In their paper Messrs. Reilly and Slaughter set out two questions, namely:

1. Prior to the introduction of technological advance in the securities market was there any difference in the market making between the NYSE and OTC on a sample of 30 stocks?

2. Following that introduction what was the effect on the market making of these securities listed on the NYSE?

The authors clearly stated the basic economic theory that underlies this exchange of assets and the price setting mechanism, and then concentrated on the empirical study. Their findings are inconsistent with their a priori expectations. This empirical study is well done; the methodology is sound and well presented. However, the authors appear to have overlooked one vital aspect of this type of study, i.e., institutional effects. I shall concentrate upon this area.

Professors Lewellen and Edmister (L-E) are to be complimented on careful development and specification of the basic conceptual framework for an accounts-receivable control model. I consider the model to be a real contribution to the basic theory of financial management and will find it a useful supplement to my basic financial management classes.

One of the most significant developments in macroeconomic analysis in the post-World War II era has been the dramatic resurgence of interest in the role of monetary factors in economic activity. The demand for money has been a focal point of this monetary renaissance, and in recent years a proliferation of studies has focused on questions such as the motives for holding money balances, the effects of changes in the rate of interest, and the existence of economies of scale for cash balances. The trend toward disaggregation of macro functions has been reflected in demand for money studies of the corporate sector as well as the household sector.

Modern micro-capital theory offers three major alternative choice theoretic approaches from which a set of market equilibrium prices can be derived. These approaches are:

1. Time-state preference theory of Arrow [1] and Debreu [6],

2. The capital asset pricing model (hereafter CAPM) of Sharpe [34], Lintner [23], and Fama [7],

3. The capital growth model of Kelly [16], Breiman [5], and Latané [17]

The bear market of the late sixties amidst inflation has led to growing concern over the validity of the proposition that stocks provide a good hedge against inflation. Conflicting arguments have been raised on both sides of the issue but a synthesis has as yet failed to emerge. The gains resulting from a careful assessment of the various propositions are obvious. If stock prices are adversely affected by inflation, the financial analyst must search for other hedges against the erosion of the purchasing power of money, while the economist must note that inflation has a depressing effect on economic growth through the rise of the cost of capital.

A major difficulty with testing the Modigliani-Miller (M-M) theory of the effect of leverage on the firm's value arises from the existence of interfirm differences in operating risk. Based upon the Sharpe-Lintner capital asset pricing model, the present study develops a test of the M-M theory that takes cognizance of heterogeneity with respect to operating risk. The empirical results support the M-M theory: holding total systematic risk constant, there was no relationship between leverage and required rates of return on equities. That is, investors appear to demand complete compensation for the increase in systematic risk attributable to financial leverage.

Ex ante predictions of the riskiness of returns on common stocks — or, in more general terms, predictions of the probability distribution of returns — can be based on fundamental (accounting) data for the firm and also on the previous history of stock prices. In this article, we attempt to combine both sources of information to provide efficient predictions of the probability distribution of returns. We predict two parameters of the distribution of returns for each security in each year: the response to the overall market return (β), and the variance of the part of risk, specific to the security, that is uncorrelated with the market return. A cross section of time series data on returns and accounting variables, taken primarily from the Compustat tape, is used. Several recent developments in statistical methodology are applied.

The problem of monitoring the ongoing receivables collection experience of an enterprise which sells on credit is, in essence, the problem of identification. The concern is an accurate appraisal of customer account payment patterns — in particular, a determination of whether and to what extent those patterns vary over time. Successful execution by the credit manager of his responsibilities for policy formulation, collection enforcement, and forecasting necessarily depends heavily on the availability to him of a reliable reporting mechanism.

In this paper the traditional capital asset pricing model is reformulated as a system of simultaneous equations in which returns on similar securities are treated as endogenous variables and in which pertinent financial data for particular firms and a market factor are treated as exogenous variables. Such a system is estimated, and serious questions are raised concerning the tenability of the simple linear model so often used to explain capital asset prices under uncertainty.

