School Of Business Administration: Financial Review

· Abstract: The main purpose of our paper is to study the institutional nature and characteristics of executive share option plans (ESOPs) in Singapore, a fast-growing economy and an important investment location in Asia. Our study provides and interesting comparison between then characteristics of ESOPs in Singapore and those in the U.S. Our paper also investigates the short-term market reaction to ESOP announcements and the long-run stock and operating performance of the sample firms following the adoption of the ESOPs. Results indicate weak evidence of a positive abnormal return on the days surrounding the announcement of the ESOPs. However, there is no evidence of long-term superior stock and operating performance for the ESOP firms relative to benchmarks. The lack of significant incentive effects for the sample firms reflects mainly the unique regulatory environment in Singapore.

"Economic Exchange Rate Exposure of U.S.-Based MNCs Operating in Europe"

Anna D. Martin, Jeff Madura, and Aigbe Akhigbe
Volume 34, No. 2, pp. 21-36

· Abstract: This study focuses on the economic exchange rate exposure of 168 U.S.-based multinational corporations (MNCs) with foreign operations primarily in Europe. The sampling plan and other refinements may improve the estimation of exposure and detection of relevant determinants. Operating characteristics that represent economic exposure are evaluated for their ability to explain cross-sectional differences in exposure. More specifically, the degree of imbalance, which is a proxy for matching cash inflows and outflows, and proportion of export sales are able to explain differential exposure. Furthermore, shifts in the degree of imbalance and proportion of export sales are found to significantly explain shifts in exposure.

"Ownership Restrictions and Stock Prices: Evidence from Chinese Markets"

Dongwei Su
Volume 34, No. 2, pp. 37-56

· Abstract: In this paper, I test a one-period capital asset pricing model (CAPM) under share ownership restrictions to explain differences in prices and expected excess returns between the classes of shares that can be bought and traded by domestic and foreign investors, respectively, in the Chinese stock markets. I find that cross-sectional variability in the spread between the expected domestic and foreign share excess returns is related to differences in individual shares' market betas. The empirical results are by and large consistent with the CAPM. After the betas are controlled for, idiosyncratic variance and firm size have no effect.

"Random Walks and Market Efficiency Tests of Latin American Emerging Equity Markets: A Revisit"

Kalu Ojah and David Karemera
Volume 34, No. 2, pp. 57-72

· Abstract: The few existing studies on equity price dynamics and market efficiency for Latin American emerging equity markets show conflicting results. This study uses multiple variance-ratio and auto-regressive fractionally integrated moving-average tests and new datga (U.S. dollar-based national equity indices for the 1987-1997 period) to clarify these results. Documented evidence shows that equity prices in major Latin American emerging equity markets - Argentina, Brazil, Chile and Mexico - follow a random walk, and that they are, generally, weak-form efficient. In sum, therefore, the evidence suggests that international investors in these markets cannot use historical information to design systematically profitable trading schemes because future long-term returns are not dependent on past returns.

"The Reaction of Closed End Funds to Stock Distribution Announcements"

Vinay Datar and David A. Dubofsky
Volume 34, No. 2, pp. 73-88

· Abstract: This study examines the impact of stock split and stock dividend announcements made by closed end mutual funds. We argue that the asymmetric information / signaling hypothesis does not apply to mutual funds. Therefore, any announcement effects must be attributed to other factors such as the optimal trading range hypothesis. We find that closed end funds react no differently than other firms to stock distribution announcements; also, trading volume and turnover remain unchanged after closed end funds' ex-stock distribution days, while liquidity declines for other firms that distribute shares.

"An Examination of Mandatorily Convertible Preferred Stock"

Nancy White Huckins
Volume 34, No. 2, pp. 89-108

· Abstract: I investigate the determinants of the use of mandatorily convertible preferred stock and assess market reaction to its issue. The security is dividend enhanced and converted into common stock within four years. Issuers have high debt ratios, low interest coverage, and bankruptcy risk. Market response to the issue was neutral suggesting the preferred issue resolved the lemon problem associated with common stock. Firms' Z-scores and abnormal returns are inversely related indicating the issues reduced financial distress. Market response was most positive for low risk firms with high cash flows.

"The Effects of Inverted Yield Curves on Asset Returns"

James Ross McCown
Volume 34, No. 2, pp. 109-126

· Abstract: Between 1954 and 1991, U.S. stocks, long-term government bonds, and corporate bonds show negative risk premiums during periods preceded by inverted yield curves. Intermediate-term government bonds do not. Going from safer to riskier asset classes, the negative risk premiums increase in absolute value and statistical significance. The consumption CAPM offers a possible explanation for the negative risk premiums. A negative covariance between the growth rate of consumption and the premium on the risky assets will result in a negative risk premium. Empirical tests of the conditional covariance show that the consumption CAPM does not explain the phenomena.

"Bond Immunization for Affine Term Structures"

Joel R. Barber
Volume 34, No. 2, pp. 127-140

· Abstract: This paper generalizes a number of important immunization theorems. We show that the Fisher and Weil immunization, Bierwag and Khang minimax, Redington multiple liability, and Bierwag, Kaufman, and Toevs coverage theorems can be generalized to a class of affine term structures. This class of term structures contains many models that are commonly used in the finance literature.

The University of Mississippi: School of Business Administration