The leading explanation for the post-issue long-runstock return underperformace of seasoned equityoffering firms is that investors have optimisticexpectations regarding future earnings and theunderperformance occures as these expectations arecorrected over time. To directly test thishypothessis, we examine investors' reaction toquarterly earnings announcements over a five-yearperiod following the offering for a large sample ofseasoned equity issuing firms. In general, ourevidence suggests that investorsare not disappointedby earnings announcements that follow seasonedequity offerings. This result is not sensitive towidening the windown over which earningsannouncement returns are computed. This result alsoholds true for subsets of equity issuing firms. Thechoice fo these three subsets is predicated byextant evidence that these firms are likely toconvey relatively more unfavorable informationthroung their earnings announcements. Overall, ourfindings are inconsistent with the optimisticexpectations hypotgesis.

We examine the stock price reaction to earningsannouncements in the five years following seasonedequity offerings (SEOs). On average, post-SEOearnings announcements are met with a significantlynegative abnormal stock price reaction. Althoughthis negative reaction accounts for adisproportionately large portion of long-runpost-SEO abnormal stock returns, on average,abnormal stock price reactions to post-seo earningsannouncements are reliably negative only within thesmallest quartile of equity issuers. For smallfirms, therefore, these findings are broadlyconsistent with the hypothesis that firms issueequity when the market overestimates the firm'sfuture earnings perfomance.

We examine whether the market demand curve for equitiesis dawnward sloping. Unlike previous studies thatexamine individual stocks' demand curves, we look atthe aggregate demand curve. As a proxy for aggregatedemand, we employ equity mutual fund flows. Unlikeprevious studies that focus on events that areunlikely to convey new information to the market, wedevise an empirical framework that disentangles theprice-pressure effect and the information effect. Wedo not find evidence for the price-pressure effectthat equity fund flows directly affect stock marketprices in the presence of fundamentals of firms.Instead, we find that equity fund flows seem to beinfluenced by the performance of the stock marketand that investors try to forecast fundamentals offirms and change their demand for stocksaccordingly. Overall, these findings are with ahorizontal market demand curve for equities.

This paper demonstrates a tradeoff between therisk-shifting and hedging incentives of firms andidentifies conditions under which each dominates. Afirm may have the incentive to hedge in amulti-period context, even if no such incentiveexists in a single-period one. Unrestricted accessto swaps in the presence of asymmetric informationabout firm type and the swapping motive would leadto unbounded speculation resulting in breakdowns inswap and debt markets. Price-based methods areunable to control this and market makers have torely upon additional exposure information or creditenhancement devices to preserve equilibrium.

The chain of events that led to the disagreementbetween the White House and Congrees over theincrease of the federal debt limit from mid-October1995 to March 1996 caused a default potential forTreasury securities. We examine the effect of thisevent chain on the yield spread between commercialpaper and Treasury bills and find that both thethree-and six-month yield spreads were reducedduring the event period. The results suggest thatthe market charged a default risk premium to theTreasury securities. There is no evidence that theseevents had a sustained effect on T-bill rates sincethe yield spread during the post-event periodresumed its pre-event level.

In this paper, we determine whether each bid (ask)quote reflects the trading interest of thespecialist, limit order traders, or both for asample of NYSE stocks in 1991. We then compareNasdaq spreads with NYSE spreads that reflect thetrading interest of the specialist. Our empiricalresults show that the average Nasdaq spread issignificantly larger than the average NYSEspecialist spread. We find that, on average, 49% ofthe difference between Nasdaq and specialist spreadsis due to the differential use of even-eighth quotesbetween Nasdaq dealers and NYSE specialists. We alsofind that the NYSE specialist spread issignificantly larger than the limit order spread,although NYSE specialists and limit order tradersare similiar in their use of even-eighth quotes.