ContentsPrices as Aggregators of Private Information: Evidence from S&P 500 Futures DataJin-Wan Cho and Murugappa Krishnan
The Determinants of Contract Terms
in Bank Revolving Credit Agreements
Gains to Bidder Firms Revisited:
Domestic and Foreign Acquisitions in Canada
The Rationality of Asset Allocation Recommendations
A Reexamination of the Motives and Gains in Joint Ventures
A Two-Factor Hazard Rate Model for Pricing Risky Debt and the Term Structure
of Credit Spreads
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AbstractsPrices as Aggregators of Private Information: Evidence from S&P 500
Futures Data This paper assesses the importance of the role of prices as aggregators of private information in the S&P 500 futures market. We estimate primitive parameters of the Hellwig (1980) noisy rational expectations model, when both prices and terminal values are observable. The variance-covariance parameters governing futures prices and terminal values can be inverted to obtain estimates of the primitive parameters, including the precision of private information and the variance of liquidity-motivated trades. We also estimate coefficients in the linear price conjecture, weights that agents place on different sources of information, and the informativeness of prices. We find that the variance of the error term in agents' private signals is several orders of magnitude larger than the variance of liquidity-motivated trades. But, in a large market, prices are still so informative that the market as a whole appears to weight them more than prior beliefs.
The Determinants of Contract Terms
in Bank Revolving Credit Agreements The paper examines the determinants of contract terms on bank revolving credit agreements (revolvers) of medium/large publicly traded companies. We model the duration (maturity), secured status, and pricing decisions within a simultaneous decision framework, thereby overcoming the biased and inconsistent estimates in prior single equation studies of debt contract terms. We find strong interrelationships between contract terms with significant bi-directional relationships between duration and secured status and between the all-in-spread and commitment fees and a unidirectional relationship from both duration and secured status to all-in-spread. We also illustrate how several single equation studies of contract terms draw incorrect conclusions because of their (inappropriate) assumption that other contract terms and leverage were exogenous. Finally, our results support the hypothesis that the setting of contract terms plays an important role in alleviating contracting problems.
Gains to Bidder Firms Revisited:
Domestic and Foreign Acquisitions in Canada We present large sample evidence on the performance of domestic and U.S. (foreign) bidder firms acquiring Canadian targets. Domestic bidders earn significantly positive average announcement period abnormal returns, while U.S. bidder returns are indistinguishable from zero. Measures of pre- and post-acquisition abnormal accounting performance are also consistent with a superior domestic bidder performance. Domestic bidder announcement returns are, on average, greatest for offers involving stock payment and for the bidders with the smallest equity size relative to the target. Neither direct foreign investment controls, horizontal product market relationships, nor acquisition propensities explain why domestic bidders outperform their U.S. competitors.
The Rationality of Asset Allocation Recommendations The popular finance literature describes the asset allocation decision as one of the most important factors in determining investment performance. This article reviews the implications of modern portfolio theory for the asset allocation decision and then examines the recommendations of some leading financial experts to see if they are consistent with theory.
A Reexamination of the Motives and Gains in Joint Ventures We distinguish between horizontal and vertical joint ventures, and find correspondingly different valuation effects. Horizontal joint ventures create synergistic gains that are shared by the partners. In contrast, vertical joint ventures generate gains only for suppliers. This is similar to the pattern we find for simple contracts, which suggests economic similarities between vertical joint ventures and contracts. Analyzing firms' choices between these contracting options, we find that firms choose vertical joint ventures over simple contracts when potential hold-up problems are severe and when suppliers face finance constraints. The results do not support a risk-sharing motive for joint ventures.
A Two-Factor Hazard Rate Model for Pricing Risky Debt and the Term Structure
of Credit Spreads This paper proposes a two-factor hazard rate model, in closed form, to price risky debt. The likelihood of default is captured by the firm's non-interest sensitive assets and default-free interest rates. The distinguishing features of the model are threefold. First, the impact of capital structure changes on credit spreads can be analyzed. Second, the model allows stochastic interest rates to impact current asset values as well as their evolution. Finally, the proposed model is in closed form, enabling us to undertake comparative statics analysis, compute parameter deltas of the model, calibrate empirical credit spreads, and determine hedge positions. Credit spreads generated by our model are consistent with empirical observations.
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