Vol. 33 No. 4 -
November 1998
"Board Composition, Managerial Ownership, and Firm
Performance: An Empirical Analysis"
Scott W. Barnhart,
Florida Atlantic University, and Stuart Rosenstein,
University of Colorado/Denver
"Golden Parachutes, Board and Committee Composition, and
Shareholder's Wealth"
Wallace N. Davidson
III, Theodore Pilger, and Andrew Szakmary University of
Illinois/Carbondale
"Stock Splits: An Instituitonal Investor Preference"
Helen B. Mason,
Centenary College, and Roger M. Shelor, Louisiana Tech
University
"The
Effect of Junk Bond Defaults on Common Stock Returns"
Joseph D. Vu, DePaul
University
"A Futures Duration-Convexity Hedging Method"
Robert T. Daigler,
Florida International University, and Mark Copper, Wayne
State University
"Option Pricing with Heterogeneous Expectations"
Chen Guo, University
of Ottawa
Elizabeth S.
Cooperman, University of Colorado/Denver, Glenn A.
Wolfe, University of Toledo, James A. Verbrugge,
University of Georgia, and Winson B. Lee, formerly,
University of Colorado/Denver
"Is There Excess Capacity in Rural Banking Markets?"
James E. McNulty and
Aigbe Akhigbe, Florida Atlantic University
"Adjustment Process of the Price to Book Ratio for
Regulated Utilities"
Emeka T. Nwaeze,
Rutgers University
Winston T. Lin,
State University of New York/Buffalo, and Yueh H. Chen,
National Sun Yat-sen University
"Board Composition,
Managerial Ownership, and Firm Performance: An Empirical
Analysis"
Scott W. Barnhart, Florida Atlantic University,
and Stuart Rosenstein, University of Colorado/Denver
Volume 33, No. 4, pp. 1-16
Abstract: Our
objective is to examine the sensitivity of
simultaneous-equations techniques in corporate
governance research. We model Tobin's Q, board
composition, and managerial ownership using a
three-equation instrumental variables approach, with two
specifications and four instruments. We find that the
variables are jointly determined. However, results
depend strongly on the specification of the model and
the instruments. We conclude that results using
simultaneous equations methods must be interpreted
cautiously, OLS estimates should not be casually
dismissed, and that sensitivity analysis is essential
when estimating an empirical model whose structure is
uncertain.
Keywords:
simultaneous equation models, cross-sectional methods,
corporate governance
JEL classifications: C31/G34
"Golden Parachutes,
Board and Committee Composition, and Shareholder's
Wealth"
Wallace N. Davidson III, Theodore Pilger, and
Andrew Szakmary University of Illinois/Carbondale
Volume 33, No. 4, pp. 17-32
Abstract: Takeover
defense mechanisms have become common for many modern
corporations. In this research, we examine one potential
takeover defense mechanism, golden parachutes. In
particular, the relationship between the board of
directors (and the board committees) and the question of
whether the parachutes are aligned with shareholder
interests or are a means of entrenching management, is
studied. Results show that the composition of the board
of directors' compensation committee influences the
market's perceived outcome of golden parachute adoption.
When insiders and affiliated outsiders dominate the
board's compensation committee, negative returns are
more likely to occur than when independent outsiders
control the committee.
Keywords: golden
parachutes, board of directors, board composition
JEL classification:
G34
"Stock Splits: An
Instituitonal Investor Preference"
Helen B. Mason, Centenary College, and Roger M.
Shelor, Louisiana Tech University
Volume 33, No. 4, pp. 33-46
Abstract: This study
examines the relationship between the level of
institutional ownership and the likelihood that firms
will enact a stock split. There is evidence of a
positive relationship between institutional ownership
and subsequent split behavior. A firm size effect
emerges from the finding that larger firms have higher
percentages of institutional owners. This implies that
institutional investors either encourage stock split
behavior or invest in firms that exhibit indicators of
eminent stock splits. Institutions purchasing shares
before the split are likely to obtain short-term and
long-term earnings increases.
Keywords: stock
splits, institutional investors
JEL classifications: G30/G32
"The Effect of Junk
Bond Defaults on Common Stock Returns"
Joseph D. Vu, DePaul University
Volume 33, No. 4, pp. 47-60
Abstract: This paper
examines the effect of junk bond defaults on common
stock returns. The evidence indicates that stockholders
uncover the signs of financial distress long before the
default date. Stock prices fall sharply at the time of
the default announcement. Although stocks of fallen
angel sample recover slowly and steadily after the
default announcement, stocks of the original-issue junk
bond sample continue to decline. On average, bankrupt
firms suffer larger negative stock returns than
defaulted firms not only at the time of announcement,
but also in both pre- and post-event periods.
Keywords: junk bond,
default, fallen angels, bankruptcy
JEL classifications: G30/G33
"A Futures
Duration-Convexity Hedging Method"
Robert T. Daigler, Florida International
University, and Mark Copper, Wayne State University
Volume 33, No. 4, pp. 61-80
Abstract: A
duration-based hedge ratio is the conventional method to
hedge against price changes of a fixed-income
instrument. However, the relationship between bond
prices and interest rates is nonlinear, creating a
convexity effect. Moreover, term structure changes often
are nonparallel in nature, which causes imperfect hedges
for the duration-based hedging model. One solution to
these problems is to dynamically change the
duration-based hedge ratio; however, this procedure is
costly and is not effective when jumps in prices occur.
