Contents

Are Shareholder Proposals All Bark and No Bite? Evidence from Shareholder Resolutions to Rescind Poison Pills
John M. Bizjak and Christopher J. Marquette

Bond Rating Agencies and Stock Analysts: Who Knows What When?
Louis H. Ederington and Jeremy C. Goh

An Empirical Analysis of the Reincorporation Decision
Randall A. Heron and Wilbur G. Lewellen

Nonparametric Modeling of U.S. Interest Rate Term Structure Dynamics and Implications on the Prices of Derivative Securities
George J. Jiang

Do Measures of Investor Sentiment Predict Returns?
Robert Neal and Simon M. Wheatley

Abstracts

The Design of Bankruptcy Law: A Case for Management Bias in Bankruptcy Reorganizations
Elazar Berkovitch, Ronen Israel, and Jaime F. Zender

In an incomplete contracting environment, bankruptcy is considered to be a renegotiation of the firm's financial contracts. An optimal bankruptcy law is derived as optimal restrictions on the environment within which the claimants to a distressed firm bargain. The law is used as a commitment device to ensure actions that are ex ante optimal but not subgame perfect. We show that the bankruptcy court can use two types of mechanisms to implement the optimal bankruptcy outcome: direct restrictions on the bargaining game between the claimants, and the use of a "restricted auction." In both cases, the restrictions prevent the strategic use of bankruptcy by firms not in financial distress, provide for truthful revelation of information so that distress results in an ex post efficient allocation of resources, and establish a bias toward the manager in reorganizations that provides correct ex ante decision making incentives.

Are Shareholder Proposals All Bark and No Bite? Evidence from Shareholder Resolutions to Rescind Poison Pills
John M. Bizjak and Christopher J. Marquette

We provide a comprehensive examination of shareholder resolutions to rescind poison pills. We find that pill rescission proposals are more frequent the more negative the market reaction to the initial pill adoption and the lower the insider and unaffiliated block ownership. Votes for such a proposal increase when performance is poor and for more onerous poison pills. While we document a stock price decline associated with the proposal announcements, we find poison pills are more likely to be restructured or rescinded when there is a shareholder resolution. Moreover, pill revisions are associated with stockholder wealth increases. Collectively, our results suggest that pill rescission proposals are more frequent when the pill is more likely to harm shareholders and that managers respond to shareholder proposals.

Bond Rating Agencies and Stock Analysts: Who Knows What When?
Louis H. Ederington and Jeremy C. Goh

Both bond rating agencies and stock analysts evaluate publicly traded companies and communicate their opinions to investors. Comparing the timeliness of each, we find that Granger causality flows both ways. While most bond downgrades are preceded by declines in actual and forecast earnings, both actual earnings and forecasts of future earnings tend to fall following downgrades. Although part of this post-downgrade forecast revision can be attributed to negative news regarding actual earnings, most appears to be reaction to the downgrade itself. We find little change in actual earnings following upgrades. Analysts, however, tend to increase their forecasts of future earnings.

An Empirical Analysis of the Reincorporation Decision
Randall A. Heron and Wilbur G. Lewellen

The literature suggests two competing explanations for reincorporations: efforts at managerial entrenchment and attempts to improve contractual efficiency. The empirical evidence to date is inconclusive. To seek further evidence, we examine a large sample of firms that changed their state of incorporation over the period 1980-1992. We find that shareholder wealth is decreased by reincorporations that erect takeover defenses, but is increased by reincorporations that establish limits on director liability. Firms that claim they reincorporate to limit the personal liability of their board members and thereby attract better qualified outside directors do, in fact, expand the outside representation on their boards, whereas firms citing other motives do not.

Nonparametric Modeling of U.S. Interest Rate Term Structure Dynamics and Implications on the Prices of Derivative Securities
George J. Jiang

This paper develops a nonparametric model of interest rate term structure dynamics based on a spot rate process that permits only positive interest rates and a market price of interest rate risk that precludes arbitrage opportunities. Both the spot rate process and the market price of interest rate risk are nonparametrically specified so that the model allows for maximal flexibility in fitting into the data. Marginal density of interest rates and historical term structure data are exploited to provide robust estimation of the nonparametric term structure model. The model is implemented using U.S. data, and the estimation results are compared to those in the available literature. Empirical results not only provide strong evidence that most traditional spot rate models and market prices of interest rate risk are misspecified, but also confirm that the nonparametric model generates significantly different term structures and prices of common derivatives.

Do Measures of Investor Sentiment Predict Returns?
Robert Neal and Simon M. Wheatley

It has long been market folklore that the best time to buy stocks is when individual investors are bearish, and the best time to sell is when individual investors are bullish. We examine the forecast power of three popular measures of individual investor sentiment: the level of discounts on closed-end funds, the ratio of odd-lot sales to purchases, and net mutual fund redemptions. Using data from 1933 to 1993, we find that fund discounts and net redemptions predict the size premium, the difference between small and large firm returns, but little evidence that the odd-lot ratio predicts returns.