John Herbert Orr (1911-84) was an Alabama entrepreneur who formed Orradio Industries, Inc., a pioneering hightechnology firm that made magnetic recording tape. In 1945, Orr was among the U.S. Army Intelligence officials who investigated this technology, which was originally developed in Germany during the 1930s. Orr's early knowledge allowed him to establish Orradio in 1949 on a shoestring budget and to make it competitive with larger firms. When, after some uncertainty, tape became the standard medium for magnetic recorders, and as other uses such as data storage and videotape appeared, Orradio's sales expanded rapidly in the late 1950s. The company was purchased by a larger competitor, the Ampex Corporation, in 1959. The history of Orradio illustrates some of the technological, organizational, and locational problems associated with the establishment of a small high-technology firm in a new industry.

This paper examines a dynamic production economy with incomplete information and shows that the set of myopic preferences, those that induce myopic decisions, depends on the representation of the information flow. For example, logarithmic preferences are nonmyopic when some of the economic state variables are unobservable. The analysis offers a broader definition of myopic behavior, termed “generalized myopia,” which is independent of the representation of the information flow. Allowing for any smooth concave utility function, logarithmic preferences endogenously emerge as necessary for generalized myopia in incomplete information economies; and when combined with restrictions on the information structure, they become sufficient.

Lease valuation models often begin with the assumption that leases and debt are substitutes. This paper demonstrates that, because leasing is a mechanism for selling excess tax deductions, it can motivate the lessee firm to increase the proportion of debt in its capital structure relative to an otherwise identical firm that does not use leasing. Thus, debt and leases can be complements. We also show that a competitive lessor will use diversification to reduce risk and increase the probability that tax deductions are fully utilized so that it can lower lease payments.

Long-term performance plans are theoretically adopted to better align the interests of the managers and stockholders by redirecting managerial decision-making toward the longterm performance of the corporation. This study reports significant positive excess returns around the announcement of performance plan adoption, which is consistent with the view that such plans would reduce the agency problem. In addition, this study finds an association between the adoption of long-term performance plans and subsequent growth in profitability, suggesting that long-term performance plans may have been successful in motivating an enhancement in the accounting measures of profitability used to reward managers under the plan. Finally, the excess returns around the announcement of performance plan adoption are found to be positively correlated with subsequent change in growth of earnings per share, the most commonly used accounting performance measure.

In this paper, we derive simple, directly computable conditions for minimum-variance portfolios to have all positive weights. We show that either there is no minimum-variance portfolio with all positive weights or there is a single segment of the minimum-variance frontier for which all portfolios have positive weights. Then, we examine the likelihood of observing positively weighted minimum-variance portfolios. Analytical and computational results suggest that: i) even if the mean vector and covariance matrix are compatible with a given positively weighted portfolio being mean-variance efficient, the proportion of the minimum-variance frontier containing positively weighted portfolios is small and decreases as the number of assets in the universe increases, and ii) small perturbations in the means will likely lead to no positively weighted minimum-variance portfolios.

Agency theory recognizes that the interests of managers and shareholders may conflict and that, left on their own, managers may make major financial policy decisions, such as the choice of a capital structure, that are suboptimal from the shareholders' standpoint. The theory also suggests, however, that compensation contracts, managerial equity investment, and monitoring by the board of directors and major shareholders can reduce conflicts of interest between managers and shareholders. This research investigates the relationship between the firm's capital structure and 1) executive incentive plans, 2) managerial equity investment, and 3) monitoring by the board of directors and major shareholders. This paper finds a positive relationship between the firm's leverage ratio and 1) percentage of executives' total compensation in incentive plans, 2) percentage of equity owned by managers, 3) percentage of investment bankers on the board of directors, and 4) percentage of equity owned by large individual investors. These findings are consistent with the predictions of agency theory, suggesting, in turn, that capital structure models that ignore agency costs are incomplete.

This paper examines holding period returns to constant duration portfolios of U.S. Government notes and bonds, and measures the return premium generated by liquidity differences in bonds. The approach compares constant duration portfolios constructed in two distinct ways: one using only bonds issued in the most recent Treasury auction, one using all other bonds. Comparisons of the resulting series are made meaningful by choosing narrow duration ranges in the portfolio formation procedure. This, in turn, induces a missing data problem in the created time series. Parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data. It is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments.

This paper extends the Palepu (1986) acquisition likelihood model by incorporating measures of insider and institutional shareholdings, by examining the deterrent effect of various takeover defenses, and by considering the effect of varying proportions of fixed (tangible) assets in a firm's total asset structure. We find that the probability of receiving a takeover bid is positively related to tangible assets, and negatively related to firm size and to the net change in institutional holdings. Blank-check preferred stock authorizations are the only common takeover defense significantly (negatively) correlated with acquisition likelihood.

Recent papers by Lamoureux and Poon (1987) and Brennan and Copeland (1988) document a significant permanent increase in average beta subsequent to stock split ex-dates. This paper demonstrates that the shift in estimated beta following ex-dates decays as the measurement interval is lengthened. There is no statistically significant difference between pre- and post-split betas using the Scholes-Williams (1977) estimator and weekly return data, or using monthly returns. We conclude that Lamoureux and Poon's and Brennan and Copeland's results can be attributed to a bias created by using too short a return measurement interval to estimate beta.

The expectations theory of the term structure is well known to give wrong signals as to the future course of long-term interest rates. One explanation involves rational time-varying term premia. However, the “anomaly” may also be due to inflation forecast errors. We study survey forecasts of inflation. It seems that the respondents' forecasts are insufficiently adaptive. Interest rates reflect expectations similar to the inflation forecasts. As a result, past survey forecast errors reliably predict premia on U.S. Government Bonds.

Assuming that individual investors account for most odd-lot transactions, we examine oddlot purchases and sales around the turn of the year and find a pattern that is related to the well-known January effect in stock returns. A significant change in the ratio of odd-lot sales to odd-lot purchases occurs at the turn of the year, which supports the hypothesis that the January effect results from trading by individual investors. The trading patterns that we find are not due entirely to tax considerations.