This paper examines estimation issues associated with multivariate tests of asset pricing. Two issues are considered: (1) the constraint that the sample size (N) must be less than the time series (T), and (2) the relative effect on power of using the multivariate statistic versus a univariate counterpart. We find that an alternative statistic that allows for large N does not dominate the usual portfolio tests. More notably, we find that the power of a simple diagonal statistic usually dominates the multivariate statistic for cases considered in this study.

This paper examines the role of large shareholders in monitoring managers when they propose antitakeover charter amendments. We attempt to distinguish between two competing hypotheses: the “active monitoring hypothesis” and the “passive voting hypothesis.” We find a statistically significant positive relation between institutional ownership and the stockholder wealth effects of various types of amendments, after controlling for ownership concentration among institutions, managerial ownership, and firm size. Our empirical evidence lends support to the “active monitoring hypothesis” proposed by Demsetz (1983) and Shleifer and Vishny (1986) that the existence of large shareholders leads to better monitoring of managers.

Critics argue that shelf registration greatly reduces the ability of underwriters to perform adequate due diligence. This argument suggests underwriters will demand greater compensation for shelf issues compared to such traditional issues as an insurance premium for protection against potential litigation or loss of reputation caused by inadequate due diligence. Our findings suggest the presence of such a premium, that the premium is higher for firms with higher expected due diligence liabilities, and that underwriters perceive that shelf registration erodes due diligence and, subsequently, price the due diligence erosion accordingly. This pricing behavior is consistent with our findings that firms with higher expected due diligence liabilities are more likely to choose traditional registration.

Cross-sectional and time series tests are performed to explain levels and changes in short interest. Explanatory variables and tests are chosen based on tax, arbitrage, and speculative reasons for going short. Short interest is found to follow a seasonal pattern that is weakly consistent with tax-based trading. Stocks with high betas and the existence of convertible securities or options tend to have higher levels of short interest, which is consistent with arbitrage efforts. For firms with traded options, there is a positive association between the month-to-month changes in option open interest and short interest. Prior months' returns and changes in short interest are positively related, but there is no relationship between changes in short interest and returns in the subsequent month.

An approximate method is developed for computing the values of European options on the maximum or the minimum of several assets. The method is very fast and is accurate for parameter ranges that are often of the most interest. The approach casts the problem in terms of order statistics and can be used to handle situations where the initial asset prices, the asset variances, and the covariances are all unequal. Numerical values are given to illustrate the accuracy of the method.

Most asset pricing models postulate a positive relationship between a stock portfolio's expected returns and risk, which is often modeled by the variance of the asset price. This paper uses GARCH in mean models to examine the relationship between mean returns on a stock portfolio and its conditional variance or standard deviation. After estimating a variety of models from daily and monthly portfolio return data, we conclude that any relationship between mean returns and own variance or standard deviation is weak. The results suggest that investors consider some other risk measure to be more important than the variance of portfolio returns.

Previous literature documents significant seasonalities in stock market returns. One explanation is seasonality in earnings information. If true, a return index comprised solely of firms reporting earnings should exhibit stronger intertemporal seasonalities than a return index comprised of firms not reporting earnings. Employing all New York and American Stock Exchange firms over six years, this study examines the seasonality of stock returns. Generally, seasonal patterns for reporting returns are found to be similar to or slightly weaker than for nonreporting returns. Thus, it is doubtful that earnings news seasonality induces stock return seasonality.

This paper presents an empirical analysis of firms that are delisted from a major stock exchange. The delisting process is described and stock price movements surrounding delisting are analyzed. For firms with prior announcements, equity values decline by approximately 8.5 percent on announcement day. For firms without prior announcements, a similar adjustment takes place between the last day of trading in the initial market and the close of the first day of trading in the new market. Four hypotheses concerning the decline in firm value are examined. These are the liquidity hypothesis, the management signalling hypothesis, the exchange certification hypothesis, and the downward sloping demand curve hypothesis. Evidence consistent with the liquidity hypothesis is presented in the paper. Unlike evidence on stock exchange listings, returns in the post-delisting period do not appear to be anomalous.

The paper uses a signalling equilibrium to explain the market's reaction to the announcement of a firm's financing decision. In our model, a firm can issue one of the following securities: convertible debt with a different conversion ratio, straight debt, and stock. We identify conditions under which the conversion ratio of a convertible debt issue serves as a credible signal of a firm's private information, given the continuous distribution of attributes (information) across firms. In this signalling equilibrium, we find that the lower the expected future earnings, the higher the conversion ratio of a convertible debt issue. At the limit, firms that expect the highest earnings will use straight debt financing, and firms that expect the lowest earnings will use equity financing. Based on the signalling equilibrium, we predict that at announcement of a convertible debt issue, negative abnormal common stock return increases in absolute value with the conversion ratio.