A superior solution is to develop a two-instrument hedge
ratio that simultaneously hedges both duration and
convexity effects. This paper first presents such a
two-instrument hedge ratio and then we examine its
effectiveness. The simulation results show that this
duration-convexity hedge ratio is vastly superior to
alternative hedge ratio methods for both simple and
complex changes in the term structure.
Keywords: futures,
hedging, duration, convexity
JEL classifications:
G13
"Option Pricing with
Heterogeneous Expectations"
Chen Guo, University of Ottawa
Volume 33, No. 4, pp. 81-92
Abstract: This paper
re-derives the finite mixture option pricing model of
Ritchey (1990), based on the assumption that the option
investors hold heterogeneous expectations about the
parameters of the lognormal process of the underlying
asset price. By proving that the model admits no
riskless arbitrage, this paper justifies that the entire
family of finite mixture of lognormal distributions is a
desirable candidate set for recovering the risk-neutral
probability distributions from contemporaneous options
quotes. The parametric method derived from the model is
significantly simpler than the nonparametric method of
Rubinstein (1994) for recovering the risk-neutral
probability distributions from contemporaneous option
prices.
Keywords: mixture of
distributions, options, heterogeneous expectations
JEL classification: G12
Elizabeth S. Cooperman, University of
Colorado/Denver, Glenn A. Wolfe, University of Toledo,
James A. Verbrugge, University of Georgia, and Winson B.
Lee, formerly, University of Colorado/Denver
Volume 33, No. 4, pp. 93-106
Abstract: Whether
pure contagion is more likely to occur when a federal
deposit insurer is severely undercapitalized is an
unanswered question. This paper provides evidence on
this issue by examining the stock market reaction of
savings and loans (S&Ls) to the crisis of Financial
Corporation of America (FCA) in 1984, when the Federal
Savings and Loan Insurance Corporation was fiscally
unsound. Consistent with a contingent insurance
guarantee hypothesis, the results show large,
significant negative abnormal returns (ARs) for a
portfolio of high insured deposit S&Ls during FCA's
crisis.
Keywords: Regulatory
discipline, banks, savings and loans, contagion, deposit
insurance
JEL classification: G21/G28
"Is There Excess
Capacity in Rural Banking Markets?"
James E. McNulty and Aigbe Akhigbe, Florida
Atlantic University
Volume 33, No. 4, pp. 107-124
Abstract: The
literature indicates that it is difficult to identify
and quantify the degree of excess capacity in banking.
Economic theory indicates that there are at least three
indicators of excess capacity in banking: (a) low
loan-to-asset ratios, (b) low profitability and (c) high
per unit operating expense relative to some norm. If
excess capacity exists, it will be easiest to identify,
through these indicators, at small rural banks. This
paper finds significant evidence of excess capacity at
rural Colorado banks using univariate analysis;
simultaneous equations analysis reinforces this
conclusion. It appears that the "excess capacity effect"
outweighs the "market power effect" in these rural
banking markets.
Keywords: banking
markets, excess capacity, univariate analysis,
simultaneous equations analysis
JEL classification: E44/G21/D24
"Adjustment Process
of the Price to Book Ratio for Regulated Utilities"
Emeka T. Nwaeze, Rutgers University
Volume 33, No. 4, pp. 125-140
Abstract: This study
tests whether shifts in the price to book ratio (PB) of
electric utilities follow a partial adjustment rather
than the pure adjustment process implied by the
cost-plus pricing policy. The results for utilities are
compared to benchmark results for manufacturing firms.
It is shown that shifts in PB follow a partial
adjustment process. The adjustment period is longer for
utilities than for manufacturing firms and extends well
beyond the average regulatory lag. Moreover, shifts in
PB are associated with changes in future profits and
investments.
Keywords: Price to
book ratio, adjustment process, regulatory effects
JEL classification: L94/L51
Winston T. Lin, State University of New
York/Buffalo, and Yueh H. Chen, National Sun Yat-sen
University
Volume 33, No. 4, pp. 141-162
Abstract: This paper
examines the impacts of pension benefits on capital
asset pricing in conjunction with wealth accumulation
and retirement, and derives and tests a dynamic capital
asset pricing model (CAPM) within the framework of a
life cycle hypothesis-based dynamic model. The life
cycle hypothesis-based dynamic model maximizes the
expected utility of the individual's lifetime wealth in
a continuous time process. An optimal solution of the
individual's wealth path, incorporating the ages of
retirement and death, is obtained and, based on the
optimal wealth path, an analysis of comparative dynamics
is pursued. The dynamic CAPM is then derived from the
optimal wealth path; simulation and nonparametric tests
are undertaken to evaluate the performance of the
dynamic CAPM as compared to the traditional model which
does not consider the impacts of pension benefits and
the static model that incorporates the effects of
pension benefits. The test results suggest that the
proposed dynamic CAPM closely states the expected rate
of return for a capital asset; that the new dynamic CAPM
is preferable over the static model that is preferable
over the traditional model; and that the three models
considered are statistically distinguishable from one
another.
Keywords: Optimal
wealth path, pension benefits, dynamic capital asset
pricing, life cycle hypothesis, nonparametric Wilcoxon
signed-rank test
JEL classification:
D91/G12/G23