the securities market while very little research has been done in the real estate markets. The existing research on real estate market efficiency has been either descriptive or illustrative with very little empirical testing being performed. The major reason for the lack of empirical testing has been the inability to develop an adequate data base. The results of the empirical work that has been done do not support the widely held belief that real estate markets are inefficient. This study, using the autoregressive-integrative-moving average (ARIMA) time series analysis technique, tests the weak-form efficiency of the Dallas-Fort Worth office properties real estate market. According to the weak-form efficient market hypothesis, all price information should be capitalized into current real estate prices and not provide the basis for earning abnormal returns in trading. Price data formed from office building sales dating from January, 1979 to January, 1985 are used to test the market. The data was gathered from the files of several professional appraisal firms located in the Dallas-Fort Worth area. The transaction information includes (1) transaction …

This study addressed two issues. First, it examined the ability of two models, developed by Cox, Ingersoll and Ross (CIR), to explain the differences between futures and implicit forward prices in the thirteen-week T-bill market. The models imply that if future interest rates are stochastic, futures and forward prices differ; the structural difference is due to the daily settlement process required in futures trading. Second, the study determined the efficiency of the thirteen-week T-bill futures market using volatility and regression tests. Volatility tests use variance bounds to examine whether futures prices are excessively volatile for the market to be efficient. Regression tests investigate whether futures prices are unbiased predictors of future spot prices. The study was limited to analysis of the first three futures contracts, using weekly price data as reported in the Wall Street Journal from March, 1976 to December, 1984. Testing of the first CIR model involved determination of whether changes in futures-forward price differences are related to changes in local covariances between T-bill futures and bond prices. The same procedure applied in testing the second model with respect to changes in futures-forward price differences, local covariances between T-bill spot and bond prices, and local variances of bond …

The purpose of this study is to investigate the usefulness of statistical decomposition measures in the prediction of industrial bond rating changes. Further, the predictive ability of decomposition measures is compared with multiple discriminant analysis on the same sample. The problem of this study is twofold. It stems in general from the statistical problems associated with current techniques employed in the study of bond ratings and in particular from the lack of attention to the study of bond rating changes. Two main hypotheses are tested in this study. The first is that bond rating changes can be predicted through the use of financial statement data. The second is that decomposition analysis can achieve the same performance as multiple discriminant analysis in duplicating and predicting industrial bond rating changes. To explain and predict industrial bond rating changes, statistical decomposition measures were computed for each company in the sample. Based on these decomposition measures, the two types of analyses performed were (a) a univariate analysis where each decomposition measure was compared with an industry average decomposition measure, and (b) a multivariate analysis where decomposition measures were used as independent variables in a probability linear model. In addition to statistical decomposition analysis, multiple …

This dissertation examines the reaction of common stock prices to changes in bond ratings by Moody's Bond Service. The question is whether an announcement of a re-rating by Moody's is new information. There are only two studies of stock price reaction to bond changes and the results are conflicting. Pinches and Singleton (1978) [PS] concluded that any reaction comes well before the re-rating. Griffin and Sanvicente (1982) [GS] found that their portfolio test indicated that rating changes do convey new information. This was particularly true for downgradings. Both studies used monthly data and neither performed a statistical testing of residual reversals. PS provided a graph of the residuals which indicated the presence of a reversal trend. GS provided no information on this topic. This study, using daily data and the cumulative prediction error technique, finds that bond re-ratings offer new information. The results indicate that the market only partially anticipates the bond change. For the downgrades, the excess return on the announcement day is .6% which is statistically significant. The residuals reverse after the announcement day, but are not statistically significant. The upgrades do not have a significant reaction on the announcement day, but have a statistically significant negative reaction …

This empirical study is concerned with the usefulness of proposed supplementary disclosures for oil and gas producers to financial analysts in valuing a company. It is concerned with what supplementary information is being used, to what extent it is being used and which type of information is used most. Three main research procedures are employed. In the first procedure, the Mann-Whitney U Test is applied to determine any significant difference between valuing an oil and gas producing company using basic financial statements and ratio data, and valuing the same company with this information plus the proposed disclosures. The second procedure involves applying the chi-square and Cramer's V statistics to determine whether the disclosure information caused switching in valuation method used for each of the cases. The third procedure tests for significant differences between financial ratios used for each case by employing the test of differences between two proportions. Additional evaluation attempts to determine analysts' perceived usefulness of each of the schedules of the proposed disclosures

The purpose of this study is to examine a two-part hypothesis. The first part is that underdepreciation is the cause of serious financial problems which have beset investor-owned electric utilities in recent years. The second part is that depreciation adjusted for changes in the general level of prices would do much to alleviate these problems.