The current merger movement has been characterized by the willingness of the management of some acquiring companies to pay substantial merger premiums. A merger premium exists when the common stockholders of an acquired company receive cash and/or securities possessing a value greater than the company's premerger market value. The rationalization or justification of these “premiums” is based on a merger synergy concept. Contemporary merger literature recognizes two broad forms of merger synergy — the potential for greater operating efficiencies [14] and/or potential financial benefits — with the latter containing instantaneous [12] and real elements [1, 7, 9, 10, 11, 13].

The objective of this paper is to carry out tests of the general hypothesis, most recently urged by Scherer [14, pp. 100–102] and Weston and Brigham [17, p. 689], that the cost-of-equity capital of small industrial corporations is greater than that of large industrial corporations. The paper denotes this cost as ke and defines it as the expected rate of return on the stock of a company when the current price of the stock is in equilibrium. A common designation of ke of course is the equity capitalization rate. It will be noted that this definition of the cost-of-equity capital abstracts from the flotation costs that are usually incurred when companies sell new stock. Archer and Faerber [2] have already shown that these costs are inversely related to the size of companies.

In so far as the concept of systematic risk is predicated on the Sharpe-Lintner theory of capital market equilibrium [5, 4], the time-horizon of systematic risk must conform with the time-horizon of market equilibrium. Since it has been suggested that market equilibrium is instantaneous [3, p. 188], it would follow that systematic risk should also be instantaneous. This paper is, therefore, concerned with the evaluation and measurement of instantaneous risk. Although Jensen [3] has made a similar attempt in a much larger study, we have reason to believe it is not satisfactory. We shall then begin in Section I by discussing Jensen's approach to the horizon problem. In Section II, an alternative procedure of evaluating systematic risk is suggested. Section III concludes the paper by comparing estimates of instantaneous risks based upon weekly returns of 30 Dow-Jones stocks. The motivation behind the paper is obvious. A correct formulation of instantaneous systematic risk is not only a logical extension of the capital market equilibrium theory but is also a yardstick for measuring portfolio performance in terms of risk and return.

The FTC reported 22,517 corporate acquisitions during the 1960s compared with 7200 for the period, 1940–1959. The increased employment of this method of corporate growth has generated a number of studies explaining certain segments of the merger movement. Attempts have been made to explain why firms merge, how firms merge, and how mergers have affected subsequent performance of firms. Mergers have been described as consummated to avoid bankruptcy (for the acquired firm), to capitalize upon managerial inefficiencies, to gain from valuation discrepancies, to achieve portfolio diversification, and for synergistic purposes and many other reasons.

This study deals with behavioral assumptions that necessarily underlie the theory of asset valuation. Recognized logical and empirical implausibilities associated with the particular set of assumptions that provides the underpinnings of much currently espoused asset theory are reviewed. A valuation model based on a more realistic set of behavioral assumptions is then proposed and tested empirically.

In their present paper. Professors Cheng and Deets (hereafter C-D) attempt to derive a measure of instantaneous systematic risk for securities and portfolios which is consistent with the Sharpe-Lintner-Mossin capital asset pricing model when the true market horizon is infinitesimally short. In so doing, they assert that Jensen's resolution of the horizon problem for such a market horizon is incorrect. In the comments which follow, I shall attempt first to indicate explicitly the causes for the differences in the Jensen and C–D results, and second, to evaluate their relative merits.

Professors Simkowitz and Logue (S-L) remind us that capital asset pricing is a simultaneous process. Their approach differs from traditional capital market models [3 and 6 ], where an investment's risk and return characteristics depend solely on a structural relationship between asset and market portfolio returns. Simkowitz and Logue argue that, within groups of homogeneous securities, investment returns are determined simultaneously and that market portfolio return as well as certain firm-related factors are exogeneous determinants of investment returns. This comment will, first, examine their basis for a simultaneous model and, then, look at presented empirical results.