School Of Business Administration: Financial Review

· Abstract: This study attempts to determine whether an acquisition announcement signals potential gains to the corresponding industry rivals of the target, and whether these gains can be explained by industry-specific and rival firm-specific factors that reflect the likelihood of a takeover.
The research finds that the valuation effects of the target, combined acquirer and target, and industry rivals of the target are positive and significant. The mean variant effects per corresponding industry are significantly related to industry-specific characteristics that reflect the probability of a takeover. Specifically, industries characterized as having a higher level of free cash flow, a higher level of tangible assets, and a smaller market value experience a more favorable revaluation.
A supplemental analysis of the individual rival firms is also conducted, since the variation in the valuation effects between rival firms within each of the industries is distinctly different from the variation of mean industry effect across industries. The analysis of the individual rivals finds that the same rival-specific variables are significant and in the same direction as the analysis of the industry-specific variables. In addition, the valuation effects of individual rivals are also inversely related to their previous performance. Overall, the results suggest that industry-specific and rival firm-specific characteristics that reflect a higher probability of a takeover are important in explaining acquisition gains and motivation.

"Private Placement of Common Equity and Earnings Expectations"

Jeremy Goh, Michael J. Gombola, Hei Wai Lee and Feng-Ying Liu
Volume 34, No. 3, pp. 19-32

· Abstract: We examine earnings forecast revisions by analysts subsequent to the announcement of private equity placements. Results show that analysts make significant upward revisions to their forecasts for current-year earnings. Furthermore, these forecast revisions are significantly related to announcement-period abnormal returns, but not t the risk changes accompanying the equity placement. These findings are consistent with the information hypothesis, which suggests that private equity placements convey favorable information about future earnings.

"Examining the Impact of the 1986 Tax Reform Act on Corporate Dividend Policy: A New Methodology"

K. Mike Casey, Dwight C. Anderson, Hani I. Mesak and Ross N. Dickens
Volume 34, No. 3, pp. 33-46

· Abstract: The article introduces a new methodology to investigate the effects of the 1986 Tax Reform Act (TRA) on corporate dividend policy. The methodology employs a modified version of Rozeff's (1982) model to control for the potential effects of underlying influential variables. The empirical results show there is no widespread reaction to the 1986 TRA passage on the aggregate level of dividends and only modest support for an industry-related dividend effect. We also find that firm size does not play a significant role in dividend policy reaction to the 1986 TRA.

"A Cross-Sectional Empirical Test of a Dual-State Multi-Factor Pricing Model"

Shelly W. Howton and David R. Peterson
Volume 34, No. 3, pp. 47-64

· Abstract: During empirical testing of the Capital Asset Pricing Model an assumption is typically made that risk is intertemporally constant. However, prior research finds that risk changes over time. We empirically test a conditional dual-state cross-sectional model allowing risk to change through prior identification of different market and economic states. We examine relationships between returns and conditional market and economic-factor betas, size, book-to-market equity, and earnings-price ratios. We find that relationships shift across regimes, suggesting the importance of a conditional, as opposed to unconditional, model. Relationships also change in January.

"An Empirical Examination of the Nasdaq/CHX Dual-Trading Experiment"

Bonnie F. Van Ness, Robert A. Van Ness, and Stephen W. Pruitt
Volume 34, No. 3, pp. 65-78

· Abstract: We analyze the effects of the SEC's experimental Nasdaq/CHX dual-trading program. The program, which began in 1987 and continues to the present, establishes an experiment in which the costs and benefits of competition between dealer and specialist market structures can be observed directly. Our primary finding is that the program led to significantly reduced mean quoted and percentage spreads for the dual-traded issues. Further, even though the CHX specialists quote lower spreads, they are not able to garner a significant number of trades from Nasdaq.

"Comparing the Effectiveness of Traditional and Time Varying Hedge Ratios Using New Zealand and Australian Debt Futures Contracts

Katherine J. Wilkinson, Lawrence C. Rose and Martin R. Young
Volume 34, No. 3, pp. 79-94

· Abstract: We apply cointegration methodology to the New Zealand and Australian 90-day, three-year and 10-year debt and futures markets. We compare traditional methods of calculating hedge ratios with those computed by using univariate and multivariate error correction models. We use out-of-sample forecasting to determine which approach is the most effective. Contrary to recent research, our results show that univariate and multivariate error correlation models do not outperform more traditional methods of constructing hedges.

"Futures Commitments and Commodity Price Jumps"

Arjun Chatrath and Frank Song
Volume 34, No. 3, pp. 95-112

· Abstract: We examine the relationship between the commitments of three of the largest groups of futures traders and the abnormal price movements in five agricultural commodities. The general evidence suggests that the commitments of futures traders have been increasing over time, whereas the frequency of price jumps have not. Regression results indicate a negative relationship between price jumps and the commitments of speculators and small traders. There is also evidence of a negative relationship between the number of speculators and cash market volatility, consistent with a host of speculation-based theories.

"Price Elasticity of Demand and an Optimal Cash Discount Rate in Credit Policy"

Muhammad Rashid and Devashis Mitra
Volume 34, No. 3, pp. 113-126

· Abstract: While the provision of a cash discount is equivalent to a reduction in price, the role of price elasticity of demand in determining credit terms has been neglected in the extant literature. In this paper, this role is investigated and it is shown that the optimal cash discount rate is affected by the price elasticity of demand for the firm's product. The comparative effects on the optimal cash discount rate with respect to exogenous changes in the fraction of credit sales paid after taking cash discount, the cost of short-term funds and the bad debt loss ratio are investigated. A trade-off between the time value gain and the price elasticity of demand is established. We find that firms which sell in locations having different price elasticities for their products, and/or which face various costs of short-term funds in different locations, should vary their cash discount terms accordingly.

The University of Mississippi: School of Business Administration